DON’T MESS WITH THE GENERAL AGREEMENT OF INDEMNITY

Posted on December 31, 2014December 31, 2014 by Edward Garber

I have previously posted articles about the all mighty General Agreement of Indemnity (“Agreement of Indemnity”) that a surety requires a contractor bond-principal and designated guarantors to execute before issuing payment and performance bonds to the contractor. In cases forming the basis of the articles, the surety demands rights under the Agreement of Indemnity such as the right for collateral security to protect the surety from anticipated or pending claims and the contractor bond-principal refuses. In these cases, the surety files a lawsuit and moves for an injunction which, among other things, requires the principal to post the very collateral security it refused to post to begin with. As reflected in these cases, the surety gets the injunction granted because the Agreement of Indemnity is designed to protect the surety’s interests. In other words, don’t mess with the Agreement of Indemnity because the surety will typically get the recourse it pursues.

Recently, another opinion came out further supporting the rights of a surety under the Agreement of Indemnity and why it is beneficial to figure out an avenue to work with the surety instead of against it. In this case, Travelers Casualty and Surety Co. of America v. Design Build Engineers and Contractors Corp., 2014 WL 7274803 (M.D.Fla. 2014), the contractor bond-principal was working on two public projects. On one project, a dispute with a subcontractor resulted in a claim that the surety paid plus substantial attorney’s fees awarded to the subcontractor by the court. Although the contractor reimbursed its surety for the principal amount of the claim, it refused to reimburse the surety for the substantial attorneys’ fees awarded to the subcontractor. And, on the other project, the contractor was terminated resulting in pending performance bond and payment bond claims against the surety.

The contractor, in furtherance of trying to shield major property and assets, did some creative asset transfers forming holding companies, etc. This did not work. The surety filed a lawsuit against the contractor and guarantors under the Agreement of Indemnity and moved for a preliminary injunction to require the contractor to post collateral security and to prevent the contractor from disposing of assets. Guess what? The surety prevailed on its motion for an injunction and the Middle District Court ordered that the contractor post the requested collateral that included properties the contractor tried to shield and prevented the contractor and certain holding companies it formed from disposing or encumbering of assets (inclusive of the real property is was ordered to post as collateral).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CHART SUMMARIZING ENFORCEMENT OF CONSTRUCTION LIEN AND PAYMENT BOND RIGHTS

Posted on December 30, 2014December 30, 2014 by Edward Garber

Previously, I included a chart that summarizes the preliminary notice requirements for construction liens and payment bonds in Florida. This chart focuses on steps a potential lienor / claimant must undertake to preserve lien or payment bond rights.

Now that the lienor / claimant preserved its rights to record a lien or pursue a claim against the payment bond, what are the next steps to undertake if in fact that lienor is owed money? To follow-up on this preliminary notice chart is a chart that summarizes these next steps of enforcing the lienor’s / claimant’s rights against the real property (in the case of a lien) or the payment bond.

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THE DIFFICULTY IN RAISING EQUITABLE TOLLING TO JUSTIFY AN UNTIMELY MILLER ACT PAYMENT BOND LAWSUIT

Posted on December 23, 2014December 23, 2014 by Edward Garber

Previously, I discussed the statute of limitations for a Miller Act payment bond claim and the equitable tolling of the limitations based on a claimant’s late filing of a Miller Act payment bond lawsuit.

Another decision came out in U.S. ex rel. Walter Toebe Construction Co. v. The Guarantee Co. of North America, 2014 WL 7211294 (E.D. Mich. 2014), dealing with the exact same subject matter of a claimant raising equitable tolling to overcome filing a Miller Act payment bond lawsuit outside of the statute of limitations. Understanding the statute of limitations for a Miller Act payment bond claim is vital to a claimant’s rights on a federal construction project because the doctrine of equitable tolling (of the statute of limitations) is not designed to simply allow a careless claimant to untimely file a lawsuit.

In this case, a sub-subcontractor was hired to install drilled shafts on a federal project. The sub-subcontractor was owed approximately $500,000 and demanded arbitration with the subcontractor that hired it and the Miller Act payment bond surety. The surety apparently participated in the arbitration hearing and on the last day of the hearing the arbitrators dismissed the surety from the arbitration pursuant to the surety’s motion to dismiss for lack of jurisdiction. The arbitrators then issued an award in favor of the sub-subcontractor against the subcontractor that was confirmed by a Michigan circuit court. The subcontractor failed to pay the judgment and the sub-subcontractor demanded that the Miller Act payment bond surety pay the judgment. The surety (properly) refused stating that the sub-subcontractor failed to file a lawsuit within the one year limitations period set forth in the Miller Act.

The sub-subcontractor then filed a Miller Act payment bond lawsuit in federal court and argued that the statute of limitations to file a Miller Act payment bond lawsuit should be equitably tolled in light of the arbitration proceeding and the surety’s participation in the arbitration (until it was dismissed because there was no jurisdiction to bind the surety to an arbitration award).

A Miller Act payment bond lawsuit must be brought no later than one year after a claimant’s final / last furnishing of labor or materials. Here, it was clear that the lawsuit was filed well outside of the one-year statute of limitations. Appreciating this, the sub-subcontractor argued the statute of limitations should be equitably tolled.

“Equitable tolling allows a federal court to toll a statute of limitations when a litigant’s failure to meet a legally-mandated deadline unavoidably arose from circumstances beyond that litigant’s control.

***

To determine whether equitable tolling is available to a plaintiff, a court considers five factors: (1) the plaintiff’s lack of notice of the filing requirement; (2) the plaintiff’s lack of constructive knowledge of the filing requirement; (3) the plaintiff’s diligence in pursuing her rights; (4) an absence of prejudice to the defendant; and (5) the plaintiff’s reasonableness in remaining ignorant of the particular legal requirement.”

United States ex. rel. Walter Toebe Construction Company, supra, at *3-4 (internal citations and quotations omitted).

Unfortunately for the sub-subcontractor, its failure to file a lawsuit within the one-year limitations period did not fit into any of the equitable tolling factors. The sub-subcontractor did not suggest, nor could it really, that it did not have notice of the statute of limitations to file a Miller Act claim. The sub-subcontractor could not argue that it actively took steps to timely file the lawsuit, because it did not. And, the sub-subcontractor could rely on no law to support its argument that the statute of limitations should be tolled pending an arbitration; and, in fact, there is law that states otherwise.

This case has important considerations:

It is important for a potential Miller Act payment bond claimant on a federal project to know what it needs to do to preserve payment bond rights including the timely filing of a lawsuit no later than one year from its last furnishing of labor or materials.

It is important for a potential Miller Act payment bond claimant to timely file its lawsuit in federal district court to ensure its lawsuit is timely filed. Even if a claimant wants to arbitrate with the party that hired it, it is still imperative that the claimant timely files the lawsuit to preserve its payment bond rights and avoid any argument that the lawsuit was not timely filed.

Equitable tolling is a challenging doctrine, especially in the Miller Act context where claimants have statutory notice of their rights. Claimants certainly do NOT want to be in a position where they are trying to rely on this doctrine to overcome the late filing of a Miller Act payment bond claim because it is more often than not a losing argument.

YES, LIEN PRIORITY IS IMPORTANT

Posted on December 19, 2014December 19, 2014 by Edward Garber

When a construction lender forecloses, a lienor (e.g., contractor, subcontractor, supplier) is in a bad predicament because the lender’s mortgage will maintain priority over the lienor’s construction lien. The lienor would be named in the lender’s lawsuit (provided a lien has been recorded) because the lender will look to foreclose or wipe out the lienor’s inferior construction lien.

From a real-world standpoint, if there is not enough equity in the real property to satisfy the lender’s mortgage / loan, there is not going to be any surplus from a foreclosure sale to satisfy the inferior construction lien(s). Since a lien really is only as good as the equity in the real property being liened, if there is not any equity in the real property and/or the construction lender is foreclosing, pursuing the lien may be an exercise in futility.

Sometimes, due to the lack of equity in the real property at the time of the foreclosure, the lender will file the foreclosure lawsuit but delay in prosecuting the action. One reason is that the lender knows the owner is under water and hopes the value in the property increases down the road. The lender knows that it will ultimately take possession of the real property but at the time of the foreclosure the value of the property is much less than the amount owed under the loan.

Unfortunately, irrespective of any delay by the lender in prosecuting the foreclosure, the lender’s interest in the real property will always take priority. There is little the lienor can do to establish that its lien should jump priority over the lender’s mortgage. This point was confirmed in the non-construction case U.S. Bank National Association v. Farhood, 39 Fla. L. Weekly D12594a (Fla. 1^st DCA 2014), where the appellate court claimed that it was error for a trial court to sanction a lender in a mortgage foreclosure lawsuit for dilatory practices by deeming that a condominium association’s lien on a unit for unpaid assessments took priority over the mortgage.

So, yes, the priority of your construction lien is important and should always be a consideration in a lien foreclosure action.

CHART SUMMARIZING PRELIMINARY NOTICE REQUIREMENTS FOR LIENS AND PAYMENT BONDS

Posted on December 16, 2014December 16, 2014 by Edward Garber

In previous articles, I discussed preliminary notice requirements to properly preserve construction liens and payment bonds on private projects, payment bonds on public projects, and public payments bonds for Florida Department of Transportation (FDOT) projects. Now, how about a chart that assists in summarizing this information:

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INCLUDE PROPER (LIENABLE) AMOUNTS IN YOUR CONSTRUCTION LIEN!

Posted on December 13, 2014December 13, 2014 by Edward Garber

Contractors, subcontractors, and suppliers need to appreciate what amounts to actually include in a construction lien before preparing and recording that lien. Stated differently, contractors, subcontractors, and suppliers need to appreciate what items are lienable and what items are not. In a nutshell, the item needs to relate to a labor, service, or material constituting an improvement to the real property—the item needs to bestow a permanent benefit on the real property and should be performed under another’s (e.g., general contractor) direct contract with the owner.

Not every item constitutes an improvement / bestows a permanent benefit to real property.

Items that have NOT been found to be properly lienable include without limitation:

Extended general conditions / delay damages;
Residential cleaning;
Maintenance services including landscaping and pool upkeep (see example below);
Materials from a supplier not incorporated into property (excluding specially fabricated materials);
Lost profit;
Expert witness services;
Insurance and property tax payments for partially constructed home (see example below);
Constructing a removable kiosk at a mall (see example below); and
Extras (change order work) not performed in good faith, pursuant to the terms of a contract, within a reasonable time, and were unnecessary to finish a job.

For example, in Palm Beach Mall, Inc. v. Southeast Millwork, Inc., 593 So.2d 1121 (Fla. 4^th DCA 1992), a contractor constructed a kiosk in a mall and recorded a lien for unpaid amounts. The kiosk was not a permanent improvement to the mall, but was removable at the termination of the tenant’s lease. The Court held that the contractor could not lien for constructing the kiosk.

As another example, in Levin v. Palm Coast Builders and Const. Inc., 840 So.2d 316 (Fla. 4^th DCA 2003), a contractor recorded a lien that included costs for lawn maintenance, pool upkeep, utility charges, and association maintenance fees. Not only did the Court hold that these items were not lienable, but affirmed that the lien was fraudulent!

And, as the last example, in Sam Rodgers Properties, Inc. v. Chmura, 61 So.3d 432 (Fla. 2d DCA 2011), discussed in detail in a previous posting, a contractor was building a custom home when a payment dispute arose. The owner stopped making payments and the contractor ceased construction and recorded a lien. Subsequently, the contractor performed additional work to protect the unfinished structure from the elements and amended its lien to include these amounts as well as property taxes and insurance the contractor paid on the property. Regarding the additional work to protect the unfinished structure, the Court held that these amounts were lienable: “All of these items were contemplated by the contract, and all of them were completed in a good faith effort to secure the property and mitigate damages so that a bad situation did not become worse.” Chmura, 61 So.3d at 439. But, as it related to the property taxes and insurance, the Court held these items were not lienable as they pertained to the maintenance of the property as opposed to improvement of the property.

By including inappropriate amounts in a lien, a lienor runs the risk of having its lien declared fraudulent under Florida’s Lien Law that would not only render the lien invalid, but expose the lienor to liability. Do not let this happen to you!

VALIDITY OF NON-COMPETE AGREEMENTS

Posted on December 5, 2014December 5, 2014 by Edward Garber

The validity of a non-compete agreement (also referred to as a restrictive covenant since it imposes a restriction on trade or commerce) will be governed by Florida Statute s. 542.335. (A copy of this statute is set forth below). Written and signed non-compete agreements or clauses are presumptively valid if they are reasonable in time (the non-compete time period), area (geographic limitation), and line of business; these clauses cannot be overbroad.

Even if the non-compete agreement is in writing and signed by the employee, it still needs to be supported by a proven legitimate business interest justifying its enforcement (e.g., learning of trade secrets or confidential business information, relationships with customers or clients, customer or client goodwill associated with the business). Stated differently, the employer seeking to enforce the non-compete agreement against a former employee still needs to establish that the enforcement of the non-compete is reasonably necessary to protect its legitimate business interests.

To enforce non-compete agreements, a party (typically, the former employer) moves for injunctive relief.

The case of Ankarli Boutique, Inc. v. Ortiz, 2014 WL 6674727 (4^th DCA 2014) held that a two-year non-compete agreement, to the extent valid, applied from the time the former employee left the company. The case also maintained that the non-compete period could not be “nullified because the non-compete period was devoured by the time it took to appeal an erroneous ruling on the interpretation of the [non-compete] clause.” Ankarli Boutique, supra, at *1. In other words, if there is a delay in entering a ruling (i.e., an injunction) enforcing the non-compete clause, or the non-compete time period is consumed during the pendency of an appeal, the employer or party enforcing the clause is still entitled to reap the benefit of a valid non-compete clause. Thus, any delay tactic by litigating the issue or appealing the issue should not nullify an otherwise valid non-compete clause.

Florida Statute s. 542.335

(1) Notwithstanding s. 542.18 and subsection (2), enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, so long as such contracts are reasonable in time, area, and line of business, is not prohibited. In any action concerning enforcement of a restrictive covenant:

(a) A court shall not enforce a restrictive covenant unless it is set forth in a writing signed by the person against whom enforcement is sought.

(b) The person seeking enforcement of a restrictive covenant shall plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant. The term “legitimate business interest” includes, but is not limited to:

1. Trade secrets, as defined in s. 688.002(4).

2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets.

3. Substantial relationships with specific prospective or existing customers, patients, or clients.

4. Customer, patient, or client goodwill associated with:

a. An ongoing business or professional practice, by way of trade name, trademark, service mark, or “trade dress”;

b. A specific geographic location; or

c. A specific marketing or trade area.

5. Extraordinary or specialized training.

Any restrictive covenant not supported by a legitimate business interest is unlawful and is void and unenforceable.

(c) A person seeking enforcement of a restrictive covenant also shall plead and prove that the contractually specified restraint is reasonably necessary to protect the legitimate business interest or interests justifying the restriction. If a person seeking enforcement of the restrictive covenant establishes prima facie that the restraint is reasonably necessary, the person opposing enforcement has the burden of establishing that the contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interest or interests. If a contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest or interests, a court shall modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.

(d) In determining the reasonableness in time of a postterm restrictive covenant not predicated upon the protection of trade secrets, a court shall apply the following rebuttable presumptions:

1. In the case of a restrictive covenant sought to be enforced against a former employee, agent, or independent contractor, and not associated with the sale of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.

2. In the case of a restrictive covenant sought to be enforced against a former distributor, dealer, franchisee, or licensee of a trademark or service mark and not associated with the sale of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 1 year or less in duration and shall presume unreasonable in time any restraint more than 3 years in duration.

3. In the case of a restrictive covenant sought to be enforced against the seller of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 3 years or less in duration and shall presume unreasonable in time any restraint more than 7 years in duration.

(e) In determining the reasonableness in time of a postterm restrictive covenant predicated upon the protection of trade secrets, a court shall presume reasonable in time any restraint of 5 years or less and shall presume unreasonable in time any restraint of more than 10 years. All such presumptions shall be rebuttable presumptions.

(f) The court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is a third-party beneficiary of such contract or is an assignee or successor to a party to such contract, provided:

1. In the case of a third-party beneficiary, the restrictive covenant expressly identified the person as a third-party beneficiary of the contract and expressly stated that the restrictive covenant was intended for the benefit of such person.

2. In the case of an assignee or successor, the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.

(g) In determining the enforceability of a restrictive covenant, a court:

1. Shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.

2. May consider as a defense the fact that the person seeking enforcement no longer continues in business in the area or line of business that is the subject of the action to enforce the restrictive covenant only if such discontinuance of business is not the result of a violation of the restriction.

3. Shall consider all other pertinent legal and equitable defenses.

4. Shall consider the effect of enforcement upon the public health, safety, and welfare.

(h) A court shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement. A court shall not employ any rule of contract construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract.

(i) No court may refuse enforcement of an otherwise enforceable restrictive covenant on the ground that the contract violates public policy unless such public policy is articulated specifically by the court and the court finds that the specified public policy requirements substantially outweigh the need to protect the legitimate business interest or interests established by the person seeking enforcement of the restraint.

(j) A court shall enforce a restrictive covenant by any appropriate and effective remedy, including, but not limited to, temporary and permanent injunctions. The violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of a restrictive covenant. No temporary injunction shall be entered unless the person seeking enforcement of a restrictive covenant gives a proper bond, and the court shall not enforce any contractual provision waiving the requirement of an injunction bond or limiting the amount of such bond.

(k) In the absence of a contractual provision authorizing an award of attorney’s fees and costs to the prevailing party, a court may award attorney’s fees and costs to the prevailing party in any action seeking enforcement of, or challenging the enforceability of, a restrictive covenant. A court shall not enforce any contractual provision limiting the court’s authority under this section.

(2) Nothing in this section shall be construed or interpreted to legalize or make enforceable any restraint of trade or commerce otherwise illegal or unenforceable under the laws of the United States or of this state.

(3) This act shall apply prospectively, and it shall not apply in actions determining the enforceability of restrictive covenants entered into before July 1, 1996.

A LETTER OF INTENT CAN FORM THE BASIS OF AN ENFORCEABLE CONTRACT

Posted on December 2, 2014December 2, 2014 by Edward Garber

Just because there is not an executed subcontract, does not mean there is not an enforceable written contract between a contractor and subcontractor. While it is good practice for there to be an executed contract in place, this does not always occur. But, this lack of occurrence does not necessarily mean a performing subcontractor can escape contractual obligations merely because it never signed the subcontract. Indeed, many times a subcontractor starts performing based on a letter of intent that it received from the contractor. The letter of intent may indicate that a formal subcontract will be furnished to the subcontractor such as when the contractor is awarded the project or after the subcontractor starts performing under the letter of intent. If the subcontractor starts performing based on the letter of intent that it received, this letter of intent can certainly form the basis of an enforceable contract!

The decision in Sealevel Construction, Inc. v. Westcoast Corp., 2014 WL 3587264 (E.D.La. 2014) exemplifies how a letter of intent can form the basis of a written contract. Here, a subcontractor on a federal project solicited bids from sub-subcontractors to perform aspects of its work based on the plans and specifications for the project. The specifications, among other things, contained a liquidated damages section. A sub-subcontractor submitted a bid to install concrete piles. The subcontractor accepted the bid and issued the sub-subcontractor a letter of intent. The letter of intent was signed by both the subcontractor and sub-subcontractor and referenced the specifications. The letter of intent further stated that a formal subcontract would be entered between the parties; however, a subcontract was never executed.

The sub-subcontractor started to perform its scope of piling work based on the letter of intent. Thereafter, the subcontractor notified the sub-subcontractor of delays with the sub-subcontractor’s scope of work. The sub-subcontractor was unable to cure the delays and the subcontractor hired another entity to supplement its sub-subcontractor’s work. Nevertheless, as a result of delays to the sub-subcontractor’s scope of work, the government assessed liquidated damages against the prime contractor. The prime contractor, in turn, withheld the amount of the liquidated damages from the subcontractor in addition to the prime contractor’s own extended general conditions. The subcontractor then withheld this money from its sub-subcontractor in addition to its own extended general conditions.

The Eastern District of Louisiana found that the letter of intent served as an enforceable contract between the subcontractor and sub-subcontractor and the sub-subcontractor breached the letter of intent through its delayed performance. As a result, the subcontractor was entitled to withhold / back-charge the sub-subcontractor for (i) the costs spent on the supplemental entity to mitigate the sub-subcontractor’s delay and (ii) the portion of liquidated damages attributable to the sub-subcontractor’s delay. The court did not, however, allow the subcontractor to back-charge the sub-subcontractor for other delay-related costs (such as the prime contractor’s and the subcontractor’s extended general conditions) since the sub-subcontractor never contractually agreed to these types of damages unlike the liquidated damages section that was included in the specifications referenced in the letter of intent.

Take-aways:

If a letter of intent is issued, the letter of intent should identify the subcontract amount, the applicable scope of work, and reference the plans and specifications. The more detail in the letter of intent the better so that if the subcontractor starts performing based on the letter of intent there is a strong argument that the detailed letter of intent served as the contract between the parties (such as if the subcontractor refuses to sign the subcontract, the parties are unable to agree on the formal written subcontract, or if the subcontract is never issued).

It is good practice to have both the contractor and subcontractor sign the letter of intent.

An unexecuted contract does not mean there is not a written contract between the parties. Parties need to consider this before taking an extreme position that a contract does not exist or that they are not bound by certain requirements.

It is good practice for a party subcontracting work to be able to flow-down damages such as liquidated damages and their own extended general conditions. In this case, the subcontractor would have been able to flow-down the prime contractor’s and its extended general conditions attributable to the sub-subcontractor’s delay had this been identified in the letter of intent or clarified by an executed written subcontract.