CONDITIONAL PAYMENT BONDS AND TRANSFERRING A LIEN TO THAT BOND

Posted on October 31, 2015October 31, 2015 by Edward Garber

There are two types of statutory payment bonds that can be furnished on private construction projects in Florida: (1) unconditional payment bonds issued pursuant to Florida Statute s. 713.23 and (2) conditional payment bonds issued pursuant to Florida Statute s. 713.245.

With an unconditional payment bond, an owner’s real property is exempt from construction liens from subcontractors and suppliers.

However, with a conditional payment bond, an owner’s real property is not exempt from construction liens from subcontractors and suppliers. The conditional payment bond operates to condition claims against the bond to the extent the general contractor (principal of the bond) received payment from the owner. If the general contractor did not receive payment from the owner, then the conditional payment bond does not apply. If the general contractor did receive payment from the owner, then the conditional payment bond can operate to transfer the lien to the security of the conditional payment bond.

Because a lienor realistically has no way of knowing whether the general contractor was paid for their work, they are required to timely perfect their lien rights under Florida law. This means serving a Notice to Owner and recording a construction lien within 90 days of final furnishing.

Conditional payment bonds are fairly confusing so let’s use hypotheticals to explain.

Hypothetical #1: Owner pays contractor for painting scope of work. Painter timely served a Notice to Owner and recorded its lien for $75,000.

The objective here would be to transfer the painter’s lien to the conditional payment bond since the contractor has been paid for this work. Under this scenario, the owner or the contractor can record within 90 days from the recording of the lien a Certificate of Payment to the Contractor certifying that the contractor has been paid $75,000 (full lien amount) for the work described in the lien. The Certificate of Payment to the Contractor would be recorded with a Notice of Bond attaching a copy of the conditional payment bond.

If the contractor records the Certificate of Payment to the Contractor (together with the Notice of Bond), then the lien will be transferred to the conditional payment bond to the extent of the payment identified.

If the owner records the Certificate of Payment to the Contractor (together with the Notice of Bond), the contractor can do three things: (1) record a Joinder in Certificate of Payment agreeing with the Certificate of Payment to the Contractor recorded by the owner, (2) record a Notice of Contest of Payment stating that the contractor has only been paid “x” amount of the lien; or (3) do nothing. If the contractor does nothing or records a joinder in the Certificate of Payment, the lien will be transferred to the bond. If the contractor records a Notice of Contest of Payment, the “contested” portion will remain a lien against the real property and any uncontested amount will be transferred to the conditional payment bond.

Hypothetical #2: Owner paid contractor $50,000 but painter’s lien is $75,000. Owner records Certificate of Payment to the Contractor for $75,000.

Under this scenario, the contractor may want to record a Notice of Contest of Payment within 90 days from the lien certifying it has only been paid $50,000. If the contractor does this, the painter will have a $25,000 lien claim (the contested amount) and a $50,000 claim transferred to the conditional payment bond (the uncontested amount) since this amount would be transferred to the bond.

Hypothetical #3: Owner paid contractor for the painter’s scope and the painter liened. Neither the contractor nor the owner recorded a Certificate of Payment to the Contractor together with a Notice of Bond within 90 days from the lien.

Under this scenario, the painter’s lien has not been transferred to the conditional payment bond even though the owner paid the contractor for the painting scope of work. But, the lien can still be transferred to the security of the conditional payment bond even after 90 days and even after the painter files a lien foreclosure lawsuit. The same procedure will still need to be followed with the recording of a Certificate of Payment to the Contractor together with the Notice of Bond. The difference is that the Notice of Bond must be jointly signed by the owner, the contractor, and the surety for the lien to be transferred to the bond. See Fla.Stat. 713.245(4) (“Any notice of bond recorded more than 90 days after the recording of the claim of lien shall have no force or effect as to that lien unless the owner, the contractor and the surety all sign the notice of bond.”).

As you can see, conditional payment bonds can be procedurally confusing. The key for a lienor is that it still must perfect its lien rights and record and pursue its construction lien. The key for the owner and the contractor is that there are steps in place to transfer the lien or a portion of that lien (based on what the contractor has been paid) to the security of the conditional payment bond.

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.

TENDERING UNDISPUTED SUMS TO CUT OFF ACCRUAL OF INTEREST

Posted on October 17, 2015October 17, 2015 by Edward Garber

Disputes over the quantum of money owed are not uncommon. For instance, say a subcontractor claims it is owed $500,000 from the general contractor and the general contractor disputes this amount. Say that of this $500,000, $300,000 is undisputed contract balance and $200,000 is disputed change orders. In this situation, what should the general contractor do?

The issue in this hypothetical is the $300,000 in undisputed contract balance. I am a strong believer in paying or tendering undisputed amounts so that the dispute is confined to the issues and amounts actually disputed between the parties.

Why tender undisputed funds? An appropriate tender is a tender of money without any conditions tied to the depositing of the money; the tender must be absolute and unconditional. See James A. Cummings, Inc. v. Young, 589 So.2d 950,955 (Fla. 3d DCA 1991) (finding that a written proposal to pay money after litigation commenced does not constitute a tender and a tender cannot include conditions on the money).

The check should be cash or a cashier’s check and should include interest on the undisputed money owed. “[T]he tender of a mere check does not constitute payment of cash or its equivalent and it thus makes such a tender of payment merely conditional.” See Enriquillo Export & Import, Inc. v. M.B.R. Industries, Inc., 733 So.2d 1124, 1127 (Fla. 4^th DCA 1999).

The objective of the tender is to relieve the paying party from any subsequent accrual of interest owed on the money. See Morton v. Ansin, 129 So.2d 177, 182 (Fla. 3d DCA 1961); see also Ismark v. W.G.Mills, Inc., 899 So.2d 1213 (Fla. 2d DCA 2005) (“[A] tender of sums due on a date certain under a contract will stop the accrual of prejudgment interest only when the tender is absolute and unconditional.”). The effect of an appropriate tender is to cut off additional interest owed on the money from the date of the tender.

“A tender of less than the full amount due, however, is insufficient. Thus, if the amount of the tender does not include the interest to which a creditor is entitled, the tender is nugatory.” Dade County v. American Re-Insurance Co., 467 So.2d 414 (Fla. 3d DCA 1985) (internal citations omitted) (finding that tender was insufficient since it failed to include interest due on owed amount).

There is authority that a party can tender a disputed or protested amount as long as there are no conditions tied to the depositing of the money. See Gascoyne v. Bay Towne Property Owners Ass’n, Inc., 575 So.2d 671, 672 (Fla. 2d DCA 1991) (“A tender under protest will only be conditional if acceptance is predicated on the recipient being required to take some action.”). The reason to do this would be to cut off the accrual of interest on the money. However, in my opinion, tendering protested or disputed amounts should be carefully done to avoid the appearance that it is indeed a conditional payment or an insincere tender.

Whether to tender money should ideally be done under the guidance of your attorney. And, if a tender is considered, it is important that it is done properly so that you get the value of the reason for the tender–to cut off the accrual of interest.

A FORUM SELECTION PROVISION IN A SUBCONTRACT CAN BENEFIT A MILLER ACT PAYMENT BOND SURETY

Posted on October 10, 2015October 10, 2015 by Edward Garber

The recent opinion in U.S. ex rel. Galvin Bros., Inc. v. Fidelity and Deposit Co. of Maryland, 2015 WL 5793346 (E.D.N.Y. 2015) illustrates when a forum selection provision in a subcontract can benefit a Miller Act payment bond surety.

The subcontract in this case contained the following forum selection provision:

6.4 Notwithstanding the foregoing, and in consideration of $100 paid to the Subcontractor, the receipt whereof is acknowledged as part of the Subcontract Sum, at the sole option of the Contractor, any controversy, dispute or claim between the Contractor and the Subcontractor related in any way to this Agreement or the Project may be determined by a separate action in court or by a separate arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then pertaining, whichever the Contractor may elect in its sole discretion. The parties expressly agree that the venue of any such court action or arbitration shall be Boston, Massachusetts. Any award rendered by the arbitrator or arbitrators shall be final and judgment may be entered upon it in accordance with the applicable law in any court having jurisdiction.

6.8 The Subcontractor, on behalf of itself and its assignees, sureties and agents, if any, agrees that the dispute resolution procedure in this Article shall inure to the benefit of, and be enforceable by, the Contractor and its sureties or assignees, and that such terms shall be deemed incorporated into any payment, labor and material or other similar bond issued by or for the Subcontractor regarding the Project.

Galvin Bros., supra, at *1.

The bolded language is key as this language is designed to allow the Miller Act payment bond surety to reap the benefit of the forum selection provision in the subcontract. This makes sense since the prime contractor routinely defends and indemnifies its surety.

The subcontractor in this case sued the prime contractor’s Miller Act payment bond surety where the project was located. The Miller Act requires a claimant to sue the surety in the federal district court where the contract is performed. Notwithstanding, the surety moved to dismiss the action or transfer venue to Boston, Massachusetts in accordance with the forum selection provision in the subcontract.

The federal district court dismissed the lawsuit for numerous reasons.

First, the court held that even though the Miller Act requires the lawsuit to be brought in the federal district court where the contract was to be performed, such “venue” can be modified by contract and, particularly, by a forum selection provision.

Second, the language bolded above in the forum selection provision allows the surety to enforce the forum selection provision in the subcontract.

Third, although all witnesses are located outside of Boston and are instead located where the project is located (and it would be more expensive to litigate in Boston), this alone is not enough to render meaningless a forum selection provision in a negotiated subcontract. In other words, the subcontractor cannot demonstrate that it would be deprived of a fair opportunity to litigate its Miller Act payment bond claim in Boston.

And, fourth, because the forum selection provision allows the parties to arbitrate at the sole option of the contractor, transferring venue would not be appropriate since the contractor / surety may elect to arbitrate this dispute. For this reason, the court dismissed the lawsuit. (To me, dismissing this action makes no sense other than to potentially create a statute of limitations argument when the subcontractor elects to re-file the lawsuit in a federal district court in Boston. And, to the extent the surety or prime contractor want to compel arbitration, they can certainly file a motion to compel arbitration pursuant to the forum selection provision once the action is transferred.)

If you are a prime contractor, the bolded language is language that you may consider incorporating into your subcontracts so that your surety can enforce a forum selection provision in the subcontract. And, if you are a subcontractor, be mindful of such a provision when electing where to file a lawsuit such as a Miller Act payment bond lawsuit.

ENSUING LOSS EXCEPTION IN PROPERTY INSURANCE POLICIES

Posted on October 3, 2015October 3, 2015 by Edward Garber

Property insurance policies such as builder’s risk policies contain a design defect / faulty workmanship exclusion (as well as other exclusions for excluded risks or perils). But, certain exclusions such as the design defect / faulty workmanship exclusion may contain what is referred to as the “ensuing loss exception.” Stated differently, a design defect / faulty work is excluded from the insurance policy BUT losses ensuing (or separately resulting) from the design defect / faulty work are excepted from this exclusion and covered under the policy. If your initial reaction as to the application of the ensuing loss exception is “huh?!?,” then that exact sentiment is shared by others. Trust me!

The Florida Supreme Court decision in Swire Pacific Holdings, Inc. v. Zurich Ins. Co., 845 So.2d 161 (Fla. 2003) dealt with a design defect exclusion that read:

Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or omission in design, plan or specification.

This initial part of this exclusion is a design defect exclusion. The underlined part is the ensuing loss exception to this exclusion.

In Swire, errors and omissions with the structural design and, therefore, structural work, of a condominium project halted the issuance of the certificate of occupancy for the condominium. The developer incurred $4.5 million to retain a new structural engineer to modify the plans as well as corrective structural work in the field. The developer then submitted a builder’s risk insurance claim. The builder’s risk insurance carrier denied coverage based on the foregoing design defect exclusion arguing that the developer incurred money to correct a design defect, but there were no covered losses or damages ensuing from the design defect. The Florida Supreme Court agreed with the builder’s risk insurer:

Swire’s [developer’s] sole claim here is an attempt to recover the expenses incurred in repairing a design defect. No ensuing loss resulted [from the design defect] to invoke the exception to the exclusionary provision…. No loss separate from, or as a result of, the design defect occurred. Therefore, we conclude…Swire is not entitled to recover the expenses associated with repairing the design defect. To hold otherwise would be to allow the ensuing loss provision to completely eviscerate and consume the design defect exclusion….This [builder’s risk insurance] contract does not operate as a warranty for faulty workmanship and should not be transformed into a guarantee against design and construction defects.

Swire, 845 So.2d at 167-68.

In a more recent case, Peek v. American Integrity Ins. Co. of Florida, 2015 WL 5616294 (Fla. 2d DCA 2015), a property insurance policy contained the following ensuing loss exception:

“We do not insure loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.”

Coverages A and B contained exclusions for latent defects, corrosion, faulty workmanship and pollution. Thus, the property insurance policy did not cover these items but it did cover “any ensuing loss…not excluded or excepted in this policy.”

Peek dealt with homeowners moving into a house with Chinese drywall. The homeowners contended that the Chinese drywall resulted in a noxious smell and corroded air conditioning coils. The homeowners contended that the defective drywall (exclusion) resulted in (a) the loss of use of their house due to the noxious smell and (b) damage in the form of corrosion to air conditioning coils, and that such items should be covered under the ensuing loss exception.

The Second District Court of Appeal disagreed with the homeowners regarding the application of the ensuing loss provision. The court explained:

An ensuing loss follows as a consequence of an excluded loss, and the crux of the ensuing loss provision is that there must be a covered cause of loss that ensues from the excluded cause of loss….Given that American Integrity [property insurer] proved that the Chinese drywall was an excluded defective construction material, it was the Peeks’ [homeowners] burden to demonstrate that the policy covered a loss that occurred subsequent to and as a result of that excluded peril.

First, the evidence below demonstrated that the odor present in the Peeks’ home was a manifestation of the sulfur gases emanating from the Chinese drywall and that the corrosion was caused by the chemicals released by the sulfur gases, which emanated from the Chinese drywall. As such, the losses were not “ensuing.” …

Additionally, both of the claimed ensuing losses are specifically excluded under the policy because an excluded cause of loss—defective Chinese drywall—led directly to another set of exclusions—pollution and corrosion….. Here, the damage to the Peeks’ home and consequently the odors and corrosion of metals and electronics were directly related to the defective Chinese drywall and thus directly stemmed from an excluded risk. Thus coverage was excluded under the express terms of the insurance contract.

Peeks, supra, at *4.

Recovering losses or damage under an insurance policy can be challenging in light of the various exclusions in the policy. Even the ensuing loss exception to exclusions, as demonstrated above, does not except from policy exclusions the types of losses that an insured may seek to recoup.