SUBCONTRACTOR PASS-THROUGH CLAIMS AND THE CONTRACT DISPUTES ACT

Posted on April 26, 2016April 26, 2016 by Edward Garber

A prime contractor submitting a subcontractor’s pass-through claim MUST still comply with the certification requirements in the Contract Disputes Act. And, the prime contractor cannot sponsor a pass-through claim unless it remains liable to the subcontractor for the claim, a doctrine known as the Severin doctrine based on the decision Severin v. U.S., 99 Ct.Cl. 435 (Ct.Cl. 1943). These are important concepts for a prime contractor and subcontractor to understand and appreciate on federal projects.

Certification of Pass-Through Claims

For claims of more that $100,000 (including subcontractor pass-through claims) submitted to the federal government, the contractor must certify:

(A) the claim is made in good faith;

(B) the supporting data are accurate and complete to the best of the contractor’s knowledge and belief;

(C) the amount requested accurately reflects the contract adjustment for which the contractor believes the Federal Government is liable; and

(D) the certifier is authorized to certify the claim on behalf of the contractor.

40 U.S.C. s. 7103(b).

The certification of the claim is defective if it does not include these four elements (set forth in (A) through (D) above).

However, if the certification is defective, this can be cured prior to final judgment by a court or a final decision by a federal agency. See M.K. Ferguson Co. v. U.S., 2016 WL 1551650 (Fed.Cl. April 14, 2016). On the other hand, a failure to certify (versus a defective certification) cannot be cured meaning the contractor has not submitted a proper claim under the Contract Disputes Act. Id.

Severin Doctrine

According to the Severin doctrine, “a prime contractor may not sponsor a pass-through claim unless it remains liable to its subcontractor on the underlying claim.” M.K. Ferguson, supra, at *13. If the federal government is relying on the Severin doctrine:

(1) the burden is on the government to prove that the prime contractor is no longer liable to its subcontractor on the pass-through claim; and

(2) the Severin doctrine generally requires an ‘iron-bound release or contract provision immunizing the prime contractor completely from any liability to the sub.

Id. at *14 quoting E.R. Mitchell Constr. Co. v. Danzig, 175 F.3d 1369, 1370-71 (Fed.Cir. 1999)

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.

QUICK NOTE: TIMING TO SUE PUBLIC PAYMENT BOND FOR RETAINAGE ON PUBLIC CONSTRUCTION PROJECTS

Posted on April 22, 2016April 22, 2016 by Edward Garber

You are a subcontractor (or sub-subcontractor) on a public construction project. The general contractor has a public payment bond per Florida Statute s. 255.05. You finished your scope some time ago but you are still owed retainage. When do you sue for retainage? There is a statutory retainage exception that governs the timing of when to sue for retainage. Check out this article for the applicable statutory language regarding the retainage exception. Timing is important to ensure that you do not prematurely sue for retainage or, worse, sue for retaiange after the statute of limitations expired.

QUICK NOTE: COVERAGE MUST FIRST BE ESTABLISHED TO HAVE A BAD FAITH INSURANCE CLAIM

Posted on April 20, 2016April 20, 2016 by Edward Garber

In order to have a bad faith insurance claim you must first establish that there was coverage under the insurance policy. Otherwise, the bad faith claim is prematurely filed and will be dismissed or abated.

THERE DOES NOT HAVE TO BE A PREVAILING PARTY FOR PURPOSES OF ATTORNEY’S FEES IN CONSTRUCTION LIEN DISPUTE

Posted on April 16, 2016April 16, 2016 by Edward Garber

Just because you are suing to foreclose your construction lien does NOT mean you will automatically recover your attorney’s fees as the prevailing party. There does NOT have to be a prevailing party for purposes of recovering attorney’s fees. This means a court or arbitrator could rule that neither party was the prevailing party for purposes of attorney’s fees; thus, neither party can recover their attorney’s fees from the other (or presumed losing) party. This is an important consideration because it is impossible to predict on the frontend whether a court or arbitrator will deem you the prevailing party for purposes of recovering your attorney’s fees. This is because a court or arbitrator is to employ the significant issues test to determine which party prevailed on the significant issues to be deemed the prevailing party; and, again, a court or arbitrator could find neither party prevailed on the significant issues, hence there is no prevailing party.

This issue was clarified the hard way in Wells v. Halmac Development, Inc., 41 Fla.L.Weekly D924a (Fla. 3d DCA 2016) when an arbitrator ruled that neither party was the prevailing party for purposes of awarding attorney’s fees. (Check here for a history of this dispute.) The attorney’s fees incurred in the arbitration were probably significant so a party believed it should have been declared the prevailing party for purposes of attorney’s fees and continued to fight this issue in court when the arbitration award was trying to be confirmed and enforced. The fight turned acrimonious–there were motions for sanctions served and two appeals.

Of applicability here, one of the appeals dealt with whether the trial court should have granted attorney’s fees pursuant to a motion for sanctions due to the opposing party continuing to try to declare itself as the prevailing party after (a) the arbitrator determined there would be no prevailing party and (b) the arbitrator’s determination corresponded with the law. The Third District held that the motion for sanctions should have been granted awarding the party attorney’s fees because the continuous fight to be declared the prevailing party was not colorable under the law—the law was clear that there did NOT have to be a prevailing party for purposes of attorney’s fees in a construction lien action. On this point, the Third District stated:

In fact, at the time Castro filed his motion requesting the trial court to declare him the prevailing party, the Florida Supreme Court had already weighed in on this issue and had explicitly “reject[ed] the notion that in every construction lien case the trial court is compelled to find a prevailing party.” Trytek, 3 So. 3d at 1204 n. 13. The Trytek court further emphasized that there might not always be a “prevailing party” in these types of suits and held that “the possibility that neither party is a ‘prevailing party’ is consistent with an application of the ‘significant issues’ test of Moritz and .” Id. at 1203. Most notably for our analysis, Trytek made it clear that Hollub and similar cases should not be read to mean that a prevailing party must be declared in a construction lien action:

We do not construe any of the appellate cases concerning prevailing party attorneys’ fees to mandate that there be a prevailing party, only that where a “prevailing party” is determined, the entitlement to attorneys’ fees is mandatory. See Pennington & Assocs., Inc. v. Evans, 932 So.2d 1253, 1254 (Fla. 5th DCA 2006); Hollub Constr. Co. v. Narula, 704 So.2d 689, 690 (Fla. 3d DCA 1997); Grant v. Wester, 679 So.2d 1301, 1308 (Fla. 1st DCA 1996); Sanfilippo v. Larry Giacin Tile Co., 390 So.2d 413, 414 (Fla. 4th DCA 1980). We reject the notion that in every construction lien case the trial court is compelled to find a prevailing party. See Kenmark Constr., Inc. v. Cronin, 765 So.2d 129 (Fla. 2d DCA 2000) (declining to announce a bright-line rule that a trial court must find a prevailing party in every construction lien action).

Id. at 1204 n. 13.

The Trytek decision — issued in 2009 — represented the settled law in Florida well before the arbitration proceedings in this case, and the arbitrator specifically relied upon and cited to Trytek in its determination that “there is no prevailing party for the purposes of an award of attorney’s fees.” Therefore, Castro’s counsel knew or should have known that any claim that Castro was entitled to be declared the prevailing party, after the arbitrator clearly determined there was no prevailing party, “[w]ould not be supported by the application of then-existing law to those material facts.” § 57.105(1)(b), Fla. Stat. (2012). This court has already and necessarily made this very determination when we held (in the prior appeal) that the trial court had no legal basis upon which to overturn the arbitrator’s determination (that there was no prevailing party) and to declare that Castro was the prevailing party.

Wells, supra.

If you extract anything from this case, it is that a court or arbitrator does NOT have to deem a party the prevailing party in a construction lien case. The court or arbitrator will do this by finding that neither party prevailed on the significant issues of the case (as determined by the court or arbitrator). As such, neither party is the prevailing party and neither party is entitled to attorney’s fees from the opposing party.

QUICK NOTE: PERFECT PRIVATE PROJECT PAYMENT BOND RIGHTS IF NOT IN PRIVITY WITH GENERAL CONTRACTOR

Posted on April 13, 2016April 13, 2016 by Edward Garber

Remember, if you are not in privity of contract with the general contractor on a private project where the general contractor furnished the owner with a payment bond (e.g., sub-subcontractor or supplier), you NEED to perfect your payment bond rights by initially serving a notice of intent to look to the bond on the general contractor. (Or, serve a notice to owner but make sure you serve a copy on the general contractor). Not serving the general contractor with this initial notice can deprive you of payment bond rights. How do you know if there is a payment bond in place? Pull up the notice of commencement recorded in the official records where the property is located which should identify if there is a payment bond and will attach a copy of the payment bond.

For more information on payment bond rights, check out this chart.

THERE IS VALUE RECORDING A NOTICE OF CONTEST OF LIEN

Posted on April 9, 2016April 9, 2016 by Edward Garber

If you receive a construction lien on your property, I have preached the value in recording a Notice of Contest of Lien to shorten the lienor’s statute of limitations to foreclose on the lien from 1 year to 60 days. If the unwary lienor fails to foreclose its lien within the shortened 60-day window, its lien is extinguished under the law. Ouch! (Check out this article and this article for more on Notice of Contest of Liens.)

Now, what if a lienor timely forecloses its lien and during the lien foreclosure lawsuit the lien is transferred from the real property to a lien transfer bond. Typically, if a lien foreclosure lawsuit is underway and the lien is transferred to a lien transfer bond, the lienor has one year from the date of the transfer to amend its lawsuit to sue the lien transfer bond. Could the owner record a Notice of Contest of Lien to shorten the lienor’s statute of limitations to amend its lawsuit from one year from the date of the transfer to 60 days?

In a recent case, the Second District held that an owner could record a Notice of Contest of Lien AFTER the lienor filed its lien foreclosure lawsuit to shorten to limitations period for the lienor to amend its lawsuit to sue the lien transfer bond to 60 days. In this case, because the lienor failed to amend its lawsuit within 60 days, the Second District held that the lienor lost its right to sue the lien transfer bond. This means the lienor no longer gets to foreclose its lien (against the real property or the lien transfer bond) all because a Notice of Contest of Lien was recorded after the lien foreclosure lawsuit was filed and after the lien was transferred to the bond. This case serves as a huge “W” for owners that appreciate the value of the Notice of Contest of Lien! See Hiller v. Phoenix Associates of South Florida, Inc., 41 Fla.L.Weekly D881d (Fla. 2d DCA 2016) (“It is undisputed Phoenix [lienor] took no action in this case within sixty days after Hiller [owner] transferred the lien to a bond and served the notice of contest. It is this failure on the part of Phoenix that compels reversal in this case. The fact that Phoenix had a proceeding pending against the lien at the same time of the transfer did not excuse compliance with the other provisions of Chapter 713 [Lien Law]).”)

Remember, there is oftentimes a strategic value recording a Notice of Contest of Lien if you are dealing with a construction lien.

QUICK NOTE: LIABILITY INSURER’S BAD-FAITH BASED ON TOTALITY OF THE CIRCUMSTANCES

Posted on April 3, 2016April 3, 2016 by Edward Garber

Generally, whether a liability insurer engaged in bad-faith is a question of fact to be determined based on the totality of factual circumstances. In other words, there is more to it then the insured being exposed to a verdict / judgment in excess of the insured’s liability policy’s limits since it is based on a totality of circumstances and reasonablness standard. As explained by the Eleventh Circuit quoting the Florida Supreme Court: “The insurer must investigate the facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so.” Moore v. Geico Ins. Co., 2016 WL 736824, *2 (11th Cir. 2016) quoting Berges v. Infinity Ins. Co., 896 So.2d 665, 668-69 (Fla. 2004). For more on a general understanding of bad-faith claims in Florida, check out this article.

INDEMNIFICATION PROVISIONS AND “IN WHOLE OR IN PART” LANGUAGE

Posted on April 2, 2016April 2, 2016 by Edward Garber

If you negotiate or prepare construction contracts, then you should be familiar with Florida Statute s. 725.06. This statute contains requirements for indemnification provisions in construction contracts and is a must-know and must-read for all construction participants responsible for negotiating and preparing construction contracts, especially those that contain indemnification provisions for bodily injury and property damage (and all such contracts do and should contain such indemnification language!). For more on Florida Statute s. 725.06, please check out these articles:

Although not a construction case, the opinion in ATC Logistics Corporation v. Southeast Toyota Distributors, LLC, 41 Fla. L. Weekly D816b (Fla. 1^st DCA 2016), demonstrates the importance of drafting clear indemnification language. This case contained the following indemnification provision:

(a) ATC [Carrier] shall indemnify and hold harmless SET from and against any and all losses, liabilities, damages, costs, fines, expenses, deficiencies, taxes and reasonable fees and expenses of counsel and agents, including any costs incurred in enforcing this Agreement, that SET may sustain, suffer or incur arising from (i) Carrier’s failure or alleged failure to comply, in whole or in part, with any of its obligations hereunder; (ii) any loss of or damage to a Vehicle while loaded onto, transported on or unloaded from a Car Carrier; (iii) any damage to any property of SET caused by the maintenance or operation of any Car Carrier or the loading or unloading of any Car Carrier; (iv) any claims by any third person with respect to death, injury or property damage caused by the maintenance or operation of any Car Carrier or the loading, transportation or unloading of Vehicles on or from a Car Carrier and (v) any claims resulting from or arising out of injury or death of any employee, agent of contractor of Carrier including claims alleging that SET failed to provide a safe place to work.

The indemnity obligation was broken into five (i – v) sections.

In this case, SET sued ATC (the named Carrier in the indemnification provision) to recover amounts it paid out in a settlement. SET argued that ATC was responsible for indemnifying it for its (SET’s own) negligence based on the language in section (i) that required ATC to indemnify SET for “Carrier’s failure or alleged failure to comply, in whole or in part, with any of its obligations hereunder.”

The issue, however, was that SET was really seeking indemnification relating to section (iv) which did NOT contain any “in whole or in part” language. In other words, section (iv) did not require ATC to indemnify SET for its actions whether caused “in whole or in part” by ATC’s negligence. Had section (iv) contained this “in whole or in part” language, then ATC would have likely been required to fully indemnify SET for its actions even if the damages were partially caused by the negligence of SET. While SET wanted the “in whole or in part” language included in section (i) to be read into the language in section (iv), this was NOT how this clause was written and the court is not there to rewrite parties’ contracts. Accordingly, the First District held that ATC was not required to indemnify SET for SET’s negligence.

Importantly, if the indemnification provision pertained to a construction contract and required the indemnitee (e.g., subcontractor) to indemnify the indemnitor (e.g., contractor), it would need to include certain language for it to be enforceable under s. 725.06. Such indemnification provisions that require the indemnitee to indemnify the indemnitor for “liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” Fla. Stat. s. 725.06.