DEMONSTRATING A FRAUDULENT INDUCEMENT CLAIM OR DEFENSE

Posted on January 12, 2020January 12, 2020 by Edward Garber

In a recent case, Florida’s Fourth District Court of Appeal reversed a trial court’s denial of a motion for a temporary injunction sought by an employer due to an independent contractor’s violation of a non-compete and non-solicitation provision in an employment / independent contractor agreement (“employment agreement”). You can find more on this case and the enforcement of the non-compete and non-solicitation clause here.

A worthy discussion in this case centers on the independent contractor’s fraudulent inducement defense. Specifically, the independent contractor, as a defense to the injunction, claimed that he was fraudulently induced into entering into the employment agreement because the employer promised he would make a certain amount of money and he would work predominantly in one geographic location. The employment agreement contained NO such representations. Instead, the employment agreement contained a fee and services schedule and the independent contractor would be compensated based on that schedule. It stated nothing as to the independent contractor only having to work, or predominantly working, in one geographic location, or that the independent contractor would be guaranteed “X” amount of money working in that location. Why is this important?

In order to support a claim or defense of fraudulent inducement, a party must prove the following elements: “1) a false statement concerning a material fact, 2) knowledge by the person making the statement that the representation is false, 3) intent by the person making the statement that the representation will induce another to act upon it, and 4) [justifiable] reliance on the representation to the injury of the other party.” GEICO General Ins. Co. v. Hoy, 136 So.3d 647, 651 (Fla. 2d DCA 2013 (citation omitted); see also Hillcrest Pacific Corp. v. Yamamura, 727 So.2d 1053, 1055 (Fla. 4th DCA 1999). “[T]o satisfy the element of an injury, the claimant must establish that he or she has sustained pecuniary damage or injury by which he or she has been placed in a worse position than he or she would have been absent the fraud.” Hoy, 136 So.3d at 651.

However, and this is a BIG however, “[A] party cannot recover in fraud for oral misrepresentations that are [covered or] later contradicted in a written contract.” Picture It Sold Photography, LLC v. Bunkelman, 45 Fla. L. Weekly D74a (Fla. 4th DCA 2020).

The employment agreement stated it was the entire agreement between the parties. (There is a reason why agreements contain language that states that the agreement is the final and complete agreement between the parties and supersedes prior agreements and representations between the parties. Such provision is not for naught!)

Hence, the independent contractor’s claim that he was induced into entering the agreement based on making a certain amount of money was covered by the agreement that contained a schedule for services and the corresponding fees. As mentioned, the agreement did not promise a certain amount of money and/or the money would be based on the independent contractor working in a certain location. In other words, you cannot claim fraud in the inducement if your contract contradicts what you are claiming or the agreement covers that issue.

Further, even if there was an argument that there were misrepresentations as to money and location, the independent contractor would still need to demonstrate that he justifiably relied on the misrepresentations. “Without justifiable reliance, there can be no actionable fraud.” Bunkelman, supra (citation omitted).

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.

FEDERAL INTERPLEADER DEALING WITH COMPETING CLAIMS OVER UNDISPUTED PAYABLE TO SUBCONTRACTOR

Posted on September 23, 2017September 23, 2017 by Edward Garber

What do you do if you are holding undisputed money owed to a subcontractor? Well, you make an effort to pay it or tender it! Right? I am never a fan of a client holding undisputed sums without a legitimate contractual basis.

There are circumstances, however, where the effort to pay an undisputed payable is not so easy. In fact, it is challenging, as in the below case example where the subcontractor filed for an Assignment for the Benefit of Creditors (referred to as an “ABC”). An ABC, in a nutshell, allows an insolvent entity to file an insolvency action in state court governed by state law and choose its assignee (versus a federal bankruptcy action governed by federal law where a trustee is appointed). One major difference is that there is no automatic stay in an ABC as there is in a federal bankruptcy action. Thus, the insolvent entity can still be sued, but, while that entity is in an ABC, there are many creditors that will not be able to enforce a judgment. (See Florida Statute Ch. 727).

In Balfour Beatty Construction, LLC v. New Era Lending, LLC, 2017 WL 3971438 (MD.Fla. 2017), a general contractor on a pool swimming pool rehabilitation project at a large Disney hotel was holding approximately $100,000 from a subcontractor that instituted an ABC. As a result of the ABC, the subcontractor’s subcontractors and suppliers and other creditors made a claim against this money. (It is uncertain whether any of these entities had lien or payment bond claims.) Due to the competing claims for the same money, the general contractor cleverly filed a federal interpleader action pursuant to 28 U.S.C. s. 1335 and Federal Rule of Civil Procedure 22. The general contractor acknowledged that the money was an open payable owed to the subcontractor that filed an ABC, but due to the competing claims, did not know which subcontractor or supplier or creditor was owed which amounts. Hence, the interpleader action, which has advantages when a party is holding undisputed sums subject to competing claims.

The federal interpleader statute [28 USC s. 1335] gives the district court jurisdiction of “any civil action of interpleader or in the nature of interpleader,” where the claimants are minimally diverse and the plaintiff has “any obligation written or unwritten to the amount of $500 or more …” 28 U.S.C. § 1335(a)(1). “Interpleader is the means by which an innocent stakeholder, who typically claims no interest in an asset and does not know the asset’s rightful owner, avoids multiple liability by asking the court to determine the asset’s rightful owner.” In re Mandalay Shores Co-op. Hous. Ass’n Inc., 21 F.3d 380, 383 (11th Cir. 1994). The well-pleaded allegations in the Second Amended Complaint establish that here, there is a single Fund [money or bond that was interpleaded with the court’s registry] that is the subject of adverse claims by Defendants. Balfour [innocent stakeholder] has also demonstrated that it is a disinterested stakeholder in that it makes no claim to the Fund, except for its attorney’s fees and the costs of this action. Accordingly, the Court finds that this interpleader action is properly brought.

Balfour Beatty, supra, at *5.

The general contractor knowing it owed the money cleverly filed the interpleader lawsuit depositing the undisputed sums or provided a bond conditioned on a future court order and sued all parties that have made a claim or could make a claim against the sums. The contractor claimed no interest in the money except for its attorney’s fees and costs incurred in the action. Notably, a plaintiff in an interpleader action, known as the innocent stakeholder, may, and oftentimes is as a matter if equity, awarded attorney’s fees and costs if the interpleader action is successful. See Murphy v. Travelers Ins. Co., 534 F.2d 1155, 1164 (5^th Cir. 1976) (“In fact, as a general rule, when an interpleader action is successful, the court often awards costs, as well as attorney’s fees, to the stakeholder.”) See also Aetna Life Ins. Co. v. Outlaw, 411 F.Supp. 824, 826 (D.Md. 1976) (“The theory behind the award of attorneys’ fees in interpleader actions…is that plaintiff by seeking resolution of the multiple claims to the proceeds benefits the claimants and that plaintiff should not have to absorb attorneys’ fees in avoiding the possibility of multiple litigation.”).

Additionally, the general contractor knew that by filing an interpleader action, it could also move for a contemporaneous injunction preventing all of the potential claimants from prosecuting an action pertaining to the undisputed sums:

Title 28, United States Code, Section 2361 allows a district court to enter an order in an interpleader action “restraining [claimants] from instituting or prosecuting any proceeding in any State or United States court affecting the property, instrument or obligation involved in the interpleader action until further order of the court.” The district court has the authority to “discharge the plaintiff from further liability, make the injunction permanent, and make all appropriate orders to enforce its judgment.” .

Balfour Beatty, supra, at 5 (citations omitted).

By moving for an injunction, the general contractor—the innocent stakeholder—could move the court for a temporary restraining order/injunction and then a permanent injunction preventing any existing or future action asserted against it for the recovery of the undisputed sums.

In this circumstance, and without knowing all of the nuances of the case, this strategy was extremely clever. By filling the interpleader action, the contractor had a basis to recover the attorney’s fees it incurred in dealing with competing claims and move for an injunction to prevent numerous, competing claims over the same money.

Strategy is always important. Always. Here, the strategy not only worked, but it was clearly the most effective strategy based on the factual issues in the case in light of the subcontractor filing an ABC. Good strategy is rewarded!

OBTAINING TEMPORARY INJUNCTION TO ENFORCE NON-COMPETE AGREEMENT

Posted on June 1, 2016June 1, 2016 by Edward Garber

When a party breaches a non-compete agreement (with a non-solicitation clause), the non-breaching party typically moves for a temporary injunction. The breaching party is the party that signed the non-compete agreement, such as a former employee or consultant that agreed not to solicit its employer’s customer lists or referral sources upon leaving. The non-breaching party or the party moving for the temporary injunction is the party that is looking to protect its trade secret customer lists or referral sources, such as the employer.

“In order to obtain a temporary injunction…[the non-breaching party is] required to establish (1) the likelihood of irreparable harm, (2) the unavailability of an adequate remedy at law, (3) a substantial likelihood of success on the merits, and (4) that the injunction will serve the public interest.” Smart Pharmacy, Inc. v. Viccari, 41 Fla. L. Weekly D1274a (Fla. 1^st DCA 2016). Again, a party moving to enforce a non-compete agreement will and should move for a temporary injunction.

In the recent case, Smart Pharmacy, an employer regarded its referral sources to be confidential trade secrets. The employer had its employee sign a non-compete agreement that precluded the employee from competing against its employer in a certain geographic area for two years upon the employee’s departure from the employer. The non-compete agreement prevented the employee from soliciting its employer’s referral sources upon leaving (a non-solicitation clause). The employee left and started soliciting the referral sources in violation of the non-compete agreement. The employer sued the employee and the employee’s new employer and moved for a temporary injunction preventing them from soliciting the referral sources.

In analyzing the four temporary injunction factors set forth above:

(1) Likelihood of Irreparable Harm

The violation of a non-compete agreement creates the presumption of likelihood of irreparable harm. Thus, this factor is established.

(2) Inadequate Remedy of Law

An employer has an inadequate remedy at law for the irreparable harm because money damages in this context are difficult to prove with a reasonable degree of certainty and would not fully compensate the employer for a violation of a non-compete agreement. Thus, this factor is established.

(3) Substantial Likelihood of Success

Soliciting customers of a business is a legitimate business interest. An employee breaches a non-compete agreement that contains a non-solicitation clause when the employee solicits the customers or sources of his or her former employer, meaning the employer has a substantial likelihood of success. Thus, this factor is established.

(4) Injunction will Serve the Public’s Interest

An injunction will serve the public’s interest since it would protect an employer’s legitimate business interest in protecting its customer lists and referral sources. Thus, this factor is established.

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).

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.

THE ALL MIGHTY GENERAL AGREEMENT OF INDEMNITY WITH THE SURETY

Posted on July 8, 2014July 8, 2014 by Edward Garber

Sureties do not issue bonds (e.g., payment or performance bonds) unless the principal and the principal’s personal guarantors execute a General Agreement of Indemnity (“Indemnity Agreement”). The Indemnity Agreement routinely requires that the principal / guarantors: (1) defend and indemnify the surety for all losses, liability, claims, attorney’s fees, and expenses that the surety may incur and (2) post collateral security into a reserve account set up by the surety to cover any claim on the bond; the surety may seek an injunction to compel such collateral if the principal / guarantors refuse. Yes, these are powerful provisions in favor of the surety if a claim is asserted against the principal’s bond (especially a performance bond claim) or if the surety, to offset liability or exposure, pays a claimant on behalf of the principal. The leverage lies with the surety with respect to the provisions in the Indemnity Agreement and the worst thing a bond principal can do when a claim is asserted against the bond is to outright refuse to work with and cooperate with the surety (based on the powerful provisions in the Indemnity Agreement).

The opinion in Developers Surety and Indemnity Co. v. Hansel Innovations, Inc., 2014 WL 2968138 (M.D.Fla. 2014), exemplifies what can happen if a bond principal refuses to cooperate with a surety even if the principal has potentially meritorious arguments. In this case, a surety issued a performance bond to a fire protection subcontractor. During the course of construction (and, arguably due to the general contractor’s nonpayment), the subcontractor experienced cash flow problems. The general contractor expressed concerns as to the subcontractor’s financial wherewithal to complete the contract work and made demand on the surety. The subcontractor requested financial assistance from its performance bond surety and the surety agreed to pay the subcontractor and its vendors in excess of $100,000 provided the subcontractor execute a separate financing and collateral agreement (as the surety expected to recoup its “loan”). Subsequently, the general contractor advised the surety and subcontractor of performance issues with the subcontractor’s work. The subcontractor, however, refused to complete its work and address the performance issues unless the surety continued to fund the subcontractor’s work, released the guarantors from personal liability, and pursued claims against the general contractor. Based on the subcontractor’s stance, the surety retained another subcontractor to complete the work and incurred additional costs. The surety filed a lawsuit to, among other rights afforded under the Indemnity Agreement, require the subcontractor and guarantors to post $200,000 in collateral security into a reserve account. The subcontractor and guarantor failed to post collateral upon demand.

The surety, as it customarily will do, moved for a preliminary injunction in accordance with the Indemnity Agreement for the court to order the subcontractor and guarantors to post collateral. One of the requirements for a court to order a preliminary injunction is for the surety to establish that it is substantially likely to succeed on the merits. This is not a challenging hurdle for a surety given the powerful provisions in the Indemnity Agreement. (Please see the following articles for more information on a surety’s right to demand collateral security and the requirements for a preliminary injunction in federal court: https://floridaconstru.wpengine.com/a-suretys-right-to-demand-collateral-security/ and https://floridaconstru.wpengine.com/a-suretys-right-to-demand-collateral-security/.)

The subcontractor argued that bad faith or unclean hands, evidenced by an improper motive, extinguished the surety’s substantial likelihood that it would succeed on its claim. The subcontractor argued this because it did not want to post collateral. In support of bad faith, the subcontractor contended that when the general contractor raised performance issues the subcontractor was 99% done with its work with the remaining work simply commissioning the fire sprinkler system and completing as-built drawings. It further argued that the general contractor placed it in a dire financial position because the general contractor did not pay it for over one year and did not pay it for change order work that was performed at the general contractor’s direction. (Not an uncommon subcontractor argument!) The subcontractor also stated that it only signed the financing and collateral agreement because the surety assured it that the surety would assist the subcontractor in collection efforts against the general contractor if the subcontractor signed the agreement and continued with the work. Then, the surety discontinued funding the subcontractor at the eleventh hour to help the subcontractor complete the work while contemporaneously failing to assist the subcontractor in collecting any money from the general contractor. The Magistrate, though, was not persuaded by the subcontractor’s bad faith argument taking the position that it cannot be bad faith for the subcontractor to be induced into completing its work on a project it was hired to complete.

The subcontractor may have very strong arguments that it was truly placed in a cash flow crunch because the general contractor refused to pay for contract work plus additional work. Thus, the subcontractor was forced to finance a job that it was never in a financial position to finance. Then, when it agreed to complete its work with the surety’s assistance, it did so with the understanding that the surety would assist the subcontractor in recovering monies that the subcontractor should have been paid all along for contract and change order work that would also be used to reimburse the surety. But, as shown in this case, truly establishing bad faith is very, very difficult and should not be sugarcoated with the sentiment that the provisions in the Indemnity Agreement do not have any teeth, because they do!

Keep in mind that a performance bond guarantees performance under a contract. Once a bond is furnished, it is rarely advisable to abandon a job or refuse to perform because it puts the surety in a compromising position where it will likely need to complete the subcontractor’s performance in order to mitigate its exposure and liability. Here, the subcontractor’s surety was willing to finance the subcontractor’s work until the subcontractor was virtually complete. All the subcontractor had to do was complete its work when it was 99% complete and work with and cooperate with the surety since the best course of action in the long run may have been for these entities to work together to recover monies that the general contractor owed the subcontractor and/or figure out how the subcontractor would reimburse the surety. However, based on what the surety may have construed as an obstinate position by the subcontractor, the surety incurred additional expenses and elected to pursue its options against the subcontractor and guarantors under the all mighty Indemnity Agreement.

TIPS FOR DRAFTING RESTRICTIVE COVENANT (SUCH AS NON-COMPETE / ANTI-COMPETITION) LANGUAGE IN EMPLOYMENT AGREEMENT

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

Parties sometimes seek counsel to enforce a restrictive covenant in an agreement or a provision in an agreement that prohibits the other party from doing something or limiting the use of something. Such provisions are sometimes found in employment agreements to prevent an employee from learning how the employer conducts business, obtaining valuable information such as client contacts and client and pricing lists, and then starting a competing business. The recent decision of Richland Towers, Inc. v. Richland Towers, LLC, 39 Fla. L. Weekly D535b (Fla. 2d DCA 2014), is a new opinion that emphasizes the importance of including the following language in any agreement that contains a restrictive covenant such as an agreement that contains a non-compete / anti-competition provision:

“Covenants Independent. Each restrictive covenant…set forth in this Agreement shall be construed as a covenant independent of any other covenant or provisions of this Agreement or any other agreement which the Corporation and Employee [parties to the agreement] may have, fully performed and not executory, and the existence of any claim or cause of action by the Employee against the Corporation, whether predicated upon another covenant or provision of the Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation of any other covenant.” Richland Towers, supra.

By identifying that each covenant in the agreement is INDEPENDENT instead of dependent on one another, it should prevent the party opposing the restrictive covenant from arguing that the party enforcing the covenant committed a prior material breach of contract and, thus, can no longer enforce the restrictive covenant. This is a common argument from parties opposing the enforcement of a restrictive covenant such as non-compete language.

The above language was in the employment agreement in the dispute. The former employer moved for a temporary injunction to enforce non-compete / anti-competition language in the employment agreement. The trial court denied the injunction finding that because the employer did not pay certain bonuses, the employer committed a prior breach of contract and, thus, the restrictive covenant (non-compete provision) was not enforceable. The Second District, however, reversed the trial court court’s denial of the temporary injunction based on the above quoted language in the agreement. Since one covenant was independent of the other, whether the bonuses were paid would not render the non-compete language unenforceable. So, if drafting a restrictive covenant, having language that clarifies the intent that the covenants in the agreement are independent is important. On the other hand, if agreeing to non-compete language, consider the significance of the provision and the fact that the provision may be deemed independent of any other provision in the agreement.

Restrictive covenants are enforced through requesting a temporary injunction. To prevail on a temporary injunction, the moving party must establish: “the threat of irreparable harm to the movant for which there would be no adequate legal remedy, the movant’s substantial likelihood of success on the merits, and a determination that granting the injunction would serve the public interest.” Richland Tower, supra, citing Atomic Tattoos, LLC v. Morgan, 45 So.3d 63, 64-65 (Fla. 2d DCA 2010). Furthermore, if a temporary injunction is ordered, the court should require the moving party to post an injunction bond to cover damages in the event the injunction is determined to have been wrongly ordered. Richland Tower, supra (reversing trial court’s denial of the injunction and holding that if the injunction is ordered, the trial court must require the moving party to provide an injunction bond.)

For more on the requirements for temporary injunctions, specifically in the bit protest arena, please see: https://floridaconstru.wpengine.com/the-difficulty-in-prevailing-in-a-bid-protest/

MORE ON A SURETY’S RIGHT TO DEMAND COLLATERAL SECURITY FROM THE CONTRACTOR BOND-PRINCIPAL AND BOND GUARANTORS

Posted on October 17, 2013October 17, 2013 by Edward Garber

I previously discussed a surety’s right to demand collateral security from its bond principal and personal guarantors by discussing the case Developers Surety and Indemnity Co. v. Bi-Tech Construction, Inc., 2013 WL 4563657 (S.D.Fla. 2013). (Please see below for the link where this blog article can be located.)

To add to this discussion, the Middle District of Florida in Travelers Cas. and Sur. Co. of America v. Industrial Commercial Structures, Inc., 2012 WL 4792906 (M.D.Fla. 2012), a case that preceded Bi-Tech Construction, dealt with a similar issue of a performance bond surety demanding the bond principal and guarantor to post / deposit collateral to offset the surety’s liability exposure. In this case, the surety issued a performance bond to the contractor in connection with a residential project. A dispute arose between the contractor and the owner and the contractor sued the owner for, among other claims, breach of contract and to foreclose a construction lien. The owner countersued the contractor and the performance bond surety (which is not uncommon in a payment dispute where the owner asserts construction defects or incomplete performance). The dispute was hotly contested.

During the dispute with the owner, the surety demanded that the contractor post collateral – it demanded that the contractor deposit money into a reserve account that would be used to offset the surety’s liability. When the contractor did not post / deposit the amount of money the surety wanted, the surety filed a lawsuit against the contractor (principal) and the contractor’s guarantors that executed the General Agreement of Indemnity (the agreement the surety requires to be executed before it issues bonds on the principal’s behalf). The surety moved for a preliminary injunction asking the Court to order the contractor to deposit the money into a reserve account. The surety also moved for an injunction demanding that the contractor not transfer or encumber assets, allow the surety to have a full accounting of the contractor and guarantor’s assets, and allow the surety access to the contractor and guarantor’s books and records.

The Middle District, analyzing the requirements for a preliminary injunction, agreed with the surety and ordered that the contractor post / deposit collateral into the reserve account. Of interest, the surety prior to the lawsuit demanded collateral of $1.5 million that it subsequently reduced to $300,000. Although the surety in its motion for preliminary injunction demanded that the contractor deposit the $1.5 million in collateral, the court ordered the contractor to deposit $300,000 to the reserve account. (There was some indication in the opinion that the contractor posted approximately $139,000 as collateral, but it is uncertain whether this was collateral provided in connection with the issuance of the bonds or the lawsuit with the owner.)

The MIddle District elaborated:

“As one federal court of appeals has succinctly explained, ‘[a] collateral security provision [in an indemnity agreement] provides that once a surety…receives a demand on its bond, the indemnitor must provide the surety with funds which the surety is to hold in reserve. If the claim on the bond must be paid, then the surety will pay the loss from the indemnitor’s funds; otherwise, the surety must return the funds to the indemnitor.’ Moreover, ‘[s]ureties are ordinarily entitled to specific performance of collateral security clauses.’ This is because ‘[i]f a creditor is to have the security position for which he bargained, the promise to maintain the security must be specifically enforced.’ Industrial Commercial Structures, supra, at *2 (internal citations omitted).

However, the court did not order the contractor or guarantor to give a full accounting, provide the surety access to books and records, or prohibit the transferring of assets as the surety did not establish it would be irreparably harmed (a requirement for an injunction) if this relief was not granted. Also, the court, unlike the court in Bi-Tech Construction, required the surety to post a $100,000 bond for the injunction to cover damages in the event the injunction was wrongly ordered.

Although the court in this case did not discuss the collateral security provisions, such provisions are virtually identical in most General Agreements of Indemnity. Even in a hotly contested dispute between the contractor and the owner (such as the situation in Industrial Commercial Structures), if a claim is asserted against the surety or it is sued, the surety can demand for the principal and guarantor to post collateral into a reserve account to offset the surety’s liability exposure. However, if the surety demands more, such as an accounting, access to books, etc., this case can support the argument that these remedies are not warranted because the surety has not established it will be irreparably harmed if this recourse is not ordered. Now, if the circumstances are different and the surety carries its burden of establishing irreparable harm, it is possible that this recourse will also be ordered; however, this additional recourse should ideally result in a higher injunction bond amount.

The objective is for the contractor (bond-principal) and guarantors to understand their rights and options in the event a claim or lawsuit is asserted against the bond.

To find out more about this issue and the requirements for a preliminary injunction, please see
https://floridaconstru.wpengine.com/a-suretys-right-to-demand-collateral-security/

A SURETY’S RIGHT TO DEMAND COLLATERAL SECURITY

Posted on September 17, 2013September 17, 2013 by Edward Garber

Before payment and performance bonds are issued by a surety, the bond principal-contractor is required to execute an indemnity agreement with the surety that is often personally guaranteed. The indemnity agreement is naturally written in favor of and for the benefit of the surety that is issuing bonds that are typically in the amount of the contracts that are awarded to the contractor. Contractors that execute indemnity agreements need to understand what the surety’s rights and remedies are in the event performance and/or payment bond claims are made that raise a concern to the surety. Not understanding these rights could put the contractor in a losing situation with the surety.

The recent Southern District of Florida opinion in Developers Surety and Indemnity Co. v. Bi-Tech Construction, Inc., 2013 WL 4563657 (S.D.Fla. 2013), exemplifies a surety’s options against its bond principal-contractor. In this case, the contractor was awarded a contract by a public owner to install a new generator system. The contractor was required to obtain public performance and payment bonds. Shortly after construction commenced, a payment dispute arose between the contractor and the public owner. The public owner refused to pay the first full payment application amount because it originally over-estimated the amount of trenching that the contract would require. The contractor contended that it bid its work on its own assessment of the trenching and needed to be paid in full to cover project costs. The contractor further argued that it could not complete the project without full payment; the public entity therefore elected to terminate the contractor from the project.

The public owner and the contractor’s surety entered into discussions as the public owner must have submitted a performance bond claim to the surety. They agreed that the public owner would pay the contractor in full and the contractor would be reinstated to complete the work. The surety then issued the contractor a memorandum of understanding that outlined the terms of its agreement with the public owner and needed the contractor to sign off on the memorandum of understanding. The contractor, however, refused because it objected to certain provisions in the memorandum of understanding that would have, among other things, required the public owner’s payments to the contractor to be held in a third party trust account until the surety authorized the disbursement of the funds.

Meanwhile, subcontractors to the contractor remained unpaid. The electrical subcontractor was owed approximately $172,000 and filed a suit against the contractor’s payment bond. Additionally, another subcontractor was owed approximately $8,000. The surety decided to create a reserve account and deposited $205,000 into that account. The surety demanded that the contractor also deposit $205,000 into the reserve account as collateral security. The contractor refused prompting the surety to file suit against the contractor.

While the surety’s lawsuit against the contractor was pending, the surety immediately moved for a preliminary injunction asking the Court to order the contractor to provide the surety $205,000 as collateral security to be deposited into the reserve account.
“In order to obtain a preliminary injunction, the plaintiff [surety] must establish [the following elements:] (1) a substantial likelihood that it will prevail on the merits of the underlying cause of action; (2) a substantial threat that it will suffer irreparable injury if the injunction is not granted; (3) that the threatened injury to the plaintiff outweighs the threatened harm the injunction may have on the defendant; and (4) that the public interest will not be adversely affected by granting the preliminary injunction.” Bi-Tech, 2013 WL at *3. If the Court decides that an injunction is appropriate, it has the discretion to determine the amount of the bond the plaintiff (in this case, the surety) will have to post as security to cover damages in the event the injunction is wrongfully issued. Id. at *5 quoting Fed.R.Civ.P. 65.
The Court, in determining whether the elements for injunctive relief were satisfied, analyzed the terms of the indemnity agreement. (The Court would also do this when determining whether the contractor breached the terms of the indemnity agreement.) The indemnity agreement contained few applicable provisions:

“-Indemnitor [contractor and guarantors]…shall indemnify and hold harmless Surety from and against any and all liability…which Surety may sustain or incur by reason of or in consequence of the execution and delivery by Surety of any Bond on behalf of Principal [contractor].
-Indemnitor shall, immediately upon demand and whether or not Surety shall have made any payment therefor, deposit with Surety a sum of money equal to such reserve account and any increase thereof as collateral security on such Bond…If Indemnitor shall fail, neglect or refuse to deposit with Surety the collateral demanded by Surety, Surety may seek a mandatory injunction to compel the deposit of such collateral together with any other remedy at law or in equity the Surety may have.
-Principal and Indemnitor…agree to hold all money and all other proceeds for the Obligation, however received, in trust for the benefit of Surety and to use such money and other proceeds for the purposes of performing the Obligation and for discharging the obligations under the Bond, and for no other purpose until the liability of the Surety under the Bond is completely exonerated.”
Bi-Tech Construction, 2013 WL at *1.

Based on these provisions, the Court maintained that the surety has the contractual right to create the reserve account and demand for the contractor to post collateral security in the reserve account equal to the amount deposited by the surety. This contractual right exists irrespective of whether the contractor disputes the legitimacy of claims made against the surety’s bond. Once the Court recognized this contractual right, it recognized that the surety could suffer irreparable injury because it would be unsecured against claims (hence, the reason why the indemnity agreement allows the surety to request collateral security). Finally, finding that an injunction was appropriate, the Court did not require the surety to post a bond.

Indemnity agreements with sureties contain very similar provisions as the ones referenced above. The provisions applicable for purposes of the preliminary injunction are contained in many indemnity agreements which, among other things, give the surety the right to request collateral security. It is important to understand rights and remedies in connection with the indemnity agreement to hopefully avoid any situation or dispute where the surety pursues recourse against the bond principal-contractor and the guarantors that executed the indemnity agreement.

THE DIFFICULTY IN PREVAILING IN A BID PROTEST

Posted on August 14, 2011August 14, 2011 by Edward Garber

The difficulty in prevailing in a bid protest is illustrated in the non-construction case of Charlotte County v. Grant Medical Transportation, Inc., 36 Fla. L. Weekly D173a (2d DCA 2011). In this case, Charlotte County solicited bids to provide the County with bus drivers and washers for a transit program for disabled persons. An unsuccessful bidder sued the County arguing that the winning bidder’s bid was nonresponsive because it failed to comply with requirements of the solicitation. In particular, the unsuccessful bidder argued that the bid solicitation required all bidders to acknowledge receipt of any addenda to the bidding documents prior to the close of the bids, i.e., bid opening, and the winning bidder failed to comply with this requirement making its bid nonresponsive. (A bid is nonrespnsive if it materially fails to comply with the solicitation. While minor irregularities can be waived by the public entity, material irregularities cannot in that they impact the integrity of the public procurement process which requires all bidders to be on an equal playing field.) After the bid opening, the County required the winning bidder to confirm its receipt of all addenda to the bid documents. (Notably, material portions of a bid should never be able to be changed after bid opening.)

The unsuccessful bidder moved for a temporary injunction preventing the County from awarding the contract at-issue to the winning bidder. The trial court granted the temporary injunction and the County appealed. At the time the trial court granted the injunction, the County had already contracted with the winning bidder and services had been provided in accordance with the contract.

The Second District relied on the following standard for granting injunctive relief:

“To obtain temporary injunctive relief, the movant must satisfy each of the following elements: (1) the movant has a clear legal right to the requested relief or, in other words, it has a substantial likelihood of success on the merits; (2) the movant will suffer irreparable harm if the trial court refuses to grant the injunction; (3) the movant does not have available another adequate remedy at law; and (4) a public interest will be served by the imposition of the injunction.” Grant Medical citing Snibbe v. Napoleonic Soc’y of Am., Inc., 682 So.2d 568, 570 (Fla. 2d DCA 1996).

The Second District reversed the granting of the temporary injunction primarily because the unsuccessful bidder offered no evidence at the noticed and contested hearing (to determine whether an injunction should be entered) to support any of the above-mentioned elements. Although the Second District noted that the winning bidder failed to confirm its receipt of all addenda prior to bid opening, at the injunction hearing, the Senior Division Manager of the County’s Purchasing Department testified that the winning bidder’s failure to confirm receipt was simply a minor deficiency or irregularity. The Second District also noted that at the time the trial court entered the injunction, the contract between the County and the winning bidder had been finalized, with services starting to be performed pursuant to the contract.

It is exceedingly difficult to satisfy each of the above-mentioned elements for the entry of a temporary injunction, especially in the bid protest arena. This case exemplifies the uphill battle an unsuccessful bidder has to prevent the public entity from awarding the contract to the winning bidder.

First, when a public entity waives a known irregularity with a winning bidder’s bid, it will always claim the irregularity is minor and, thus, waiveable at their discretion. This is the reason the County offered testimony at the injunction hearing to basically acknowledge the deficiency with the winning bidder’s bid but to say “it was not big deal.” Well, if it was not a big deal, then why did the County require the winning bidder to confirm receipt of the addenda AFTER bid opening? From a logical standpoint, it would seem that if it is important enough for the County to require that the winning bidder confirm in writing that it received all addenda to the solicitation after the bids were already opened and they knew who the winning bidder was, then it was a material component of the bid solicitation.

Second, unless something totally egregious transpires during the solicitation process, how can a unsuccessful bidder truly establish each and every element to the entry of injunctive relief at what is ultimately an early stage in the lawsuit when discovery should be ongoing? In other words, unless the movant can establish a substantial likelihood of success on the merits or a public interest will be served by the imposition of the injunction, an injunction should not be entered. In Grant Medical, the trial court actually granted the injunction, but the Second District found reasons to reverse the entry of the injunction.

Finally, if the movant does not act quickly in getting the hearing on a temporary injunction, which should mean little discovery, if any, has been conducted, then the movant risks the public body finalizing and entering into the contract with the winning bidder and the winning bidder starting to perform services pursuant to the contract. A no-win situation for an unsuccessful bidder.

While unsuccessful bidders should certainly explore the possibility of protesting, it is important to consider the uphill battle that will be encountered. If the trial court will consider having a hearing and entering injunctive relief in a an ex parte (and, thus, uncontested hearing), that should be explored to avoid the undesirable situation of the contract being entered and services performed by the winning bidder. For this to take place, legal arguments and factual arguments need to be well framed to establish entitlement to the entry of injunctive relief. If a noticed and contested hearing is required, legal and factual arguments still need to be very well framed, but it is important to offer evidence at the hearing. Specifically, if your protest is based on the argument that the winning bidder’s bid was nonrespnsive, you need to know that the public body will argue that the deficiency was minor so that you are prepared to rebut this argument in order to establish a substantial likelihood of success on the merits. You should also offer evidence to show that the deviation is material in that it affects the public interest by detrimentally impacting the competitive procurement process (i.e., it would affect some material component of your bid such as price or scope, etc.).