GOOD-TO-KNOW POINTS REGARDING (I) MILLER ACT PAYMENT BONDS AND (II) PAYMENT BOND SURETY COMPELLING ARBITRATION

Every now and then I come across an opinion that addresses good-to-know legal issues as a corollary of strategic litigation decisions that are questionable and/or creative.  An opinion out of the United States District Court of New Mexico, Rock Roofing, LLC v. Travelers Casualty and Surety Company of America, 2019 WL 4418918 (D. New Mexico 2019), is such an opinion.

In Rock Roofing, an owner hired a contractor to construct apartments. The contractor furnished a payment bond.  The contractor, in the performance of its work, hired a roofing subcontractor.  A dispute arose under the subcontract and the roofer recorded a construction lien against the project. The contractor, per New Mexico law, obtained a bond to release the roofer’s construction lien from the project (real property).  The roofer then filed a lawsuit in federal court against the payment bond surety claiming it is entitled to: (1)  collect on the contractor’s Miller Act payment bond (?!?) and (2) foreclose its construction lien against the lien release bond furnished per New Mexico law.

Count I – Miller Act Payment Bond

Claiming the payment bond issued by the contractor is a Miller Act payment bond is a head scratcher. This claim was dismissed with prejudice upon the surety’s motion to dismiss. This was an easy call.

A Miller Act payment bond is a bond a prime contractor gives to the United States (US) for a public project. Here, the contractor entered into a contract with a private developer for a private apartment project. There was nothing to suggest that the private developer was, in fact, the US government or an agent of the US government.  There was also nothing to suggest that the apartment project was, in fact, a public project.  The roofer alleged that it believed the US Department of Housing and Urban Development provided funding for the project. The Court found this allegation as a big so-what: “The Court finds this allegation insufficient to demonstrate either the payment bond was furnished to the [US] Government as required by the [Miller Act], or that the apartment complex was a public building or public work as required by the [Miller Act].” Rock Roofing, LLC, 2019 WL at *3.

Count II – Foreclosure of Construction Lien Against Lien Release Bond

The surety moved to compel the roofer’s foreclosure claim against the lien release bond to arbitration pursuant to the contractor’s subcontract with the roofer.  The roofer countered that arbitration was inappropriate since the surety was not a party to the subcontract.

The Court (relying on a Florida district court opinion I was intimately involved with) found that the doctrine of equitable estoppel applied to compel the roofer to arbitration because the roofer’s claim for payment was based on its subcontract that contains the arbitration provision. “Because [the roofer’s] claim on the payment bond depends on its subcontract with [the contractor], the arbitration clause in the subcontract must precede [the roofer’s] right to bring suit as provided by the payment bond.Rock Roofing LLC at *7.

 

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.

 

GENERAL CONTRACTOR SUPPORTING A SUBCONTRACTOR’S CHANGE ORDER ONLY FOR OWNER TO REJECT THE CHANGE

The opinion in Westchester Fire Ins. Co, LLC v. Kesoki Painting, LLC, 260 So.3d 546 (Fla. 3d DCA 2018) leads to a worthy discussion because it involves a common scope of work occurrence on construction projects involving a general contractor and subcontractor.  The contractor submits a subcontractor’s change order request to the owner and the owner rejects the change order.   What happens next is a scope of work payment dispute between the general contractor and subcontractor.   Yep, a common occurrence.

In this case, a general contractor hired a subcontractor to perform waterproofing and painting.  A scope of work issue arose because the specifications did not address how the window gaskets should be cut and then sealed. The owner wanted the window gaskets cut at a 45-degree angle and the subcontractor claimed this resulted in increased extra work.    The general contractor agreed and submitted a change order to the owner to cover these costs.  The owner rejected the change order claiming it was part of the general contractor’s scope of work even though the cutting of window gaskets at a 45-degree angle was not detailed in the specifications.

After the subcontractor filed a suit against the general contractor’s payment bond surety, the project architect further rejected the change order because gasket cutting was part of the specification requirements.  (Duh! What else was the architect going to say?  It was not going to concede there was an omission that resulted in a change order to the owner, right?)

Importantly, the subcontract agreement stated that, “If a dispute arises between the Contractor and the Subcontractor regarding the Scope of Work, or in the interpretation of the Contract Documents, and the parties hereto do not resolve that dispute, the decision of the [Architect] shall be final.”   As it pertains to this provision, while the appellate court noted the enforceability of the provision, it found that it did not apply because there was not a scope of work dispute between the general contractor and its subcontractor.  The general contractor agreed that this resulted in a change order condition, i.e., that there was a change to the subcontractor’s scope of work, and submitted a change order to the owner for the scope of work change.  Ouch!  The payment bond surety was on the hook to pay for this change order.

A few things that I find noteworthy.

First, the opinion does not include a lot of discussion on language in the subcontract. This tells me that there may not have been great language in the subcontract dealing with the subcontractor’s scope of work.  It is not uncommon to hear that a specification does not include every single detail so if the subcontractor was always required to cut gaskets in performing its scope of waterproofing work then there may be an argument there is not a scope of work change.  Either way, detailing the scope of work in the subcontract is important to account for the inevitable scope of work dispute.

Second, I understand the logic from the general contractor’s perspective of having the architect decide scope of work disputes between a general contractor and subcontractor because the architect is going to naturally disfavor scope of work changes or changes of work associated with its plans and specifications.  This will benefit the general contractor as a rejection of a scope of work change will support the denial of a change order.  With that said, I am generally not in favor of the finality of such a decision from an architect, particularly when addressing the scope of work dispute may warrant a detailed analysis of the governing subcontract. Also, the court in this case seemed to dismiss such language because the general contractor supported the subcontractor’s change.

Third, just because a general contractor supports a subcontractor’s change order request does not mean that it and its surety should automatically be bound by the change and finance the change.  Again, there was little discussion as to language in the subcontract and it does not appear the surety tried to make an argument under the pay-when-paid clause. While such defense is generally not applicable to payment bond sureties, the (creative) argument could be different when dealing with a change order to preclude the effect of a surety and general contractor being on the hook for every change order submitted to the owner that the owner rejects.

And, fourth, this opinion does not address how the general contractor handled or pursued this with the owner.  That is important because if the general contractor agreed and supported the change, there should have been an effort to collect this amount from the owner.  This leads to another important consideration.  In this scenario, the subcontract could include language that any claim the subcontractor initiates stemming from a dispute involving the owner should be stayed pending the resolution of the dispute with the owner.  On the other hand, if the general contractor elects not to pursue the dispute with the owner but recognized the change, then it having to pay for the change makes sense based on the business decision it made.

What are your thoughts?

 

 

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.

STATUTORY CHANGE TO NOTICES OF NONPAYMENT TO PRESERVE RIGHTS UNDER PAYMENT BOND

Mark this on your calendar – beginning on October 1, 2019 subcontractors and suppliers (e.g., claimants/lienors) serving a notice of nonpayment to preserve rights under a payment bond must now do so under oath. But, that is not all. The notice of nonpayment form will now require the claimant to attest, as follows, in the new notice of nonpayment form:

Notice of Nonpayment

To: (Name of Contractor and address)
(Name of Surety and address)

The undersigned notifies you that:

1. The lienor has furnished_______ (describe labor, services, or materials) for the improvement of the real property identified as_______ (property description). The corresponding amount unpaid to date is $______, of which, $______ is unpaid retainage.
2. The lienor has been paid to date the amount of $____ for previously furnishing________ (describe labor, services, or materials) for this improvement.
3. The lienor expects to furnish________ (describe labor, services, or materials) for this improvement in the future (if known), and the corresponding amount expected to become due is $_____ (if known).

I declare that I have read the foregoing Notice of Nonpayment and that the facts stated in it are true to the best of my knowledge and belief.

Dated on _______

(signature and address of lienor)

The foregoing instrument was sworn to (or affirmed) and subscribed before me this___ days of ____, _____, by __________(signatory)

(Signature of Notary Public-State of Florida)

(Print, Type, or Stamp Commissioned Name of Notary Public)

Personally Known OR Produced Identification

Type of Identification Produced____

It will be imperative to work with counsel when putting together a notice of nonpayment. The reason being is that the added language in the statute will give the contractor a built-in “fraud” defense upon receipt of any notice of nonpayment. Fraudulent notices of nonpayment will now be asserted defensively as a matter of course akin to the fraudulent lien defense when a construction lien is recorded.  This is supported by new statutory language to Florida Statute sections 713.23 (dealing payment bonds on private projects) an 255.05 (dealing with payment bonds on public projects except FDOT projects) relative to notices of nonpayment that goes into effect on October 1, 2019:

The negligent inclusion or omission of any information in the notice of nonpayment that has not prejudiced the contractor or surety does not constitute a default that operates to defeat an otherwise valid bond claim. A claimant who serves a fraudulent notice of nonpayment forfeits his or her rights under the bond. A notice of nonpayment is fraudulent if the claimant has willfully exaggerated the amount unpaid, willfully included a claim for work not performed or materials not furnished for the subject improvement, or prepared the notice with such willful and gross negligence as to amount to a willful exaggeration. However, a minor mistake or error in a notice of nonpayment, or a good faith dispute as to the amount unpaid, does not constitute a willful exaggeration that operates to defeat an otherwise valid claim against the bond. The service of a fraudulent notice of nonpayment is a complete defense to the claimant’s claim against the bond.

Again, it is imperative to work with counsel when putting together a notice of nonpayment!

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: 4 ELEMENTS OF MILLER ACT PAYMENT BOND CLAIM

 

 

A subcontractor on a federal construction project must prove the following four elements in a Miller Act payment bond claim:

 

1. The subcontractor supplied labor and/or material per its subcontract;

 

2. The subcontractor is unpaid for the labor and/or material supplied per its subcontract;

 

3. The subcontractor had a good faith belief that the labor and/or material supplied was for purposes of the project (and the prime contractor’s contractual scope of work for the project); and

 

4. The subcontractor satisfied jurisdictional requirements in bringing the Miller Act payment bond lawsuit.

 

Notably, the  subcontractor’s performance will be determined in reference to the subcontract. This includes reference to the scope of work and the payment terms contained in the subcontract. 

 

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.

 

“LABOR” THAT CAN BE PURSUED AGAINST A MILLER ACT PAYMENT BOND

It is important to ensure you consult with counsel when it comes to Miller Act payment bond rights and defenses.  One consideration is the type of “labor” that can be pursued against a Miller Act payment bond.  The opinion in Prime Mechanical Service, Inc. v. Federal Solutions Groups, Inc., 2018 WL 6199930 (N.D.Cal. 2018) contains a relevant and important discussion on this topic.

 

In this case, a prime contractor on a federal construction project hired a subcontractor to prepare and install a new HVAC system.  The subcontractor was not paid and filed a lawsuit against the prime contractor’s Miller Act payment bond.   The prime contractor moved to dismiss the claim, with one argument being that design work the subcontractor was suing for was NOT “labor” that can be pursued against a Miller Act payment bond.  The Court agreed:

 

As used in the Miller Act, the term “labor” primarily encompasses services involving “manual labor,” see United States ex rel. Shannon v. Fed. Ins. Co., 251 Fed. Appx. 269, 272 (5th Cir. 2007), or “physical toil,” see United States ex rel. Barber-Colman Co. v. United States Fid. & Guar. Co., No. 93-1665, 1994 WL 108502, at *3 (4th Cir. 1994). Although “work by a professional, such as an architect or engineer” generally does not constitute “labor” within the meaning of the Miller Act, see United States ex rel. Naberhaus-Burke, Inc. v. Butt & Head, Inc., 535 F. Supp. 1155, 1158 (S.D. Ohio 1982), some courts have found “certain professional supervisory work is covered by the Miller Act, namely, skilled professional work which involves actual superintending, supervision, or inspection at the job site see United States ex rel. Olson v. W.H. Cates Constr. Co., 972 F.2d 987, 990-92 (8th Cir. 1992) (internal quotation and citation omitted) (citing, as examples, “architect … who actually superintends the work as it is being done” and “project manager … [who] did some physical labor at the job site” (internal quotation and citation omitted)).

 

Here, plaintiff alleges it “attended 4 or 5 on-site field meetings … to determine the location and layout of the new equipment, … performed on-site field coordination with the existing equipment, … took on-site field measurements for fabrication of duct work and support hangers, … scheduled the start date and while on-site planned site access and crane locations, prepared product and equipment submittals, and obtained security passes.” (See FAC ¶ 12.) The above-listed services are, however, “clerical or administrative tasks which, even if performed at the job site, do not involve the physical toil or manual work necessary to bring them within the scope of the Miller Act.” See United States ex rel. Constructors, Inc. v. Gulf. Ins. Co., 313 F. Supp. 2d 593, 597 (E.D. Va. 2004) (holding subcontractor did not furnish “ ‘labor’ within the contemplation of the Miller Act” where subcontractor’s duties entailed paying invoices, reviewing subcontractor and vendor proposals, supervising the hiring of site personnel, and providing site coordination services). Although taking “on-site field measurements” (see FAC ¶ 12) may have involved some minor physical activity, it does not amount to the physical “toil” required by the Miller Act.

 

Prime Mechanical Service, 2018 WL 6199930, at *3.

 

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.

 

PROVIDING “LABOR” UNDER THE MILLER ACT

shutterstock_611517449A recent opinion out of the Northern District of California discusses the “labor” required to support a Miller Act payment bond claim on a federal construction project.   It is a good case that discusses the type of labor required  to support a Miller Act payment bond claim.

 

In Prime Mechanical Service, Inc. v. Federal Solutions Group, Inc., 2018 WL 619930 (N.D.Cal. 2018), a prime contractor was awarded a contract to design and install a new HVAC system.  The prime contractor subcontracted the work to a mechanical contractor. The mechanical contractor with its sub-designer prepared and submitted a new HVAC design to the prime contractor and provided 4-5 onsite services to determine the location and layout for the new HVAC equipment, perform field measurements, obtain security passes, and plan site access and crane locations.  The mechanical contractor submitted an invoice to the prime contractor and the invoice remained unpaid for more than 90 days, which the prime contractor refused to pay.  The mechanical contractor than filed a Miller Act payment bond lawsuit.

 

The prime contractor and surety argued that the mechanical contractor had no valid Miller Act payment bond claim because it was seeking professional services and not the labor covered by the Miller Act.   The trial court agreed. 

 

As used in the Miller Act, the term “labor” primarily encompasses services involving “manual labor,” or “physical toil.”  Although “work by a professional, such as an architect or engineer” generally does not constitute “labor” within the meaning of the Miller Act, some courts have found “certain professional supervisory work is covered by the Miller Act, namely, skilled professional work which involves actual superintending, supervision, or inspection at the job site.”

 

Prime Mechanical Service, Inc., 2018 WL at *3 (internal citations omitted). 

 

The mechanical contractor attempted to argue that it was onsite and the onsite services it performed should constitute “labor.”   However, the onsite services the mechanical contractor identified were clerical or administrative-type services which did NOT involve “the physical toil or manual work necessary to bring them within the scope of the Miller Act.”  Prime Contractor Mechanical Service, Inc., 2018 WL at *3.  

 

In this case, the mechanical contractor gave it a worthy go to support a Miller Act payment bond claim. But, because the services it performed did not rise up the type of “labor” covered by the Miller Act, it was out of luck.   Had these services been coupled with actual  manual labor at the site connected to the installation of the new HVAC system, the result would have been much different since the mechanical contractor would have performed “labor” covered by the Miller Act. 

 

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.

REPAIRING ONE’S OWN WORK AND THE ONE YEAR STATUTE OF LIMITATIONS TO SUE A MILLER ACT PAYMENT BOND

shutterstock_516982177When it comes to Miller Act payment bond claims, repairing one’s own work does NOT extend the one year statute of limitations to file suit on a Miler Act payment bondBelonger Corp., Inc. v. BW Contracting Services, Inc., 2018 WL 704379, *3 (E.D. Wisconsin 2018) (“The courts that have considered this question tend to agree that, once a subcontractor completes its work under the subcontract, repairs or corrections to that work do not fall within the meaning of ‘labor’ or ‘materials’ and, as such, do not extend the Miller Act’s one-year statute of limitations.”).

 

Well, what if the subcontractor was repairing its own work due to an issue caused by another subcontractor? 

 

This was the situation in Belonger Corp. where a plumber was asked to unclog a plumbing line that had concrete in the line (caused by another subcontractor)  months after the plumber had completed its contractual scope of work.  Before the subcontractor did this work, it smartly sent an e-mail stating that it needs an e-mail acknowledgement that this additional work is authorized and a change order will be forthcoming.  The contractor responded, “Yes, please proceed with repair work on a T&M [time and materials] basis….”   Sure enough, the subcontractor unclogged the line and a change order was never issued.

 

The subcontractor filed a Miller Act payment bond claim for unpaid contract work plus change order work, such as unclogging the line.  The subcontractor based its last day for purposes of the statute of limitations on the work associated with unclogging the line and not on the day it completed its contractual scope of work.  If it was determined that the subcontractor’s last day / final furnishing date was when it fully completed its contractual scope of work, its Miller Act payment bond lawsuit would be untimely / barred by the one year statute of limitations to sue on a Miller Act payment bond.  

 

The issue was whether the subcontractor’s remedial work to its own plumbing line extended its final furnishing date.  The trial court found this to be a question of fact because this arguably was change order work that amended the subcontract to include this additional work.  The fact that the subcontractor sent an e-mail before doing this work and the fact that the contractor responded helped the subcontractor create a question of fact that its payment bond claim was not untimely because unclogging its own plumbing line due to an issue caused by another trade subcontractor was additional subcontractual work that extended its final furnishing date.

 

If you are in this situation, the best bet is not to bank on this type of argument.  File your Miller Act payment bond claim within one-year of finishing your contractual work.  With that said, if you don’t, the argument raised by the subcontractor here that repairing its own work due to an issue caused by another subcontractor was additional work that modified the terms of the subcontract and extended its final furnishing date is a creative argument helped by the e-mail this subcontractor smartly sent.

 

For more information on the Miller Act, check out this ebook.

 

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: NOTICE OF CONTEST OF CLAIM AGAINST PAYMENT BOND

imagesOn private jobs where the general contractor has an unconditional payment bond, subcontractors, sub-subcontractors and suppliers need to serve a notice of nonpayment to preserve payment bond rights.

 

Just like an owner can record a Notice of Contest of Lien to shorten a lienor’s statute of limitations to foreclose the lien to 60 days, a general contractor can record a Notice of Contest of Claim Against Payment Bond.  See Fla. Stat. s. 713.23(e).  When a contractor records a Notice of Contest of Claim Against Payment Bond, the contractor is contesting the notice of nonpayment and shortening the claimant’s period to sue on the payment bond to 60 days from the date of service of the notice.  

 

This tool is used less frequently than the Notice of Contest of Lien; however, it can be a very successful tool for a contractor to use when receiving a notice of nonpayment.

 

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.

SUBCONTRACTOR’S MILLER ACT PAYMENT BOND CLAIM

 

shutterstock_426148276Since I wrote my ebook on the application of federal Miller Act payment bonds, I have not discussed a case applying the Miller Act.  Until now!

 

Below is a case that reinforces two important points applicable to Miller Act payment bond claims.  First, the case reinforces what a claimant needs to prove to establish a Miller Act payment bond claim.  Very important.  Second, the case reinforces that a subcontractor is going to be governed by its subcontract. This means that those provisions regarding payment and scope of work are very important.  Not that you did not already know this, but ignoring contractual requirements will not fly.

 

In U.S.A. f/u/b/o Netplanner Systems, Inc. v. GSC Construction, Inc., 2017 WL 3594261 (E.D.N.C. 2017), a prime contractor hired a subcontractor to run cabling and wiring at Fort Bragg.  The subcontractor claimed it was owed a balance and filed a lawsuit against the general contractor the Miller Act payment bond.

 

“A plaintiff must prove four elements to collect under the Miller Act: (1) labor or materials were supplied for work in the contract; (2) the supplier of that labor or materials is unpaid; (3) the supplier had a good faith belief that the labor or materials were for the specified work; and (4) jurisdictional requisites are met.”   U.S.A. f/u/b/o Netplanner Systems, Inc., supra, at *5. 

 

The prime contractor claimed that the subcontractor was not owed any balance since it violated terms of the subcontract regarding its timely performance.  Per the subcontract, the subcontractor agreed that it would perform and complete its work in accordance with the schedule approved by the federal government and that final payment will be made when the subcontractor fully performed in accordance with the requirements of the Contract Documents.

 

In this case, the trial court determined there were questions of fact involving whether the subcontractor complied with the terms of the subcontract.  But, in doing so, the trial court confirmed, again, what we already know — that the subcontractor’s performance will be determined in reference to its underlying subcontract.

 

 

‘Whether a subcontractor has been paid in full for providing labor and materials must be determined by reference to the underlying subcontract as it relates to the scope of the work and the payment terms.’”  U.S.A. f/u/b/o Netplanner Systems, Inc., supra, at *5 quoting U.S. ex rel. Acoustical Concepts, Inc. v. Travelers Cas. and Sur. Co. of Am., 635 F.Supp.2d 434, 438 (E.D. Va. 2009).

 

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.