VENUE FOR PAYMENT BOND DISPUTES IN FLORIDA

Posted on July 9, 2013July 9, 2013 by Edward Garber

Two main Florida payment bond statutes are Florida Statute s. 713.23 (payment bonds for private projects) and Florida Statute s. 255.05 (payment bonds for Florida public projects-not federal projects). Both statutes prohibit a payment bond issued after October 1, 2012 from restricting venue. In other words, if the payment bond contains a venue provision after this date, it is not enforceable.

This prohibition is important because there are times where the project is located in a venue that is not where the subcontractor resides and/or is contrary to the venue provision in the subcontract (typically, a venue where the general contractor resides).

It is good practice for the general contractor to include in its subcontract a venue provision that applies to its surety such that the subcontractor must sue the payment bond in the same venue that governs the subcontract. While it is uncertain how the new prohibition from restricting venue in a payment bond will apply in this context, the counter-argument is that the payment bond is not restricting venue, rather the “negotiated” subcontract governs the venue of any and all disputes between the parties including claims against the general contractor’s surety (and the general contractor is indemnifying and defending the surety). Worst case scenario is that the venue provision is deemed inapplicable to the surety. However, courts do not favor splitting causes of action (due to, among other things, the concern for conflicting results over the same facts) and should not favor a subcontractor lawsuit against the general contractor in one venue and a simultaneous subcontractor lawsuit against the general contractor’s payment bond surety in another venue. Indeed, courts have refused to enforce venue provisions in subcontracts in order to avoid splitting of causes of action. See, e.g., Miller & Solomon General Contractors, Inc. v. Brennan’s Glass Co., Inc., 837 So.2d 1182 (2003) (refusing to enforce subcontract venue provision when action as to lien transfer bond was filed in correct venue). Including a venue provision that also covers claims against the payment bond surety is useful in the event the general contractor wants to countersue the subcontractor or simply wants to create an argument that its subcontractor disputes should be confined to its preferred venue versus the subcontractor’s preferred venue.

On the other hand, there are situations where a subcontractor may not want to sue the general contractor and strategically prefers to just sue the payment bond surety. One situation may be the subcontractor knows the general contractor was not paid and the subcontract contains a pay-when-paid provision which would be enforceable as to the general contractor, but not against the payment bond surety. Another situation may be due to the venue provision in the subcontract; the subcontractor prefers to sue in a venue outside of the venue provision in the subcontract and has a better argument around the venue provision if it does not join the general contractor. There is caselaw that supports an argument to sue a payment bond surety in a venue where the subcontractor (lienor) resides that, depending on the dispute, could be appealing to the subcontractor. See, e.g., American Insurance Co. v. Joyner Electric, Inc., 618 So.2d 799 (Fla. 1st DCA 1993) (finding that action under s. 255.05 public payment bond was proper where lienor / subcontractor resided); Coordinated Constructors v. Florida Fill, Inc., 387 So.2d 1006 (Fla. 3d DCA 1980) (finding that venue was proper under s. 713.23 private payment bond action where lienor / supplier resided).

Venue is a pretty heavily litigated procedural strategic issue. Just like any dispute, venue as to a payment bond claim should not be ignored and should absolutely be considered at the onset of a dispute.

For more information on venue provisions, please see:

https://floridaconstru.wpengine.com/venue-provisions-read-what-you-sign/

and

https://floridaconstru.wpengine.com/subcontractors-read-and-understand-the-implications-of-venue-provisions/

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.

SUBCONTRACTORS – READ AND UNDERSTAND THE IMPLICATIONS OF VENUE PROVISIONS

Posted on May 15, 2013May 15, 2013 by Edward Garber

Subcontracts often have venue provisions. However, these are often overlooked until a dispute arises. In many instances, the venue provision requires disputes to be brought in a court in a different venue than where the project is located. This could have the adverse effect of exposing a subcontractor, in particular, to disputes in multiple forums. The recent case of East Coast Metal Decks, Inc. v. Boran Craig Barber Engel Construction Co., Inc., 38 Fla. L. Weekly D1061a (Fla. 2d DCA 2013), explains the undesirable dynamics of venue provisions.
In East Coast Metal Decks, the general contractor hired the subcontractor on two public projects in Brevard County and Sarasota County. The general contractor, however, sued the subcontractor in Collier County due to a venue provision in the subcontract. The subcontractor brought the general contractor’s payment bond surety into the fold and then tried to transfer the venue to Brevard County because the subcontractor was being sued by material suppliers in that County. The trial court denied the transfer of venue because of the Collier County venue provision in the subcontract.

On appeal, the Second District affirmed the trial court’s ruling. The Second District found that (i) the parties were bound by the subcontract venue provision as there was not a compelling reason not to enforce the provision and (ii) because the payment bond was a public payment issued under Florida Statute s. 255.05, venue for a claim against the bond did not have to lie in Brevard County (where the project was located).

What does this case mean? Well, it means that the subcontractor needs to litigate with the suppliers in Brevard County and litigate with the general contractor in Collier County even though the disputes are related. Most likely, the suppliers sued the subcontractor because they were not paid and the general contractor did not pay the subcontractor due to the facts related to the general contractor’s claim against the subcontractor in Collier County.
Litigation in different counties over a related dispute can become expensive and undesirable. It is important to understand and consider the impact of venue provisions in contracts. Sometimes, it makes sense to argue the compelling reasons why the venue provision should not be enforced. However, courts do favor venue provisions because that is what parties negotiated and agreed to on the front-end. Other times, it makes sense to resolve the smaller lawsuits or lawsuits where the facts may not be in your favor (such as a subcontractor’s lawsuit with a supplier) to focus on the lawsuit with more upside (the subcontractor’s lawsuit with the general contractor or payment bond surety).

VENUE PROVISIONS – READ WHAT YOU SIGN!

Posted on November 16, 2012November 16, 2012 by Edward Garber

Venue provisions, also known as forum selection provisions, are commonly included in contracts. These provisions state that if there is a dispute arising out of or relating to the contract, the dispute must be brought in the exclusive venue of a certain locale. (For example, the provision might say disputes must be brought in the exclusive venue of Miami-Dade County.) Parties should be aware of this provision when executing a contract.

In Espresso Disposition Corp. 1 and Rowland Coffee Roasters, Inc., 37 Fla. L. Weekly D2643a (Fla. 3d DCA 2012), the parties entered into a contract. However, the party that prepared the contract cut-and-pasted the venue provision / forum selection provision from another contract. In doing so, there was no realization that the venue provision required disputes to be brought in Illinois. When a dispute arose, the drafter filed suit in Miami and argued that the Illinois venue provision was in error because it was simply cut-and-pasted. The problem was that venue provisions are enforceable and presumptively valid. The Third District Court of Appeal ruled that the drafter’s lawsuit must be dismissed because according to the parties’ contract, disputes could only be brought in Illinois. In entering this ruling and enforcing the cut-and-pasted venue provision, the Third District maintained “be careful what you ask for!” In other words, review the contract you are preparing and executing.

This case stands for the important proposition that parties need to review the contracts they are executing. Failure to do so could result in you being required to resolve your dispute in a different state and inconvenient forum as was the circumstance in the above case.

THE ENFORCEABILITY OF TERMINATION FOR CONVENIENCE PROVISIONS

Posted on November 8, 2012November 8, 2012 by Edward Garber

Termination for convenience provisions are common in construction contracts, whether it’s a contract between an owner and a general contractor or a general contractor and a subcontractor. These provisions allow either a general contractor, by way of example, to terminate its subcontractor for its convenience without cause. While the subcontractor would be entitled to its costs incurred through the date of the termination (typically the recoverable costs are itemized in the termination for convenience provision), it would lose out on all of the profit it anticipated on receiving for that project. Termination for convenience provisions are enforceable.

The case of Vila & Son Landscaping Corp. v. Posen Construction, Inc., 2012 WL 4093545 (Fla. 2d DCA 2012), illustrates the enforceability of termination for convenience provisions. In this case, the general contractor terminated the subcontractor for convenience because it found another subcontractor that would do the same work cheaper. The terminated subcontractor asserted that the termination was wrongful and sued the general contractor. The subcontractor’s main argument was that the general contractor needed to utilize good faith in terminating the subcontractor for convenience and it did not by terminating it for a better price. The Second District Court of Appeal essentially found that the termination for convenience provision was enforceable, i.e., there was no wrongful termination simply because the general contractor terminated the subcontractor to obtain better pricing.

Contractors need to be aware of termination for convenience provisions. Subcontractors should be especially aware because these provisions can allow a general contractor to terminate it in order to obtain a different subcontractor to do the same scope of work at a reduced price. If this is a concern, one approach is to try to negotiate the recoverability of some profit (or termination damages) in the event the termination for convenience provision is exercised.

BUTTONING-UP CONTRACTUAL INDEMNIFICATION LANGUAGE

Posted on May 15, 2012May 15, 2012 by Edward Garber

A contractual indemnification provision is one of the most important provisions in construction contracts. Owners want to be indemnified from the general contractor to the extent a person or entity performing a scope of the general contractor’s work asserts a claim against the owner or a person is injured on the owner’s property. Likewise, general contractors want their subcontractors to indemnify them to the extent the owner asserts a claim against them arising out of the general contractor’s work or a person or entity performing a scope of the subcontractor’s work asserts a claim against the general contractor.

Indemnification (hold harmless) provisions need to be carefully drafted because Florida Statute §725.06 includes a limitation on indemnification for construction contracts. In short, this statute provides in material part that if a contract requires an indemnitor (such as a subcontractor required to indemnify a general contractor) to indemnify and hold harmless the indemnitee (such as the general contractor receiving the indemnification) “for liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee…[the indemnification provision] 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.” Stated simply, if the indemnification provision does not comply with Florida law, it may be unenforceable – a very bad thing for a party expecting to be indemnified!

Recently, the First District Court of Appeal in Griswold Ready Mix Concrete, Inc. v. Reddick, 2012 WL 1216268 (Fla. 1st DCA 2012), dealt with the enforceability of an indemnification provision. In this case, a concrete supplier leased a pump truck (to facilitate pouring concrete). The lease agreement provided that the concrete supplier was to:

“(g) To assume all risks and liabilities for and to indemnify Lessor [of the pump truck]…and Lessor’s agents against all claims, actions, suits, penalties, expenses and liabilities, including attorneys fees, whether or not covered by insurance, for (i) loss or damage to the Equipment; (ii) injuries or deaths of any persons; and (ii)[sic] damage to any property, howsoever arising or incurred from or incident to the use, operation or possession of the Equipment, unless such claims, actions, suits, penalties, expenses or liabilities are caused solely by the intentional conduct of the Lessor or its agents.”

When concrete was being poured, a construction worker was injured and asserted a claim against the concrete supplier and the lessor of the pump truck. The lessor settled the claim and asserted a claim for contractual indemnification against the concrete supplier based on the contractual language above. Among other arguments, the concrete supplier argued that the indemnification provision was unenforceable under Florida Statute §725.06 because it contained no monetary limitation.

Although the trial court found the indemnification provision to be enforceable, the First District disagreed, maintaining, “The indemnity provision at issue in this case does not contain a dollar limit to Griswold’s [concrete supplier] potential liability. For that reason, it is void and unenforceable as provided in section 725.06, and the trial court erred in ruling otherwise.”

While this case does not contain a lengthy discussion with respect to the language of the indemnification provision between the concrete supplier and the lessor of the pump truck, it appears clear that the provision required the concrete supplier to indemnify the lessor for the lessor’s potential negligence (i.e., damage or injury caused in whole or in part by any act, omission, or default of the lessor). For this reason, the indemnification provision needed to include a monetary limitation and should have under the law also expressed that it was part of the bid documents or project specifications.

This case illustrates the importance of making sure an indemnification provision is properly worded and drafted in accordance with Florida law, especially if you are a contractor or an owner where the indemnification provision is a material portion of the contract. As you can see, not doing so can have the harsh effect of having the indemnification provision declared unenforceable.

A CONTRACTOR’S RIGHT TO SET-OFF AMOUNTS FROM A SUBCONTRACTOR

Posted on February 18, 2012February 18, 2012 by Edward Garber

Oftentimes, subcontractors perform trade work for the same contractor on multiple projects. Because of this, it is practical for contractors to include in the subcontract a provision that authorizes them to set-off the subcontract amount due to any defects, breaches, etc. by the subcontractor that occur on another project. On the other hand, subcontractors that understand the ramifications of this provision, want to delete this provision from any subcontract in order to keep their receivables from one project completely separate from another project.

In Carolina Consulting Corp. d/b/a Barrier Wall of South Florida v. Ajax Paving Industries, Inc. of Florida, 2012 WL 163927 (2nd DCA 2012), a roadway contractor subcontracted the paving work on two separate projects (in two different counties).

After the subcontractor completed its work for the first project (“Project One”), a payment dispute arose whereby the subcontractor asserted it was owed more money than it was paid. At this time, the second project (“Project Two”) had not begun and was severely delayed.

When Project Two was ready to commence, the paving subcontractor advised the contractor that it would not perform until it was paid in full for Project One and was issued a change order for the increase in material price due to the severe delay to the start date. The subcontractor later stated that it would not perform until it received adequate assurances from the contractor of the contractor’s ability and willingness to pay for Project Two. The contractor then terminated the subcontractor and hired another subcontractor to perform the paving work for Project Two at an increased rate and lawsuits between the contractor and paving subcontractor were initiated.

The trial court held the subcontractor was entitled to suspend its performance on Project Two until it received adequate assurance that it would be paid for the work. The trial court further found that the subcontractor should be awarded approximately $119,000 for unpaid work for Project One and approximately $105,000 for the contractor wrongfully terminating the subcontractor on Project Two.

The contractor appealed to the Second District Court of Appeal maintaining that the subcontractor breached the subcontract for Project Two when it decided to condition its performance on the receipt of adequate assurances of the contractor’s ability to pay. The Second District agreed and reversed the trial court.

In examining this issue, the Second District looked at Florida’s Uniform Commercial Code, particularly Florida Statute s. 672.609(1), dealing with the sale of goods. This statute, in short, provides that “a merchant has the right to demand adequate assurance of performance ‘[w]hen reasonable grounds for insecurity arise with respect to the performance of’ the other party.” Carolina Consulting, 2012 WL at *2.

The Second District, however, noted that it previously declined to address whether this right under the Uniform Commercial Code applies in the context of construction contracts. The Court further declined to address this issue in this case. Rather, it stated that under the facts of the case, the subcontractor did NOT have a reasonable basis to demand adequate assurances from the contractor because the contractor had a payment bond (which is designed to guarantee payment to subcontractors and suppliers, etc.). For this reason, the Court maintained that the subcontractor breached the subcontract for Project Two and the contractor had the right to set-off amounts for the breach for Project Two for any amounts the contractor may have owed the subcontractor for Project One.

On this point, the Second District stated:

“Under the terms of both subcontracts, upon Ajax’s [subcontractor] breach of subcontract, the contractor had the right to hire another subcontractor to perform the work and then deduct the cost from any amount owed to Ajax in connection with the Pasco County subcontract [Project One].”

This bolded language seems to suggest that the contractor’s subcontract included a provision that allowed it to deduct or set-off amounts owed on one project due to defects or breaches on another project. However, even without this contractual language, it would seem that any amounts owed to the subcontractor for Project One would be offset by any amounts owed to the contractor for Project Two (due to the subcontractor’s breach of that subcontract). In this scenario, the outcome could be the same irrespective of the contractual language. Although, without the contractual set-off language, and assuming the contracts permitted prevailing party attorneys’ fees, it would seem that the subcontractor would be entitled to its fees for the contractor’s breach of the subcontract for Project One and the contractor would likewise be entitled to its fees for the subcontractor breaching the subcontract for Project Two. With the contractual set-off language, it is highly possible that the subcontractor would not be entitled to recover its fees for the contractor’s breach of the subcontract for Project One because the contractor had the contractual right to set-off such amounts due to any breaches associated with Project Two. This is a confusing but important distinction.

As it relates to the subcontractor demanding adequate assurances, this case is important because it illustrates that if the contractor has a payment bond, it will be very difficult for a subcontractor to ever condition its performance on demanding adequate assurance of the contractor’s ability to pay (i.e., its creditworthiness). While, irrespective of the payment bond, such an argument seems extremely challenging if made under the Uniform Commercial Code–many times contracts (particularly prime contracts) will include language that allows a contractor to demand adequate assurance of the paying party’s creditworthiness. Even with this contractual language, it will still be a difficult argument to make if there is a payment bond in place. Also, expanding this rationale, because of lien rights, a court may find that because a contractor/subcontractor has the right to lien the project (a subcontractor can lien the project if there is not a payment bond), it is really never in the situation to reasonably condition its performance on adequate assurances because it could preserve or try to collateralize its payment claim by recording a lien on real property as well as pursue a breach of contract claim against the nonpaying party.

CAREFUL DRAFTING OF ARBITRATION PROVISIONS TO ENSURE THE STATUTE OF LIMITATIONS APPLIES TO CLAIMS RESOLVED THROUGH ARBITRATION

Posted on November 27, 2011November 27, 2011 by Edward Garber

Many construction contracts include arbitration provisions as the means to resolve a dispute instead of resorting to litigation. Certain owners prefer to resolve their disputes with contractors through arbitration and certain contractors, likewise, prefer to resolve their disputes with subcontractors through arbitration.

The case of Raymond James Financial Services, Inc. v. Phillips, 36 Fla. L. Weekly D2479a (2d DCA 2011), certified the following question to the Florida Supreme Court:

“Does Section 95.011, Florida Statutes, apply to arbitration when the parties have not expressly included a provision in their arbitration agreement stating that it is applicable.”

While this case was not a construction case, the question certified to the Florida Supreme Court was a fundamental issue that applied to ALL arbitration provisions. Section 95.011 is included in Florida Statutes Chapter 95 (“Chapter 95”) dealing with the statute of limitations for actions. The statute of limitations requires lawsuits to be brought within the specified timeframe set forth in Chapter 95 or else the action is time-barred, meaning it cannot properly be asserted under the law. In this case, however, the Second District found that there was nothing in the arbitration provision at-issue that required actions to be brought within the limitations periods set forth in Chapter 95 and, along these lines, nothing in Chapter 95 clarified that the statutes of limitations for actions was intended to apply to disputes resolved through arbitration.

This decision was crucial because if the statute of limitations is not intended to apply to disputes resolved through arbitration, and nothing in the arbitration provision clarifies that the statute of limitations periods set forth in Chapter 95 are intended to apply, then there is technically NO time period for when a dispute needs to be initiated because they could never be time-barred under the law. The corollary of this is that it could open arbitration floodgates because parties that thought they could no longer bring an arbitration claim under the law could now assert an argument that their claim was never time-barred under the law.

Luckily, the Florida Supreme Court answered the Second District’s certified question in the affirmative holding that the statute of limitations DOES APPLY TO ARBITRATION PROCEEDINGS!!! See Raymond James Financial Services, Inc. v. Phillips, 126 So.3d 186 (2013). This means that the defense of statute of limitations can be raised in an arbitration proceeding as a basis to bar an untimely filed claim.

With respect to construction contractors, parties that utilize the AIA Agreements (promulgated by the American Institute of Architects) that select arbitration as the dispute resolution procedure should still safely ensure the agreement contains a provision to the effect:

“In no effect shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim would be barred under the applicable statute of limitations.”

The AIA standard form agreements usually include this provision almost verbatim. This provision should not be deleted. When drafting or negotiating an AIA agreement that includes an arbitration provision, a party should ensure that language to the effect is included in the agreement and not deleted or substantially manipulated so as to render it ambiguous. Also, parties that do not use an AIA agreement and prefer arbitration need to draft such a provision or mimic one after the provision used in the standard form AIA agreements to ensure the statute of limitations applies to claims / disputes resolved through arbitration no matter what.

CAREFUL DRAFTING OF PAY-WHEN-PAID PROVISIONS

Posted on November 27, 2011November 27, 2011 by Edward Garber

The pay-when-paid provision is an important aspect of a contractor’s subcontract. Under this provision, the risk of an owner’s nonpayment to a contractor for a subcontractor’s scope of work is shifted to the subcontractor. In other words, a contractor is not responsible for paying the subcontractor unless the contractor was specifically paid by the owner for the subcontractor’s work–the owner’s payment to the contractor serves as an express condition precedent to the contractor’s payment to a subcontractor. However, for pay-when-paid provisions to be enforceable, they need to be clearly drafted so that it is unequivocal that the owner’s payment to the contractor for a subcontractor’s work serves as the express condition precedent to the contractor’s payment to the subcontractor.

Subcontractors oftentimes look for arguments to circumvent the pay-when-provision. If the contractor has a payment bond, then the subcontractor does not need to look to the contractor for payment, even if the owner has not paid the contractor for the subcontractor’s work. When there is a payment bond, the subcontractor can sue the bond and the surety that issued the bond cannot raise the pay-when-paid provision as a defense. See OBS Co. v. Pace Construction Corp., 558 So.2d 404 (Fla. 1990).

However, if there is no payment bond, or the subcontractor, for whatever reason, did not properly preserve its rights to pursue a payment bond claim, the recent case of International Engineering Services, Inc. v. Scherer Construction & Engineering of Central Florida, LLC, 2011 WL 5109306 (5th DCA 2011), provides another argument that a subcontractor can raise in an effort to escape the harsh effect of a pay-when-paid provision. In this case, the subcontract incorporated by reference the contractor’s prime contract with the owner. The prime contract provided:

“Neither final payment nor any remaining retained percentage shall become due until the Contractor submits to the Architect (1) an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner’s property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied.”

The subcontractor successfully argued that this provision in the prime contract, which was incorporated into its subcontract, created an ambiguity with the pay-when-paid provision. The reason being is that this provision maintained that the owner was not responsible for paying the contractor until the contractor paid its subcontractors. Well, this conflicts with a pay-when-paid provision which says a contractor is not responsible for paying a subcontractor until an owner has paid the contractor. By the subcontractor arguing that this provision in the prime contract conflicts and creates an ambiguity with the pay-when-paid provision, the Fifth District held that the pay-when-paid provision was unenforceable because it was ambiguous. Thus, the contractor was responsible for paying the subcontractor!

The outcome of this case is important for both contractors and subcontractors. For contractors, it is important to ensure that language in the prime contract does not conflict with language in the subcontract, particularly the pay-when-paid provision. Typically, all subcontracts incorporate by reference the prime contract. One thing a contractor can do is to include a provision in the subcontract that says something to the effect: “If anything in the subcontract conflicts or creates an ambiguity with anything in the prime contract, the terms of the subcontract shall govern. This includes anything that conflicts with the pay-when-paid provision included in this subcontract and subcontractor therefore understands that owner’s payment to contractor for subcontractor’s scope of work is an express condition precedent to contractor’s payment to subcontractor.”

For subcontractors, it is important to request a copy of the owner’s prime contract with the contractor since it is incorporated into the subcontract. By looking for a provision in the prime contract that may conflict with the pay-when-paid provision in the subcontract–a provision similar to the one referenced above that requires the contractor to pay its subcontractors before the owner is obligated to pay the contractor final payment–can allow the subcontractor to argue that the pay-when-paid provision should be deemed unenforceable thereby making the contractor liable to the subcontractor for payment even if the contractor was not paid by the owner.