RECORDING THE NOTICE OF BOND TO TRANSFER THE CONSTRUCTION LIEN TO THE PAYMENT BOND

imagesIf a contractor furnishes a payment bond for a private project (per Florida Statute s. 713.23), a copy of that bond should be recorded with the Notice of Commencement recorded in the official records of the county where the project is located. A contractor furnishes a payment bond on a private project in order to exempt the owner’s real property from construction liens.

 
There are times, though, where a subcontractor or a supplier will still go ahead and record a lien against the owner’s real property even though there is a payment bond that was recorded with the Notice of Commencement. This is a frustrating scenario because the point of paying for the payment bond and furnishing the bond is to prevent this very scenario from occurring. No worries, however, because Florida’s Lien Law efficiently addresses this scenario by allowing the contractor or owner to record in the official records and serve on the lienor a verified Notice of Bond (attaching a copy of the payment bond) that will operate to transfer the lien to the payment bond. Fla. Stat. s. 713.23(2). A copy of the Notice of Bond form is provided below.

 
Moreover, this Notice of Bond procedure would apply even if the contractor furnished a payment bond, but for whatever reason, that payment bond was not recorded with the Notice of Commencement. When this happens, and it does happen, the subcontractor or supplier may honestly not know that the contractor actually furnished a payment bond and will move forward and record a lien. Again, no worries, because the contractor or owner should implement the same procedure by recording and serving the lienor with a Notice of Bond. Every lien recorded AFTER the execution and delivery of the payment bond will be transferred to the payment bond through the recording of the Notice of Bond (attaching a copy of the payment bond).

 

Now, if the contractor did NOT furnish a payment bond BEFORE the lien was recorded, the contractor could move to transfer the lien to a lien transfer bond pursuant to Florida Statute s. 713.24. This is different than a payment bond. The lien transfer bond is simply a mechanism where a contractor through a statutory procedure procures and records a lien transfer bond that is designed to transfer a specific lien to the security of the bond. (When a contractor procures a lien transfer bond, the bond must be for the principal amount of the lien, plus the greater of $1,000 or 25% of the principal amount to cover potential attorney’s fees and court costs, plus three years worth of interest on the principal amount at the prevailing statutory rate.)

 

 

NOTICE OF BOND

To (Name and Address of Lienor)
You are notified that the claim of lien filed by you on ___, ___, and recorded in Official Records Book ___ at page ___ of the public records of ___ County, Florida, is secured by a bond, a copy being attached.
Signed: (Name of person recording notice)

 

 

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.

MILLER ACT AND TIMELY SERVING NOTICE OF NON-PAYMENT WITHIN 90 DAYS OF LAST FURNISHING

images-1Federal district courts interpreting the Miller Act provide value to those prime contractors, subcontractors, suppliers, and sub-subcontractors that work on federal construction projects, even if the decisions and projects are outside of Florida.

 

Remember, the Miller Act requires sub-subcontractors and suppliers in direct contract with a subcontractor but that have no contractual relationship with the prime contractor to serve a notice of non-payment to the prime contractor within 90 days from their last furnishing of labor or materials to the subcontractor.   Failure to provide this notice will result in a very strong defense from the prime contractor and surety that the supplier or sub-subcontractor has NO Miller Act payment bond rights.  Do not…let me repeat, do not…put yourself in this position if you are a supplier or sub-subcontractor on a federal project.  And, if you are a prime contractor or surety defending a Miller Act payment bond claim from a sub-subcontractor or supplier, analyze whether the claimant timely served its notice of non-payment within 90 days from its last furnishing to the subcontractor.

 

For example, in U.S. ex rel. Sun Coast Contracting Services, LLC v. DQSI, LLC, 2014 WL 5431373 (M.D.La. 2014), a sub-subcontractor initiated a Miller Act payment bond claim.  But–and this is a big but–the sub-subcontractor could not dispute the fact that it independently failed to serve a notice of non-payment within 90 days from its last furnishing to the subcontractor that hired it.   Instead, the sub-subcontractor argued that a notice of non-payment from the subcontractor to the prime contractor served as its notice since it included amounts the subcontractor owed to it.  Yet, the letter that the sub-subcontractor relied on never mentioned the sub-subcontractor or the amount the subcontractor owed to the sub-subcontractor.  Therefore, it was easy for the federal district court to conclude that the sub-subcontractor had NO Miller Act payment bond rights:

 

Beyond SCCS’s [subcontractors] letter, whose content did not even allude to the existence of a claim by Plaintiff [sub-subcontractor], Plaintiff has not put forth any assertion that it communicated its claim to DQSI [prime contractor] within ninety days after the date of Plaintiffs last performance on the project. By failing to provide proper notice according to statutory requirements, Plaintiff has no right to sue Defendants DQSI or Western Surety under the Miller Act.

Sun Coast Contracting Services, LLC, supra, at *4.

 

While federal courts liberally construe the method of service of the notice of non-payment from the supplier or sub-subcontractor to the prime contractor, it really should never get to this point as it simply gives the prime contractor and surety a legitimate defense to a Miller Act claim.  If you are a supplier or sub-subcontractor, do NOT deal with this unnecessary headache.  Properly preserve your Miller Act payment bond rights.  On the other hand, if you are a prime contractor or surety, you should absolutely explore whether the Miller Act payment bond claimant properly preserved its payment bond rights and, if not, defend the claim based on this failure.

 

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.

 

MILLER ACT TIME

UnknownIf you are a subcontractor or a sub-subcontractor / supplier in direct privity of contract with a subcontractor on a federal project, you NEED to know your Miller Act payment bond rights.  Why?  Because the payment bond is designed to protect YOUR interests as a mechanism to insure non-payment.

 

Sub-subcontractors and suppliers in direct privity of contract with a subcontractor MUST serve the prime contractor within 90 days of their final furnishing date a notice of non-payment stating “with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed [e.g., the subcontractor].”  40 USC 3133(b)(2).  Please do not neglect this all-important initial step in preserving a Miller Act payment bond claim.  The notice should be served from the final furnishing of labor or materials exclusive of punchlist or warranty / corrective work.  (Notably, subcontractors in direct privity of contract with the prime contractor do not need to serve this notice of non-payment on the prime contractor.)

 

 

In U.S. f/u/b/o Butler Supply, Inc. v. Power & Data, LLC, 2014 WL 4913421 (E.D.Miss. 2014), a supplier furnished electrical materials to an electrical subcontractor working on a federal project.  Due to non-payment, the supplier sued the prime contractor’s Miller Act payment bond.   The prime contractor argued that the supplier is not a valid Miller Act payment bond claimant because it did not have a direct contract with the supplier.  The federal district court dismissed this argument because the electrical subcontractor signed a credit application and corresponding personal guaranty that served as the basis of a direct contract between the supplier and subcontractor. To this point, the federal district court expressed, “[S]eparate order of materials under an open account or credit basis, typically represented in purchase orders or invoices, satisfy the [Miller] Act’s underlying contract requirement.”  Butler Supply, supra, at *3.

 

Next, the prime contractor argued that the supplier did not timely serve its written notice of non-payment within 90-days of final furnishing because the supplier could not prove that the materials were delivered to the job. The federal district court dismissed this argument too since actual delivery or incorporation of materials into a federal project is immaterial with respect to a supplier’s Miller Act rights.  What is material is the “supplier’s good faith belief that the materials were intended for the specified work [project].”  Butler Supply, supra, at *4 (internal quotation and citation omitted).   In this instance, the supplier submitted invoices showing the material furnished, the price of the material, the name and location of the project, and delivery tickets showing the materials were signed by the subcontractor.

 

In Butler Supply, the federal district court granted summary judgment in favor of the supplier’s Miller Act claims dismissing the prime contractor’s arguments.  Although this ruling it outside of Florida, the same result should be achieved in a Miller Act suit in Florida.   The key is to (a) establish a direct contractual relationship with a subcontractor and (b) establish your final furnishing date with documentary evidence (since you can expect the prime contractor to challenge the timeliness of the written notice of non-payment).  In Butler Supply, the supplier relied on a credit application (and subsequently submitted invoices), which is a routine document required by suppliers, especially suppliers that furnish material on credit or through an open account.   And, the supplier relied on invoices and delivery tickets reflecting its final furnishing date and that it had a good faith belief the materials furnished would be utilized on the project.

 

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.

SURETY BONDING – THE NUTS & BOLTS

images-2Surety bonding is necessary in construction, particularly on federal and Florida public projects where the contractor is required to furnish a payment and performance bond.  Even certain owners of large-scale private projects want their contractor to obtain a payment and performance bond.  Understanding the nuts and bolts of surety bonding is valuable for the contractor that wants to increase job opportunities and/or increase their bonding capacity.

 

 

There are three main parties to the surety bond:

 

1. The surety– the entity (typically, a division of an insurance company) that issues the payment or performance bond for the contract price; the surety guarantees obligations on behalf of its principal, whether it is the performance of the contract (performance bond) or the payment to those entities working under the contractor providing labor, services, or materials (payment bond)

 

2. The principal – the entity (contractor) that procured the bond from the surety and who the surety is issuing the bond on behalf of; the principal along with personal and corporate guarantors will execute a General Agreement of Indemnity before the bond is issued outlining the rights and remedies of the principal/guarantors and the surety

 

3. The obligee – the entity (or entities) that can make a claim against the bond and who the bond is ultimately designed to benefit

 

Not every contactor can get a payment and performance bond.  This means that not every contractor can perform public work that requires a bid bond to be furnished with the bid/proposal and then a payment and performance bond upon the award of the contract.  This is because sureties undertake rigorous underwriting to best assess their risk before issuing bonds. And, many contractors, even if bonds are issued, will have a bonding capacity meaning the surety will not issue an unlimited dollar amount for the bond(s) issued or will not issue an unlimited number of project bonds at the same time. Rather, it will issue a bond or bonds totaling the bonding capacity of the contractor.

 

To obtain a bond, a contractor will go to a surety bond agent/broker, commonly referred to as the producer.  The producer represents select sureties.  Certain sureties cater to certain market niches or contractors and the producer tries to fit the contractor with the surety that best fits the needs, strengths, and qualifications of the contractor. The producer will work with the contractor to fill out required forms and review and collect the material and information that will be needed by the surety in the underwriting process. As a contractor, it is important to develop a strong relationship with a producer that understands your construction business and capabilities and can assist you with obtaining bonding capacity.

 

images-3In the underwriting process, the surety will want to determine the financial strength, creditworthiness, and condition of the contractor by analyzing extensive financial documentation along with the contractor’s operational ability to perform a contract based on the contractor’s history, equipment, personnel, etc.  Underwriting needs to obtain and assess financial and operational material to best assess the surety’s risk (based on the surety’s appetite or market) because if the surety has to pay out a claim on the bond it will absolutely be looking to recoup the costs it incurs from the bond principal as well as the guarantors that executed the General Agreement of Indemnity.  Among other things, the surety will run a credit check for the principal and likely the owners/guarantors; will analyze balance sheets, income statements, and other financial information to understand the contractor’s cash flow, working capital, net worth, and profitability history and forecasts; will want to know of judgments and lawsuits; will likely contact references; and will want to specifically understand past projects completed and current projects underway, including the project in which the bond is being requested, from an estimating and accounting standpoint, personnel and management standpoint, insurance standpoint, and possibly a scheduling standpoint.  The surety will do its homework because the very last thing a surety wants to do is pay a claim or expose itself to massive liability with a bond claim from a contractor that failed to pay its subcontractors or abandoned a job without any true recourse to recoup money expended.  The surety will consider the personal and corporate guarantors it requires from a contractual indemnity standpoint per the General Agreement of Indemnity and may require cash collateral or property collateral to be pledged for underwriting approval.   Again, developing the relationship with the producer that understands your business is crucial as the producer will understand the underwriting process and facilitate the transmission of information and material between the contractor and the surety.

 

 

The surety charges a premium for the issuance of the bond.  Payment and performance bonds are often single premium bonds.  Depending on the producer you ask, the premiums typically range from 1-3% of the bond amount.   Naturally, there are contractors that will have to pay in excess of 3% of the bond amount based on the associated credit risk with issuing the bond.

 

Once underwriting runs its course and the contractor is approved for the requested bonds, the producer typically signs the bonds on behalf of the surety.  The producer is given a power-of-attorney to sign bonds as an attorney-in-fact on behalf of the surety.

 

 

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.

MILLER ACT REQUIREMENT FOR SUPPLIER ON AN ONGOING OR OPEN ACCOUNT

UnknownSuppliers oftentimes rent or furnish supplies or equipment on credit to a customer (such as a subcontractor) on an ongoing or open account.  Under this scenario, the supplier typically has its customer enter into a credit application (ideally, where there is a personal guarantor) and then there may be a sales or rental agreement (or purchase order) documenting the costs of the supplies bought or rented in accordance with the account.

 

The case of Romona Equipment Rental, Inc. ex rel. U.S. v. Carolina Casualty Ins. Co., 2014 WL 2782200 (9th Cir. 2014), illustrates an argument raised against a supplier of rental equipment in a federal Miller Act payment bond action when the supplier rented equipment to a subcontractor on an open account.  In this case, the subcontractor entered into a credit application with the supplier that established the open account for the subcontractor to rent equipment on a federal construction project.  The rental equipment that the subcontractor would utilize would be documented by rental agreements and corresponding invoices. The subcontractor entered into 89 rental agreements with the supplier where the supplier furnished the rental equipment on credit.   Around this time, the prime contractor terminated the subcontractor from the project leaving the subcontractor owing the supplier substantial sums of money for the rental equipment.

 

 

The supplier served the prime contractor with its notice of nonpayment within 90 days of the last day it furnished rental equipment (as it was required to do under the Miller Act since the supplier was not in privity of contract with the prime contractor).  The supplier then filed suit against the prime contractor’s Miller Act payment bond for the unpaid rental charges.  The prime contractor and surety argued that the supplier’s notice of nonpayment was untimely as to ALL the rental equipment furnished to the construction project more than 90 days before service of the notice.  The prime contractor and surety further argued that the supplier failed to mitigate its damages by continuing to supply equipment despite nonpayment. At trial, the district court held that the supplier’s notice of nonpayment covered ALL rental equipment the supplier furnished to the subcontractor for the project in light of the open book account.  The district court further held that the supplier’s duty to mitigate damages occurred 4 days after the subcontractor was terminated and, therefore, the supplier was not entitled to recover for rental equipment after this date.

 

The main issue on appeal to the Ninth Circuit Court of Appeals was whether the supplier’s notice of nonpayment was timely as to ALL rental equipment furnished on an open book account more than 90 days before the notice.   Stated differently, the issue was whether each rental agreement created, in essence, a separate contract with a separate requirement to serve a notice of nonpayment within 90 days from the last date the specific equipment was furnished pursuant to each rental agreement.   The Ninth Circuit, relying on precedent from the First, Fourth, and Fifth Circuits, affirmed that: “if all the goods in a series of deliveries by a supplier on an open book account are used on the same government project, the ninety-day notice is timely as to all of the deliveries if it is given within ninety days from the last delivery.”  Romona Equipment Rental, supra, at *3.   This is a good ruling for suppliers!

 

Interestingly, while the Ninth Circuit agreed with the district court as to the date when the supplier’s duty to mitigate occurred (4 days after the subcontractor was terminated), there was discussion on this issue.  It turned out that the subcontractor originally paid its supplier the first 9 invoices for rental equipment, but then only paid 2 of the remaining  invoices.  The supplier ceased renting equipment to the subcontractor when it learned that the subcontractor was terminated from the project.   Yet, before the subcontractor was actually terminated, the subcontractor and prime contractor were trying to resolve the issues that led to the subcontractor’s termination (not uncommon).  Thus, the supplier had a good faith belief that the issues would get resolved and it would get paid. Also, the subcontractor and supplier had a longstanding relationship and the supplier was currently furnishing equipment on another federal project and was being paid by the subcontractor.  For these reasons, the Ninth Circuit explained that, “Although Ramona [supplier] failed to alert Candelaria [prime contractor] to Otay’s [subcontractor] delinquency until the seventy-eight invoices from Otay were overdue, this does not render the district court’s conclusion-that Romona had commercially reasonable justifications for choosing not to mitigate its damages prior to June 10, 2008 [4 days after the termination]—illogical.”  Romona Equipment Rental, supra, at *4.

 

This dialogue raises an interesting issue regarding the mitigation of damages defense (or duty to mitigate losses/damages) raised by a prime contractor or surety when a supplier goes unpaid for an extended period of time but continues to furnish supplies or equipment.  The point of termination raised an easy line of demarcation as to when the credit for rental equipment needed to be cut off.  But, what if the subcontractor was not terminated and the supplier continued to rent equipment despite nonpayment? Even though the supplier typically expects payment net 30 days and does not have a pay-when-paid provision in its rental agreements or purchase orders, it still many times will give its customer (e.g., subcontractor) the appropriate slack while its customer is awaiting payment, especially a longstanding customer, a good customer, or when it has a good faith belief that it will ultimately get paid.  Also, as it relates to rental equipment, while the supplier can stop furnishing new rental equipment, it is not that easy simply showing up to a project (let alone a federal project) unannounced and removing equipment being rented on a monthly or daily rate.  So, there are definitely commercially reasonable justifications where a supplier will continue to let an account grow when it is not getting timely paid.  The key for the supplier to establish that it tried to mitigate its losses is to lay the foundation that it sent communications to its customer and its customer’s customer (such as the prime contractor) regarding the delinquent account and its expectation that the equipment  be returned when it becomes apparent (or the supplier is concerned) that it may not get paid (or when it no longer has the good faith belief that it will get paid).  In Romona Equipment Rental, although the prime contractor likely knew the subcontractor was renting construction equipment (and was not in a position to pay unless the subcontractor received payment), the prime contractor still argued that the supplier should have notified the prime contractor of the subcontractor’s delinquent account as a means to mitigate damages.

 

For more information on a supplier’s burden of proof in a Miller Act action, please see: http://www.floridaconstructionlegalupdates.com/suppliers-burden-of-proof-in-a-miller-act-payment-bond-claim/.

 

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.

IMPORTANT BULLET POINTS FOR PAYMENT BONDS ON FLORIDA PUBLIC PROJECTS (FLA. STAT. s. 255.05)

florida-county-mapContractors that work on Florida state and local government construction projects (non-FDOT projects) must be familiar with Florida Statute s. 255.05.  This statute governs the payment bond (and performance bond) the general contractor is required to provide for public projects in excess of $200,000.  (No payment bond is statutorily required for projects in the amount of $100,000 or less and the public body has discretion waiving the bond requirement for projects in the amount of $200,000 or less.)

 

Here are important bullet points regarding payment bonds for public projects required by s. 255.05:

 

  • The general contractor (hired by the public body) is required to execute and record the payment bond (and performance bond) in the public records where the project is located. Fla. Stat. s. 255.05(1).

 

  • The public body is not supposed to make payment to the contractor until it receives a certified copy of the recorded bond.  Fla. Stat. s. 255.05(1)(b).

 

  • The bond must state on the front page the “name, principal business address, and phone number of the contractor, the surety, the owner of the property being improved and, if different from the owner, the contracting public entity.”  Fla. Stat. s. 255.05(1)(a).  The bond should also contain reference to s. 255.05 and contain reference to the notice and time limitation provisions in subsections (2) and (10) (as referenced in subsequent bullet points).  Fla. Stat. s. 255.05(6).  Notwithstanding, the payment bond “shall be construed and deemed statutory payment bonds…and such bonds shall not under any circumstances be converted into common law bonds.” Fla. Stat. s. 255.05(4).

 

  • Any provision in payment bonds issued after October 1, 2012 that “further restricts the classes of persons protected by the bond, which restricts the venue of any proceeding relating to such bond, which limits or expands the effective duration of the bond, or which adds conditions precedent to the enforcement of a claim against the bond beyond those provided in this section is unenforceable.” Fla. Stat. s. 255.05(1)(e).

 

 

  •  A claimant not in privity with the general contractor shall serve a written notice of nonpayment on the contractor and surety no later than 90 days after final furnishing.  Fla. Stat. s. 255.05(2)(a)(2).   The notice must specify the portion of the nonpayment amount designated as retainageId.   Note, however, that this requirement differs from payment bonds for private projects where all claimants are required to serve the notice of nonpayment even if in privity with the general contractor.  Here, only those claimants not in privity with the general contractor need to serve the written notice of nonpayment.

 

  • A claimant has one year from final furnishing to file an action on the payment bond. Fla. Stat. s. 255.05(10). However, there is an exception for retainage:

CAP App

An action for recovery of retainage must be instituted against the contractor or the surety within 1 year after the performance of the labor or completion of delivery of the materials or supplies; however, such an action may not be instituted until one of the following conditions is satisfied: 

(a) The public entity has paid out the claimant’s retainage to the contractor, and the time provided under s. 218.735 or s. 255.073(3) for payment of that retainage to the claimant has expired;

(b) The claimant has completed all work required under its contract and 70 days have passed since the contractor sent its final payment request to the public entity; or

(c) At least 160 days have passed since reaching substantial completion of the construction services purchased, as defined in the contract, or if not defined in the contract, since reaching beneficial occupancy or use of the project.

(d) The claimant has asked the contractor, in writing, for any of the following information and the contractor has failed to respond to the claimant’s request, in writing, within 10 days after receipt of the request:

1. Whether the project has reached substantial completion, as that term is defined in the contract, or if not defined in the contract, if beneficial occupancy or use of the project has occurred.

2. Whether the contractor has received payment of the claimant’s retainage, and if so, the date the retainage was received by the contractor.

3. Whether the contractor has sent its final payment request to the public entity, and if so, the date on which the final payment request was sent.

If none of the conditions described in paragraph (a), paragraph (b), paragraph (c), or paragraph (d) is satisfied and an action for recovery of retainage cannot be instituted within the 1-year limitation period set forth in this subsection, this limitation period shall be extended until 120 days after one of these conditions is satisfied.”

 

 

Now, what happens if the recorded bond does not specifically reference s. 255.05 or the notice and time provisions of the statute as required by the statute in s. 255.05(6)?  This issue was decided by the Florida Supreme Court in American Home Assur. Co. v. Plaza Materials Corp., 908 So.2d 360, 370 (Fla. 2005), where the Court held:

 

“[W]e conclude that the notice and time limitation provisions of section 255.05(2) may be enforceable, even where the statutory payment bond at issue does not contain reference to those notice and time limitation provisions in accordance with section 255.05(6). Once the claimant upon the bond makes a prima facie showing that the bond is facially deficient within the context of the statute and establishes by a preponderance of the evidence that the claimant did not have actual notice of the provision, the surety is estopped from attempting to enforce those provisions.

 

In other words, the bond is not going to be converted into a common law bond which would deem the required notice provisions unenforceable.  This showing by a claimant is actually a challenging hurdle to overcome, especially for a claimant that performs work on public projects and should know the notice requirements for public payment bonds!

 

Now, what happens if the bond is not recorded in the public records?  The same holding and potential hurdle would likely apply.  See Ardaman & Associates, Inc. v. Travelers Cas. And Sur. Co. of America, 2009 WL 161203 (N.D.Fla. 2009) (relying on the Florida Supreme Court’s decision in American Home Assur. to find that a payment bond not recorded on an FDOT project pursuant to Florida Statute s. 337.18 should be subject to the same analysis).

 

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.

 

PAYMENT BONDS AND PRELIMINARY NOTICE REQUIREMENTS FOR FLORIDA DEPARTMENT OF TRANSPORTATION (FDOT) PROJECTS

RoadworkPayment and performance bonds for Florida Department of Transportation (“FDOT”) projects are governed under Florida Statute s. 337.18.  These bonds are statutorily required for contract prices greater than $250,000 and the FDOT can waive the bond requirement for projects with a contract price of $250,000 or less if it determines the project will not endanger the public health, safety, or property.  (Payment bonds and performance bonds for other public projects, or non-FDOT projects, are governed under Florida Statute s. 255.05, and will not be specifically discussed in this posting.)

 

Section 337.18 contains the following relevant provisions applicable to FDOT payment bonds:

 

(1)(b) Before beginning any work under the contract, the contractor shall maintain a copy of the payment and performance bond required under this section at its principal place of business and at the job-site office, if one is established, and the contractor shall provide a copy of the payment and performance bond within 5 days after receiving a written request for the bond. A copy of the payment and performance bond required under this section may also be obtained directly from the department by making a request pursuant to chapter 119. A claimant has a right of action against the contractor and surety for the amount due him or her, including unpaid finance charges due under the claimant’s contract. The action may not involve the department in any expense. 

 

 

(1)(c) A claimant, except a laborer, who is not in privity with the contractor shall, before commencing or not later than 90 days after commencing to furnish labor, materials, or supplies for the prosecution of the work, furnish the contractor with a notice that he or she intends to look to the bond for protection. A claimant who is not in privity with the contractor and who has not received payment for his or her labor, materials, or supplies shall deliver to the contractor and to the surety written notice of the performance of the labor or delivery of the materials or supplies and of the nonpayment. The notice of nonpayment may be served at any time during the progress of the work or thereafter but not before 45 days after the first furnishing of labor, services, or materials, and not later than 90 days after the final furnishing of the labor, services, or materials by the claimant or, with respect to rental equipment, not later than 90 days after the date that the rental equipment was last on the job site available for use. An action by a claimant, except a laborer, who is not in privity with the contractor for the labor, materials, or supplies may not be instituted against the contractor or the surety unless both notices have been given.

 

 

(1)(d) An action must be instituted by a claimant, whether in privity with the contractor or not, against the contractor or the surety on the payment bond or the payment provisions of a combined payment and performance bond within 365 days after the final acceptance of the contract work by the department.

 

 

 

(1)(e) When a contractor has furnished a payment bond pursuant to this section, he or she may, when the department makes any payment to the contractor, serve a written demand on any claimant who is not in privity with the contractor for a written statement under oath of his or her account showing the nature of the labor or services performed to date, if any; the materials furnished; the materials to be furnished, if known; the amount paid on account to date; the amount due; and the amount to become due, if known, as of the date of the statement by the claimant. Any such demand to a claimant who is not in privity with the contractor must be served on the claimant at the address and to the attention of any person who is designated to receive the demand in the notice to the contractor served by the claimant. The failure or refusal to furnish the statement does not deprive the claimant of his or her rights under the bond if the demand is not served at the address of the claimant or directed to the attention of the person designated to receive the demand in the notice to contractor.The failure to furnish the statement within 60 days after the demand, or the furnishing of a false or fraudulent statement, deprives the claimant who fails to furnish the statement, or who furnishes the false or fraudulent statement, of his or her rights under the bond.

 

 

(1)(f) The bonds provided for in this section are statutory bonds. The provisions of s.255.05 are not applicable to bonds issued pursuant to this section.

 

 

imagesQL593J1UThe application of s. 337.18 was discussed in Ardaman & Associates, Inc. v. Travelers Cas. and Sur. Co. of America, 2009 WL 161203 (N.D.Fla. 2009), that involved a FDOT bridge restoration project.  FDOT hired the design-builder to replace damaged structures on a dual bridge that spanned Escambia Bay.  The design-builder hired the engineering firm and the engineering firm engaged a geotechnical engineer.  The geotechnical engineer sued for payment for services performed under the engineer that hired it as well as additional services it performed pursuant to an oral agreement directly with the design-builder.

 

The design-builder and its surety moved to dismiss the bond claim because the geotechnical engineer was supposed to serve its notice of intent to look to the bond pursuant to Fla. Stat. s. 337.18(1)(c) no later than 90 days after it commenced work and it did not serve this statutory notice until two years after it commenced work.  The geotechnical engineer countered that it did not have to serve the statutory notice of intent to look to the bond on the design-builder because (a) it entered into an oral agreement to perform additional services with the design-builder and, thus, was not required to serve the preliminary notice since it became in privity of contract with the design-builder and (b) the bond was never recorded in the official records and, therefore, the surety should be estopped from enforcing any statutory preliminary notice requirement.  (At the time of this lawsuit the statute required the bond to be recorded; this recording requirement has subsequently been removed from the statute and is no longer required for FDOT payment bonds.)

 

The Northern District disagreed with the geotechnical engineer’s first argument that the engineer did not need to serve the preliminary notice for the work it performed directly under the engineer that hired it.  The statute required the geotechnical engineer to serve the preliminary notice for this work since it was not in direct privity with the design-builder (contractor) when it performed this work.  In other words, the failure of the geotechnical engineer to serve this preliminary notice would deprive it of amounts it was seeking against the payment bond for work it directly performed under the engineer that hired it.

 

The Northern District further disagreed with the geotechnical engineer’s second argument that the engineer did not need to serve the required preliminary notice because the bond was never recorded.  (Although, as shown above in the statutory language, this recording requirement has been removed for FDOT payment bonds, it is still a requirement for payment bonds for other Florida public projects issued pursuant to s. 255.05.)  The Northern District held that the geotechnical engineer must allege (and ultimately prove) that its failure to timely serve the preliminary notice was caused by the design-builder’s failure to record the bond in the public records.  (Notably, this burden of proof is very, very challenging, especially for an entity that has performed public construction work and knows a payment bond is a requirement.)

 

Finally, the geotechnical engineer, as another argument to overcome its failure to timely serve the preliminary notice, contended that the payment bond should be deemed a common law bond because it was not properly recorded.  If the bond was deemed a common law bond than statutory notice requirements and time limitations would not be strictly construed. The Northern District disagreed with this argument and held that the payment bond at-issue specifically referenced section 337.18 and the statute specifically states that the bond is a statutory bond.

 

Valuable take-aways:

 

  • Do not neglect serving your preliminary notice to enforce your bond rights.  Know that the requirements of a FDOT project are different than other public projects governed under Florida Statute s. 255.05.  The key is to know that preliminary notice needs to be served and serve it immediately. Work with your notice company or counsel to ensure the required preliminary notice is correctly served based on the construction project you are undertaking.  For more information on a preliminary notice company and preliminary notice requirements for private projects, please see: http://www.floridaconstructionlegalupdates.com/serving-preliminary-lien-payment-bond-notices-on-private-projects/.

 

  • The best course of action is really never to argue that a statutory payment bond for a public project is a common law bond.  It presents a challenging hurdle for the claimant.  Indeed, section 255.05 (again, for non-FDOT public projects) provides that “such bonds shall not under any circumstances be converted into common law bonds.” Fla. Stat. s. 255.05(4).   Interestingly, and for whatever reason, s. 337.18 does not contain this added language although it does provide that the bonds provided per this section are statutory bonds.

 

 

  • The provisions of s. 255.05 are not applicable to the FDOT payment bond issued pursuant to s. 337.18.  While the court may look to cases interpreting s. 255.05 for guidance, the fact remains that the statute explicitly distinguishes itself from the s. 255.05 bond requirements.  Be aware of this when performing a FDOT project.

 

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.

 

SERVING PRELIMINARY LIEN / PAYMENT BOND NOTICES ON PRIVATE PROJECTS

Subcontractors and suppliers need to know the preliminary notices (such as a Notice to Owner for liens or Notice to Contractor for payment bonds) that need to be served to preserve their lien or payment bond rights on private projects.

 

 A.    Obtaining a Copy of the Notice of Commencement

 

images-1The first thing a potential lienor should do is obtain the Notice of Commencement for the project (or any Amended Notice of Commencement).  The Notice of Commencement will be recorded in the official records where the project is located and will provide a potential lienor with a description of the real property, the owner’s information, the contractor’s information, the construction lender’s information, whether the contractor has a payment bond (which should be recorded with the Notice of Commencement), and persons other than the owner that the Notice to Owner needs to be served on.

 

 B.    Preliminary Notices for Liens- the Notice to Owner

 

If there is no payment bond recorded with the Notice of Commencement, then the potential lienor knows it wants to preserve its lien rights.  Entities not in privity of contract with the owner will need to serve a Notice to Owner. The Notice to Owner must set “forth the lienor’s name and address, a description sufficient for identification of the real property, and the nature of the services or materials furnished or to be furnished.” Fla. Stat. s. 713.06(2).  A statutory form is included in Florida’s Lien Law (Florida States Chapter 713) and set forth at the bottom of this posting.  Importantly, the Notice to Owner must be served by the potential lienor “before commencing, or not later than 45 days after commencing, to furnish his or her labor, services, or materials.”  Fla. Stat. s. 713.06(2).  The key is that the Notice to Owner must be served within 45 days of the entity’s initial furnishing.  For instance, a supplier’s initial furnishing is when the materials arrive on site.  However, a supplier of specially fabricated material’s initial furnishing is when the supplier started fabrication irrespective of when the materials arrived on site.  A company supplying construction rental equipment’s initial furnishing is when the rental equipment arrived on site.  And, a subcontractor’s initial furnishing is when it first starts to furnish labor, services, or materials for the project.  Again, there is no reason to delay serving the Notice to Owner – it should be served immediately as a matter of course.

 

A copy of the Notice to Owner should be served on the contractor if the potential lienor was not hired by the contractor in addition to the potential lienor’s customer’s customer.  In other words: “A sub-subcontractor or a materialman to a subcontractor must serve a copy of the notice on the contractor as a prerequisite to perfecting a lien under this chapter and recording a claim of lien. A materialman to a sub-subcontractor must serve a copy of the notice to owner on the contractor as a prerequisite to perfecting a lien under this chapter and recording a claim of lien. A materialman to a sub-subcontractor shall serve the notice to owner on the subcontractor [potential lienor’s customer’s customer] if the materialman knows the name and address of the subcontractor.” Fla. Stat. 713.06(2). (Lien rights, however, are not automatic in that the further removed an entity is from the owner may impact whether or not that entity has lien rights.  For example, a sub-sub-subcontractor does not have lien rights and a supplier to a supplier is not going to have lien rights.  On the other hand, sub-subcontractors will have lien rights and a supplier to a sub-subcontractor should also have lien rights.)

 

 C.    Preliminary Notices for Payment Bonds-the Notice to Contractor and  the Notice of Nonpayment

 

Now, if there is a payment bond in place, the owner’s property is exempt from liens and the entities should look to the payment bond for payment.  In this case, entities not in privity of contract with the general / prime contractor “before beginning or within 45 days after beginning to furnish labor, materials, or supplies…shall serve the contractor with notice in writing that the lienor will look to the contractor’s bond for protection on the work.” Fla. Stat. s. 713.23(1)(c).  Similar to the Notice to Owner, this Notice to Contractor of the potential lienor’s intent to look to the bond must be served within 45 days of initial furnishing.  A statutory form for this notice is also included in Florida’s Lien Law and further set forth at the bottom of this posting.  Importantly, if a lienor is unsure and/or wants to preserve both lien and payment bond rights the lienor can combine the Notice to Owner form with the Notice to Contractor form by calling the Notice to Owner form “NOTICE TO OWNER/NOTICE TO CONTRACTOR.”  This is actually common as it kills two birds with one stone in the event the lienor is unsure and wants to preserve both lien and bond rights.

 

 

However, unlike perfecting a lien claim, potential lienors looking to recover under a payment bond for a private project must serve a Notice of Nonpayment to the contractor and payment bond surety within 90 days of finial furnishing at the project.  (As it relates primarily to subcontractors, “The failure of a lienor to receive retainage sums not in excess of 10 percent of the value of labor, services, or materials furnished by the lienor is not considered a nonpayment requiring the service of the notice provided under this paragraph. Fla. Stat. s. 713.23(1)(d).)  This Notice of Nonpayment even needs to be served by the subcontractor/supplier in privity of contract with the general contractor (even though the preliminary Notice to Contractor does not need to be served by the subcontractor/supplier in privity of contract with the general contractor).  Final furnishing refers to the last date the lienor furnished labor, services or materials (excluding warranty or punchlist work).  With respect to companies that furnish rental equipment, this final furnishing date is measured from the last date the rental equipment was on the project site and available for use.

 

Understanding the specific preliminary notices that need to be served and the timing of these notices is important to ensure that a subcontractor, supplier, etc. is properly preserving their lien or bond rights.

 

 D.    Preliminary Notice Companies

 

images-2There are numerous companies that cost effectively assist subcontractors and suppliers with serving preliminary notices as a matter of course based on the information provided by the subcontractor and supplier.  This is important to ensure the company preserves lien and bond rights!

 

One such emerging company that can assist with the generation, preparation and service of preliminary notices is FileMyPrelim (www.filemyprelim.com) with its cool, innovative web-based platform called PrelimTracker (www.prelimtracker.com).  FileMyPrelim and PrelimTracker have developed a preliminary notice service and tracking platform that adapts to a construction industry that is evolving with the generation and transmission of electronic documentation.  What is really cool is that by using FileMyPrelim, the lienor’s data is stored and tracked with PrelimTracker.  Because these preliminary notices (whether it is a Notice to Owner, Notice to Contractor, etc.) are linked to PrelimTracker, the general contractor, the owner, and even the owner’s construction lender can universally track those entities that served the preliminary notices jointly on this web-based platform.  By doing this, the general contractor, owner, and lender are all on the same page to ensure that those entities that preserved lien rights are properly transmitting releases of lien in consideration of progress payments (so that their lien rights are released through a specified date) and that a final release of lien is given in consideration of final payment to that lienor.  In fact, PrelimTracker can generate the lienor’s release of lien based on the information provided by the lienor and transmit it electronically with a secure electronic signature.  This allows all of the lienor’s releases to be stored and tracked in a platform accessible to the project team.  Even if a lien could not be recorded against the owner’s project because the general contractor furnished a payment bond, PrelimTracker could track the preliminary notices from lienors served through FileMyPrelim preserving payment bond rights to ensure the general contractor is obtaining releases of lien from those entities.  (Keep in mind, PrelimTracker provides value as it pulls data compiled in FileMyPrelim to report critical lien related documents.)  Check out the website links to learn more about this emerging technology that can serve as a beneficial tool to the entire project team.

 

 E.    Preliminary Notice Forms

 

 

Preliminary Notice for Liens

 

 

WARNING! FLORIDA’S CONSTRUCTION LIEN LAW ALLOWS SOME UNPAID CONTRACTORS, SUBCONTRACTORS, AND MATERIAL SUPPLIERS TO FILE LIENS AGAINST YOUR PROPERTY EVEN IF YOU HAVE MADE PAYMENT IN FULL.

 

UNDER FLORIDA LAW, YOUR FAILURE TO MAKE SURE THAT WE ARE PAID MAY RESULT IN A LIEN AGAINST YOUR PROPERTY AND YOUR PAYING TWICE.

 

TO AVOID A LIEN AND PAYING TWICE, YOU MUST OBTAIN A WRITTEN RELEASE FROM US EVERY TIME YOU PAY YOUR CONTRACTOR.

 

NOTICE TO OWNER

 

To (Owner’s name and address)

 

The undersigned hereby informs you that he or she has furnished or is furnishing services or materials as follows:

 

(General description of services or materials) for the improvement of the real property identified as (property description) under an order given by____________.

 

Florida law prescribes the serving of this notice and restricts your right to make payments under your contract in accordance with Section 713.06, Florida Statutes.

 

IMPORTANT INFORMATION FOR

 

YOUR PROTECTION

 

Under Florida’s laws, those who work on your property or provide materials and are not paid have a right to enforce their claim for payment against your property. This claim is known as a construction lien.

 

If your contractor fails to pay subcontractors or material suppliers or neglects to make other legally required payments, the people who are owed money may look to your property for payment, EVEN IF YOU HAVE PAID YOUR CONTRACTOR IN FULL.

 

PROTECT YOURSELF:

 

–RECOGNIZE that this Notice to Owner may result in a lien against your property unless all those supplying a Notice to Owner have been paid.

 

–LEARN more about the Construction Lien Law, Chapter 713, Part I, Florida Statutes, and the meaning of this notice by contacting an attorney or the Florida Department of Business and Professional Regulation.

 

(Lienor’s Signature)

(Lienor’s Name)

(Lienor’s Address)

 

Copies to: (Those persons listed in Section 713.06(2)(a) and (b), Florida Statutes)

 

 

Preliminary Notices for Payment Bonds

 

 

NOTICE TO CONTRACTOR

 

To (name and address of contractor)

 

The undersigned hereby informs you that he or she has furnished or is furnishing services or materials as follows:

 

(general description of services or materials) for the improvement of the real property identified as (property description) under an order given by (lienor’s customer) .

 

This notice is to inform you that the undersigned intends to look to the contractor’s bond to secure payment for the furnishing of materials or services for the improvement of the real property.

 

(name of lienor)

 

(signature of lienor or lienor’s representative)

 

(date)

 

(lienor’s address)

 

 

NOTICE OF NONPAYMENT

 

To (name of contractor and address)

 

(name of surety and address)

 

The undersigned notifies you that he or she has furnished (describe labor, services, or materials) for the improvement of the real property identified as (property description) The amount now due and unpaid is $___.

 

(signature and address of lienor)

 

 

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.

A SUPPLIER AND SUBCONTRACTOR’S PURSUIT OF ATTORNEY’S FEES IN MILLER ACT PAYMENT BOND ACTION

costWhile the Miller Act does not provide a statutory basis for the recovery of attorney’s fees, this does not mean that attorney’s fees cannot be recovered in a Miller Act payment bond action against the surety and prime contractor.  If the underlying contract between the claimant and its customer provides for the recovery of attorney’s fees, this can support a basis to recover attorney’s fees against the surety and prime contractor in a Miller Act payment bond action.

 

The Eleventh Circuit in U.S. f/u/b/o Southeastern Municipal Supply Co., Inc. v. National Union Fire Ins. Co. of Pittsburg, 876 F.2d 92 (11th Cir. 1989), held that a subcontractor’s supplier could recover attorney’s fees against the Miller Act surety based on a contractual provision between the supplier and the subcontractor. Other federal circuits have found similarly.  See GE Supply v. C&G Enterprises, Inc., 212 F.3d 14 (1st Cir. 2000) (supplier to prime contractor entitled to recover attorney’s fees based on attorney’s fees provision included in invoices sent to contractor with each delivery); U.S. f/u/b/o Maddux Supply Co. v. St. Paul Fire & Marine Ins. Co., 86 F.3d 332 (4th Cir. 1996) (surety liable to supplier for attorney’s fees and interest based on subcontractor’s credit application with supplier); U.S. f/u/b/o Carter Equipment Co., Inc. v. H.R. Morgan, Inc., 554 F.2d 164 (5th Cir. 1977) (finding that equipment rental supplier to subcontractor could recover attorney’s fees against surety based on contractual provision between supplier and subcontractor).

 

In pursuing a Miller Act action, it is good practice to look at the underlying contract, purchase order, or documentation forming the agreement to determine if there is a contractual basis to recover attorney’s fees.  If there is, this basis should be specifically pled in the complaint against the Miller Act surety (as well as the prime contractor as the principal of the bond) to support a basis to recover attorney’s fees.  This contractual basis should not be overlooked.  In addition, suppliers and subcontractors on federal projects may want to ensure that such a contractual basis is included in their respective agreements in the event that a Miller Act action needs to be pursued.  While suppliers will typically have a contractual provision in their agreement with their customer that allows them to recover attorney’s fees in collection efforts, there are circumstances where a prime contractor may not want to include an attorney’s fees provision in its subcontract.  One reason for this may be because the prime contractor does not want to give the subcontractor a basis to recover attorney’s fees in a Miller Act action.  Although this may not help the prime contractor in a lawsuit initiated by the subcontractor’s supplier (where there is a contractual provision for attorney’s fees between the supplier and subcontractor), the lack of a contractual basis could force a subcontractor to consider how it wants to proceed knowing it does not have a basis to recover attorney’s fees in its Miller Act action.

 

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.