ARGUMENTS TO RECOVER ATTORNEYS’ FEES AGAINST A MILLER ACT PAYMENT BOND

Posted on March 31, 2013March 31, 2013 by Edward Garber

For those subcontractors and suppliers providing labor, services, or materials to federal construction projects, understanding your rights under the Federal Miller Act (40 USC s. 3131 et seq.) is important. Among other things, the Miller Act advises what a subcontractor and supplier need do to preserve a right against the prime contractor’s payment bond, from providing the prerequisite notice of nonpayment to the surety within 90 days from final furnishing / performance (if there is no privity of contract with the prime contractor) to ensuring suit is filed in federal court within a year from final furnishing / performance. Obtaining a copy of the payment bond and understanding these timeframes is critical to an unpaid subcontractor or supplier; otherwise, their claim will be barred against the payment bond.

One of the downsides to Miller Act bond claims is that there is no statutory right to the recovery of attorneys’ fees under the Federal Miller Act. This means that every dollar spent on lawyers is potentially reducing the amount in recovery because there is no avenue to recoup those attorneys’ fees under the Miller Act. Unless this claim is significant, this downside often demotivates a supplier or subcontractor from filing suit in federal court against a Miller Act payment bond.

There are, however, arguments to recover attorneys’ fees in a Miller Act action. The first argument is if there is an underlying contract involving the claimant relating to the project that provides for attorneys’ fees (such as the contract between the subcontractor and prime contractor), the claimant can recover its attorneys’ fees. See, e.g., U.S. f/u/b/o Southeastern Mun. Supply Co., Inc. v. National Union Fire Ins. Co. of Pittsburg, 876 F.2d 92 (11th Cir. 1989) (finding that attorneys’ fees provision in contract between supplier and subcontractor was enforceable to enable supplier to recover attorneys’ fees against Miller Act surety).

There is also a second argument that attorneys’ fees should be recoverable in Florida against a Miller Act bond under a 1968 Fifth Circuit Court of Appeal’s decision in United States Fidelity and Guaranty Co. v. Hendry Corp., 391 F.2d 13, 20-21 (5th Cir. 1968). This case analyzed Florida law to fill in the gap to determine whether attorneys’ fees were recoverable under the Miller Act (since the Act is silent on the issue). In doing so, the Fifth Circuit analyzed Florida’s Insurance Code and maintained that provisions in Florida’s Insurance Code (still in effect today) allow for the recoverability of attorneys’ fees in a Miller Act bond dispute.

Parties pursuing Miller Act actions for Florida-based federal projects should plead for attorneys’ fees whether through a contractual provision and/or the Fifth Circuit’s ruling in Hendry Corp. Now, it is uncertain whether the Fifth Circuit’s ruling would still apply today; however, it is an argument that should still be pursued in furtherance of trying to recover attorneys’ fees in an action against a Miller Act payment bond, especially if there is not an underlying contract that provides for attorneys’ fees.

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.

INDEMNITY AGREEMENTS BETWEEN A SURETY AND ITS BOND PRINCIPAL

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

Sureties that issue contractors payment and/or performance bonds obtain indemnity agreements with the contractor, or bond principal, prior to issuing such bonds. These indemnity agreements, besides requiring the bond-principal contractor to indemnify, defend, and hold harmless the surety in the event a claim is submitted on the bonds, are designed to fully protect the surety in the event the contractor fails to do so.

There are situations where a surety needs to protect its own interests and comply with the terms of the bond and pay a claim on a performance or payment bond (such as if the contractor gets into financial trouble, walks off a project, is not paying subcontractors, etc.). If the surety pays a claim, they typically assert a claim against the bond-principal contractor for breach of the indemnity agreement along with any person that personally guaranteed the agreement (which is often the case). The indemnity agreement will include a provision that provides that the bond-principal assigns certain collateral to the surety in the event the principal is in default of the agreement. Among those rights that are collaterally assigned to the surety would be all of the principal’s contract rights and causes of action for accounts receivable.

The case of Guarantee Co. of North America v. Mercon Construction Co., 2012 WL 1232104 (M.D.Fla 2012), exemplifies a surety’s rights under the indemnity agreement. This case involved a situation where a surety paid a performance bond claim on behalf of its principal contractor and sued the contractor, as well as others, under the indemnity agreement. The surety also exercised its right under the indemnity agreement and settled a claim the contractor had against another payment bond (issued by a different surety). In other words, the surety’s position was that the claim for an account receivable under the other payment bond was collaterally assigned to the surety due to the contractor’s default. The contractor asserted a counterclaim arguing, among other things, that the surety did not have the authority to settle its account receivable payment bond claim. The Middle District disagreed and dismissed the contractor’s counterclaim with prejudice!

If a bonded contractor is involved in a situation where its surety either paid a claim or will pay a claim, it is important for the contractor to consult an attorney to understand the surety’s rights under the indemnity agreement. Again, surety’s oftentimes have the indemnity agreement personally guaranteed so that the obligations under the agreement could not only impact the bond-principal contractor but also the guarantors to the agreement.

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.

CONTRACTORS AND SUPPLIERS-DO NOT NEGLECT THE NOTICE REQUIREMENTS IN FLORIDA’S LIEN LAW

Posted on October 9, 2011October 9, 2011 by Edward Garber

Oftentimes, subcontractors, suppliers, and sub-subcontractors rely on companies to serve the statutory notices that are prerequisites to preserving a lien or bond claim under Florida’s Lien Law in the event of nonpayment. However, if these notices are not served in accordance with Florida’s Lien Law, the outcome could be injurious to the subcontractor, supplier, or sub-subcontractor. Stated differently, the outcome could mean a loss of lien or bond rights which may be the only true leverage the party has to secure payment.

The case of Stock Building Supply, Inc. v. Soares Da Costa Construction Services, LLC, 36 Fla. L. Weekly D2200a (Fla. 3d DCA 2011), illustrates the absolute importance of complying with the notice requirements in Florida’s Lien Law.

In this case, an owner hired a contractor to build a condominium. The contractor subcontracted with a structural shell subcontractor which, interestingly, held a 40% ownership interest in the contractor. The subcontractor engaged a supplier to provide rebar to the project. The contractor also engaged the same supplier to provide certain materials to the project. To graphically illustrate:

Contractor –> Shell Subcontractor –> Supplier

and

Contractor –> Supplier

Originally, there was no payment bond on the project. Therefore, once the supplier was engaged to provide materials, it served a statutory notice to owner on the contractor and the owner stating that it was supplying materials under an order given by the subcontractor. It served a second notice to owner on the contractor and owner stating it was supplying materials under an order given by contractor. (Notably, Florida Statute §713.06 requires lienors not in privity of contract with the owner to serve a notice to owner on the owner no later than 45 days after commencing services. The notice should also be served on anyone up the chain to the owner the lienor is not in privity of contract with, i.e., the sub-subcontractor or supplier to the subcontractor should serve the notice on the contractor too. This is a mandatory statutory notice if there is not a payment bond in place.)

Shortly after construction commenced, there was a funding problem that led to a halt in construction. The supplier recorded 2 claims of lien for nonpayment: one for nonpayment by the subcontractor and the other for nonpayment by the contractor.

The owner then paid the supplier and had the liens satisfied and recorded a notice of termination of the initial notice of commencement which is a procedure under Florida’s Lien Law that allows an owner to terminate a notice of commencement that accurately states that all lienors were paid in full. After the notice of commencement was terminated by law, the owner recorded a new notice of commencement that attached a payment bond, meaning the owner’s property was now exempt from all liens except that of the general contractor it hired. (One of the main reasons an owner would terminate a notice of commencement and record a new notice of commencement is so a construction lender financing construction can record a mortgage and maintain a first priority encumbrance on the property in the event the owner did not repay the loan.)

Once construction restarted, the supplier continued supplying rebar to the structural shell subcontractor. The supplier also continued to supply building materials to the contractor. However, for whatever reason, the company the supplier hired to serve the statutory notices served only one statutory notice to contractor stating that the supplier was supplying building materials under an order given by the contractor. Unlike the notice to owner mentioned above, when there is a payment bond in place, lienors not in privity of contract with the contractor must serve a notice on the contractor stating that they intend to look to the contractor’s payment bond for payment. In other words, the supplier was required to serve a notice on the contractor that it was supplying materials under an order given by the subcontractor, but it really wasn’t required to serve the same notice for the supplies it was providing under an order given by the contractor.

The point or objective of the notices is so the owner, in a situation without a payment bond, and a contractor, in a situation with a payment bond, know specifically who is performing work on the project to ensure these entities get paid. The reason why a contractor doesn’t need to serve a notice to owner (when there is no bond) or a subcontractor doesn’t need to serve a notice on the contractor (when there is a payment bond) is because the owner or contractor in these situations know the entities it hired to ensure these entities get paid.

Although the contractor paid the structural shell subcontractor for the rebar, the subcontractor did not pay the supplier. The supplier then served a notice of nonpayment on the payment bond surety (another prerequisite to suing on a general contractor’s payment bond) and filed suit.

The main issue in this case was whether the supplier had properly preserved a payment bond claim for the rebar it supplied to the subcontractor that it was not paid for by virtue of its neglect in serving the proper notice on the contractor that it was supplying rebar under an order given by the subcontractor. The trial court concluded that the supplier could NOT pursue a payment bond claim because it failed to serve this notice. The Third District affirmed the trial court on this issue essentially holding that because lien and bond claims are creatures of statute, the supplier’s failure to comply with the lien law by serving this initial notice was fatal to its bond claim for rebar materials it supplied to subcontractor.

Unfortunately for the supplier, this is a hypertechnical argument that killed its claim against the payment bond for materials it supplied under the order given by the structural shell subcontractor. This ruling, however, does not seem to make sense in light of the specific facts of the case. Again, the whole point of the notice is so the contractor in this situation knows that the supplier is supplying rebar to the subcontractor and that it will look to the payment bond if it is not paid so that the contractor can affirmatively ensure the supplier gets paid. First, the contractor knew the supplier was supplying rebar because before the owner terminated the notice of commencement, the supplier was supplying the same rebar and the contractor was made aware of same. Second, after the owner recorded a new notice of commencement with a payment bond, the supplier served a notice on the contractor (although it was not legally required to do so) that it was serving materials to the contractor per an order given by the contractor. Well, at this point in time, the contractor had continued knowledge the supplier was still involved in the project and still supplying materials, even though there may have been oversight in that another notice was not also provided by supplier for the materials it was providing under an order given by the subcontractor. And, last, the subcontractor owned 40% of the contractor, thus, how could contractor not know that its minority owner was still utilizing and ordering rebar? The Third District did not get into this, but I believe this fact is important because it would seem to impute some knowledge on the contractor under this fact pattern that the subcontractor was still utilizing the supplier, which just so happened to an identical supplier that contractor was utilizing and ordering materials from. Thus, where was the prejudice to the contractor??

Regardless of the equities of the Third District’s decision, the morale remains that it is absolutely critical to comply with Florida’s Lien Law, as in many circumstances, oversight or neglect will not be tolerated!! Do not let this happen to you!

In this case, the supplier used an outside company to serve the required statutory notices and it was uncertain why the outside company did not serve the required notice on the contractor that supplier would look to the bond for protection if it was not paid for materials supplied to the subcontractor, especially when it served the unnecessary notice for materials being supplied directly to contractor. The supplier or outside company’s oversight, whatever the case may be, resulted in a loss of its payment bond claim.

To prevent this from happening, it is always a good idea to utilize an attorney on the front end to ensure the proper notices are being served. An attorney understanding construction will ask: 1) is it a private project or publicly funded project; 2) do you have a copy of the notice of commencement (to see whether there is or is not a payment bond in place); 3) who hired you; and 4) when did you first start commencing services. In the event of nonpayment, the attorney will ask the follow-up questions: 5) when was your last day on the job and 6) how much are you owed and how did you arrive at this specific amount (e.g., retainage owed, contractual work owed, change order work owed, does this include delay-related damages or lost profit, etc.) in order to ensure the lien or payment bond claim comports with Florida’s Lien Law.

OWNERS DON’T FORGET ABOUT SERVING A REQUEST FOR SWORN STATEMENT OF ACCOUNT

Posted on July 17, 2011July 17, 2011 by Edward Garber

Owners undertaking a construction project are always concerned about construction liens from subcontractors, sub-subcontractors, and suppliers that preserved their lien rights by serving a notice to owner in accordance with Florida’s Lien Law (Florida Statutes Chapter 713) (“Lienors”). One way an owner alleviates this concern is by requiring the contractor to obtain a payment bond so that its property is exempt from construction liens from Lienors. See Fla. Stat. §713.23. However, payment bonds do not protect the owner’s property from the general contractor’s lien.

Unfortunately, payment bonds are not always feasible or economical. While the contractor procures the payment bond, it is the owner that pays the premium for the bond. Sometimes an owner does not want to or is not in a position to pay this premium, which could be substantial depending on the cost of the project. In these circumstances, the owner’s property is subject to construction liens from Lienors. Anyone involved in construction knows that it is very difficult to construct a project without there being some form of a payment dispute involving Lienors.

When an owner receives a lien, or if it presumes a lien could be forthcoming from a Lienor, the owner should serve a request for a sworn statement of account BEFORE the lienor forecloses on its lien. Florida Statute §713.16 provides in material part:

“(2) The owner may serve in writing a demand of any lienor for a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, 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 lienor…The failure or refusal to furnish the statement under oath within 30 days after the demand, or the furnishing of a false or fraudulent statement, deprives the person so failing or refusing to furnish such statement of his or her lien….

(3) A request for sworn statement of account must be in substantially the following form:

REQUEST FOR SWORN STATEMENT OF ACCOUNT

WARNING: YOUR FAILURE TO FURNISH THE REQUESTED STATEMENT, SIGNED UNDER OATH, WITHIN 30 DAYS OR THE FURNISHING OF A FALSE STATEMENT WILL RESULT IN THE LOSS OF YOUR LIEN.

To: (Lienor’s name and address)

The undersigned hereby demands a written statement under oath of his or her account showing the nature of the labor or services performed and to be performed, 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 for the improvement of real property identified as (property description) .”

Besides getting verification as to how much the Lienor swears they are owed as of the date of the sworn statement of account, importantly, a Lienor that does not timely provide this sworn statement of account within thirty days could be deprived of its lien. In other words, this tool allows an owner to catch an unsuspecting Lienor (or even the contractor if served on the contractor) off guard that neglects to treat this request for a sworn statement of account seriously. The loss of a construction lien to a Lienor is a huge loss!

The owner is not limited to serving only one request for a sworn statement of account. The law simply provides that if the owner serves more than one request on the same Lienor “and none of the information regarding the account has changed since the lienor’s last response to a demand, the failure or refusal to furnish such statement does not deprive the lienor of his or her lien.” Fla. Stat. 713.23. For this reason, there is nothing wrong with an owner serving a request for a sworn statement to those Lienors that served a notice to owner at some point or points during the course of the construction project, and in most cases, this is very good practice. While the owner could technically serve one upon its receipt of each of the contractor’s applications for payment, this could be an administrative burden and not always practical. (There are other methods an owner can utilize to ensure it is protected from liens from Lienors by requiring the contractor as a condition precedent to payment to provide releases of lien through the date of the application for payment from those entities that served a notice to owner.) With that said, an owner should certaintly take advantage of this tool by serving a request for sworn statement of account upon immediately receiving a lien and before the Lienor forecloses on the lien. Ideally, before the owner tenders final payment, it should serve the sworn statement of account to Lienors to best protect its interests.