In the world of construction, the old legal saying “equity aids the vigilant, not those who slumber on their rights” rings true. A weary contractor risks more than an OSHA violation – when a contractor fails to protect its legal rights, it can wake up near the end of the project only to find that it has lost a substantial amount of money with little ability to recover.
Since the Recession of 2008, the story of the construction project that fell through shortly after breaking ground has repeated itself far too frequently. In too many of these situations, financing dries up, leaving owners without project funds to pay general contractors and general contractors without funds to pay early-phase subcontractors who have already performed their work (e.g., demolition, excavation, and site work). With that uplifting backdrop, let’s discuss how these circumstances affect mechanics’ lien rights.
As many of our readers know, mechanics’ lien claims are powerful tools for contractors to ensure that they get paid for their work by “encumber[ing] the owner’s property and, if taken to their logical end, force a sale of the property to pay creditors.” A recent case in the Superior Court of Pennsylvania brought to light the issue of mechanics’ lien rights on buildings that go un-built.
In B.N. Excavating, Inc. v. PBC Hollow-A, L.P. and PBC Hollowb, L.P., a site contractor (“BN Excavating”) was hired as a subcontractor to perform excavation work for the proposed construction of a two-building project. BN Excavating performed its work, but the buildings were never actually constructed. The contractor that hired BN Excavating never paid for the work, so BN Excavating filed a mechanics’ lien claim on the property.
The owner argued that BN Excavating’s lien was invalid because the buildings were never actually erected. The Superior Court, however, allowed BN Excavating’s claim to proceed because the excavation work was incidental to planned construction. In other words, the Court held that BN Excavating’s lien rights were tied to the existence of a construction plan, not to the ultimate fulfillment of that plan.
For contractors, subcontractors, and suppliers who perform site work can rest easier knowing that your lien rights are tied to the nature of your work and not whether a building is ultimately erected. It is nonetheless critical for you to supply your attorney with detailed information about the project, so that he or she drafts the mechanics’ lien claim in a way that makes clear that your work was part of a construction plan.
For owners and developers, understand that the Mechanics’ Lien Law could be unsympathetic to situations in which a construction project falls through before a building is erected. Predecessor work such as demolition and excavation will still be protected under the Mechanics’ Lien Law.
Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.
Trevor Taniguchi, a summer associate with Cohen Seglias, contributed to this post.
Law360, an on-line publication, has reported that two Pennsylvania Democrats, Rep. Brendon Newman (D – Washington) and Rep. Anthony DeLuca (D – Allegheny), are preparing to introduce legislation that may bring the False Claims Act (FCA) to the Commonwealth. Twenty-nine (29) states currently have their own version of the FCA, which has been used with much vigor by the federal government since 2007 to root out government fraud. While the version that is slated for introduction in Pennsylvania is focused on “medicaid fraud,” don’t be fooled. Medicaid fraud was also the focus of the federal government’s push for a stronger FCA back in 2007 and the impact has been felt far beyond medicaid.
The federal government has used allegations of fraud against contractors in all sorts of cases where federal money is being sought, or has been paid.
Here’s how it works:
If you are a contractor for the federal government, you must make certifications of all kinds. When you wish to obtain payment for work performed, you must certify that you are entitled to it. If you have a claim against the government for additional money, generally speaking, you have to certify that you’re owed what you are claiming. If, at some point along the way, the government suspects that you’re not actually entitled to money claimed, or received, it can pursue an action against you, both civilly and criminally, and the penalties can be severe. Monetary penalties can far exceed the value of your contract and incarceration is certainly possible.
The intention of the FCA is not to punish someone who has made an honest mistake. However, the federal government has gotten very aggressive in its pursuit of “potential” fraud. That means that federal government contractors have had to be increasingly careful when asking government agencies for money. If Pennsylvania does pass its own version of the FCA, those that do business with the Commonwealth will have to be equally vigilant. Once the bill is introduced, we will report back to you with its content.
Edward T. DeLisle is a Partner in the Construction and Federal Contracting Groups of Cohen Seglias Pallas Greenhall & Furman PC. He concentrates his practice in the areas of construction law, construction litigation and small business procurement and litigation. In addition, he is a frequent contributor to the Federal Construction Contracting Blog.
One of the most commonly overlooked yet critically impactful provisions of a construction contract is a notice provision. In their most typical form, a contractual notice provision will require contractors to provide written notice to their customers to advise them of critical project issues (e.g., delays and claims for extra work) that may require additional time or compensation. The provision usually requires the contractor to provide the written notice within days of becoming aware of the issue and also provides that if a contractor fails to comply with the written notice requirement, it is not entitled to the relief it seeks such as an extension of time to complete the project or additional compensation for extra work.
The concept seems reasonable. Owners should be entitled to know about potentially costly issues as they develop so that they can deal with them up front before they become more costly or problematic. But the effect on contractors can be devastating. For instance, a contractor could leave hundreds of thousands of dollars of legitimate extra costs on the table simply because it verbally advised its customer of the issue and the associated cost while on site but never in writing. While some courts or arbitrators may overlook a contractor’s less formal compliance with contractual notice provisions and allow them to proceed with a claim, others will be unsympathetic to the contractor’s gripe.
The lessons to take from this reality, though seemingly obvious, are critically important:
- Read your construction contracts thoroughly before signing them, and, if there is room for negotiation, consider striking the writing requirement of the notice provision so that actual or constructive notice is sufficient.
- Read and understand all of the notice provisions in the contract (in many instances, there will be a multistep process that begins with general written notice and includes following up with a formal written change request or alternative dispute resolution).
- Advise the appropriate employees at your company of the notice requirement at the beginning of the project.
- Memorialize every time and cost impact on the job that you consider worth pursuing as a claim as they develop, and advise your customer in writing. Provide regular written updates to your customer.
At the end of the day, contractors should strive to comply strictly with contractual notice provisions because relying upon a judge or arbitrator to be lenient can be a risky and costly proposition.
By: Jennifer R. Budd and George E. Pallas
A bill allowing the New Jersey Turnpike Authority (“NJTA”) to enter into design-build contracts has been introduced in the New Jersey Assembly (A1561) and the Senate (S1211). The NJTA is the entity charged with maintaining and implementing capital improvements on the New Jersey Turnpike and the Garden State Parkway. The bill, if passed, would give the NJTA the discretion to administer any project through a design-build contract, rather than through the current design-bid-build method of procurement.
How It Will Work
According to the bill, if the NJTA decides to bid a project as a design-build, the NJTA must adhere to a two-phase procedure for awarding the contract. Under the first phase, the NJTA would qualify interested bidders, which may include joint ventures, by the issuance of a Request for Qualification. The Request for Qualification will list information such as the minimum qualifications needed by the design-build entity, a scope of work statement, the maximum time allowed for the project and the NJTA’s estimated costs of design and construction. Of the phase one bidders that respond to the Request for Qualification, the NJTA must select at least two but no more than five bidders to participate in a second phase Request for Proposal (“RFP”) solicitation.
For the second phase, the NJTA will issue an RFP to the remaining bidders. In response, those contractors will submit a technical proposal and a sealed price bid. The technical proposal will be reviewed by a technical review committee, given a score, and that score shall be submitted to the NJTA and made public. The NJTA will set a minimum technical proposal score, and any proposal that does not meet the minimum shall be rejected. Once the NJTA has determined which proposals have met the minimum score, the price bids will be opened publically, and the NJTA must award the project to the design-build entity with the lowest bid.
The Bill Has Some Traction
During the 2010-2011 term, legislators introduced a similar bill, and the Assembly Transportation, Public Work and Independent Authorities Committee unanimously passed it with amendments. The NJTA bill is very similar to the version passed by the Committee last year, which may be suggestive of the legislature’s belief that design-build bidding will be more efficient and cost effective for the NJTA.
Implications On Contractors
If passed, this bill could have widespread effects on highway and road contractors in New Jersey. Due to the high level of engineering, design and technical skill required to compete in price, and the cost of retaining such professional services, many small and mid-sized contractors could be squeezed out of the competition. On the other hand, larger contractors may enjoy the independence that often accompanies design-build construction since the contractors will have the benefit of design input from project inception.
Notwithstanding the additional independence, contractors should keep in mind that design-build projects are fraught with higher risk because design-builders are responsible for all phases of the project and any liability stemming from it. Additionally, unlike in design-bid-build construction where the contractor can look to the owner or the designer to share the costs from unanticipated circumstances, a design-build contractor is less likely to benefit from such cost-sharing.
Daniel E. Fierstein, an Associate with the Firm contributed to this post.
By: Jennifer M. Horn and Robert Ruggieri
A September 1, 2011 decision by the Maryland Court of Special Appeals reminds us of the critical importance of strictly following contractual and procurement procedures before performing change order work for a pubic entity; and of the perils of proceeding with work outside the scope of a contract without formal approval, even where employees and agents of the public entity request and provide informal, and even written authorization, for the additional work.
Baltimore County, Maryland v. AECOM Services, Inc., f/k/a DMJM H&N, Inc.
This case concerned a dispute between Baltimore County (County) and DMJM H&N, Inc., now known as AECOM Services, Inc. (DMJM) over payment for services performed by DMJM for the County in connection with the expansion of the Baltimore County Detention Center (Project). DMJM entered into a contract with the County to provide architectural and engineering services for the Project. The County sued DMJM seeking damages for an alleged breach of contract and negligence. DMJM countersued, seeking payment for services provided both under the “base contract” and for “additional services” performed outside the scope of the base contract. After trial, the jury found that DMJM did not breach its contract, and had not been negligent. More importantly, the jury awarded DMJM damages in the amount of $1,653,600, the majority of which included payment for the additional services. Appeals followed, with the most important issue being whether DMJM was entitled to payment for the additional services where DMJM had not obtained a formal contract amendment approved by the County Council for the additional services.
Language in the contract required not only written authorization by the County, but also approval by the County Council before the contract amount could be increased. DMJM claimed that during the course of the Project it had performed significant additional services valued at $1,471,498, that were authorized and requested by County officials, but had not been formally approved by a contract amendment.
The Court’s “Harsh” Ruling
The Appeals Court, relying on a strict interpretation of the contact, the Baltimore County Charter, the Baltimore County Code, and prior Maryland case law, reversed the jury’s award to DMJM for the additional services, and held that DMJM was not entitled to payment for any of the additional services because they were not formally approved by the County and County Council in a written amendment. First, the Court stated that the contract language unambiguously required written authorization from the County to obligate the County to pay for the additional services. Second, the Court found that the Baltimore County Code and Baltimore County Charter required that a contract amendment had to be approved by the County Council to be enforceable; because the County Council never approved an amendment for the additional services, the County could not be liable for payment. Finally, the Court relied on prior Maryland case law that set forth the principle that “a government entity may never have an obligation imposed upon it except in the formal manner expressly provided by law.” The rationale behind this principle, the Court provided, is that public funds must be protected by stringent procurement procedures, not only against outside parties, but even against its own employees and agents.
The Court was not persuaded by DMJM’s argument that County Council approval was only required for the underlying contracts, but not for changes to existing contracts. Nor did the Court accept DMJM’s argument that the County had waived its right to rely the strict procedures of the contract and Baltimore’s code and charter by acting and proceeding as if all the requirements had been met and informally approved and authorized the additional services.
The Court acknowledged that its ruling was harsh, but insisted that it was not unjust, and that there are sound policy reasons for its harshness. The Court reasoned that DMJM knew, or should have known, by the terms of the contract, that County Council approval was required for all amendments, and that the law imputes upon the party contracting with the municipality knowledge of the municipality’s limitations. The Court’s decision makes it abundantly clear that even if the additional services were done at the express request and direction of the County’s employees and agents, DMJM would still not be entitled to payment because the exact contract requirements were not fulfilled. The Court reasoned that it is more reasonable that an individual contractor or design professional occasionally suffer from the mistakes of public officials and agents who improperly authorize additional work than to risk detriment or injury to the public. The Court also reiterated that no state more rigidly enforces these principles than Maryland, and that those who deal with employees and agents of a Maryland municipality must, at their peril, take notice of the limits of the powers of both the municipality and those who assume to act as its agents and officers.
Not all states are as unforgiving as Maryland when it comes to allowing payment to contractors and design professionals who have performed work not approved in 100% accordance with contract requirements. States such as Pennsylvania, in certain circumstances, will consider other factors, such as whether the municipality was prejudiced and/or whether the municipality, though its conduct of requesting and informally approving additional work, waived its right to rely on strict contractual procedures to avoid payment obligations. Nonetheless, this case provides an important lesson to all contractors and design professionals, in any state, of the importance of strictly following procedures for changed or extra work and the perils of not doing so, especially when contracting with public entities.
A recent Delaware Supreme Court decision limited the field of bond claimants on a private project. In the case, Berlin Steel proper claimants under bond.pdf the Supreme Court overruled the trial court’s interpretation of an earlier decision that stood for the proposition that all subcontractors, regardless of their relationship to the principal under the bond, were third party beneficiaries of the payment bond.
Background of the Case and Key Parties
Berlin Steel Construction Company (Berlin) was a contractor for a private project in Delaware. Under the terms of the contract, Berlin obtained a payment and performance bond for the benefit of the construction manager and the project owner. Berlin subsequently entered into a subcontract with Structural Steel (Structural) to perform certain steel work at the project. Structural then subcontracted with J&J Rigging (J&J) to lease and operate a crane. J&J leased a crane for the project from Salah and Pecci Leasing Co. (S&P). Although Berlin paid Structural, and Structural paid J&J, J&J did not pay S&P. In order to obtain payment, S&P, a third tier subcontractor in relation to Berlin, made a claim against the payment bond held by Berlin.
Although entering the public bidding arena presents contractors with a plethora of opportunities, these opportunities do not come without risk. As many contractors can attest, oftentimes public bidding can seem more like gambling than bidding. This holds true not only when a contractor steps into the public bidding area for the first time, but also when experienced public bidders decide to cross state lines to pursue new opportunities.
Public Bidding in New York
Unlike the public bidding laws in New Jersey and Pennsylvania, the New York public bidding laws give contractors the option of withdrawing their bids after the expiration of a firm offer period. Under Section 105 of New York’s General Municipal Law, New York’s public bidding statute, a public agency must award a contract within 45 days of bid opening. During this period, which cannot be expanded by contract or local laws, a contractor’s bid is irrevocable. Once the 45 day firm offer period expires, however, a contractor may withdraw its bid if the public agency has not yet awarded and entered into the contract. Providing notice of the award is not sufficient. As such, contractors can withdraw their bids when the public agency has indicated its intent to award a contract, but has not yet bound itself to the contract within the 45 day firm offer period.
Guy Pratt, Inc. v. The Town of North Hempstead
The case, Guy Pratt, Inc. v. The Town of North Hempstead, is a long-standing example of a New York contractor’s ability to withdraw its bid when a public agency does not unequivocally enter into the contract. In Guy Pratt, the Appellate Division of the Supreme Court of New York held that contractor Guy Pratt, Inc.’s withdrawal of its bid after the expiration of the 45 day period was valid and effective. The Court upheld the withdrawal even though counsel for the Town of North Hempstead (Town) notified the contractor by letter within 45 days of bid opening that the Town had awarded it the contract, and even though Guy Pratt, Inc. had already executed and returned the proposed contract to the Town prior to withdrawal of its bid.
In issuing its ruling, the Court relied upon language in the subject contract that stated that a contractor was proceeding at is own risk unless and until:
an Award of the Contract to him is consummated by the delivery of an executed duplicate of the Agreement which has been approved by and filed in the Office of the Town Clerk.
The Court found that this language made it clear that the Town was not bound by the contract until it had delivered an executed copy of the contract to Guy Pratt, Inc. Since it was undisputed that an executed contract had not been delivered to the contractor within the 45 day period, and since the contractor’s notice of withdrawal of its bid came before the delivery of the contract, the withdrawal was valid and effective.
In this case, the Court held that an award must be unequivocal in order to bind a contractor within the 45 day period and to prevent a contractor from executing its right to withdraw its bid. The fact that this case is still good law demonstrates just how serious New York courts take the contractor’s ability to withdraw its bid after the 45 day period.