Category Archives: Construction

Show Me the Money: Getting Paid on Private Massachusetts Construction Projects

By Andrea Jacobs, Esq.,

strangscott2015-15As a general rule, parties to private contracts are afforded wide latitude to dictate and negotiate the terms as they see fit. While this notion of “freedom of contract” is an entrenched tradition within American law it is not without its limitations.  The Prompt Pay Act, enacted in 2010, is one such limitation that every Massachusetts sub-contractor and contractor should have an acute awareness of.

     In effect the Prompt Pay Act requires that standard state provisions be incorporated into otherwise private construction contracts with an original valuation of over three million dollars. The Prompt Pay Act specifically affects the interpretation of payment clauses in such contracts.

     As a reminder, “pay-if-paid” clauses create a condition precedent to subcontractor payment. That is, a subcontractor has no right to payment for completed work until the general contractor has received payment from the owner. “Pay-when-paid” clauses create no such condition precedent to subcontractor payment. Rather, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within the ‘reasonable time’ the subcontractor still has the right to seek payment from the general contractor. Ambiguous contract language often complicates the subtle, yet substantial, differences between the two types of clauses leading to high stakes contract interpretation disputes.

     In 2004, Massachusetts did away with distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects.  Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004). Thus with regard to Massachusetts state-level public construction projects “pay-if-paid” causes have been effectively eliminated in favor of “paid-when-paid” clauses.”

     Federal-level public construction projects, on the other hand, have not completely eliminated the distinction between “pay-if-paid” and “pay-when-paid” contract clauses. On federal-level public construction projects “pay-if-paid” language included in a subcontract could complicate subcontractor recovery in relation to the principal contractor. The limited amount of Federal case law on the issue, however, leads to the inference that Federal Courts disfavor allowing “pay-if-paid” clauses to operate in the federal-level public construction context.

     The Prompt Pay Act directs that, on private construction projects valued at over three million dollars, payment clauses be interpreted as “pay-when-paid,” thus effectively eliminating “pay-if-paid” in most instances. Specifically, and with very narrow exception, “[a] provision in a contract for construction which makes payment to a person performing the construction conditioned upon receipt of payment from a third person that is not a party to the contract shall be void and unenforceable.” MGL c. 149 sec. 29E (e).

     This statutory language is a clear attempt, in the name of the broad public interest, to provide protections to subcontractors by endeavoring to ensure swift payment for work provided in order to keep construction projects moving and companies afloat by regulating cash flow.

     Smith Ironworks, Inc. v. Torrey Co., Inc., Not Reported in N.E.3d (2014), is the only Massachusetts case to discuss the Prompt Pay Act at any length. Even so, it is an arbitration decision as discussed in Smith, and not the Court itself, that provides the limited interpretation of the Act. In Smith, the subcontractor applied for payment from the contractor for work provided on a private project. Disputes as to the actual amount owed existed, however, rather than actively reject the request for payment, the contractor did not respond at all. Pursuant to the terms of the Prompt Pay Act the request for payment was deemed approved after the statutorily prescribed time passed without formal rejection. The parties submitted to voluntary arbitration and an arbitrator found that the contractor was liable to the subcontractor for the amounts submitted, plus interest, as the contractor failed to properly respond to the request for payment as prescribed by the Prompt Pay Act. The contractor was deemed liable even though it had not been paid in full by the owner.

     To reiterate, while Smith details an outcome favorable to a subcontractor by application of the Prompt Pay Act, that outcome is not of true precedential value. Questions remain as to the effectiveness of the Prompt Pay Act. Specifically, questions regarding the true parameters and enforceability of payment timelines and the exact remedy for non-compliance. Thus, subcontractors should keep an eye towards the development of the law in this area and strive to understand how the Prompt Pay Act may apply to various projects. If you have any questions about payment issues on public construction projects you should contact a Massachusetts construction lawyer.

Understanding the Limitations of Chapter 93A – Pursuing Litigation Is Not Unfair or Deceptive

Companies operating or conducting business in Massachusetts are aware of an all-too-familiar statute, Massachusetts General Laws Chapter 93A. This statute provides individual consumers and businesses a right to bring legal action if they are harmed by an unfair business practice. The statute eloquently, although perhaps ambiguously, states that a violation shall exist when a company commits an “unfair or deceptive act or practice, or unfair method of competition,” against another who is engaged in commerce within the Commonwealth.  Violations can cover a litany of topics, such as a company that unfairly demands more money to complete its contract obligations after having already executed the contract (Anthony’s Pier Four, Inc. v. HBC Associates, 411 Mass. 451), or where insurance providers fail to offer a fair and equitable settlement amount within the required time period (Rhodes v. AIG Domestic Claims, Inc., 461 Mass. 486), or against landlords who fail to provide habitable units to their residential tenants (Haddad v. Gonzalez, 410 Mass. 855).  Although Chapter 93A is far-reaching, it does have its limitations.

Recently, Strang Scott attorneys Cole Young and Jennifer Lynn argued to the Massachusetts Appeals Court that litigation tactics alone are not unfair or deceptive acts or practices, such that they violate Chapter 93A.  Agreeing, the Appeals Court held that demanding payment under a contract, filing suit, and continuing to litigate a claim over a disputed amount is a simple contract dispute and nothing more. Aggregate Industries ­– Northeast Region, Inc. v. Hugo Key & Sons, Inc., 90 Mass.App.Ct. 146 (2016).   Said another way, the Appeals Court held that plaintiffs should not be punished for deciding to litigate, rather than accepting a lower settlement amount.  The Appeals Court went on to hold that the unfair or deceptive practice must arise from an independent act of trade or commerce, “not tangentially from litigation concerning that conduct.” 

The precedent of this case will be far-reaching and provides security to companies and businesses who choose to file suit, as opposed to being forced into settlement for fear of committing an “unfair” act.  Because the breadth of Chapter 93A can be complicated and nuanced, potential litigants should speak with an experienced Massachusetts litigator.

Keeping up Formalities: Protecting Assets Across Commonly Owned Companies

By Andrea Jacobs, Esq. 

strangscott2015-15A recent Massachusetts Bankruptcy Court decision should serve as a clear reminder to business owners that, in order to enjoy the benefits that limited liability entities afford, one must respect established corporate formalities and comport business accordingly. Briefly, in In Re: Cameron Construction & Roofing Co., Inc. the  Bankruptcy Court held that the assets of a Massachusetts limited liability company, closely related to a Massachusetts construction business subject to Chapter 7 bankruptcy proceedings, could be reached to satisfy the claims of the creditors of the construction business. 

The two separate entities shared a common owner yet were formed as distinct enterprises. In this case, however, the Court determined that the owner controlled both the non-debtor LLC and debtor construction business and had allowed for the intermingling of assets. Further, the Court noted that the common owner “was thinly capitalized, and the two entities observed only minimal corporate formalities by filing separate tax returns and Annual Reports.” Thus, the Court held that ‘substantive consolidation’ was the appropriate remedy- effectively disregarding the sovereignty of the separate entities and combining their assets as a means to satisfy the liabilities of one.  Had the owner resected the separate corporate forms of his commonly owned entities in his everyday operations he likely would have been in a better position to shield assets held by the  non-debtor LLC from creditor access.

Negotiate Your Lien Waiver Terms with Your Contract

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    Most construction project owners require general contractors to provide periodic lien waivers from subcontractors and material suppliers to verify they received payment. This is generally a good thing, as it helps ensure payment is flowing down to the proper parties. Lien waivers, however, can become the source of conflict when parties can’t agree on their terms.

     Lien waivers frequently become contentious because they are presented for the first time when payment is due. Almost inevitably the lien waiver will contain terms that are inconsistent with or in addition to existing contract terms, and every day spent negotiating the particular language of the lien waivers delays payment already due. Delayed payments have a ripple effect, as contractors rely on prompt payments to keep up with labor and material costs, and to keep the project running on schedule.

     Among the most common sticking points is waiver language that is simply too broad. Payment is being made in exchange for labor and materials provided on a project through a particular date. Yet owners often propose lien waivers that try to force contractors to release much more than that. Commonly owners propose clauses that require the payee to promise to indemnify the payor for other liens filed on the project, among others. Of course, the party holding the money maintains some unfair leverage to force the other to sign away rights not contemplated when negotiating the original contract in order to get paid.

     To prevent disruptive disputes during the course of construction, prudent parties should review and negotiate the actual lien waiver forms as appendices to contracts, prior to signing anything. This practice is wise for contracts between owners and general contractors as well as between general contractors and subcontractors or material suppliers. It is also always best to have a construction attorney review your contracts and lien waivers to fully understand the rights and responsibilities included in them.

Attorney Fees Awards are Mandatory for Prevailing Massachusetts Subcontractors and Suppliers Under MGL c. 149, s. 29

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In Aggregate Industries – Northeast Region, Inc. v. Hugo Key & Sons, Inc., 90 Mass.App.Ct. 146 (2016), the Massachusetts Appeals Court ruled in favor of Strang Scott’s position, reversing part of the trial court’s earlier decision. The Massachusetts Supreme Judicial Court (“SJC”) recently declined to further review the case. As such, the Appeals Court’s decision is now clear precedent on the standard for attorney fees under the Massachusetts Payment Bond Statute, G.L. c. 149, § 29 (“Section 29”).

The case arose over materials and services that a subcontractor / material supplier provided to a general contractor for use on a public construction project in Salem, Massachusetts. The general contractor refused to pay in full, so the subcontractor brought suit against it and the payment bond surety. The trial court awarded damages to the subcontractor for the value of certain services provided but refused to include an award of attorneys’ fees. The trial court incorrectly held that Section 29, which provides for mandatory attorneys’ fees awards to prevailing subcontractors and material suppliers, was inapplicable.

On appeal, the plaintiff argued, through counsel (Cole Young and Jennifer Lynn, at Strang Scott), that Section 29 is a remedial statute with a clear purpose of protecting unpaid subcontractors and material suppliers on state-owned projects.  Said another way, an attorneys’ fee award is mandatory for prevailing claimants and is not within the court’s discretion. The statutory purpose is clearly to level the playing field where general contractors could otherwise hold back payment to deserving subcontractors and material suppliers, using litigation costs as leverage to deter them from filing suit. Now they have greater incentive to make those payments when they become due, or face greater consequences.

The precedent of this case will be far-reaching and will benefit Massachusetts suppliers and subcontractors for years to come.  To learn more about securing payment on construction projects, contact an experienced Massachusetts construction attorney.

New Hampshire Supreme Court Refuses to Extend Statute of Limitations for Municipalities in Public Construction Context

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            In the matter of City of Rochester v. Marcel Payeur et al., the New Hampshire Supreme Court had occasion to consider whether the common law doctrine of Nullum Tempus Occurit Regi (literally “time does not run against the king”) tolled the the statute of limitations against breach of contract claims against private entities filed by municipalities.

            The doctrine of Nullum Tempus derives from common law and serves to protect the public’s interest in public rights and revenue and against injury to public property and lands.  The policy underlying the doctrine suggests that it is in the public’s interest to toll the statute of limitations for claims asserted by the government because the government is in a disadvantaged position to enforce the public’s rights against injury vigilantly, as the government’s agents are too few in number and too occupied with ordinary governmental duties to prevent or redress injuries to public rights seasonably.

            In the instant matter, the City of Rochester engaged the primary defendant to recoat a public water tank, to modify the tank and to install a mixer in the tank.  After the work was performed, the tank developed a leak.  During the investigation of the leak, the City of Rochester determined that in addition to improper modification work, the tank was constructed improperly when it was built.  The construction of the tank was completed in 1985.  Following its investigation, the City of Rochester filed suit against the contractor that performed the repair and modification work and the contractor that built the tank in 1985, among others.  The company that initially built the tank moved to dismiss the claims against it citing the statute of limitations found in NH RSA 508:4.  The Superior Court agreed with the company, and dismissed the claims against it as time barred.  The City of Rochester appealed.

            On appeal, the New Hampshire Supreme Court affirmed the trial court ruling.  In the opinion, the court reasoned that the public policy rationale supporting Nullum Tempus was inapplicable to municipal contracts, because municipalities function like private parties in the contracting context.  The court determined that municipalities are not disadvantaged in their contractual relationships and are equally equipped as private parties to enforce the terms of their agreements.  Accordingly, the court concluded that public policy ends advanced by Nullum Tempus were not served by application of that doctrine in connection with municipal contracts with private entities.  

            Additionally, the court resolved that applying Nullum Tempus in this circumstance would undermine the public policy interests supporting the statute of limitations.  Namely, that permitting municipalities to assert claims against contractors on an almost limitless basis would be contrary to the policy end of providing defendants timely notice of claims against them, which protects defendants from stale claims.  Further, the court noted that in this context, Nullum Tempus would likely subject contractors to claims that would be unduly difficult to defend, costly, and time-consuming, due to faded memories, lost or destroyed evidence and witnesses that may be dead, unavailable or simply not able to be located after a long passage of time.  In short, the court determined that the policy interests supporting the application of statute of limitations were more compelling in this context than those supporting Nullum Tempus.  Accordingly, the court affirmed the Superior Court’s dismissal of the claims as time barred.

              The decision in City of Rochester is a favorable one for contractors and subcontractors.  Not only does it reaffirm contractors’ expectations regarding the duration of their potential exposures, it signals the New Hampshire Courts’ intention to treat municipalities more like private entities in contracting.  For contractors, this decision should provide more certainty that municipalities will be held to the terms of the agreements they reach with private entities performing work for them.  Contractors, however, should anticipate that sophisticated municipalities will take additional steps to limit future exposures of this kind in light of the court’s decision.  As a result, contractors should exercise care in reviewing the terms of contracts with municipalities subsequent to this decision.  In order to limit exposure and fully understand the risks associated with any municipal contract, contractors should review proposed contracts with their New Hampshire construction attorney.

Strang Scott Prevails on Summary Judgment in Case Involving Falsified Payroll Reports on Federal Construction Project

     In the case of United States for the Use and Benefit of Metric Electric, Inc. v. CCB, Inc. and the Hanover Insurance Company, Civil Action No. 15-11934, in the United States District Court in Massachusetts, the court ruled in favor of Strang Scott’s motion for summary judgment, dismissing all of the plaintiff’s claims.

     The case arose over construction work in the John F. Kennedy Federal Building in Boston. The electrical subcontractor submitted periodic certifications that it paid its employees for work performed on the project. These statements turned out to be false. Six of the subcontractor’s employees brought suit against it for failure to pay wages over several months.

     The general contractor terminated the subcontract shortly thereafter. The electrical subcontractor brought suit against the general contractor and its payment bond surety, claiming an unpaid subcontract balance was due. The claims were brought under the Miller Act, as well as for breach of contract, quantum meruit, and violations of M.G.L. c. 93A (the Massachusetts law governing unfair or deceptive business practices).

     Attorney Christopher Strang argued that intentionally submitting false certified payroll documents constitutes a material breach of contract, justifying termination and also extinguishing any right to further payment. The judge agreed, finding “[i]ts failure to pay its employees in a timely fashion as required by state and federal law (as well as by the terms of the Subcontract), compounded by Sampson’s filing of perjured certifications of payment, bars Metric from entering any chamber of equity.”

     Contractors should use caution when submitting certifications on public, or any, construction projects. Making false statements on these documents can preclude any future recovery of contract payments. Concerned contractors should contact an experienced Massachusetts construction attorney.

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Contractors Beware:  OSHA Penalties Set to Increase on August 1, 2016

By Corey N. Giroux

            On August 1, 2016, the Occupational Health and Safety Administration (“OSHA”), will raise the limits of its maximum penalties for the first time in nearly twenty-six years.

           Current maximum penalties for “serious,” “other than serious” and “posting requirement” penalties will increase from $7,000.00 per violation to $12,471.00 per violation.  Penalties for failure to abate hazards or violations will increase from $7,000.00 to $12,471.00 per day for each failure to abate the condition subsequent to the abatement date.  Finally, the maximum penalties for “willful” or “repeat” violations will increase from $70,000.00 to $124,709.00 per violation. 

            All contractors, and especially those with a history of violations or alleged violations with OSHA, would be wise to insure that all personal protective equipment, tools and equipment are OSHA compliant in advance of the changes in maximum penalties.  If your firm hasn’t recently revisited its safety procedures, practices and documentation, now is the time to review your firm’s safety program in order to avoid exposure to increased maximum penalties for OSHA violations set to take effect. 

           For contractors in states that operate their own, state run, “mini-OSHAs,” OSHA has required that those agencies adopt maximum penalties that meet or exceed those imposed by OSHA.  Accordingly, contractors operating in states with “mini-OSHA” agencies should be mindful to consider whether they’re subject to penalties for any violation that may exceed the penalty that OSHA might impose for any similar violation.  

          Of course, the best way to avoid an increased OSHA penalty for a violation is to refrain from committing any violation.  As a practical matter, violations frequently occur despite your firm’s best efforts and dedication to providing a safe and compliant work environment.  If OSHA requests to inspect your work site or office, you’d be well-advised to immediately contact an attorney experienced in OSHA practice to help guide your firm through the process and to achieve best results.

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Show Me the Money: Getting Paid on Federal Public Construction Projects

 

By Andrea Jacobs

            It is imperative that subcontractors and material suppliers seeking payment for completed work on federal-level public construction projects be aware of the paradigm of laws and policies that exist governing such matters. To start, The Miller Act, codified as 40 U.S.C. §§ 3131-3134, exists to provide subcontractors on federal-level public construction projects a means by which to secure their right to payment in an analogous manner to how M.G.L. c. 149, § 29 operates to provide Massachusetts subcontractors and material suppliers on state-level public construction projects a means by which to secure the same. Specifically, the Miller Act requires general contractors on federal projects to provide performance bonds and payment bonds to the awarding authority where the prime contract exceeds $100,000. (for a comprehensive overview of subcontractor Miller Act rights see, “Federal Subcontractors – Understanding the Basics of Your Rights Under the Miller Act.”). 

            While the legal framework behind federal-level public construction projects and state-level public construction projects often operate in tandem it is imperative to note that Federal law and Massachusetts law treat the enforceability of “pay-if-paid” and “pay-when-paid” subcontract clauses somewhat differently. This distinction is one that subcontractors need be wary of when entering into public construction contracts.

             “Pay-if-paid” clauses create a condition precedent to subcontractor payment. That is, a subcontractor has no right to payment for completed work until the general contractor has received payment from the owner. “Pay-when-paid” clauses create no such condition precedent to subcontractor payment. Rather, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within the ‘reasonable time’ the subcontractor still has the right to seek payment from the general contractor. Ambiguous contract language often complicates the subtle, yet substantial, differences between the two types of clauses leading to high stakes contract interpretation disputes.

            In 2004, Massachusetts did away with the fraught distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects. See, Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004). Thus with regard to Massachusetts state-level public construction projects “pay-if-paid” causes have been effectively eliminated in favor of “paid-when-paid” clauses.” 

            Federal-level public construction projects, on the other hand, have not completely eliminated the distinction between “pay-if-paid” and “pay-when-paid” contract clauses. Thus, on federal-level public construction projects “pay-if-paid” language included in a subcontract could complicate subcontractor recovery in relation to the principal contractor. The limited amount of Federal case law on the issue, however, leads to the inference that Federal Courts disfavor allowing “pay-if-paid” clauses to operate in the federal-level public construction context, particularly on Miller Act projects.

            According to Federal Courts in both the First and Ninth Circuits, “the Miller Act is ‘highly remedial in nature,’ and should be construed and applied liberally to ‘effectuate the Congressional intent to protect those whose labor and materials go into public projects.’” United States ex rel. J.H. Lynch & Sons v. Travellers Cas. & Surety Co. of Am., 783 F. Supp. 2d 294, 296 (D.R.I. 2011) quoting, United States ex rel Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199, 1209 (9th Cir. 2002). Furthermore, according to the reasoning of the Ninth Circuit, because the Miller Act itself conditions payment, not on whether prime contractor is paid, but rather, whether the subcontractor has performed AND whether the statutory amount of time to bring a Miller Act claim has passed, it then follows that the terms of the Miller Act trump subcontract “pay-if-paid” language absent a “clear and explicit” waiver on the part of the subcontractor. Of particular note, the Ninth Circuit, specifically states, and the District Court of Rhode Island, located in the First Circuit, specifically quotes, the following language; “A subcontractor that has performed as agreed need not await the Government’s payment of the contractor before initiating an action under the Miller Act against the contractor or the surety.” United States ex rel Walton Tech., Inc. v. Weststar Eng’g, Inc., (9th Cir. 2002); United States ex rel. J.H. Lynch & Sons v. Travellers Cas. & Surety Co. of Am., (D.R.I. 2011).

             The law is far from settled regarding the enforceability and distinction between “pay-if-paid” and “pay-when-paid” subcontract clauses on federal-level public construction projects. While there is some guidance on this issue in the context of the Miller Act, the distinction between the two clauses may still prove thorny for subcontractors seeking to enforce their right to payment.  Thus, subcontractors should keep an eye towards the development of the law in this area as it is likely that more distinct legal trends will begin to emerge. If you have any questions about payment issues on public construction projects you should contact a Massachusetts construction lawyer.   

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Massachusetts Attorney General Finds Minority-Owned Business Goals to be Statutorily Mandated

By Christopher D. Strang,

     In a recent bid protest decision the Massachusetts Attorney General allowed a protest contesting a bidder’s right to submit Minority Business Enterprise (“MBE”) or Women’s Business Enterprise (“WBE”) qualifications after the bid opening. The opinion deemed MBE and WBE goals to be statutory and therefore not waivable by the awarding authority. The decision also found that allowing such post-bid submissions would violate the equal-footing principles upon which bidding laws rely.

     The Fall River project required M/WBE compliance forms to be included with bids. The low bidder listed itself as an MBE in its bid. However, it soon learned that a change in the law made it no longer qualified to be a certified MBE. It then provided the city with the name of a qualifying subcontractor, albeit post bid opening. The city was willing to accept this post-bid supplement, however, another bidder filed a protest.

     Generally speaking, cities may use their discretion in waiving their own public bidding requirements in certain circumstances. However, they are not authorized to waive statutory requirements. M.G.L. c. 7C, § 6(a)(6), enacted in 2013, provides that “state assisted construction contracts shall include language… setting forth the participation goals of minority and women workers to be employed on each such contracts.” Given the mandate of the “shall” language, the AG hearing officer found the M/WBE participation requirements to be statutory and therefore the city could not waive them.

     The decision went further in finding that accepting the supplement post-bid would violate equal footing principles. An entity that already has the low bid will tend to have more leverage in negotiating prices with subcontractors and suppliers than competitors had pre-bid. Such advantages are not allowed.

     Bidders should use caution going forward in verifying the current status of the M/WBE components of their bids and including thoroughly completed participation compliance forms in bid submissions.

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