On September 22, the Supreme Court of Georgia ruled that the state’s sovereign immunity is waived for a surety’s claim against a contract with the state in State of Georgia Department of Corrections v. Developers Surety and Indemnity Company.
What is Sovereign Immunity?
Generally, sovereign immunity protects the state and other government entities (such as the federal government) from being sued without consent. This doctrine comes from British law and embodies the idea that the government (or, originally, the monarch) cannot commit a legal wrongdoing. Governments may waive this defense of immunity – thereby agreeing to be sued – so that citizens with claims against them may seek proper recourse.
Before the United States began waiving its sovereign immunity, would-be claimants’ only recourse was to get Congress to pass a bill in their favor. The unwieldiness of that process eventually brought about sovereign immunity waivers for particular types of claims – such as contract disputes, import duties, and internal revenue complaints – in specialty courts, allowing the government to be sued. Today, governmental entities – from local municipalities to the federal government – voluntarily waive their immunity in a variety of situations.
How Does the State of Georgia Approach Sovereign Immunity?
In 1939, the Georgia Supreme Court recognized the historical presence of sovereign immunity in the state and noted that if the citizens preferred to allow suits against the government, they should seek the removal of the immunity through their elected legislators. However, the people of Georgia embraced sovereign immunity by approving a constitutional amendment in 1974. Today, the Georgia Constitution allows for the state’s sovereign immunity to be waived by the General Assembly in specific situations and explicitly waives it for claims stemming from a breach of a written contract entered into by the state.
How Does Sovereign Immunity Impact Construction Contracts on Georgia Public Works Projects?
The State of Georgia Claimed that Performance Bond Company Could Not Sue State Agency due to the Doctrine of Sovereign Immunity: In the case decided last week, the Georgia Department of Corrections – a state agency – contracted with a roofing company for work on a prison. The company obtained the required payment and performance bonds from a surety company. In addition, the roofing and surety companies signed an indemnity agreement that assigned the roofer’s right to payment under bonded contracts to the surety. The state allegedly restricted jobsite access to the roofing company, contrary to the contract terms, which inhibited the roofing company’s ability to perform under its roofing contract with the state agency. When the roofing company failed to perform under the contract, the surety fulfilled its performance bond obligations by providing another company to complete the roofing work. The surety later sued the state for breach, claiming it had no obligation under the payment and performance bond issued to the roofing company due to the state agency’s duty to provide access to the site.
Surety Prevails In the Lower Court: The trial court ruled in favor of the surety, concluding that the state waived sovereign immunity by contracting with the roofing company and that the surety could stand in place of the roofing company since it assumed the obligations under the bond. The state appealed on the basis that the surety (the performance bond and payment bond company) was not a party to the roofing contract and therefore, it claimed, the state’s waiver of sovereign immunity for breach didn’t apply to the surety. The appellate court affirmed the lower court’s findings.
Surety Prevails on Appeal to Georgia Supreme Court: On final appeal to the Georgia Supreme Court, the state lost again by the same reasoning: (1) the stated waived sovereign immunity by entering into a written contract, and (2) after paying the debts of the contracting party, the surety may stand in the place of that party for rights under the contract. As the Court noted, the constitutional waiver addresses the suit – not the party suing – against the state.
This decision comes just a week after the Texas Supreme Court addressed the sovereign immunity issue in Zachry Construction Corporation v. Port of Houston Authority relating to a general contractor’s delay claims against a local government entity. The Court held that the government could not claim an absolute defense against the contractor’s claims, although the Court was divided on this point. A Texas statute waives sovereign immunity for a contract claim for “balance due and owed.” The Court was split as to whether delay damages were “due and owed” under the contract since the no-damage-for-delay clause prohibited such damages.
by Mark A. Cobb
Isn’t it generally true that the best time to ask for something from someone is when they want something from you in return. It doesn’t matter whether it’s your spouse, your neighbor or your boss, if they need a favor from you, they are more likely to grant your favor in return. Thus, the best time to get pertinent information from a customer is when they want to purchase something on credit from you! And yes, by utilizing materialman’s liens and payment bonds laws you can substantially reduce your exposure. However, getting the right information in the beginning can help you immeasurably.
Look at it this way, when a potential customer contacts you and requests to purchase materials for use on a construction project, use this opportunity to get information which will make collection faster and easier in case you have future payment issues with this customer. Similarly, when an existing customer contacts you and requests an increase in their credit line, guess what? It’s another opportunity to (i) add useful information to their credit file and (ii) update the borrower’s information in their file.
As the (recent) recession has taught us so well, even the best customers can become credit risks. In this day-and-age, even one bad construction project can topple an otherwise good company.
What Kind of Credit Information Should A Material Supply Company (or Equipment Rental Company) Request:
Written Credit Application: Credit Applications are an easy and ideal way to collect all of the information used to determine a customer’s credit worthiness to your firm and to assist you in pursuing bad-debt. Standard forms can be uploaded to your company’s website which allow prospective purchasers to easily assess your forms. Although there are some very good, useful template credit application forms available, it is worth the investment to use the template as a starting point–use it to build an application based upon (i) your specific industry and (ii) real-life situations your company has experienced. Also, don’t let the form become static; instead, mend the form every time you think about or learn about additional, useful information.
Yes, you are likely already asking the question “What Information is Important to Know to Determine Credit Worthiness?”, but you should also be asking the question, “What Information Will Help Us Collect Our Money If The Borrower Defaults?” Adding this perspective can make the difference between collecting your open accounts and forfeiting your money.
Since we are a law firm focusing on Georgia construction law, and more to the point Subcontractor Law, we regularly have to file, enforce and foreclose upon liens to get our client’s their recovery. A very common scenario exists where our client received a monetary judgment for the amount the are owed, but the judgment must be collected. Frequently, the first (and most useful) information comes from the judgment-debtor’s (your customer’s) application for credit. Consequently, we have seen countless credit applications, and we encourage that at a minimum your credit application includes the following:
- the Customer’s full, legal name (a step which is almost always omitted but very important is the credit analysis’ verification of the name with the Georgia Secretary of State’s business registration records);
- Entity type (corporation, LLC, partnership, sole proprietorship); if it is a partnership, follow-up with the customer prior to extending credit to get the names, addresses and social security numbers for EVERY partner;
- the Customer’s tax ID number (do not confuse this with the owner’s or guarantor’s social security number);
- the business owner(s) full name and Mailing address;
- the business owner(s) physical, Residential address; in Georgia, service of process is accomplished through the Sheriff or other court-approved process server physically providing service on the individual names in the lawsuit; thus, having (and confirming) the residential address can save a lot of time and money (this means street address only–not a post office box and, more importantly, not a fictitious business location with a mail-box drop);
- the business owner(s) Social security number (in addition to the business’s tax ID number);
- the owner(s) Spouse’s name and social security number;
- Current bank account information;
- require your customers to update their credit applications regularly to keep the information current; and
- make sure it is LEGIBLE! When it comes down to locating a customer, nothing is more frustrating than an illegible social security number!
Written Account Terms: Depending upon the nature of your agreement (such as open account or written contract), you should always have every customer sign an agreement of your written terms. Having your customer’s consent to your terms is invaluable to asking a court for recovery-in-full. For example, seeking attorney’s fees on collection matters can be much easier to get if your customer has agreed (in writing) to paying for your attorney’s fees. Please consider including the following terms on your contract or open account agreement:
- a Joint-check provision to allow you to request a Joint Check from the general contractor; if payment from a particular project is not flowing-down to you, this provision can give you some authority (and the GC some firmer ground) to circumvent your client and seek payment directly for the prime contractor; this can give you easier access to the project’s retainage;
- Jurisdiction and venue consents can save you money as it can allow your collection lawyer to file all suits in the same convenient location; this promotes lower fees and a more predictable (dare we say favorable?) court;
- jury trials can add expense and delay recovery; Waiver of jury trial can be an effective way to avoid these problems;
- include provisions that allow you to collect Interest, Attorney’s fees and collection costs;
- Liability for theft, inclement weather, of other loss to your materials on the jobsite; this provision clears up any gray area as to whom is responsible for your materials after delivery; and
- periodically have your customer update their consent to your terms (you don’t really want to try and enforce a provision signed in 1981!)
Personal Guarantees: Most customers are willing to provide personal guarantees prior to receiving the materials which you are able to provide them, but it’s almost impossible to obtain a PG after credit has been extended. Pursuant to Georgia’s Statute of Frauds, a personal guaranty MUST be in writing in order to be enforceable. Here are some ideas which you should consider adding to your PG:
- make sure your guarantee meets Current legal requirements to be an enforceable guarantee; during the recession there was a great deal of litigation surrounding PGs and your document should reflect some of the changes in the laws;
- although you don’t want to be onerous, there is no legal limit on how many personal guarantees you are allowed to require in order to extend credit;thus, it is OK to require More than one person to submit a guarantee; this is particularly helpful in situations where your customer is a partnership (get all of the partners to submit to a credit check and a PG) or where the owner of the business has moved his or her assets into a spouse’s name to avoid collection of their debts;
- obtain the Guarantor’s social security number, mailing address and physical, residential address; and, like the credit app recommendation above, verify that this information is legible;
- get a copy of the guarantor(s) Drivers license; this contains useful information including (i) driver’s license number, an example signature, and a photograph (we shouldn’t have to remind you, but check to make certain the photo ID and signature match with your account app, contract terms, PG, etc.;
- get the personal guarantee Witnessed by someone who can later testify that the guarantee personally signed it;
- UPDATE the guarantees and re-verify the credit worthiness of your personal guarantees.
Use Georgia’s Statutory Construction Notice Scheme for your Benefit: As you likely know, third-tier subcontractors (which are generally sub-subcontractors and material suppliers to subcontractors) must comply with Georgia’s statutory construction notice scheme; although it may seem cumbersome because it may require you to send notices to the project owner and the general contractor, there are advantages to compliance; when you supply at a third tier level, it is important to meet all of your notice obligations; although your customer may not have all of the necessary information, you should try to get the following from them before you supply to them (or extend them credit):
- Keep in mind that in order to file a valid materialmen’s lien or payment bond claim, you must demonstrate that the materials, labor or services which you provided were used on the project against which you claim a lien (or payment bond claim); thus, you must get the information necessary for your construction notice compliance on each “purchase” or “rental”;
- You need to know the project’s name;
- the project’s location;
- the prime contractor’s name and address;
- the project owner’s name and address;
- your customer’s payment bond information (if applicable);
- the general contractor’s payment bond information (remember that payment bonds are required on most municipal, state and federal projects, but many private construction projects are ALSO covered by a payment bond);
- a copy of the Notice of Commencement.
Don’t Forget! In order to take advantage of some of the useful collection techniques permitted by your industry, you must make certain that your internal accounting procedures comply:
- keep track of supplies by customer and project
- apply payments properly
- have a calendaring system which alerts you to deadlines
Through our blog, the construction lawyers of the Cobb Law Group try to provide industry professionals with the latest information, case law, trends and interests. Although there are some very sizeable construction projects going on throughout Georgia including the work for Plant Vogtle and work for the Georgia Port Authority, there may not be any more “interesting” project than the new stadium for the Atlanta Braves which, as announced earlier today, will be known as SunTrust Park.
Although there has been some preliminary site work, construction of the new Atlanta Braves stadium complex in Cobb County officially began with the September 16th ceremonial groundbreaking. The general contractor, joint venture American Builders 2017, is on schedule to complete the project for Opening Day 2017. The county is funding $300 million of the $672 million project. “This new ballpark will be a world-class venue that will give Braves Country the ultimate fan experience, both inside the park and out,” said Braves Chairman and CEO Terry McGuirk.
The designs call for 41,500 seats distributed over three cantilevered decks designed to bring each fan closer to the action, a canopy three-times larger than average, wide concourses with field-views, and indoor viewing areas. Fans will have fourteen access points to enter the park and parking will be evenly distributed around the complex.
But this 74-acre mixed-use project is for more than just baseball fans. According to the September 2nd press release, the “project will be the first of its kind – a lifestyle destination that will seamlessly integrate a state-of-the-art baseball stadium with an engaging multi-use community.” Shops, restaurants, and entertainment venues on the property will be open year-round, even on baseball-free days.
In April of this year, the Braves and Cobb County detailed the construction schedule. This initial schedule calls for clearing to be completed in October, grading to be completed in December, and stadium structure construction to begin in early 2015. The selection committee considered proposals from interested general contractors who had built at least three major sport facilities – including a new Major League Baseball stadium – in the past decade. American Builders 2017, a joint venture between Brasfield & Gorrie, Mortenson Construction, Barton Malow Company and New South Construction Company, won the bid for general contractor. Fuqua Development LLC will serve as the retail development partner; Pope & Land Enterprises, the office development partner; and Pollack Shores Real Estate Group, residential development partner. JLL (Jones Lang LaSalle) has been named the project manager and The Jerde Partnership will serve as the master land planner on the development.
Although American Builders anticipates completing the stadium by April 2017, there are construction concerns. They expect to encounter a shortage of skilled labor, due in part to the construction of the Falcons’ downtown Atlanta stadium. Project director Len Moser expects peak construction to require over 1,000 workers on site. In addition, American Builders noted the new Braves’ site is rocky and will need extensive grading given the dramatic elevation changes.
One of the first construction tasks will be to relocate three natural gas lines that run under site of the planned stadium project. The lines run about 8 feet underground for one-third of a mile on the site. Stretching from New England to Louisiana, these pipes run under I-285. However, structures cannot be built above them for maintenance access purposes. Relocating the lines will cost Colonial Pipeline Company and Atlanta Gas Light Company, who own the lines, approximately $14 million, but they will be reimbursed from the project’s funding. The work will be contracted out and requires three phases. Plateau Excavation, Inc. has been hired to complete the initial clearing and grading work, which started in May. The second phase involves digging trenches to place the pipes; the third, removing the current pipes. Relocation is expected to be completed in November.
Although the move of the team from Atlanta to the metropolitan suburbs of Marietta, the team has defended its decision. The Braves have no ownership or management rights in their current facility, Turner Field, which they lease from the city. Turner Field was built for the 1996 Olympics and has hosted the Braves since 1997. Although the team has invested nearly $125 million for maintenance and improvements, Turner Field still requires approximately $150 million in infrastructure work and another $50 million on fan experience improvements. Additionally, the stadium is poorly situated for modern transit and logistical concerns such as insufficient parking and highway access. When the lease expires in 2016, the city and the Atlanta-Fulton County Recreation Authority will decide the fate of Turner Field.
We wish all the participants in this exciting project all the best, that construction delays will be minimal, that payments will be timely, that there are no performance issues, no materialmen’s liens filed or payment (or performance) bond claims needed; we hope the weather will cooperate and that the scheduling will be met. Good luck! And, good luck to the Braves this and every season!
We are thrilled to confirm that Cobb Law Group’s rates are among the most competitive in the nation! In the September 2014 edition of the ABA Journal (the official journal of the American Bar Association), reveals the national averages of attorneys’ hourly rate.
At large law firms (those with 400 or more attorneys), senior partners charge an average of $724 per hour! At smaller firms, senior partners bill an average of $445 per hour. Since we are a small firm offering “big firm” services, our clients will be pleased to learn that we are significantly lower than the $445 average rate for a firm our size, and we are nowhere near the costs associated with hiring a large law firm.
The poll, also include the typical rates for “partner” and associates. The partner rates range from $385 to $581 per hour. We are pleased to say that even our “senior partner” rates are significantly lower than other, comparable firms “partner”rates! And the associate rates which range from $274 to $400 per hour are not even in our vocabulary. In other words, in every category, we offer much better rates than our peers.
We knew that we offered top-notch legal services at an exceptional value, but the report (issued by BTI Consulting Group) confirms this for us. One thing that the ABA Journal article did not discuss was the fees for those attorneys specializing in a particular area. Even thought this article did not mention this topic we are confident that firms which focus in particular areas and become know for their innovative work are able to charge more. Thus, our legal fees are likely even better if we could compare them side-by-side with a true competitor.
As our existing client pool understands, our firm is very unique: not only do we focus on our clients’ needs, but by limiting our practice to Georgia construction law, we are able to know and understand one area very well–we are not having to”reinvent-the-wheel”. In addition, we speak regularly at local, state and national continuing education events. That is why clients who hire us to draft their construction contracts, to file mechanics and materialmen’s liens to help them collect the money they are owed, to make payment bond claims or to handle a Miller Act claim find that we are able to assist them more quickly and with fewer problems because we spend so much of our time doing the same thing for other clients. All of this experience leads to lower over legal costs.
True, legal fees can be expensive, but the staff and lawyers at the Cobb Law Group are constantly striving to reduce our expenses and pass the savings on to our clients. Our employees are rewarded for innovative or streamlining procedures which can reduce workload and improve client satisfaction.
In addition to learning from our employees, we also welcome ideas from our clients and try to implement them to work more efficiently. For example, recently, a client wanted us to create a “form”demand letter to send to its past due customers; plus, they wanted us to produce a quick, but affordable alternative to a customized letter. We were able to create a unique letter for that client and offer the form at a reduced rate in exchange for a high-volume. We strive daily to offer the best services at the best rates. And, if you have any questions regarding our rates, please contact us today.
In the Summer 2014 edition of The Construction Lawyer (Volume 34, Number 3), noted construction attorney, Adrian L. Bastianelli, III wrote a glowing review of Construction Subcontracting: A Comprehensive Practical and Legal Guide which was published in April.
“Subcontractors are the backbone of the construction industry. For every prime contractor, there are multiple subcontractors. . . The law dealing with the prime/subcontractor relationship generally is well developed and can be unique, complicated, and unpredictable.”
The review continues to laud the editors and confirms that the book met its editors and authors’ goals in that it
“It covers the full landscape of subcontracting issues. The book not only provides a detailed discussion of the legal principles and case law relating to subcontracting, but also offers sound practical advice for both prime contractors and subcontractors on how to dal with problems and avoid disputes.”
Mark Cobb participated in writing the section of the book focusing on payment issues, and the reviewer confirms:
“Payment is always a key topic of concern for subcontractors and an area where there has been considerable litigation. The authors discuss pay-if-paid versus pay-when-paid clauses, prompt payment statutes and laws, setoff, and the impact of flow-down payment clauses. Intertwined with the payment chapter are separate chapters on liens and bonds.”
Mr. Bastianelli concludes his thorough and glowing review of the book with the following statement:
“The editors and authors should be commended for producing an important, comprehensive book on a subject that is of such great importance to the industry. The book will be an important tool on the construction lawyer’s bookshelf and should be a book that prime contractors and subcontractors regularly use.”
We greatly appreciate Mr. Bastianelli’s kind words and the time he took to read and assess the 628-page book. Mark was honored to be a part of this notable project and to work with some of the greatest living construction lawyers in the country.
by Mark A. Cobb
It doesn’t matter whether you are a material supplier delivering products to a subcontractor, a subcontractor performing work directly for a GC, or a GC building a structure for an owner, you expect to be paid for the labor, materials, and equipment which you provided. In fact, without payment, it could send your business plummeting downward if you cannot pay your own bills.
We highly recommend that before entering into any construction contract, you perform proper due diligence and protect yourself as much as possible. No matter how thorough you are, however, as the project continues, one of the parties involved with the project might experience a material change in their business or their cash-flow which can directly impact you and make recovery of the money you are owed more difficult. Thus, you want to keep evaluating each customer’s credit-worthiness.
For over 20 years, clients have shared with us some of the early-warning signs (which they largely ignored) which indicated that their customer might be a payment risk after the initial credit-check, and we thought our readers might like to see this list (and add to it themselves!) The following is a checklist of situations which may indicate that you are working with a potentially distressed party:
1. A change in your customer’s bank account may indicate many things including accounts closed, banking problems, a garnishment, etc.
2. Your customer pays you from different bank accounts (unless its accounts are separated by project, escrow, etc.); this is unprofessional and may indicate spreading out their assets to avoid garnishment or to rely upon the float by the banks.
3. Significant fluctuations in your customer’s inventory may indicate volatile business practices, changes in credit with other vendors, etc.
4. An unusually large order may indicate that the customer has undertaken a project larger than its capabilities.
5. Unexpected / unplanned growth of your customer’s business; great businesses maintain and update business plans; unplanned growth can cripple a business, overextend its employees and assets, and cause the business to fail to meet its new obligations.
6. High debt to equity ratio; customers in this position are a credit risk.
7. When your customer loses a major job or client; if too much business comes from one relationship, then the loss of that business can be devastating.
8. A generally disorganized approach to its business, accounts payable, accounts receivable is scary; likely, that business does not understand the extent of their liabilities, realistic expectations of income, etc. and that could put you in a dangerous position if you need to implement collection procedures.
9. Rumors; my Mother always told me that “where there is smoke, there is fire.”
10. If you hear comments from other construction industry professionals that your customer isn’t charging enough, then it might indicate that your customer is trying to get business on any terms in order to improve its panic for cash-flow; inevitably, they will run out of money and someone (hopefully not you!) will be left holding the bag.
11. Requests to extend payment terms may indicate that your customer needs more time to “shuffle” its assets to pay you.
12. Liens (including state and federal tax liens which are all public record); a 10-second check on-line can indicate the fiscal health of your customers.
13. Slow payments: creditors and debtors typically establish a billing and payment practice over time, when they deviate, it may indicate a potential problem.
14. Employee layoffs; if possible, visit your customer at their office, a reduction in their workforce could hint of problems to come.
15. Key employee changes dramatically alter the bottom-line and the business practices; when changes in management occur, they may use other vendors (forgetting to pay you), may emphasis other payment policies, could indicate that top management was receiving their paychecks or benefits.
16. Family and health issues related to owner or key employee (or their families) such as divorce, death or serious illness can greatly impact a business relationship.
17. Excessive downtime may indicate unexpected reduction in your customer’s revenues.
18. You customer’s business is for sale or sold; there may be ways for a new purchaser to avoid debt incurred prior to the sale; it can also indicate financial or industry-specific problems; also, it may result in a new corporate atmosphere which may make collection more difficult; frequently, the new owners tell you the former owner is responsible for the debt, but the old owner tells you that the new owner assumed the obligations.
19. You receive excessive inquiries for credit references for your customer; this might be a customer who is trying to expand their credit in order to generate funds to pays others (“borrow-from-Peter-to-pay-Paul syndrome).
20. Excuses for nonpayment or slow payment (lost invoices, “check is in the mail”, skipped invoices, unsigned checks, NSF checks, “no one is available to sign the check”, etc.); excuses are never a good sign.
Good credit management means vigilance. Do not agree to extend credit, perform work, or supply materials unequivocally on a long-term project without some follow-up to see if your customer’s financial position has changed. If it changes, and if you react promptly enough, it will make recovery of your money easier and reduce your exposure. Fortunately, you have several options including filing a preliminary lien, obtaining personal guarantees, and requiring stricter terms. In next week’s blog we will explore some of the options you may want to consider when you see indicators that a customer may become a credit-risk to you.
If you have other early-warning signs that alert you to potential payment issues, please leave a comment below.
by Mark A. Cobb
Beginning this summer, there is a new set of supplementary rules for the arbitration of construction cases. The American Arbitration Association (AAA) promulgated these rules in an attempt to lower participants’ costs and to fast-track certain construction matters.
The new rules do not apply to arbitration claims less than $75,000; similarly, they do not apply to arbitration claims more than $5 million. Thus, the intentions are to make the process more efficient for the middle ground claims. Some of the changes include the following:
- there are schedules (based upon the amount of the claim) which cap the AAA Administration fees
- statements of claims and counterclaims are limited to five pages or less
- amendments to the complaint must be completed within 30 days of the counterclaim (unless the arbitrator extends this time)
- within 3 days of the filing of the Demand for Arbitration, the AAA and the parties will participate in an administrative conference
- the AAA has 2 days following the administrative conference to provide a list of at least 10 potential arbitrators to the parties
- the maximum days for an arbitration hearing is limited to 10 days
- the arbitrators’ study hours are capped at 40 hours
- arbitrators’ study hours have a maximum rate of $350 per hour
- an award must be given within360 days of the date the claim is filed
- total arbitrator fees are capped at $52,000 (not including travel, costs & expenses)
- conference call arbitration fees are capped
- post-hearing reviews fees are capped
- site visit fees are capped (for claims over $1 million, for example, site visits are limited to 8 hours of time at a maximum rate of $350 per hour)
- parties are to provide the name of a representative (other than their attorney) to be included in all communications (it may be an officer, in-house counsel, etc.)
How Do I Claim the Benefits of the AAA Supplemental Rules? If you are interested in taking advantage of the new supplemental arbitration rules for your construction claims, then we suggest that you include a specific provision in your construction contract which states that the fee caps of the supplemental rules will apply to matters originating from your contract.
If you are already involved in an arbitration matter, then the parties to the arbitration may choose to proceed under the supplemental rules by a joint submission to the AAA.
This is just a very general overview of some of the changes which contractors involved in arbitration will see in the future, and it will take some time to determine whether the AAA’s goals of shortening the arbitration process and capping the fees on certain construction claims has been met.
If you have any comments regarding arbitrating claims between $75K and $5M with the new rules, please let us know below.
Mark Cobb is excited about speaking to Atlanta architects and engineers at a Construction Law continuing education seminar sponsored by HalfMoon Education. Mark is speaking on IMPROVING THE PROJECT OUTCOME WITH ACCURATE AND EFFECTIVE CONSTRUCTION CONTRACTING in which he will address the basics of general contract law, the unique aspects of construction contracts and how to avoid non-performance.
One aspect Mark will address are non-payment issues including the filing of a Claim of Lien against the project. Here is a sample of the summary of Georgia’s lien laws which he will present:
Who Can File A Lien?
∙ Architects and Engineers, Surveyors, Foresters
∙ Contractors in privity with the Owner
∙ Subcontractors in privity with the GC
∙ Sub-subcontractors and suppliers if they sent an NTO (and an NTO was required)
∙ Remember: if you do not have a required license, then you do not have the right to file a lien
Why File a Lien?
∙ To secure the money you are owed
∙ To make third parties responsible for the money you are owed (even though you didn’t contract with them)
∙ To apply pressure on those upstream who may be delaying payment
When Would you Consider Filing a Lien?
∙ When you are owed money
Important Things to Know About Liens:
∙ Lien Claimant must have substantially complied with the contract
∙ Lien is (generally) enforceable up to the amount of the improvements actually made
∙ Thanks to legislative efforts on behalf of the AGC Georgia, liens may be for full contract amounts
∙ Contractors who abandon project may not be entitled to file a lien (however, they may recover amount for partial performance under theory of quantum meruit)
∙ A Lien Claimant who ceases work after being told they are not going to be paid can file a lien
Filing Deadlines for Liens:
∙ 90 days from Last Day Worked or 60 days from date of Lien Waiver (whichever is shorter)
∙ Last Day Worked is NOT Invoice Date
∙ Lien must be perfected (“suit filed”) before the first anniversary of the filing of the lien
∙ Liens must be perfected within one year of the date on which they are filed, otherwise, they automatically expire
∙ Liens are perfected by (i) filing a lawsuit against the entity with whom you contracted and (ii) filing a Notice of Filing of Action to Perfect Lien with the clerk of court in the county where the project was located
∙ “Foreclosure” of Liens are generally an additional, separate step to perfecting liens. Unless there is jurisdictional alignment, a lien claimant must wait to seek foreclosure against the owner of the real estate until after they have received a judgment against the entity with whom they original contracted
by Mark A. Cobb
I just read a very insightful and accurate description of what it means to be a contractor:
We design and construct buildings but the reality is we are risk managers. Virtually anyone could design or construct a project if it had no risk. The reality is that owners hire and pay “experienced” designers and contractors to manage project risk. We are risk managers and the better we manage, the better our profit and final product. [emphasis in original].
This description of a contractor’s responsibilities comes from BIM and Virtual Construction: Where is the Money by Damon Socka and Jennifer Lanzetti recently published in Constructor: The Magazine of the Associated General Contractors of America (July / August 2014). This definition reminds us of the realities of working in the construction industry in the 21st century.
As a law firm committed solely to issues related to construction law, we have a very diverse client base. Newer clients are frequently caught off-guard when risk stares them squarely in the face–and that’s why they call us for the first time. When we meet these new owners and project managers, they often comment about the volume of paperwork–they thought that entering the field of construction work would let them spend a lot of time outside working with their hands; instead, they find themselves poring over contracts, drafting emails and letters to address problems, delays or weather-related re-scheduling issues.
Although a contractor’s sole role may not be risk manger, it is a significant part of every project manger’s and every contractor’s (or subcontractor’s) business. The finest of these are able to avoid most of the risks or greatly minimize the risks; when this isn’t possible, then owners, contractors and subcontractor’s engage in a dance to transfer risk from themselves to another party. Here is a short list of ideas that help eliminate, reduce or transfer risk:
- work only with responsible owners
- verify owner’s credit worthiness
- require payment bonds and/or performance bonds (it shows the credit worthiness of your subcontractors)
- build relationships (with GC’s, subcontractors, sureties, banks, project developers, construction lawyers)
- make honesty a hallmark of your work
- written construction contracts should spell out the goals, the responsibilities, the payment, and have a dispute resolution plan waiting in the wings in case it is needed
- use the best subcontractors and suppliers (which may not be the lowest bid)
- keep detailed, daily logs
- run efficient but meaningful weekly meetings
- document subcontractor issues in writing, with photos, etc.
- know your construction contract’s deadlines and communication methods for problems
- take responsibility
- stay on top of payment issues and, if necessary, file materialmen’s liens or make payment bond claims
- if materials are difficult to source, make certain that a back-up source is available
- budget properly for time and money
- pay your bills on time (and pay your subcontractors & suppliers promptly)
- don’t sweat the little stuff
There are many different ways to avoid construction risks or eliminate them completely, please share your favorite tips for reducing risks on construction projects with us by leaving a comment below.
by Mark Cobb
It would be wonderful to live in a world where a handshake or a person’s word meant something. The Georgia Court of Appeals just handed down a verdict in First Bank of Georgia v. Robertson Grading which will make you question whether or not you can trust any body when it comes to being paid on a construction project.
The background is a little longer than we normally put on our blog; however, we believe that it is very important for our readers to understand that the subcontractor lost all his right to payment even though he made regular visits with the construction lender and was (allegedly) repeatedly told that payment would be forthcoming.
R & B Construction (“GC”) was the general contractor / developer of a subdivision in the Richmond County / Augusta, Georgia area. The GC contracted with Robertson Grading (the “Subcontractor”) to pave the new streets. Because the Subcontractor had never worked with the GC before, the Subcontractor requested a list of the GC’s creditors in order to determine the GC’s credit worthiness. After signing the paving subcontractor, the Subcontractor visited one of the credit references and the construction lender First Bank of Georgia (the “Bank”) in order, ostensibly, to make sure there was money available to pay the $400,000 paving contract. Although the bank disputes some of the statement, the Subcontractor’s evidence suggested that the bank representative allegedly advised the Subcontractor two things:
1. The Subcontractor “WOULD GET PAID FOR THE PAVING”; and
2. The bank would notify the Subcontractor if any problems arose with the GC’s account.
The Subcontractor began the paving project and submitted it’s first invoice which exceeded $100,000; when the first invoice wasn’t paid, the Subcontractor returned to the bank and learned two more things:
3. The parties wanted to wait until the paving was complete to issue one check; and
4. The bank representative allegedly said that, ”[w]hen you put the last ton of asphalt down . . . I promise you [,] you will get paid.”
Apparently relying upon the bank’s representative’s statement, the Subcontractor continued its work on the subdivision. Due to some delays, some additional work requested by the GC, and an increase in material cost, the project was completed later than the Subcontractor had advised the bank and a second invoice was sent which exceeded $300,000. With the two outstanding invoices totalling $448,600.65, the Subcontractor contacted the bank when payment wasn’t made immediately. At this point, the Bank informed the Subcontractor:
5. The GC missed it’s most recent interest payment due on the construction loan and that the Bank was not disbursing any further funds on the account.
The grading Subcontractor immediately filed a Mechanics and Materialmen’s Lien pursuant to Georgia’s lien statutes; when the GC subsequently filed bankrptucy, however, it was determined that the Subcontractor’s lien was invalid as it had not been properly “perfected”. Thus, the Subcontractor was limited to pursuing collection of its payment as an unsecured creditor.
PRACTICAL TIP–FILE YOUR LIEN BUT DON’T FORGET TO PERFECT IT: If you are owed money on a Georgia construction project and you file a materialman’s lien, your lien will expire 395 days from the date the lien was filed UNLESS you properly perfect the lien. There are several ways to perfect your lien depending upon the circumstances of the claim; if the lien is not properly perfected, then you will lose your lien rights.
Despite the GC’s bankruptcy, the Bank was allowed to foreclosure upon it’s security interest in the project; eventually, the Bank was able to sell all of the lots and, even, admitted the following:
6. It would not have been possible to sell the subdivision lots without paved streets.
THE TRIAL COURT’S DECISION:
Without a valid construction lien, the Subcontractor had limited recourse in the GC’s bankruptcy and/or the Bank; nonetheless, the Subcontractor attempted to recover from the Bank by bringing a lawsuit for claims based upon (i) promissory estoppel, unjust enrichment, (iii) negligent misrepresentation, and (iv) fraud. The trial court awarded the Subcontractor $448,600.65 in damages plus and additional $149,500 in attorneys fees. The Bank appealed to the Georgia Court of Appeals which reversed the trial court’s decision!
Technically, the Bank appealed the trial court’s denial of the Bank’s motion for a directed verdict. Simply stated, a judge may “direct” the jury to give a certain “verdict” is he or she finds that no reasonable jury could reach a decision to the contrary. Since the trial court judge did not grant the Bank’s motion for a directed verdict, the Bank appealed and won.
Let’s look at the Subcontractor’s claims which the Court of Appeals effectively denied:
Claim # 1: Promissory Estoppel:
What is Promissory Estoppel? In the law of contracts, the doctrine of promissory estoppel states that a promise is enforceable by law when the person making the promise makes a promise another who, in turn, relies on the promise to his or her detriment.
Since the Subcontractor was seeking payment from the Bank, it was, for all practical purposes, relying upon the Bank to be a guarantor of the GC’s debt to the Subcontractor. The Statute of Frauds, however, requires that an agreement by one person (or entity) to take on the debt for another must be in writing. The doctrine of promissory estoppel is an equitable doctrine which can be an exception to the written requirement of the Georgia’s Statute of Fraud. Thus, the Subcontractor agued that it relied upon the Bank’s representative’s statements that the Bank would make sure that Subcontractor was paid for its grading and paving services.
In order to invoke a claim for promissory estoppel, four elements would have to be met:
1. The Bank would have to have made promises;
2. The Bank would have expected the Subcontractor to rely upon those promises;
3. The Subcontractor did reasonably rely upon the promises; and
4. An injustice could be avoided only by enforcing the promise.
The Court of Appeals found, however, that the Subcontractor “failed to establish exclusive or reasonable reliance upon any statement by the Bank.” Although there were several points made to substantiate the Court’s holding, the Court specifically pointed out that the Subcontractor had entered into its subcontract with the GC prior to contacting the bank. Thus, it seems evident that the Subcontractor did not rely upon the Bank’s statement to enter the original contract.
PRACTICAL TIP: It doesn’t matter whether you are a prime contractor, a specialty subcontractor, or a material supplier, you should thoroughly investigate the other party’s credit worthiness BEFORE you sign the contract.
Although this is compelling, it does not address the Subcontractor’s alleged reliance upon the Bank’s statements that they wanted to write one check after the project was completed. The Georgia Court of Appeals wrote:
In addressing this aspect of [the Subcontractor]‘s argument, we begin by noting that it was undisputed between the parties that at the time this second conversation between [the Subcontractor] and the Bank occurred in early September 2007, Robertson Grading believed that the paving work would be completed in two to three weeks’ time, putting the completion date somewhere toward the middle or end of September, and [the Subcontractor] made that representation to the Bank. Nevertheless, [the Subcontractor] testified at trial that the project’s completion was delayed by extra work the company took on to complete the public right-of-way/deceleration lane, all at [the Subcontractor]‘s request, pushing the ultimate completion date to one or two days before November 7, 2007. To sum up, then, [the Subcontractor] made two representations to the Bank in seeking the Bank’s assurance that it would be paid for its work on the project: (1) that, “if everything went according to schedule,” the work would be completed within to two to three weeks …….. and (2) that it would be performing paving work. But as it turns out, neither of these representations by [the Subcontractor] ended up being accurate, and [the Subcontractor] admitted at trial that he did not have any additional meetings with the Bank or otherwise advise it about the work delay or agreement between [the Subcontractor] and [the GC] to expand the scope and expense of the work to include grading-and-shoulder work. Suffice it to say, [the Subcontractor] cannot claim that it reasonably relied upon an assurance of payment by the Bank when it unilaterally changed the very terms upon which that assurance was based. [footnotes omitted, emphasis added].
PRACTICAL TIP: Although this is not addressed in the Court’s decision, the Subcontractor should have considered taking different steps when its first invoice was not paid. Option open to the Subcontractor may have including filing a materialman’s lien in Richmond County, Georgia, stopping work for the GC’s breach (failing to pay), or enter into a side-agreement with the bank.
Claim # 2: Negligent Misrepresentation:
The Subcontractor’s claim that the Bank negligently misrepresented information also failed according to the Court of Appeals. The Court enumerated three elements which the Subcontractor would have to have proven. The three elements of negligent misrepresentation are as follows:
1. The Bank would have to negligently supply false information;
2. The Subcontractor would have to had reasonably relied upon that false information; and
3. The Subcontractor would have to prove economic injury proximately resulting from the Subcontractor’s reliance.
Using the logic developed by the court in denying the Subcontractor’s promissory estoppel claim, the court used similar facts to conclude that the Subcontractor did prove these three elements.
Claim # 3: Unjust Enrichment:
Unjust enrichment is another equitable claim that says that an owner who is “enriched” by another may have to pay “just” compensation. In this case, the Court makes the distinction that the Bank was not the owner who hired the Subcontractor for the paving project; instead, the Bank took title to the real estate pursuant to its loan documents, and, a normal part of the foreclosure process included the improvements which had been made to the real estate (including the paving).
WARNING TO SUBCONTRACTORS: The Subcontractor’s proper remedy, the Court pointed out, was via the “Georgia’s materialman’s statute (which it did, although unsuccessfully due to its failure to perfect that lien).” [emphasis in original].
Consequently, the Court of Appeals agreed with the Bank that the Subcontractor did not have a claim under a theory of the Bank’s unjust enrichment.
This lawsuit is another pertinent reminding for every construction professional who work on or supplies materials to Georgia construction projects. In some ways, this decision confirms that it’s “every man for himself” when it comes to collections; before you rely on assurance from another party, get the promises in writing. Also, although this case does not go into the reasons why the Subcontractor’s materialman’s lien was not perfected, but it is a reminder that every Georgia lien claimant must strictly comply with Georgia’s materialmen’s lien statute and that includes meeting every deadline for filing and perfecting your claim of lien.
What do you think about this decision?