Whoops! I Thought You Were Someone Else – Quasi Public Projects

Recently, I had the pleasure to talk with Marilyn Odendahl from the Indiana Lawyer and discuss the Indiana Court of Appeals decision in Alva Electric, Inc., et. al. v. Evansville Vanderburgh School Corp., et. al., Case No. 82A01-1201-PL-2.  The Court’s opinion can be found here.  In this case eight contractors sued the school corporation and a Foundation for failing to abide by public bidding laws.  Ms. Odendahl wrote an excellent article about the case and you can read it here.

At its essence this case is about whether a project is public versus private.  For contractors this distinction matters.  More and more state and local municipalities, facing tight budget constraints are partnering with private enterprises to collaborate on projects.  When a municipal entity procures a project on its own that will be used by the public, this distinction is clear.  When its clear, the ground rules are well known.  Contractors understand they will have to go through a bidding process and follow other rules required for public projects.  They also understand that if a project is public, contractors may not file a lien on a public project.  Rather, these projects typically require a bond and a contractor may file a claim against the bond in order to get paid.

Where things become cloudy are when projects aren’t clearly public or private.  They are quasi-public projects.  As was the case in Alva, when it appears a project is owned by a private party and the parties proceed as though the project was a private project, public construction law statutes may be ignored and subcontractors may believe they have lien rights that really don’t exist.  The public entity may not get the necessary bond that was, in fact, required by statute.  This belief may expose all parties, including the owners, to legal risks if a court ultimately determines that the project is a public project.

Determining whether a project is public versus private can be difficult.  Surprisingly, legal title to the project has little impact on this determination.  As was found in Alva, some the factors considered most heavily by the courts are (1) who is primarily funding the projects, (2) who is the intended beneficiary, and (3) what is the extent of the municipality in the project.

7th Circuit Upholds Surety’s Pay-If-Paid Defense in Indiana

A recent 7^th Circuit opinion suggests that Indiana will allow a surety to assert a contractor’s pay-if-paid defense and likely, by extension pay-when-paid defenses.  These defenses have not been addressed directly by the Indiana Supreme Court.

A pay-if-paid clause provides that a subcontractor will be paid only if the contractor is paid.  This clause ensures that each contracting party bears the risk of loss only for its own work. A typical clause of this type might say: “Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes the risk.”  BMD Contractors, Inc. v. Fid. & Deposit Co. of Maryland, 679 F.3d 643, 645 (7th Cir. 2012) as amended (July 13, 2012).

A pay-when-paid clause governs the timing of a contractor’s payment obligation to the subcontractor.  Usually the clause indicates that the subcontractor will be paid within some fixed time period after the contractor itself has been paid.  A typical clause might state “Contractor shall pay subcontractor within seven days of contractor’s receipt of payment from the owner.”  Id. 

The 7^th Circuit Court of Appeals in BMD Contractors, Inc. v. Fid. & Deposit Co. of Maryland, held that a surety may assert the principal’s pay-if-paid defense which eliminated the surety’s liability under the payment bond.  BMD Contractors, Inc. (“BMD”), who was a subcontractor for Industrial Power Systems, Inc. (“Industrial Power”), who was a subcontractor for Walbridge Aldinger Company (“Walbridge”), the general contractor executed a payment bond with Fidelity and Deposit Company of Maryland (“Fidelity”), making Fidelity a surety for Industrial Power’s payment obligations to BMD. Ultimately, the manufacturer declared bankruptcy, causing a series of payment defaults to flow down the levels of contractors and subcontractors. Walbridge failed to pay Industrial Power, Industrial Power failed to pay BMD, and Fidelity refused to pay BMD. BMD sued Fidelity on the bond. The Court held, “the Industrial Power/BMD subcontract expressly provides that Industrial Power’s receipt of payment is a condition precedent to its obligation to pay BMD. This language is clear and properly construed as a pay-if-paid clause.”  Id.

The Court pointed out that Indiana surety law is clear on two points:  (1) sureties are generally liable only where the principal itself is liable and (2) concurrently executed bonds and the contracts they secure are construed together.

Until this case, it was generally believed in Indiana that a surety was barred from asserting pay-when-paid and pay-if-paid defenses under Midland Eng’g Co. v. John A. Hall Constr. Co., 398 F.Supp. 981, 993–94 (N.D.Ind.1975) (discussing Dyer ); Oberle & Assocs., Inc. v. Richmond Hotel, Ltd., No. 33C01–8706–CP–130, 1998 WL 35297806, at *5–7 (Ind.Cir.Ct. July 2, 1998).  The BMD case distinguished this case.  It agreed that

to transfer the risk of upstream insolvency or default, the contracting parties must expressly demonstrate their intent to do so; that is the rule from Dyer. But by clearly stating that the contractor’s receipt of payment from the owner is a condition precedent to the subcontractor’s right to payment, the parties have expressly demonstrated exactly that intent. Adding specific assumption-of-risk language would reinforce that intent but is not strictly necessary to create an enforceable pay-if-paid clause. BMD Contractors, Inc. v. Fid. & Deposit Co. of Maryland, 679 F.3d at 650.

The Court went on to state that “the Industrial Power/BMD contract unambiguously states that Industrial Power’s receipt of payment is a condition precedent to BMD’s right to payment.”  Id. Finally the Court noted that “the subcontracts at issue in Dyer, Midland, and Oberle did not use condition-precedent language.”  Id.

Therefore, if a subcontract contains clear “condition precedent” language in either a pay-if-paid or pay-when-paid clause, it is likely that the Indiana courts will allow a surety to assert these defenses if its principal can also assert the defenses.

Indiana Public Contracts Require Certification Regarding Investment in Iran

In Indiana, many new laws went into effect on July 1, 2012.  The General Assembly approved 160 bills this year.  One law that went into effect on July 1st makes it illegal for the State of Indiana or a political subdivision to contract with a “person” who invests in Iran’s energy sector.  As of July 1, 2012 all public contracts or renewals of public contracts must contain certification language stating that the person awarded the contract, such as a contractor or a material supplier on a public project, is not engaged in investment activities in Iran.  IC 5-22-16.5-11.  Investment activity means that a person provides goods or services of $20 million or more in value to the energy sector of Iran.  This includes activities to develop various energy sectors such a petroleum, natural gas or nuclear power and includes products used to construct or maintain pipelines used to transport fuels.

Section 13 of the law requires at the time a contract is awarded or renewed the contractor being awarded the contract must certify in writing to the governmental body that the contractor is not engaged in investment activities.

Every contractor on a public project will be expected to sign a certification regarding its investment activities in Iran.  The impact of this law would preclude, absent an applicable exception, companies that are investing in Iran’s energy sector from contracting with the State of Indiana or a political subdivision.  Particularly in large organizations, it is important to be proactive with your due diligence to determine whether this law will prohibit you from accepting public contracts in Indiana.

Brush Off The Dust Bunnies

Its time to dust this site off and it fire it back up!  Some of you may have noticed my lengthy absence from blogging.  I assure you I have not been sitting idle!  I am happy to announce the arrival of my second daughter on May 3, 2012.  It has been a whirlwind spring and summer!  Now that I am settling back into my somewhat normal (read: exhausted) life, I will be posting here again regularly.  I hope that you will continue to follow me and as always if you have any questions or would like to see any particular topics addressed, just let me know!

Time’s Up…Did You File Your Mechanic’s Lien?

As most of my faithful readers probably already know, you must timely file your mechanics lien or forfeit your rights to the lien.  In Indiana there are two different deadlines to keep in mind depending on the type of project you are working on.  If you are working on a project that involves a commercial or industrial project and regulated public utilities you must file your mechanic’s lien notice within 90 days after last performance of labor or furnishing materials to the project.   If your project involves a single or double family dwelling, the mechanic’s lien notice must be filed within 60 days after last performance of labor or furnishing materials to the project.  See Ind.Code section 32-28-3-3.

Once expired, the time cannot be revived by doing incidental work on the project.  The lien must be based upon work that was required under the contract.  Other work performed gratuitously or for work not contemplated by the original contract will not extend the time for filing your mechanics lien.

If you have not received timely payment, always remember to keep these deadlines in mind.  Otherwise you will risk losing your mechanics lien rights all together.

Some Do’s for Making a Claim Against a Surety Bond

In one of my first posts, I discussed changes to the A312 Performance Bond.  As I mentioned in that post A312 Bonds are widely used on many projects.  The golden rule when facing a default on a project is to read the bond.  Most bonds list certain conditions that must be met before an enforceable claim may be asserted against the bond.  In a relatively new case, decided by the Indiana Court of Appeals, the Court has reinforced this mandate.

In the Town of Plainfield v. Paden Engineering Co., Inc. 943 N.E.2d 904 (2011), which can be found here, the Court granted partial summary judgment in favor of the surety.  The Court held that the claimant did not satisfy conditions necessary to recover from the surety on an A312 Bond.  Here are some of the most important points to take away from this case as it relates to making a claim against an A312 Bond:

• Read the Bond.  In order to recover on a bond certain conditions must be met.  In this case, an A312-1984 Performance Bond, the surety’s obligations is triggered only after (1) the Owner has notified the Contractor and the Surety that the Owner is considering declaring a Contractor in default and request and attempt to arrange a conference with the Contractor and Surety no later than 15 days after receipt of the notice from the Owner; (2) the Owner declares the Contractor in default and formally terminates the Contractor’s right to complete the contract.  The Owner must not declare the Contractor in default earlier than 21 days after the Contractor and Surety have received the first notice; and (3) the Owner has agreed to pay the balance of the contract price to the Surety.
• In Indiana, there is a Rebuttal Presumption of Prejudice.  Many times, if a claimant fails to meet the technical requirements of making a claim against the bond, such as late notice, the Court will look to see whether or not the surety was actually prejudiced by the technical failure.  If the surety was not prejudiced, then the surety may still be liable under the bond.  The Court in Paden Engineering affirmed Indiana’s position that if a surety asserts a defense of untimely notice there is a rebuttable presumption of prejudice in favor of the surety.  The surety need not show actual prejudice.  It is then the claimant’s responsibility to rebut this presumption of prejudice.
• A Contract of Surety is Not an Insurance Contract.  The Court emphasized the unique nature of a surety contract.  Insurance indemnifies another against loss, damage, or liability resulting from an uncertain event.  A surety answers for the debt or default of another.  Therefore, the Court held that a surety’s liability must be measured by the strict terms of the contract.  (Insurance contracts are typically read in favor of the insured.)  The Court summarized its position by stating “the Sureties are liable for no more than the contract provisions would dictate.”

Sureties have the unenviable job of taking responsibility where others have failed.  Rightfully, before a surety is required to undertake responsibility it may dictate its rights and the terms for its takeover for payment or performance.  I’ve said it once, and I’ll say it again and again, always read the Bond.  There are steps that must be taken by a claimant before a surety is required to perform under the terms of the bond.

It's A Beautiful Day In This LEED Neighborhood

Mister Rogers’ Neighborhood is my 2 year old’s favorite show.  Since she could talk, she has looked up at me and asked for, “Rogers?”  If you have children, you know, what a 2 year old wants, a 2 year old generally gets.  So, I watch Mister Rogers, every day, twice a day.  After literally watching hundreds of episodes (most of them at least twenty times) I’ve relearned old songs (“Shoo Turkey Shoo”) and found out that Mister Rogers is just as relevant now as he was when I little.  In fact, he was ahead of his time.  (In one favorite episode, Mister Rogers test drives an electric car, complete with 15 car batteries linked together to run the car.)  After spending many hours in Mister Rogers’ neighborhood, I wondered whether Mister Rogers’ neighborhood is the type of neighborhood that the LEED Neighborhood Development Certification strives for, an integrated neighborhood of smart locations, neighborhood design, and green infrastructure and building.

A seldom discussed LEED certification area is the LEED-ND Certification.  By integrating LEED Neighborhood Development polices, profit and non-profit developers, builders, city and neighborhood planners can build a more sustainable, attractive and vibrant community.  Here is a brief overview of what the USGBC looks for and the general process for certifying a neighborhood project.  Visit the USGBC site (here) for more information regarding getting your project plan certified LEED-ND. 

Projects that qualify for LEED for Neighborhood Developments can range from small infill projects to large master planned communities.  Existing communities may also be retrofitted using LEED standards and policies. 

The following credit categories are included in the rating system:

Smart Location and Linkage assesses location, transportation alternatives, and preservation of sensitive lands and discouraging sprawl.

Neighborhood Pattern and Design assesses overall design for vibrant neighborhoods that are healthy, walkable, and mixed-use.

Green Infrastructure and Buildings assesses the design and construction of buildings and infrastructure that reduce energy and water use, use of sustainable materials, and renovating existing and historic structures.

Innovation and Design Process recognizes exemplary and innovative performance reaching beyond the existing credits in the rating system, as well as the value of including an accredited professional on the design team.

Regional Priority encourages projects to focus on earning credits of significance to the project’s local environment.

There are three stages of certification, which relate to the phases of the real estate development process.

Stage 1 – Conditionally Approved Plan: provides the conditional approval of a LEED-ND Plan available for projects before they have completed the entitlements, or public review, process.

Stage 2 – Pre-Certified Plan: pre-certifies a LEED-ND Plan and is applicable for fully entitled projects or projects under construction.

Stage 3 – Certified Neighborhood Development: completed projects formally apply for LEED certification to recognize that the project has achieved all of the prerequisites and credits attempted.    

The rating system can be downloaded for review by interested parties.  If you are developing a project its worth taking the time to review the rating system for possible incentives or as an evaluation tool.

Mister Rogers believed strongly in living a deep and simple life.  He invested in our future and community. He taught us all to make the same investment.  His legacy will always live on through his good work on television.  In fact, the Fred M. Rogers Center building officially opened on the Saint Vincent College Campus in October 2008.  It’s only fitting that the facility was awarded the LEED gold rating. 

We live in a world in which we need to share responsibility. It’s easy to say ‘It’s not my child, not my community, not my world, not my problem.’ Then there are those who see the need and respond. I consider those people my heroes.  -Fred Rogers

Oh Those Pesky Deadlines: Indiana Payment Bond Claims

Happy 2011!!  Now that the ball has dropped, the champagne is drunk, and the glitter is gone, it is time to commit to your New Year’s resolutions.  One of my ongoing resolutions is stay on top of all deadlines.  So, with my outlook calendar in hand and reminders popping up faster than popcorn, I wanted to remind all of our Indiana contractors of the deadlines for submitting payment bond claims and the suit limitations period for filing suit against sureties on various Indiana public projects.  Again, it’s always a good idea to consult with an attorney to make sure that you have complied with all notice and suit requirements as well as any deadlines.

Indiana does not require payment bonds to be posted on private projects.  If a bond is posted the deadlines for filing a claim and filing suit will be outlined in the bond. It is also essential that regardless of the statutory deadlines, you should always read the bond.  If the bond enlarges these time periods, the deadlines in the bond will control.

There are four different types of public projects in Indiana.  It’s important to know which type of project you are working on so that you are aware of your statutory rights and obligations. The four types of projects are:

Title 4 State Projects – Indiana Code §4-13.6-1-1 et seq.

Title 4 projects are Indiana state public works projects solicited by the Indiana Department of Administration, the Public Works Division.  Unless the bond provides for a greater period of time, a claimant must file a claim with the Public Works Division and the surety within 60 days from the last date labor was performed, material furnished or service rendered.  If you have submitted your notice of claim and have not yet been paid, you must wait at least 30 days before filing suit against the surety to recover under the Bond.  However, any suit must be brought against the surety within 1 year after final settlement of the contract with the contractor.

Title 5 State Projects – Indiana Code §5-16-1-1 et seq.

Any Indiana state public works project not covered under Title 4 or Title 8 are Title 5 projects.  In order to make a claim against the bond on a Title 5 project, the claimant must file a verified claim with the state agency that commissioned the project within 60 days after completing labor or furnishing materials.  The state agency will furnish a copy of the claim to the surety.  The claimant must then wait at least 30 days.  If payment has not been received a suit may be filed against the surety.  Any suit against the surety must be brought within 60 days from the date of the final completion and acceptance of the project.

Title 8 Indiana Department of Transportation Projects – Indiana Code §8-23-9-1 et. seq.

Title 8 covers any project for the Indiana Department of Transportation.  In order to make a claim on a bond posted for a Title 8 project, a claimant must within 1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due.  The claimant must wait at least 60 days after furnishing the statement to file suit against the surety.  The claimant must bring any action within 18 months from the date of final acceptance of the project by the Commissioner.

Title 36 Local Government Projects – Indiana Code §36-1-12-1 et. seq.

Title 36 projects are projects for local governments, political subdivisions or their agencies.  A claimant must within 60 days of last performing labor or furnishing material file with the local government board a signed statement of the amount due.  The board will forward the statement to the surety.  The claimant must then wait 30 days.  If payment has not been received, a suit may be filed against the surety.  Any suit against the surety must be brought within 60 days after the date of the final completion and acceptance of the project.

Dizzy yet?  It can be difficult to keep track of things.  So here is a quick reference guide.  Legal Construction Zone wishes you Happy and Profitable New Year!

Project Type	Notice of Bond Claim Deadline	Grace period before filing suit	Suit Against the Surety Deadline
Title 4	60 days from the last date of labor performed, material furnished or services rendered	30 days after filing notice to file suit against the surety	1 year from final settlement with the contractor
Title 5	60 days after completion of labor or service or within 60 days after last item of material was furnished	30 days after filing notice to file suit against the surety	60 days from the date of final completion and acceptance of the project
Title 8	1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due	60 days after furnishing the statement to file suit against the surety	18 months from the date of final acceptance of the project by the Commissioner
Title 36	60 days from the date of last performing labor or furnishing materials	30 days after filing the notice of claim	60 days after the date of final completion and acceptance of the project

Contractors and Bankruptcy: Getting the Piper Paid

This post, which provides an overview of basic strategies for contractors, subcontractors and suppliers who are faced with non-payment from a bankrupt entity on a project, can be found on Construction Law Musings, Christopher Hill’s excellent construction law blog (our second guest posting honor) (click HERE).  I hope you won’t have a construction project affected by a bankruptcy any time soon, especially as we emerge from the recession.  But just in case you do, check out my post and be prepared for getting paid for work you performed or materials you supplied.

Remake of a Classic – Changes to the A312 Bond Form (Part 2)

In Part 2 of our series regarding the changes to the A312 Bond forms we examine the new A312-2010 Performance Bond.* 

The most significant change in the Performance Bond form involves the process for an Owner to declare a Contractor in default and to make a claim under the Performance Bond.  Under the old Bond form a Surety was not obligated to perform until the Owner notified the Contractor and its Surety of its intention to declare the Contractor in default and attempted to arrange a meeting with both parties.  This meeting had to be held within 15 days after receipt of the claim notice.  The Owner could not then declare a contractor in default or terminate the contractor until 20 days after the Contractor and Surety received notice of the default as described above. 

Section 3 of the 2010 Performance Bond form no longer requires the Owner to jump through these hoops in order to declare the Contractor in default and assert a claim under the Bond. 

Instead, under revised Paragraph 3.1, the Owner may request a meeting in its notice to the Surety, but isn’t required to do so.  If the Owner does not make this request, the Surety may within 5 business days after receipt of the notice request the conference.  If the Surety requests the conference, then the Owner must attend within 10 business days of the Surety’s receipt of the notice.  

Additionally, the A312-2010 Performance Bond no longer requires a waiting period before the Owner can declare the Contractor in default or terminate the Contractor. 

The most important aspect to the new claims process under the A312-2010 Performance Bond is new Section 4.  This section states:

Failure on the part of the Owner to comply with the notice requirement in Section 3.1 shall not constitute a failure to comply with a condition precedent to the Surety’s obligations, or release the Surety from its obligations, except to the extent the Surety demonstrates actual prejudice. 

Failure by an Owner to comply with the notice requirement is not a free pass, even under the new Bond form.  Most jurisdictions already have case law protecting a Surety where an Owner fails to give proper notice.  For example, in Dragon Construction Company v. Parkway Bank & Trust, 678 N.E.2d 55 (Ill. App. 3d 1997), where an Owner terminated a contractor and replaced the contractor without giving notice the Surety the Illinois Appeals Court held:

since the (owner) replaced (contractor) with (replacement contractor) before informing (surety) that (contractor) was to be terminated and without consulting (surety) as to the successor, (surety) was stripped of its contractual right to minimize its liability under the performance bond by ensuring that the lowest responsible bidder was selected to complete the job. (surety) would be entitled to select, or at the very least participate in selecting, the lowest bidding contractor to complete the project in order to mitigate its damages under the performance bond.  Surely, (surety) would not have issued the surety bonds if it did not have the authority to protect itself through the selection of the successor contractor.

Generally under this line of cases, a Surety does not have to show prejudice before being discharged under the Bond. Performance Bond A312-2010, however, requires a Surety to show that it has been prejudiced by the Owner’s actions if proper notice was not given to the Surety under Paragraph 3.1.  What constitutes actual prejudice is unclear.  A Surety may be prejudiced if it was not given an opportunity to participate and mitigate its damages.  This standard could then be read in conjunction with current case law.  As the Dragon court states a Surety is entitled to mitigate its damages and it would not have issued the surety bonds if it did not have the authority to protect itself.  Or it may be that a Surety must show quantifiable damages in order to demonstrate prejudice.  Overall, it remains to be seen how the Courts will interpret this section, given existing case law, if the Bond, like its counterpart, is widely adopted. 

* Because I can’t end our flashback to 1984 without a bit of reminiscing, the #1 movie was Beverly Hills Cop, the most popular fiction was The Talisman, the most popular non-fiction was Iacocca: An Autobiography,  and the most popular television show…..Dynasty (should have been the Cosby Show!).