May/June 2002 Newsletters

 

Katz & Stone, L.L.P. Construction Newsletter
May/June 2002

 

VIRGINIA SUPREME COURT GRANTS LIEN CLAIMANTS
A WELCOME REPRIEVE FROM INFALLIBILITY

The Virginia mechanic’s lien statute contains a provision, known as the “150-day” rule, which, if strictly enforced, can have dire consequences on a claimant’s lien. Under that rule, no memorandum of mechanic’s lien may include sums due for labor or materials furnished by the claimant more than 150 days prior to the last day on which labor was performed or materials furnished to the job preceding the filing of such memorandum. The Virginia Supreme Court had previously interpreted the 150-day rule as mandating that if a lien included any sum, no matter how small, for work performed more than 150-days prior to its filing, the entire lien was invalid. In Reliable Constructors, Inc. v. CFJ Properties, 559 S.E.2d 681 (Va. 2002), however, the Virginia Supreme Court declined to strictly enforce the 150-day rule when the claimant was able to show that it inadvertently included a prohibited sum.

The Reliable case arose out of a construction project where Reliable Constructors, Inc. (“subcontractor”) provided labor and materials for plumbing and mechanical work associated with construction of a travel plaza in Ruther Glen, Virginia. After a payment dispute developed, the subcontractor filed a memorandum of mechanic’s lien in the sum of $330,846.02 against the travel plaza. The subcontractor included within its memorandum an item identified as "VOSH Department - Fine to RCI Handwash $250.00," which represented reimbursement for a fine levied by Virginia’s Occupational Safety and Health Enforcement Division (VOSH) on the subcontractor for not providing “hand wash" facilities for its employees. The fine, though, was levied 212 days prior to the last day on which the subcontractor supplied labor to the job. Thus, when the subcontractor sued to enforce the lien, the project’s owner and general contractor, as defendants, moved to dismiss the suit on the basis of the 150-day rule. The Circuit Court of Caroline County strictly enforced the rule and dismissed the subcontractor’s lien suit.

On appeal, the subcontractor asserted that the Circuit Court erred because it ruled without hearing evidence on the nature, timing, and details of the VOSH fine. The subcontractor cited a provision of the mechanic’s lien statute, which provides that "[n]o inaccuracy in the memorandum filed . . . shall invalidate the lien, if the . . . memorandum conforms substantially to the requirements of [the lien statute], and is not wilfully false." The subcontractor contended that its inclusion of the 212-day old fine was an “inaccuracy” under this provision that was not willfully false and, therefore, was not grounds for invalidating the lien.

The Virginia Supreme Court agreed with the subcontractor, holding that the subcontractor was entitled to present evidence: (i) that its inclusion of the fine constituted an inaccuracy and (ii) that the inaccuracy was not willfully false. Without having heard such evidence, the Circuit Court erred in dismissing the lien.

Reliable Constructors represents a welcome shift away from a previously strict and unforgiving interpretation of the 150-day rule against lien claimants. Contrary to prior Virginia decisions indicating that the inclusion of any sum beyond the 150-day mark was fatal to a lien, according to Reliable Constructors claimants now have the ability to save their liens by introducing evidence that any violation of the 150-day rule was an inaccuracy and not willfully false. If the claimant can demonstrate an inaccuracy was inadvertent, the lien could be amended to rectify the error, rather than invalidated in its entirety.

 

SUBCONTRACTOR’S CLAIM PARTIALLY DISMISSED BASED ON FAILURE TO COMPLY WITH CONTRACTUAL NOTICE REQUIREMENTS

Courts do not often give much leeway to contractors who have failed to comply with notification of claim provisions in their contracts. The case of Associated Mechanical Contractors, Inc. v. Martin K. Eby Construction Co., Inc., 271 F.3d 1309 (11th Cir. 2001), is an interesting example of how courts view a subcontractor’s failure to give timely notice of claims for delay damages.

In Associated Mechanical, a mechanical subcontractor entered into a $3,150,000 subcontract with the prime contractor on a project to build a correctional facility. The subcontract contained a notice provision that required any claim for delay damages be filed in writing with the prime contractor “within ten days from the commencement of the alleged damages.” Additionally, the subcontract required that the subcontractor file a “full accounting” within ten days “after the extent of damage is known.”

From the scheduled commencement of the subcontractor’s work in May 1990, the project was plagued with delays, none of which were the subcontractor’s responsibility. Beginning in August 1990, the subcontractor sent ten letters over a period of one year complaining of delay or advising the general contractor that it was suffering delay damages. Upon completion of its work, the subcontractor submitted a request for equitable adjustment, seeking a total time extension of 462 days. When the prime contractor denied the request, the subcontractor sued in federal district court.

Before the trial court, the prime contractor moved to dismiss the subcontractor’s suit, contending that, by waiting until August 1990 to give notice of delay damages incurred the previous May, the subcontractor had failed to give timely notice of its intent to seek delay damages as required by the provisions of the subcontract. In its defense, the subcontractor argued that it was not required to give notice earlier than August because both the subcontractor and the prime contractor hoped that the early project delays might be recouped. In essence, the subcontractor argued that its damages for delay did not “commence,” and thus the time to give notice did not begin running, until the extent of the delay could be quantified upon expiration of the scheduled time for completion. In addition, the subcontractor asserted that the prime contractor had actual knowledge of the delays, which satisfied the subcontract’s notice requirements.

The trial court rejected these arguments and dismissed the subcontractor’s delay claims in their entirety. On appeal, the appellate court affirmed the trial court’s reasoning. According to the appellate court, it was clear from the two-tier notice scheme of the subcontract (which required notice when damages commenced and when damages were quantifiable) that the subcontract required the subcontractor to give notice when it incurred damage, without waiting to see whether future mitigation efforts would be successful.

As to the subcontractor’s argument that the prime contractor had actual notice of the early delays, the court found that actual knowledge of the fact of a delay did not satisfy the intent of the subcontract’s notice provisions. According to the court, one of the functions of the subcontract’s notice provisions was to permit the prime contractor to include the subcontractor’s claims in its own notice to the owner. For this reason, the court found the subcontract to require notice that the subcontractor intends to claim damages for the delay, rather than simple notice of the fact of delay.

The court concluded, however, that not all of the subcontractor’s claims were barred as a result of its failure to provide timely notice. There were numerous discrete events causing delays throughout the project. As a result, the subcontractor generated a substantial body of correspondence to the prime contractor concerning the delays. The court ruled that the timeliness of delay claims based on discrete events “must be evaluated separately.” Consequently, the appellate court remanded the case to the trial court to review the correspondence and determine whether the subcontractor had satisfied the notice requirements as to each individual cause of delay.

Associated Mechanical demonstrates the importance of contractors giving prompt notice of their intent to pursue a claim for damages in strict compliance with the requirements of their contracts. This notice should specify the cause of the delay and the contractor’s intent to file a claim for the delay. In this regard, contractors are well advised to review all contractual notice provisions before commencement of the project, develop a concise checklist of notice provisions specific to the particular contract and review it with all essential personnel on the project. The time to provide such notice is usually short and failing to strictly abide by the requirements may likely foreclose any right to ultimately recover on a claim.

 

 

FEDERAL COURT FINDS BID PACKAGE NON-RESPONSIVE
DUE TO OMISSION OF A BID BOND’S PENAL SUM

It is well-established that a contractor bidding on a federal government construction project must submit a bid that complies in all material respects with the requirements of the invitation for bids. As demonstrated in Interstate Rock Products, Inc. v. United States, 50 Fed. Cl. 349 (2001), a bid that fails to conform to all material requirements may not be corrected after opening even when the contractor can show that the nonconformity was the result of an inadvertent clerical error.

In Interstate Rock, a contractor submitted a bid in response to a federal government solicitation for the grading, drainage, and asphaltic surfacing of a national park roadway. The solicitation required that the bid be accompanied by a bid guarantee in the amount of 20% of the bid price. Prior to bid submission, the contractor obtained a bid bond specifying the proper penal sum. Due to partial illegibility of the bond, however, the contractor asked the surety to replace the bond with a fully-legible version. The surety thereafter provided a bond, which was identical to the first bond in all but one respect. Inadvertently, the penal sum in the new version was left blank. Without catching the omission, the contractor submitted the new version of the bond with its bid.

At bid opening, the contractor was revealed to be the apparent low bidder. A number of days afterwards, however, the government realized the contractor’s omission of the penal sum on its bid bond and informed the contractor that its bid was non-responsive. The contractor offered to provide a copy of the original bond which, while partly illegible, contained no omissions, to prove that the bond, and the surety’s obligation thereunder, were in force prior to the bid and that the omission was a mere clerical error that should not render the entire bid non-responsive. The government refused the contractor’s offer, holding that it must determine the acceptability of a bid bond as received at the time of bid opening and that bond defects cannot be cured by supplemental statements or documents. As a consequence, the government refused to award the project to the contractor. The contractor thereafter brought a bid protest against the government before the Court of Federal Claims.

The court upheld the government’s decision on several grounds. First, the court agreed with the government that the responsiveness of a bid must be determined on the basis of the bid documents as they appear at the time of opening. As such, the court concluded that the government was not permitted to consider the contractor’s explanation concerning the defect in its bid bond, and the contractor was not entitled to amend its bid with further documentation, notwithstanding evidence that it had previously executed a proper bid bond and that the omission of the penal sum was clerical error.

Second, the court found that a bid bond lacking a penal sum is a material defect in a bid package because the omission of the sum provides the surety and the contractor with a potential defense were the government to enforce the bond. The court gave great weight to the concern that, where no penal sum is stated, no overt obligation has been undertaken in a sum certain and, in the event of a default, either the contractor or the surety could resist enforcement of the bond. If such an argument were successful, the bond’s very purpose of securing performance of the contractor’s obligations would be defeated. Given the government’s clear interest in avoiding ambiguous contract terms and avoiding the risk of a bid bond’s unenforceability, the court concluded that a bid bond lacking a penal sum, like that submitted by the contractor in Interstate Rock, is materially defective.

Due to decisions like Interstate Rock, contractors bidding on public projects should always carefully examine their bids to eliminate any defects that could be seen as material. Even a simple clerical error may be deemed material if the error would make the terms of the bid, or the rights of the parties to the resulting contract, ambiguous. Contractors should also be aware that the courts will not allow a material bid error to be corrected or explained after bid opening. For the purpose of determining bid responsiveness, contractors will be held to the terms and documents of their bid packages as submitted.

 

 


SUBCONTRACTOR ALLOWED TO WITHDRAW BID,
WITH NO PENALTY, AFTER GENERAL PRESENTS SUBCONTRACT WITH UNREASONABLE TERMS

Most subcontractors expect that, if their bid on a project is accepted, the general contractor will present a subcontract for their execution. For this reason, and in order to protect themselves against unreasonable terms in the general contractor’s proposed subcontract, sophisticated subcontractors often include language in their bids providing that they are “subject to” or “conditioned upon” the “negotiation of a mutually agreeable subcontract.” What happens, however, when the subcontractor has not included such language in its bid and the subcontract presented by the general contractor contains unreasonable terms not included in the bidding specifications at the time of bid preparation? The Court of Appeals of Ohio addressed this very question in a recent case called Lichtenberg Construction & Development, Inc. v. Wilson, 2001 Ohio App. Lexis 4372 (2001).

In Lichtenberg Construction, a general contractor relied on a masonry subcontractor’s bid when submitting its own bid on a construction project. After the general contractor was awarded the contract, it presented a subcontract to the subcontractor, as the low masonry bidder. The subcontractor, though, refused to sign the proposed subcontract because it contained objectionable terms, including a "time is of the essence" clause that required the subcontractor to complete its work under a strict time schedule allowing for project completion in less than four months. After the subcontractor rejected the subcontract, the general contractor hired another subcontractor and sued the first subcontractor for the additional amount it cost to have the masonry work done.

The trial court upheld the subcontractor’s right to reject the subcontract. On appeal, the Ohio Court of Appeals agreed that the subcontractor rightfully rejected the subcontract. Although noting that a subcontractor is normally bound to its bid when the general contractor relies on the bid and notifies the subcontractor within a reasonable time that its bid was accepted, the court ruled that a subcontractor will not be obligated to honor its bid when the general contractor proposes a subcontract with terms that the subcontractor should not reasonably have expected at the time of bid submission. The appellate court went on to cite two reasons why the "time is of the essence” clause, in particular, was unreasonable. First, the general contractor had not included the strict scheduling term at issue in the bid specifications it had issued to the subcontractor. The appellate court noted that if the time schedule for performance of the work had been included in the bidding specifications, the subcontractor “would have been obligated to honor its bid.”

Second, the court found that the general contractor did not observe local industry practice in negotiating a strict time schedule with the subcontractor. The appellate court found that, under industry practice in the project area, general contractors and subcontractors negotiated in good faith schedules for subcontract work after a general contract was awarded. If the general contractor intends to hold the subcontractor to a strict time schedule, it would send a letter of intent requesting that the subcontractor reserve a specific period of time to perform the work. Because the general contractor refused to negotiate the time is of the essence clause at issue and did not timely send a letter of intent, the subcontractor could withdraw its bid without penalty.

The Lichtenberg decision represents a victory for subcontractors seeking to resist a general contractor’s attempt to force down unreasonable subcontract terms after bid opening. The decision illustrates that contractors should not be allowed to impose unreasonable subcontract terms on a successful bidder that were neither included in the bid specifications nor negotiated in accordance with local practice. Subcontractors should be cognizant of their rights in this regard, and if a general contractor insists on a provision that could not have been reasonably anticipated during bid preparation, consult appropriate legal counsel regarding whether they might successfully withdraw their bids.