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Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 111021 (D.S.C. July 18, 2017); Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 135948 (D. Kan. Aug. 24, 2017) Two recent decisions from United States District Courts for the District of South Carolina and the District of Kansas, respectively, reached opposite conclusions when presented with the same issue: Is a surety bound to arbitrate claims against it when the surety’s bond incorporates its principal’s contract by reference, and the principal’s contract contains an agreement to arbitrate disputes. The District of South Carolina, applying South Carolina law, held that a surety is bound by the arbitration agreement in the incorporated contract, while the District of Kansas held that a surety is not so bound. These cases both arise from an arbitration demand filed by the general contractor, Carothers Construction, Inc. (“Carothers”) against the surety, Developers Surety and Indemnity Company (“DSI”). DSI issued performance and payment bonds on behalf of subcontractors Liberty Enterprises Specialty Contractor (“Liberty”) and Seven Hills Construction, LLC (“Seven Hills”) in favor of Carothers for their work on Projects located in South Carolina and Kansas, respectively. Each subcontractor defaulted on its contractual obligations. Carothers initiated arbitration against DSI regarding both Projects. According to Carothers, the bonds incorporated by reference the subcontracts’ mandatory arbitration clauses and thus, DSI was subject to binding arbitration. In declaratory judgment actions before Federal District Courts in South Carolina and Kansas, DSI asked the courts to declare that the arbitration clause did not bind it to arbitrate Carothers’ claims. Each court reached the directly opposite conclusion. This article discusses the decision reached by each court in turn. In this action, DSI sought a declaration from the District Court in South Carolina that the arbitration clause in the subcontract between Carothers and Liberty did not bind it to arbitrate Carothers’ claim. DSI argued that the arbitration clause had no application to the claim between it and Carothers because, by its own terms, the clause applied only to claims “between the Contractor and the Subcontractor,” and DSI, as surety, was neither. It similarly argued that Carothers’ claims fell beyond the scope of the arbitration clause, as the claims arose out of the bond, whereas the arbitration clause expressly applied only to claims arising from or relating to the Carothers – Liberty subcontract. Applying South Carolina law, the court held that the subcontract’s arbitration clause bound DSI to arbitrate. The court found that South Carolina cases had previously concluded that a subcontract may incorporate an arbitration agreement in the prime contract by reference, and that the same result should obtain in the case of a bond. The court further found that DSI had guaranteed the performance of all of Liberty’s obligations under the subcontract and had incorporated all of the subcontract’s terms, including the agreement to arbitrate disputes. Reasoning that a bond is to be construed together with the agreement it incorporates in order to ascertain the parties’ intent, and that a surety obligates itself under a bond to the same liability as its principal, the court concluded that the parties intended to submit disputes against DSI under the bond to arbitration. The District Court in Kansas reached the exact opposite result, finding that DSI did not consent to arbitration of Carothers’ claims on the bonds. The court accepted the argument unsuccessfully advanced by DSI in the District Court in South Carolina – that the arbitration agreement expressly applied only to disputes between contractor and subcontractor, and DSI, as surety, was neither. In so finding, the court cited other provisions within the subcontract that supported its interpretation that the subcontract did not intend for “surety” and “subcontractor” to mean the same thing. Thus, the court held that the arbitration clause’s reference to disputes with subcontractor must not have been intended to include disputes with the surety. The court also reasoned that, although the bonds incorporated the subcontract (and its mandatory arbitration provision) by reference, DSI did not agree in the bonds to assume “any or all obligations” of subcontractor. Rather, it only agreed to undertake “certain” obligations in the event of subcontractor’s default. The court said that it “respectfully disagreed” with the decision reached by the District Court in South Carolina, noting that that court had relied on the general principle of South Carolina law that “the liability of a surety is measured precisely by the liability of the principal.” The court noted that Kansas courts have not adopted such a rule. The court further found that even though a surety’s liability may be coextensive with that of the principle as a general rule, DSI’s liability in this case was defined by the terms of the bonds. Reading the plain language of the arbitration provision, other language in the subcontract, and the language in the bonds, the District Court in Kansas elected to disagree with the District Court in South Carolina’s conclusion that the parties clearly intended to submit disputes to binding arbitration. https://www.lexology.com/library/detail.aspx?g=27162bc5-be73-4329-9e4f-c2669812846f

With the summer months behind us, the fall season in the construction industry will include the next steps in passing Bill 142, also known as the Act to Amend the Construction Lien Act. If implemented, Bill 142 will represent the most significant legislative reform seen in the Ontario construction industry since 1983, when the existing Construction Lien Act came into force. The first reading of Bill 142 was carried on May 31, 2017 and it is widely anticipated that the second reading will occur early in the fall. Although consultation on the language of the draft continues, it is almost a certainty that Bill 142 will pass well before the provincial election in the spring of 2018. While the themes giving rise to this legislation have been under discussion for many years, the industry should be prepared for dramatic change with respect to both contract administration and dispute resolution. The hot button terms representing this reform are without a doubt “prompt payment” and “adjudication”. Together with a slew of changes intended to modernize construction liens, and a new requirement for bonding on most public projects, these key concepts are going to impact virtually every player in the construction industry and every type of project – from the largest P3 infrastructure project to the renovation of your kitchen. Indeed, one of the commonly cited challenges with Ontario’s construction legislation has always been that projects sitting at opposite ends of the spectrum with respect to size and contract price are nonetheless governed by the same law. There are many ways that the objectives of this construction law reform can be captured. The following three are salient: creating a statutory mechanism to enforce timely payment for work performed; reducing the prevalence, cost, complexity and duration of construction dispute resolution proceedings; and simplifying the construction lien process. Bill 142 has been modelled, in part, after other jurisdictions. However, the purpose of this article is to focus more on a forward-looking summary of what Bill 142 will mean for the industry, and less on the process that led to it. The scope of the overall changes can be seen even in the title of the legislation. Rather than the Construction Lien Act, Ontario will soon have the Construction Act. Prompt payment A lengthy debate within the construction industry over the need for prompt payment was the primary driver behind the provincial government commissioning a full review of the Construction Lien Act. It is therefore not a surprise that prompt payment features prominently in Bill 142. One of the principal criticisms of past efforts at prompt payment (many readers will recall Bill 69) was that with payment terms imposed by legislation, parties would not have the freedom to customize their contracts for the unique nature of each project. For example, while some contracts contemplate monthly billing and payment, it is quite common on larger projects for payments to be tied to the achievement of specific milestones. The prompt payment structure contemplated by Bill 142 seeks to achieve that balance. The deadline for making a payment will be triggered by the submission of a “proper invoice”. The Bill sets out the minimum information that a proper invoice must include and then allows for “any other requirements that the contract specifies” and any other information that may be prescribed by regulation. In addition to basic information such as the contractor’s contact information and where to send payment, a proper invoice must include the authority (usually the contract) on which the work was supplied, a full description of the work, the amount owing and the payment terms. Importantly, Bill 142 provides that proper invoices shall be submitted monthly unless the contract provides otherwise. Accordingly, it will be more critical than ever for parties to figure out the timing and basis for invoices (including milestone payments) at the time they draft their contract. The decision will otherwise be made for them by the legislation. It is also essential to understand that the statute will prohibit any contract clause that makes the giving of a proper invoice contingent upon payment certification or the prior approval of the invoice by an owner. In other words, if the statutory and contractual requirements for the contents of a proper invoice are met, the deadline for paying it will start to run. This concept may be disappointing to some in the industry who would have preferred to see payment deadlines tied to certification. However, the counterargument to that reaction will be the freedom to negotiate the invoice delivery process at the front end of the job. The key concept in the prompt payment section of Bill 142 is the imposition of statutory payment deadlines. The deadline for payment by an owner to a contractor will be 28 days from the delivery of the proper invoice, unless the owner delivers a prescribed form of notice of non-payment within 14 days of the proper invoice being received. Notably, such a notice must particularize the amount and basis for non-payment and can be tested, at the discretion of the contractor, in the binding adjudication process that is described below. Read The Entire Article:http://www.jdsupra.com/legalnews/dramatic-change-ahead-for-the-ontario-38417/

On Monday, the U.S. District Court for the District of Columbia ruled that bonding companies can be held liable for treble damages under the False Claims Act for issuing surety bonds to construction companies that falsely claim to be a Service-Disabled Veteran-Owned Small Business (SDVOSB). In a novel reverse False Claims Act case, whistleblower Andrew Scollick alleged that the bonding companies “knew or should have known” the construction companies were shell companies acting as a front for larger non-veteran owned entities violating the government’s contracting requirements. A reverse false claim action can occur when defendants knowingly make a false statement in order to avoid having to pay the government when payment is otherwise due in violation of 31 U.S.C. § 3729(a)(1)(G) (reverse false claims). See United States ex. rel. Scollick v. Narula, Case No: 14-cv-01339-RCL (District Court, District of Columbia. July 31, 2017). Under the Miller Act, government construction contractors must post bid bonds, performance bonds, and payment bonds that guarantee that the contractor will perform the work according to the terms of the contract. In this case, the contract terms required that the construction be performed by a SDVOSB entity. Michael Kohn, of Kohn, Kohn & Colapinto, who represents the whistleblower, argued that given their role in providing a surety bond to the contractor the bonding companies would know whether the invoicing being billed against the contract is being performed by a SDVOSB. The district court agreed and found that a “reverse false claims” violation occurred because the bonding company knew or should have known that the construction organization was not a SDVOSB and the act of issuing surety bonds furthered the fraud. As a result, the bonding companies were held legally obligated to return to the government funds the bonding company knew to be paid to contractor firms fraudulently posing as SDVOSBs. Being held liable under the False Claims Act means that treble damages will be awarded for every dollar up to the amount of the bond that the government paid out under each contract Because of the substantial dollar amounts involved, it is not all that uncommon for contractors to falsify service-disabled veteran status. Holding bonding companies liable when they have reason to know of the fraud could have an immense impact on stamping out such contract fraud. “Holding bonding companies liable for treble damages in these types of case will have a huge impact on preventing fraud in government contracts and will help ensure these contracts go to disabled veteran-owned companies as intended,” said Kohn. The Scollick case alleges that two of the largest surety bonding companies, Hanover Insurance Company and Hudson Insurance Company, knowingly bonded dozens of Veteran Administration construction contracts totaling more than $12.5 million with the knowledge that the bonded contractors did not qualify as service-disabled, veteran-owned small businesses. https://www.webwire.com/ViewPressRel.asp?aId=211708

Mechanic’s liens provide security for nonpayment to subcontractors and suppliers on private projects. Because mechanic’s liens are not valid against property that is owned by the state or a municipality, the Little Miller Act (C.G.S §49-41 et seq.) was implemented to provide subcontractors and suppliers working on public works projects with a similar level of security. Pursuant to the Little Miller Act, any contractor entering into a construction contract exceeding $100,000 for a public works project must provide the public owner with a payment bond “with a surety or sureties satisfactory to the officer awarding the contract.” If the public owner fails to receive such a bond, the statute provides that the public owner may be liable to unpaid subcontractors in accordance with C.G.S §49-42. In a series of recent lower court decisions that involved multiple subcontractor claims in connection with the same project, the Connecticut Superior Court considered the level of investigation a public owner must perform on the surety company in order to find the surety to be “satisfactory” under the Little Miller Act. The court considered whether the public owner’s contracting officer fulfilled his obligation under the Act by merely confirming that a signed bond form was provided by the contractor. The contracting officer was unaware that the surety that issued the bond was not authorized/licensed to do insurance business in the State of Connecticut and that there were irregularities on the face of the bond and its attached power of attorney. The courts concluded that finding a surety “satisfactory” requires more than a simple review of the bond as to form. The court determined that compliance with the Act by a public owner requires a focus on the surety issuing the bond and a consideration of substantive issues including: whether the surety company actually exists; whether the surety company is authorized or prohibited to do business in Connecticut; and whether the public owner has actual knowledge of facts that might or should preclude characterizing the surety as satisfactory. To comply with the Little Miller Act (and protect itself from liability), a public owner should perform a substantive review of the bond instrument and the bonding company to determine that the surety meets the conditions identified by the court. We recommend that this review include, at a minimum, a search of the records of the Connecticut Secretary of the State under the name of the surety and an inquiry of the Connecticut Insurance Commissioner to determine whether the company legally exists and is authorized/licensed to issue surety bonds in the state of Connecticut. http://www.jdsupra.com/legalnews/court-finds-public-owners-responsible-14759