Dispute Resolution Tips for Nonpayment with Adam Richards

Sometimes it feels like payment disputes are par for the course in the construction industry. Join this free webinar to hear advice from construction attorney Adam Richards on how to solve payment problems.

What we’ll cover:

• Contingent Payment Clauses and when are they enforceable?
• Liquidating agreements in dispute resolution
• Private or Public Prompt Payment Laws

Transcript

Seth Bloom: (21:11)

Thank you everyone for joining us today. I’m Seth bloom. I’m senior director of attorney services at level set here in new Orleans. We’re excited to produce another great webinar today with a construction lawyer down in Florida. And that’s Adam, Adam Richards. He’s out of Berger Singerman. He’s a partner down there and they have offices all over the state of Florida. And today he’s going to talk about dispute resolution tips for nonpayment. So if you have any questions during the show, just go ahead and ask or you can type them in, or you can always post them on our, a attorney network question and answers. So Adam, thanks. So thank you so much for doing this today. Uh, we look forward to the presentation. Thank you so much, Seth, and, uh, a special thanks to level set as well. Um, for putting this webinar together and hosting a host of other, um, webinars on various construction related issues, payment issues, um, you know, having these informative sessions where we can also have, uh, you know, interactions, questions and answers.

Adam Richards: (22:22)

Um, you know, I cannot emphasize enough how important that is for the industry. Um, what I’ve really tried to do personally, um, you know, with respect to my practice and my clients, um, is, you know, I I’m fortunate enough to not only deal with construction in the transactional realm, you know, the owner, contractor agreements or sub agreements, um, you know, public private projects, uh, all different sizes at this point, but I also litigate the disputes. Um, you know, if it is in fact in court, um, even if it’s an arbitration before the AAA, for example, um, I’ve litigated these disputes, um, regarding nonpayment, um, from beginning to end on behalf of owners, contractors, subcontractors, designed professionals, and through every single one of those cases and experiences you learn what pitfalls, um, occurred during the project, what issues in the contract, for example, um, were present throughout the litigation, uh, and the dispute, what language was problematic, what language should have been there that wasn’t, um, or if an owner is interpreting a clause to mean something while the construction side interprets it to mean another, um, I believe it is so important as lawyers to give back to the community.

Adam Richards: (23:58)

And once we learn, uh, you know, the, the good, the bad and the ugly, uh, through litigating any particular payment dispute, um, I believe that it is, yeah, it’s only proper to pay it forward and to share with my clients and the industry at large, what things we keep seeing case after case after case, um, that, um, are not being fixed by the industry. The contracts are not being modified, uh, despite these repeated issues and laws that are on the books regarding, uh, contingent payment clauses, um, dispute resolution, uh, if you have a bond on a job as opposed to a, uh, a job without a bond, so that you would be enforcing lien rights, um, deal with waivers of bond rights or lien, right? It’s uh, the bottom line is it’s such a minefield out there that if you were not constantly trying to be better from the development stages, the contract stages, the project management stage age, and then of course the dispute resolution stage prior to litigation, um, you’re only asking to repeat the same problems over and over and over again.

Adam Richards: (25:15)

So that’s really what I would want focus on today. I want to give those practice tips and, uh, you know, I’ll use it some examples from recent cases as well. Um, you know, for you to deal with your nonpayment disputes, right? Just to give you you a little bit more background of who I am and how I managed to, uh, partner at Berger Singerman down in Miami, um, actually started my career in the construction defect group of a large difference, thanks from, uh, also in Miami, um, and the construction defense world. Um, for those that do not know, you’re primarily dealing with claims of defects you’re dealing with, um, catastrophic injury, wrongful death claims with respect to them project site accidents, um, property damage claims. Mm. And you have your third party risk transfer subrogation type of claims. You’re not seeing them a lot of the nonpayment world.

Adam Richards: (26:18)

Um, you’re not seeing them the, the world, uh, regarding delay days, uh, bonds liens and so forth. And I recognized that very early on and I just made it my business to join firms and, and always try to learn and develop those other areas. And, uh, since the defense time, um, that’s exactly what I’ve done. Um, I’ve, I’ve represented national and international general contractors, subcontractors design professionals in nonpayment disputes. Um, whether it’s a bonded job, whether it’s, uh, enforcing a lien, um, even if you don’t have a lien and a, you didn’t do it, you have to do to be able to recover under the body doesn’t mean that you don’t have a contract action for nonpayment. So non-payment takes many shapes and forms. Um, at this point, uh, I’ve seen those types of disputes on both sides of the aisle, whether it’s representing ownership or the contractors.

Adam Richards: (27:21)

And that includes both on public and private projects. So, like I said, um, at this point I’ve seen enough to, to be able to share with you the most common pitfalls and the realities of nonpayment disputes. That, uh, number one I don’t see often talked about, and number two, I also don’t see lawyers talking about let alone construction lawyers. Um, and I just don’t think where we’re serving the community. If we’re not sharing the information that we learn. So that’s the background, uh, we’ll dive in now. And I think you’ll get a sense for the practicality that I’m trying to impart here. Um, when you’re, when you find yourself dealing with a payment dispute,

Adam Richards: (28:08)

Right? So the first thing that I want everyone on this webinar to know and understand is that contingent payment clauses, as far as I’m concerned, are a statutory slash, uh, judicial creation, um, by people that probably don’t have a lot of experience in construction. And, uh, it’s a lot of people lawyers as well that do not understand simply in purely the consequences of money’s either slowing down or completely ceasing on a project. Uh, there it is inevitable that there will be consequences to the lower tier subcontractors and suppliers. So in my humble opinion, rather than create massive statutory frameworks and rules regarding your contingent payment clauses, um, to, to figure out if, if you have a, a pay when paid clause or a pay of paid cause the bottom line is there is no reason why money should slow down or stop on a project if work is continuing.

Adam Richards: (29:24)

And the job is continuing, uh, you know, that is the pressure point. And I think the industry has been a bit conditioned, um, to work without being paid. And to think that failure to work by a failure to receive money by owner it’s just commonplace and that a general contractor blaming a failure to receive money from an owner is okay, commonplace. You have to pay a paid clause. So be it, uh, that, that, that I, I think that has set the industry back probably 30 or 40 years as far as evolving and making sure that on a project, if the work is continuing, the monies are flowing, uh, because those contracts and our laws provide an endless number of remedies, um, to deal with issues separate and apart from having to cut off funding and then just creating additional issues as a result of cutting off those funds.

Adam Richards: (30:26)

Um, it, it simply makes no sense to me now, of course, there’s exceptions, there’s things that can happen on a job that may require, um, some type of a drastic action, but those are few and far between. I promise you, um, to explain what a contingent payment causes for those that don’t have too much familiarity is it’s primarily a contractual provision that States as a lower tier subcontractor or supplier, um, when payment will be due from your general contractor. Now, the industry commonly refers to these as either pay if paid or, or pay when he clauses. But the first thing that you have to understand is that the enforcement of contingent payment clauses is totally incomplete, slightly dependent upon your state law, right? Just for an example, Florida is one of those States that they, they treat them, uh, in a hybrid fashion. And let, let me explain.

Adam Richards: (31:43)

So Florida’s policy in general is that the state does not like contingent payment clauses. Uh, the state does not want to foster, um, work being performed subcontractors and suppliers being squeezed. Um, as long as an owner is failing to pay the general contractor, right? So, uh, they don’t like giving the general contractor the ability to rely upon those contingent payment clauses set it another way. However, Florida, even though they don’t like it, they won’t go as far as to, um, strike down a contingent payment clause. Instead what Florida has done for example is it’s through a variety of cases, it’s narrowed and specified what language you mean need in your contingent payment clause in order to be able to enforce it. Right. And to give you more details to, to close the loop for everyone in Florida, for example, the language in your contingent payment clause must make it expressly clear that the lower tier sub or supplier is going to bear the risk of the owner’s nonpayment.

Adam Richards: (33:04)

And that the owner’s payment is a condition precedent to payment flowing down from the general contractor to those lower tiers. If you sign a contract that does not have that language, even if it says, um, something close to it, or, uh, even if the contractor interprets it as an enforceable pay when paid clause, uh, when, when that provision is before the courts, the court will not enforce it as a pay if paid clause instead, the courts will simply apply the reasonable time standard to that contract agreement, which means the contractor now has to make those payments simply within a reasonable time to the lower tier substance suppliers. And the reasonable time has nothing to do with the owner’s payment or lack thereof. Now, some savvy construction lawyers. What have I seen already as a result of that case law, I’ve seen contracts from a GC that will literally say if this clause is struck down eight, the parties acknowledge and agree that a reasonable time shall be the time it takes for the owner to make payment or for the general contractor to obtain payment from the owner through, um, judicial means or, or through enforcement.

Adam Richards: (34:36)

So I believe that that language will still fly in the face of the policy will probably get struck down if it’s ever challenged in front of the courts. Um, but the first hurdle for everyone to understand, and I cannot reiterate this enough is you need the right language in your contingent payment clause for enforcement. If you do not have that right language, those trigger words. So to say, you are dealing with a provision that you may not be able to enforce in a court of law. Now it may be able to convince a party of something before you get to the courts. But, uh, you know, we also want to know what we’re dealing with, uh, in the event, this does escalate and come to add, like I said, even before you get to the enforcement of your clause, the first step is to determine in your particular state, whether or not the clause can enforced, right?

Adam Richards: (35:38)

Whether it’s certain language that’s necessary, or for example, in California, it doesn’t matter. Um, what language you use or help clear you try to make, um, the condition of the owner’s payment California says we do not like contingent payment clauses. Therefore the general contractor has to make his payments to the lower tier subcontractors and suppliers. So number one, state specific, number two, if your state does allow enforcement, you need to understand what’s required for enforcement. Alright. Number three, I’m looking at the slide is the prime contract importance. And this is a step that I see general contractors and lower tier subcontractors and suppliers overlook 99 out of a hundred times. Let me give you an example from Florida. One of the most, uh, prevalent cases regarding contingent payment clauses is known as the ops versus paced case. If you read that case, my interpretation is yes, there is a means to enforce a contingent payment clause with the proper language.

Adam Richards: (36:59)

But what does pace also stand for? Pastes says that even if you have, and enforceable contingent payment clause, that clause better not, um, contradict or create an ambiguity with any other payment clauses in the contract documents, right. That right there is huge. And this is why, and I seen it on both sides of the aisle. At this point, let’s assume your state allows enforcement of your contingent payment clause. Step one, complete let’s assume your clause includes the proper language in order to, uh, be enforced by a court of law steps to check yeah. Three, are there any other clauses in your subcontract or in the prime contract documents that may lesson and or contradict, or even raising ambiguity with respect to your contingent payment clause? And I will, I’m willing to bet you that there more times than not your prime contract documents will be contrary to your subcontracts contingent payment clubs.

Adam Richards: (38:25)

Let me say that again, because it’s very important. And, and this is a complex topic as an owner, when you’re dealing with general contractor, do you think you would want your general contractor being able to not pay the substance suppliers unless as the owner you’re paying your general contractor, the answer is known as an owner. You’re going to want your contractor to still have to pay your subcontractors insipidus, the general contractors, subcontractors and suppliers, regardless of the dispute. You know, if an owner makes a partial payment or starts withholding payments because of damages, indemnity claims, um, D uh, allegations of defective work, for example, the contract may give the owner every right to do that. So funds will not be flowing down to the general contractor. And yet the general contractor, um, is either going to withhold those fronts from the subs or pay those funds as an owner. You’re going to want the GC paying those funds. And as a result, you’re going to make sure that your prime contract documents do not allow for a contingent payment clause. You’re most likely your prime contract documents, state that in exchange for a progress payment to your general contractor, your general contractor would give you releases of lean from your substance suppliers, right? Those releases of lean represent that the substance suppliers are paid in full no outstanding payments for all work completed.

Seth Bloom: (40:16)

Adam, I just wanted to interrupt for a second. We’ve got a, we’ve had a pretty quiet room out there, so just wanted to encourage everyone again, uh, to, you know, uh, Adams and expensive lawyers. So if you have any questions, go ahead and post them right now, ask them. And, uh, and we can get some answers and we’ll hold up a few minutes towards the end for that. But Adam, sorry about the interruption. Just want to see if anyone out there was being shy,

Adam Richards: (40:41)

Not a problem Seth. And, and I will, um, I’ll echo those words, you know, please, uh, I have no problem being interrupted at least during this webinar. Um, because if something comes to mind, uh, you know, I don’t want you to forget it or at least write it down so we can, we can talk about it towards the end. Um, you know, the know the bottom line, again, with respect to these contingent payment clauses is there is a very strong chance that the prime contract documents are going to contradict the subcontracts because the prime contract documents are going to acquire payments to your lower tier subcontractors and suppliers. That means even if you have an enforceable contingent payment clause as a GC, if anyone can point to the ambiguity being raised by the prime contract, um, as not allowing for a true pay of paid clause, then that ambiguity can also serve to invalidate your contingent payment clause, which again is going to require payment in a reasonable time.

Adam Richards: (41:53)

So if you’re a subcontractor or a supplier and you have any type of a payment dispute, right, nine times out of 10, you will likely think, Oh crap, I had to pay a paid clause, a crap. My general contractor told me that the owner hasn’t made the payment, but legally you have to understand that enforcement of a contingent payment clause through the courts is extremely difficult. It’s either going to be outright prohibited. It’s going to be limited, or even if it’s limited, but you can get away with it. There’s probably going to be an ambiguity in the prime contract documents.

Seth Bloom: (42:38)

Adam, we had a Nicole asked, and I know you partly answered this. Are there any differences specifically for written contracts sign versus electronic contracts, how to properly convert an estimate to a contract? Uh, what would those requirements be?

Adam Richards: (42:55)

No. Um, you know, that I would not say there’s differences between your written hard copy agreements and your electronic agreements. Um, the, the bottom line that Nicole is, uh, you need to have the proper terms and conditions regarding, uh, the schedule, your, your payments, your dispute resolution, uh, insurance indemnity, all of those big ticket items, um, whether you’re fully electronic or you’re still still dealing with hard copy agreements, that the most important aspect is making sure that the terms within those documents are protective are enforceable and are forward thinking. Um, you know, and that’s, that’s, that’s certainly going to be the most important aspect for us. Um, so as far as, you know, if you’re a general contractor and you’re saying yourself a prep, what does that mean? Does that mean this pay if paid provision? Um, I thought I could rely upon, uh, I now cannot rely upon such that, um, I will continue to have to make these payments to my lower tiers, even if the owner’s payments are, um, either slowing down or, or have completely ceased.

Adam Richards: (44:11)

And the answer is no. Um, you know, I just gave you the framework to understand what you will need as a general contractor, to be able to enforce and rely upon your contingent payment clauses. You know, one of the greatest difficulties you will have as a general contractor is trying to close the loop with the ambiguity in the prime contract documents, because essentially what we’re saying is, as a GC, you need to explain to the owner, I need your payments. If, if I’m not getting your payments, I’m not paying my substance suppliers and tests is, are an owner is not going to be okay with that, just in terms of negotiation and leverage during these, uh, during the early negotiations. Um, but if you can have that discussion, if you can broach the topic, if you can explain, um, what the reasons to stop funding, maybe, uh, possibly with more specifics or at least, um, uh, you know, to, to, to withhold funds, um, and you can cross the bridge of, of, uh, of reaching and understanding that, um, funds need to be paid.

Adam Richards: (45:25)

So that funds will be released to the lower tiers with ownership. That’s, um, that’s, that’s the golden gun right there. You know, then I, with confidence, you can say for your particular project, we have a pay if paid provision, the substance suppliers will be bound to it. Um, and the owner understands it, but we all know I’m sure every single person on this webinar knows and would agree that rarely are negotiations had during the contract stages to get into that much detail and really try to create a, you know, an environment for success, with respect to continuous funding from inception through completion. That’s, um, that’s, that’s, that’s what we, why I included the prime contract importance note on this tab, um, because I cannot overstate how important that analysis is when you’re either asking yourself, do you have an enforceable panic clause? Um, you know, both before dispute.

Adam Richards: (46:31)

And if the dispute is escalating, that brings me to the next topic, a dispute resolution. Um, um, this is really just a few practice tips and pointers that I’ve seen, um, trending because of the reality that I just explained regarding these can, can contingent payment clauses. I I’m confident that 99% of these participants do not know what a liquidating agreement is. A liquidating agreement is rarely used still even today, even amongst your national and international general contractors. Um, what it is is essentially a dispute resolution mechanism to deal with the reality of a payment problems on a project for a general contractor right now, if funds cease to a general contractor and the general contractor, therefore is unable to make payments to its subcontractors and suppliers, a very common, uh, situation, as we all know, there’s Domino’s, that will inevitably fall, right? Those subcontractors, those suppliers, probably the general contractor as well.

Adam Richards: (47:53)

If it’s a bonded job, they’re going to be seeking recovery under the bond for nonpayment. If it’s a job without a bond, um, then they will be moving to enforce their lien rights. Right now, if you have a large project, for example, um, couple of projects that, that, that I’ve been a part of the last couple of years, uh, the panoramic tower in Brickell, Miami for 300 plus million dollars, the Broward County courthouse up in Fort Lauderdale, um, hundreds of millions of dollars. If you have non-payment problems, inevitably you will have more issues with your lower tier substance suppliers. And then those lower tier substance suppliers claims create even more of a headache between the general contractor and owner, because the general contractor and owner maybe joined in those claims and lawsuits. So the liquidating agreement is essentially a means to stop that domino effect from happening. What it does essentially is it says if you’re a lower tier sub or supplier and you are unpaid, and that unpaint, that non-payment relates to the owner’s failure to pay, you will allow the general contractor to resolve your claim on the sub or supplier’s behalf. And if,

Seth Bloom: (49:22)

Yes, sorry, I didn’t want to interrupt, but Donna came in with a question. If we have an AB and AOB, uh, Florida, we cannot take a client to court for not payments since it’s prohibited question, is this correct

Adam Richards: (49:37)

At the AOB? So I believe that is referring to the assignment of benefits, which is, um, a little bit different than what we’re talking about. That’s that’s, if you’re dealing with a possible insurance claim and the contractor does work for an assignment of the owner’s rights and benefits to be insurance policy, uh, and then the contractor essentially is allowed to go after the insurance policy to recover the costs of said work,

Seth Bloom: (50:07)

No that or arbitration, I wasn’t sure either

Adam Richards: (50:11)

Exactly stuff. So I’m not sure because the bottom line is the funds do not flow from the owner. Typically that’s the whole purpose of the AOB that the contractor will be looking to the insurance company to make that payment. So I don’t know if that clarity helps Tanya, but feel free to ask us if, um, you have any additional questions or if, if that didn’t answer exactly what you’re looking for. Um, so back to the liquidating agreement, it’s simply something that you need to keep a lookout for, um, because it not only deals with the contingent payment clause, it actually deals with that. Now what your rights will be and how your rights may be extremely limited in the event of a nonpayment claim, that’s emanating from the owner’s nonpayment. Um, those liquidating agreements can be enforced. They will be enforced. And if you sign an agreement that has a liquidating agreement, you simply need to understand the realities of nonpayment and whether or not you even have a claim, uh, to pursue, um, or if you’ve already assigned that claim to your general contractor to pursue on your behalf.

Adam Richards:: (51:26)

And that’s, uh, whether you have an enforceable contingent payment clause or not. So liquidating agreements are certainly trending. And I just want to give everyone a heads up on unfair use there they’re very often used already in your federal government jobs, and I’m already seeing them being used more and more on your private jobs, but just because of the reality of trying to bring some order to a nonpayment project where you can have dozens and dozens of consequential, lower tier claims and lawsuits, that also deals with the forum where your dispute is. And of course your, I also added this is because you have to keep in mind, if you are going to have a nonpayment claim, whether it’s a lien, whether it’s a bond, there’s notices that you have to follow both statutorily and under your contract. And again, if, if you are starting a job and you already do not have a process where you’ve identified those notices, those requirements, and you already have somebody with some department responsible for dealing with those notices, you are behind the eight ball.

Adam Richards: (52:39)

Um, you need to evolve, uh, immediately, quite frankly, um, bonded job. I know we’re running out of time, so I I’ll be able to, to run through this pretty quickly. Um, the, the, the note there really the practicality is if you have a bonded job, your non-payment issues should largely, um, be related to recovery under the bond. You know, you’re not going to be dealing with liens, unless of course you have a conditional bond, which is a Florida statutory and creation. That again is rarely used because an owner simply says, I will not allow a conditional payment bond on my job, which is a bond only to the extent of the owner’s payment. So even though it’s there, it’s rarely used, and you’re only going to have your typical bonds with, without the conditions, which means you cannot rely upon a contingent payment clause to deny recovery under a bond.

Adam Richards:: (53:37)

So again, a, another reality that flies in the face of the concept and policy behind contingent payment clauses to finalize today’s discussion. I want to also mention, of course, the reality of dealing with private and public prompt payment laws on Florida, for example, has an abundance of private and prompt payment laws on the books. Uh, those laws provide the timeframes, um, for both public and private projects where certain payments, uh, the payments do need to be made after receiving a, um, proper and legitimate payment request. Um, and then of course, those laws also provide for certain interest penalties in the event that, uh, payments are not being made timely. So it’s great to know the laws. It’s great to understand the laws, for example, Florida’s private prompt, payment law even allows an expedited cause of action. Um, you know, in the event you are not paid and certain other requirements are made, but, um, you know, I can only emphasize that relying upon these laws only gets you so far, but this, you still, um, are going to seek enforcement and you need some type of lawsuit or claim to do that.

Adam Richards: (54:56)

So again, you know, if we’re already looking to the non-payment law to govern where you stand, uh, we’ve probably already missed the boat. You know, you should not have to seek escalation that far down the road, if we’re dealing with this properly from inception, from the contract stage, the project stages. And then of course, even if there’s a claim or dispute, so that’s what I want to reemphasize to close. You know, everyone has payment problems, everyone has, um, dispute resolution nightmares. Um, but the bottom line is there’s a host of resources out there just because of the reality of these projects to deal with these problems ahead of time, um, build the proverbial cocoon around your companies. And don’t find yourself having to be in a lawsuit over nonpayment, because there’s so many resources you have, um, to prevent that escalation. So if there’s any questions, concerns now, or even going forward, that should come up always happy to chat, always available. Um, and, uh, it was a pleasure.

Speaker 4: (56:09)

Yeah, Adam, thank you so much. And I don’t see any more questions right now, but we did get a few during the, uh, during the webinar, although, uh, wait, we’ve got, we’ve got one more, I’ll be real quick, cause we’re running quite bit over, but

Speaker 2: (56:24)

Donna asks, what’s good with a lean what’s good with a lien to do. If the homeowner’s reasoning is I’m not going to sell my house. So, so I don’t need to worry about it. I guess they’re saying what’s the use of the lien. If the, if the person’s not going to sell the house, I got it. That’s a, that’s a great question, Donna. Um, that the use of the lien is twofold, right? That even in the absence of a sale, right, the lien is still an encumbrance on the property, right? So, um, you know, th the lien can obviously create some problems if there’s anyone doing a search in the public records, um, you know, in connection with the potential, uh, acquisition down, down the road. Um, but at the same time, right? It’s not about selling the house, right? The purpose of the lien is primarily forcing a sale of the house, right?

Adam Richards: (57:22)

Let me, let me say that again, Donna, when you file a lien on a property and that property it’s in a legitimate lien, it’s an enforceable lien and you, and you, when your lien foreclosure action, that’s a forced foreclosure of your lien by the courts in order to get you paid. So it’s not up to the homeowner, um, whether or not he or she plans on selling the house ever, and may have a problem that there’s a lien on the, on the, on the property. It’s, if you have a lien, you’re going to have a short timeframe in Florida, it’s a year to foreclose your lien and the foreclosure of the lien is essentially a forced sale of that house. Now, depending on the value of the lien, you know, you may not actually end up selling the house because it’s only about the value that we need to obtain.

Adam Richards:: (58:17)

But if you have a lien, that’s going to be sizable or possibly comparable to the value of a home, that that will be a big problem for a homeowner. So, uh, I encourage you to, to understand it. It’s not about the homeowner’s desires, really at all. It’s about what, what the, what the ability to lean a property means for contractors. Well, Adam, that’s been really helpful if anyone has any other questions out there, they can contact Adam directly. Uh, we’ll also make these slides available, um, both at his website and at ours. Um, again, I’m Seth bloom, I’m senior director of attorney services. If there’s any other questions from this webinar, or you generally have construction questions anywhere in the U S post them on our attorney network, uh, question and answers and an attorney like Adam can answer them for you. Um, obviously Adam can handle anything in Florida. So give him a ring or ask the question on, see if he’ll answer it on our Q and a, but thanks so much for joining us and we really appreciate it. Have a nice day. Thanks Adam.