eNews August 23, 2018

July Retail Bump Surprises Economists as Spending Increases

Retail and manufacturing are holding steady in the third quarter of 2018 after July’s sector analysis revealed results were better than expected. As consumers react positively to the U.S. administration’s tax cuts and are willing to spend more money, NACM Economist Chris Kuehl, Ph.D., said the likelihood of inflation and ongoing trade disputes still hover over the respective industries, leaving room for concern.

During the latter half of the second quarter (Q2), between April and June, economists predicted retail sales would increase half a percent. They later revised the estimate in June to reflect the underperforming 0.2% gain, according to Reuters. Economists then went into last month with lower expectations—a 0.1% retail sales increase—but were greeted with a half percent bump. Compared to retail sales in July 2017, last month’s sales actually increased nearly 6.5%.

There has been “endless speculation” about the growth rate for Q3, Kuehl noted, especially following the more than 4% growth seen in Q2. While roughly half of economists believe Q2’s growth rate reached a peak, Kuehl said there are others who think this is just the beginning of something good.

“The key to the growth in Q2 was a combination of strong exports spurred by companies that were worried about the imposition of tariffs and the impact that will have on their future plans,” said Kuehl. “Also key was the awakening of the U.S. consumer, which took longer than expected. Consumers remain motivated to spend, as we are now in the midst of back-to-school shopping, which is often a harbinger of things to come as holiday spending increases.”

Retail wasn’t the only sector to flourish in Q2, when manufacturing work productivity was recorded at its highest since 2015. Bloomberg reported Aug. 15 that manufacturing output also rose in July, specifically machinery, vehicles, computers and electronics, and was nearly 3% higher than in 2017. Unlike retail, however, manufacturing could plateau in Q3 because of rising material costs from the trade war. High demand for certain supplies, such as steel and aluminum, may contribute to increasing costs.

The unknown is frightening, but Kuehl said one thing is clear: Retail and manufacturing have shown monthly and yearly improvement. For retail, an example was the recent surge in hiring, which Kuehl said was unexpected. Although employers still strive to cut costs by reducing the number of employees, they’re also trying to compete against online giants such as Amazon. In July alone, Retail Dive and the National Retail Federation reported 66,000 jobs added to the retail industry. On the other hand, there has been more than 75,700 job cuts in the sector since January, with more possible.

“Retail cuts have been inching up the last four years, as online shopping causes disruptions to business as usual,” CEO John Challenger, of Challenger, Gray & Christmas, said in a statement as reported by Retail Dive.

With retail and manufacturing sales expected to keep growing during the remainder of 2018, Kuehl said the next big worry is inflation.

“That will actually stimulate for a while as people anticipate higher prices and will try to do the buying now that they had planned to do later,” he said.

—Andrew Michaels, editorial associate

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Sub-subcontractor Loses Mechanic's Lien Rights

A recent decision from the Iowa Court of Appeals highlights a significant trap for contractors working on commercial construction. LM Construction, Inc. vs. HGIK Hospitality, LLC, began when property owner HGIK Hospitality (HGIK) hired general contractor DDG Construction (DDG) to build a commercial hotel in Ames. DDG hired subcontractor ESC, LLC (ESC) to perform work on the project, and ESC hired sub-subcontractor LM Construction (LM) to install drywall.

Under Iowa Code § 572.33, LM had to provide written notice to DDG within 30 days of starting work on the project if LM wanted to protect its right to file a mechanic’s lien. The notice had to include LM’s name, address, phone number, and ESC’s name. LM mailed a notice, but sent it to HGIK, not DDG.

At some point, ESC was terminated from the project, and DDG contacted LM about finishing the work on the project. LM agreed to do so, but DDG refused to pay approximately $100,000 to LM after the work was completed. LM then filed a mechanic’s lien, and filed a lawsuit to foreclose the lien.

The Iowa Court of Appeals ruled that LM was not entitled to a lien because LM failed to send the notice required by Iowa Code § 572.33 to DDG. The Court was unpersuaded by LM’s argument that it sent a notice to HGIK because the statute is clear that the notice must be sent to the general contractor.

This case highlights the risks that contractors face when hired to work on commercial construction projects. The contract between ESC and LM identified ESC as the “general contractor.” That definition was misleading because for purposes of Iowa mechanic’s lien law, ESC was not a “general contractor.”

Contractors should take time at the beginning of a project to identify the hierarchy between contractors and identify the contractor with a contract directly with the property owner. This due diligence will reveal the identities of the parties who need to receive notice to protect a contractor’s mechanic’s lien rights.

In the absence of a mechanic’s lien, contractors can file claims for breach of contract. However, these cases are often less desirable because many construction contracts do not allow subcontractors to recover attorneys’ fees from the general contractor or property owner. If contractors want to protect their mechanic’s lien rights and right to attorneys’ fees, then they should conduct due diligence at the beginning of a project to determine who needs to receive notice.

Contractors should also keep in mind that the mechanic’s lien law is full of traps for the unwary. Articles and blogs about the law are no substitute for consulting with a knowledgeable attorney because the circumstances of your situation may have a slight difference that has important consequences for your mechanic’s lien rights. You should always consult with an attorney about mechanic’s lien questions.

John Lande is a shareholder with a civil litigation practice at the Dickinson Law Firm in Des Moines. He has experience with matters involving banking and financial regulation, cybersecurity, construction and real estate litigation, and bankruptcy and collections. Lande regularly works with clients already involved in litigation and clients who are trying to avoid future litigation.

To view the article in its entirety, go to the Dickinson Law Firm website.

Connect and Learn with Credit Professionals in your Region

Regional conferences are a wonderful opportunity for members to network and share news, information and tips with fellow credit professionals from their respective geographic regions.

Central Region Credit Conference
September 13, 2018
Minneapolis, MN
Hosted by: NACM North Central

Western Region Credit Conference
October 10-12, 2018
Salt Lake City, UT
Hosted by: NACM Business Credit Services, Utah & Arizona

All-South Credit Conference
October 21-23, 2018
Clearwater Beach, FL
Hosted by: NACM Tampa

For more information and to register, contact the local Affiliate.

Cement Suppliers and the Need to ‘Go Green’

The cement industry thrived this past year and is expected to continue to succeed moving forward. According to a study published by Science Direct, the global production of cement reaches about 2.8 billion tons each year and is expected to reach about four billion tons in the upcoming years. Cement remains a key component for building homes on a global level and for creating modern infrastructures, but with recent stories of bridges collapsing across the world, cement may have played a role in structures failing, according to a recent AZO Materials article. Moving forward, cement suppliers may have to be more conscious of what goes into their cement from sustainable and safety angles as builders are beginning to take note of the possible dangers in the current cement industry.

The concept of sustainable cement has been circling the construction industry, going as far back as 15 years ago with the creation of the Cement Sustainability Initiative (CSI). CSI has been learning more about the dangers of cement production, and the organization has found cement that is not sustainably produced can lead to excess fuel use, climate change, dangers to employee health and faulty structures in general, according to AZO Materials.

“Green materials and techniques are no longer a novelty—they are practically ubiquitous, present in every stage of design, construction, operation and maintenance,” an article from the Portland Cement Association (PCA) said. “Big business is embracing green building, governmental bodies are rewarding sustainable efforts, and individuals across the globe are making everyday decisions about materials and methods that will impact generations to come.”

As the demand for cement rises year to year, so does the risk of producing cement without an ecological plan. Concrete—which is often held together in structures by cement—has been proven to have the longest lifespan of any building material, creating structures that can sometimes survive as long as 2,000 years; this is likely why the demand for concrete and, subsequently, cement remains high. While the need for cement is great, it can be easy to fall into the same pattern of producing cement the same way for decades.

Moving forward, builders will likely become warier of how cement suppliers produce their materials, basing their purchases and willingness to pay accordingly. In a recent Construction Dive article, it said some concrete suppliers are even toying with ways to eliminate cement entirely in order to cut down on CO2 emissions.

Sustainable construction and “going green” remains on the minds of builders and even local governments, offering incentive to builders who work with green materials. If suppliers refuse to adjust, sales and credit may begin to suffer.

“Communities across the United States continue to adopt programs for sustainable development. Durable construction can be an important component of such programs,” the PCA article said. “The durability and fire resistance of non-combustible concrete and masonry construction are qualities that can help communities satisfy their desire to become more sustainable.”

—Christie Citranglo, editorial associate

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Don’t Fail to Stay Mechanic's Lien Action While Pursuing Arbitration

In Von Becelaere Ventures, LLC v. Zenovic, Case No. D072620 (June 6, 2018), James Zenovic, doing business as James Zenovic Construction, entered into a construction contract to build a single-family house for Von Becelaere Ventures, LLC in Laguna Beach, California. The construction contract included an arbitration provision that stated:

If any dispute arises concerning this Contract or the interpretation thereof, of concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a Construction Dispute), such Construction Dispute will be settled by binding arbitration.

As sometimes happens on a construction project, a dispute arose. The result was that Zenovic recorded a mechanic’s lien asserting that Von Becelaere Ventures owed him nearly $450,000 on the project. Zenovic recorded his mechanic’s lien on March 20, 2017. As also sometimes happens on a construction project, Von Becelaere Ventures filed a complaint against Zenovic, alleging a host of claims relating to the work performed by Zenovic on the project. Von Becelaere’s complaint was filed on April 3, 2017. On April 7, 2017, Zenovic filed a complaint against Von Becelaere Ventures, foreclosing on his mechanic’s lien.

About a month later, Zenovic filed a motion to compel arbitration to stay the actions, while the parties arbitrated their dispute pursuant to the arbitration provision of the contract. However, the trial court denied Zenovic’s motion finding that he had waived his right to arbitration because he failed to [read and] comply with Code of Civil Procedure section 1281.5.[i]

The Court ruled that because Zenovic had not: (1) included an allegation in his complaint to foreclose on his mechanic’s lien that he did not intend to waive his right to arbitration and within 30 days of service of his complaint would seek a stay of the action while he pursued arbitration; or (2) did not file an application to stay the action at the time he filed his complaint to foreclose on his mechanic’s lien, he had waived his right to arbitration pursuant to Section 1281.5.

Zenovic appealed. On appeal, Zenovic contended that Code of Civil Procedure section 1281.5 only applied to his complaint to foreclose on his mechanic’s lien but did not apply to Von Becelaere Ventures’ claims against him.

The Court of Appeals for the 4th District disagreed holding that, under a plain reading of the statute, Section 1281.5 applies not only to actions to foreclose on a mechanic’s lien, but also to any arbitrable claim relevant to an action to enforce a mechanic’s lien:

Section 1281.5, subdivision (a), contemplates a mechanic’s lien action will be separate from an action to resolve otherwise arbitrable disputes. It makes no difference if the arbitration action is initiated in a different venue or which party initiates the arbitration action. By its plain terms, the statute permits a contractor to take advantage of the statutory mechanic’s lien process while preserving the contractual right to arbitrate disputes as provided in the arbitration agreement. The purpose of the alternative stay procedures articulated in section 1281.5, subdivision (a), is to hold the mechanic’s lien process in abeyance “pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.” However, a party who commences a mechanic’s lien action without complying with either of the stay provisions waives any such right to arbitration.

And, here, held the Court of Appeals, Von Becelaere Ventures’ claims against Zenovic were arbitrable claims under the arbitration provision of the parties’ agreement, but Zenovic failed to preserve his right to arbitration by failing to comply with Code of Civil Procedure section 1281.5 when filing his action to foreclose on his mechanic’s lien.

Read the statutes to avoid the risk of spilling coffee all over yourself.

Garret D. Murai is the Construction Practice Group co-chair with Wendel, Rosen, Black & Dean LLP.

[i] (a) Any person who proceeds to record and enforce a [mechanic’s’] lien . . . does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following:

 (1) Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action.

 (2) At the same time that the complaint is filed, the claimant files an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

 (b) Within 30 days after service of the summons and complaint, the claimant shall file and serve a motion and notice of motion pursuant to Section 1281.4 to stay the action pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien. The failure of a claimant to comply with this subdivision is a waiver of the claimant’s right to compel arbitration.

 (c) The failure of a defendant to file a petition pursuant to Section 1281.2 at or before the time the defendant answers the complaint filed pursuant to subdivision (a) is a waiver of the defendant s right to compel arbitration.

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Greece Exits Bailout Program

Greece is over the hump of its European bailout program, having exited it earlier this week; however, much work remains in the Balkan state. According to credit insurer Coface, “Greek companies are experiencing a revival—more competitive and less indebted,” with “multiple signs of an economic recovery.”

Gross domestic product (GDP) growth reached four straight quarters of expansion for the first time since 2008, with a 1.4% uptick in 2017, and a predicted 2% upward swing this year. A quarter of the Greek GDP was lost between 2008 and 2015, while investments ceased by 60%. Those hurt the most were small- and medium-sized enterprises (SMEs). A quarter of a million SMEs went bankrupt during the crisis, and the corporate investment rate was cut nearly in half.

“The bailout has been declared a success, and Greece is ready to stand on its own again,” said NACM Economist Chris Kuehl, Ph.D. However, the International Monetary Fund and European Commission forecast said it will take a decade before the Greek economy is at its pre-crisis level, stated the Coface report.

“[The] muted reaction in Greece stems from the fact that this has been accomplished with massive austerity efforts that will remain in place for many years. Greece is still impoverished and weak and unable to provide the jobs that young people are demanding,” added Kuehl.

Companies becoming more competitive has led to a growth in exports. Ten years ago, exports only accounted for roughly a fifth of the GDP compared to the rest of the eurozone at nearly double that. Between 2008 and 2017, exports in value added increased by 10%, yet some sectors faired better than others. Greek oil exports increased by more than 130%, and pharmaceuticals jumped by nearly 25%. Yet, most of the gains were seen in larger companies rather than SMEs, which have also “become more export-oriented,” according to Coface.

In the latest FCIB Credit & Collections survey for Greece (August 2018), less members are extending credit to customers in the country, down about 10% from the previous results in July 2017. Payment terms are also lengthening, expanding from 31–60 days to 61–90 days; 0–30-day terms saw minimal movement.

Cash flow was mentioned multiple times by respondents as a reason for payment issue in Greece as was the financial crisis. But, “conditions in Greece seem to be turning around. If this continues, credit restrictions may be relaxed,” said one member. Another respondent said to work with prepayment until there is a stable relationship, while another added the situation has stabilized, yet it is still difficult to trade.

—Michael Miller, managing editor

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