eNews July 25, 2019
In the News
July 25, 2019
When liening a property, determining what can be liened has its gray areas, especially as a project changes over time. If a change order falls outside the scope of the original signed-off contract, creditors can still file a lien on the property with change orders included—most of the time. Lien laws vary by state, and liening a property with change orders can depend on some variables. In Arizona, they can include: if the contract has an integration clause for change orders, if the change order has been signed off by the general contractor and if the change was communicated via electronic or spoken communication.
When liening a property, the creditor can only claim on past due balances, not on balances the customer still has time to pay. In Arizona, a creditor is able to file a lien on a property that may not be finished. And should this unfinished property receive a change order—typically at the end of a project to amend and polish the outstanding construction project—the order must be officially approved and signed off by all parties involved in order for it to be lienable. This approval can come in the form of email, text message or a written document—as long as the claimant can prove all parties officially agreed to the change and point toward an integration clause in the contract.
“Therein lies the problem,” said James Reed, Esq., with Udall Shumway PLC in Mesa, Arizona. “With respect to Arizona lien law, you can’t have an enforceable lien claim unless you have enforceable underlying contract rights.”
An integration clause reads: “All prior or contemporaneous written agreements are integrated into the contract at the time of signing,” meaning, “Any subsequent changes to the contract have to be signed by both parties in order to be effective,” Reed said. An unsigned change order, by the terms of the original contract, is not going to be binding unless signed by both sides, and therefore will not be lienable.
When attempting to secure lien rights on a change order, Reed said to first get the change order signed by the parties, but still send the preliminary notice before the change is legally approved. If the change order work is set to begin within a month and the general contractor neglects to sign off on the change for more than six weeks, then the creditor may miss out on preliminary notice protections.
Processing and communicating the change order can also determine if the change order is lienable in Arizona. Reed said two theories of law exist when thinking about change orders, should an integration clause not exist in the contract: waiving and force of performance between the parties. If the parties involved start making change orders by texts and emails, then the creditor can say there’s a course of performance and argue electronic change orders are valid. Most states—Arizona included—have electronic-signature laws now, and arguing changes over text or email as lienable will likely fall under the electronic-signature laws.
“The bottom line is don’t do this by telephone call; don’t do it orally. If you’re going to act on a change order, then at a minimum, get it in an email or a text. It’s something in writing,” Reed said. “Beyond that, the electronic-signature statute isn’t going to apply to a telephone call. It’s only going to constitute a legally informed signature, say, in the form of an email.”
—Christie Citranglo, editorial associate
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A discharged Massachusetts mechanic’s lien is back in the news following an appeals court ruling on the lien, a letter of intent (LOI) and a contract that never was. Congress Building Corp. and Golden Pond Resident Care Corp. agreed to an LOI in April 2018, allowing the construction price to be held for 10 days—when the formal written contract would be executed. The LOI established Congress was “the designated [c]ontractor for the project,” which would have a maximum price of roughly $8 million, according to documents from the Commonwealth of Massachusetts Appeals Court.
The LOI allowed Congress to start procuring subcontractors and material for the project; however, Golden Pond did not have any obligations until the final contract was signed, the Appeals Court notes. Ten days after the LOI was executed, Golden Pond told Congress the LOI was terminated, resulting in Congress finding out it would not be the contractor through subsequent correspondence. Several days later, Congress billed Golden Pond nearly $360,000—$129,000 for labor charges, $5,000 for legal costs and $225,000 for the general contractor fee Congress was expecting.
In late May 2018, Congress recorded a notice of contract and statement of account to establish a mechanic’s lien on the property. A notice of contract must be filed within 90 days after last furnishing of the contractor among other scenarios. The statement of account must be filed within 120 days after the contractor’s last furnishing among other situations. In June 2018, Golden Pond commenced action to discharge the lien, ultimately ending with a Superior Court judge dissolving the lien because the LOI “merely represents an agreement to negotiate in the future,” and the LOI was not an enforceable contract.
Mechanic’s liens are a remedy for parties who have not been paid. It is important for claimants to prove they have added value to the project in order to have lien rights, said Chris Ring of NACM’s Secured Transaction Services.
According to the Appeals Court ruling earlier this month, the Superior Court erred in dismissing the mechanic’s lien. A mechanic’s lien can only be discharged due to “defects that will customarily appear of record or be readily ascertainable by reference to undisputed documents—defects in the notice of contract or statement of account, failure to timely record the notice of statement, or a judgment or release that would preclude the lien,” the Appeals Court states. Since Golden Pond does not claim defects or dispute the timeliness of the filings, the “summary discharge of the lien … is inappropriate.”
It is important to keep an eye out for mechanic’s liens that hit projects, especially when lower in the construction supply chain. That can help determine if the lower-tiered party should file a lien as well or avoid the project altogether, Ring said.
—Michael Miller, managing editor
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Countries across the Asia-Pacific region are seeing a whirlwind of changes to payment terms in various industries, most of which have been attributed to the ongoing trade war between the U.S. and China, the United Kingdom-European Union Brexit debacle and diminishing economic growth in the U.S. and Europe. To better understand the implications behind these events, credit insurer Coface and the Finance, Credit and International Business Association (FCIB) delved into the region’s payment trends in separate studies over the past couple of years for a possible glimpse into the near future.
Earlier this month, Coface published its findings in the Asia Corporate Payment Survey 2019: Deteriorating Payment Trends Amid Trade War Woes, where more than 3,000 companies shared their payment history in 2017 and 2018. Participating companies spanned the Asia-Pacific region, including China, Malaysia, Singapore, Hong Kong and Japan. According to Coface data, average payment terms increased by five days in one year from 64 days in 2017 to 69 days in 2018.
“This is in line with trends observed in Asia since 2015,” the Coface report states. “Corresponding with the increase in payment terms, 63% of those companies surveyed stated they experienced payment delays in 2018 and the average payment delays also increased to 88 days in 2018, compared to 84 days in 2017.”
China, Malaysia and Singapore saw the lengthiest payment delays, the report noted, compared to those in Hong Kong and Japan, which were the lowest. FCIB’s own reports found mixed results after conducting surveys in 2017 and 2018 with credit managers who conduct business in those countries. FCIB released studies in 2016, 2017 and 2018.
For example, in China, the number of businesses offering 61- to 90-day payment terms decreased between 2017 and 2018, starting at 32% in June 2017 and leveling off at 21% by December 2018. Fewer businesses also offered 31- to 60-day terms by December 2018, while more offered 0- to 30-day terms. By 2018, 25% of respondents said payment delays were due to regulatory issues, followed by billing disputes and cash flow problems.
“Do not grant open payment terms,” one FCIB respondent said in December 2018. “Chinese payment habits are poor and they will look for every opportunity not to pay. Whatever business you do with the Chinese should be fully secured. Proceed with extreme caution.”
However, the results told a different story in Malaysia and Singapore. Between FCIB’s three Malaysian surveys in June 2016, June 2017 and September 2018, payment terms fluctuated but ended being most popular at 31- to 60-day terms by September. Although only a few respondents offered more than 91 days in 2016 and 2017, credit managers ceased doing so by 2018. Similarly, 0- to 30-day terms and 31- to 60-day terms tied at 44% for most granted in May 2018’s FCIB Singapore survey, where 0% of respondents granted more than 91 days.
—Andrew Michaels, editorial associate
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The Altman Z-Score is a widely used and accurate predictor for corporate bankruptcies. Learn from the creator himself as bankruptcy guru Ed Altman, Ph.D., takes a look at the Altman Z-Score models after 50 years, credit scoring systems, the credit cycle outlook and major risks going forward.
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In the case of Berkley Ins. Co. v. Kent State University, Case No. 2018-00579, 2018-Ohio-5453 (Dec. 6, 2018), Kent State University (KSU) hired R & M Electric Co., Inc., doing business as “Summit Electric” (Summit), to provide electrical construction work to renovate KSU’s School of Art. Several months after work commenced on the project, KSU found Summit in default and terminated the company shortly after it had abandoned the project. As Summit’s surety, Berkley Insurance Company (Berkley) engaged a takeover contractor in accordance with its performance bond and paid valid claims under its payment bond, which subrogated Berkley to Summit’s interest in the contract funds. On June 8, 2017, KSU sent a letter to Berkley notifying it of the university’s intent to issue back charges and assert withholding claims against contract amounts. After receiving the letter from KSU, Berkley expressed its objections through a number of communications with the university. Berkley argued that the back charges and withholdings were improper, because KSU lacked supporting documentation and KSU did not complete its initial accounting process until June 2017.
The court disagreed with Berkley and held that the contract between the parties included a mandatory dispute resolution clause: “[T]he Contractor shall initiate every Claim by giving written notice of the Claim to the A/E [architect/engineer] and the Contracting Authority within 10 days after the occurrence of the event giving rise to the claim.” According to this provision, failure to initiate a claim in that 10-day timeframe constitutes an irrevocable waiver of the claim. Berkley’s objections to KSU, even though written, did not amount to claims under the mandatory dispute resolution provision contained in the contract.
The court reasoned that even though it may not deem the language in the contract just or equitable, the language is nevertheless clear and unambiguous as to the parties’ intent. Therefore, the “court must simply apply the language as written.” The court found it undisputed that Berkley failed to properly assert its claim within 10 days and, thus, irrevocably waived its claim.
Reprinted with permission.
Casey Cross is a construction attorney who focuses on both transactional and litigation matters. In addition to providing guidance on project delivery systems, including construction manager at risk, design-build and general contractor models, she prepares procurement and bidding documents, and negotiates construction project contracts.
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