In the News

September 5, 2019

August CMI Improves, but with Some Setbacks

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New Hampshire Payment Dispute Leads to Lawsuit

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Transitioning from Electronic to Real-Time Payments

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Georgia Court of Appeals Affirms Superior Court’s Confirmation of Arbitration Award

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August CMI Improves, but with Some Setbacks

August’s Credit Managers’ Index (CMI) climbed out of July’s lower index, with a combined score of 55.2, compared to July’s 53.4. NACM Economist Chris Kuehl, Ph.D., said the economy remains in a “transition phase,” with readings that do not follow a pattern, shuffling from lower to higher readings.

“The CMI was not the only indicator that experienced a reversal of fortune, but while that trend seemed to be on the upswing for some, there were those readings that showed further decline,” Kuehl said. “In short, there is a little something for both the glass-half-full and the glass-half-empty crowds.”

August’s index falls back in line with June’s reading of 55, but the August index still falls short of May’s 55.7. While in the shadow of May’s index, the combined score for August’s favorables reached the 60s after July’s reading in the upper 50s. The combined unfavorables also saw improvement, staying in expansion territory—a score above 50—at just under 51.

The combined sales category in favorables saw a strong improvement, climbing six points from July to a comfortable 64.4. New credit applications shifted one-tenth of a point to 60.9, meaning creditors are exercising more caution. Dollar collections improved, jumping from the mid-50s to an even 60. The amount of credit extended also reached the 60s after being in the 50s in July.

The unfavorables remained lower than the favorables, with two categories in contraction. Rejections of credit applications came in at just above 52, slightly down from July’s reading. Accounts placed for collection climbed to the upper 40s, still in contraction, along with disputes, which saw an upset as it slipped into contraction from expansion. The dollar amount beyond terms kept the unfavorables afloat by jumping eight points to 53.6

Bankruptcies came in at 51.6, the lowest reading in more than three years and the most troubling data of the combined scores. Kuehl said there have been companies “hanging on by a thread,” and some cannot handle the economic reversals observed throughout the last few years.

Anxieties loom in the manufacturing sector, despite the combined CMI score of 55.7. The favorables reached expansion, from the mid-50s to just over 61 from July to August. The unfavorables also reached expansion with a score just under 52.

“All in all, it showed a better set of indicators than some of the other manufacturing indices,” Kuehl said.

The service sector went up by just over one point to 54.8. This still does not match up to the more robust readings in May or June. The favorables stayed comfortably in the 60s, and the unfavorables just climbed into expansion at an even 50.

—Christie Citranglo, editorial associate

New Hampshire Payment Dispute Leads to Lawsuit

Just as every state has its own unique border and capitol, so does every state have its own unique set of laws. This can be seen mainly within each state’s construction statutes. While some are similar in nature, they are all governed individually whether the construction project is privately or publicly owned. Federal projects fall under the jurisdiction of the Miller Act; state- or city-owned projects (public) are under each states’ Little Miller Acts; and private construction is run through each states’ statutes.

In New Hampshire, a subcontractor is fighting a project owner and general contractor over alleged nonpayment. The dispute is currently in Cheshire County Superior Court after Wallace Building Products filed suit in July. Wallace claims $342,000 has not been paid for work on a retirement community in Keene.

The Prospect-Woodward Home entered into a contract with the MacMillin Co. and DEW Construction (MacMillin/DEW) as the general contractor in April 2017, and Wallace was subcontracted by MacMillin/DEW roughly four months later. Wallace completed its work at Hillside Village Keene in March 2019, and Wallace’s vice president and chief operating officer sent a letter to the project owner in May, announcing its intent to file a lien, according to the Keene Sentinel.

Prospect-Woodward objected to the lien because there is a payment bond for the cost of the construction contract (about $56 million). “Technically, you could go after the bond and lien the property,” said Gregory Ramsey, Esq., co-founder of Twomey & Ramsey, LLP. For private bonds, subcontractors have to comply with the language of the bond itself rather than follow statute (public bonds)—if the bond requires that bond notices must be provided in a particular manner or timeframe, then they must comply to obtain the benefit of the bond, Ramsey gave as an example.

There is confusion sometimes with bonds as there are several varieties that come into play in differing circumstances; there are “target” and “blanket” bonds that generally go hand-in-hand with mechanic’s liens and act to substitute a contractor’s security in the property for the bond itself, said Ramsey. The bond in this case appears to be a payment bond, which is just another form of security for subcontractors; however, going after both a payment bond and the property can lead to arguments of whether subcontractors are over secured. One possible result in this instance may lead to either the payment bond or lien claim being dismissed by the Court to pursue one of the two forms of security pursued.

It is important to note, however, Ramsey said, that if a payment bond is not pursued by a subcontractor and properly noticed to avail themselves of the rights of the payment bond, then the existence of a payment bond may be immaterial to the argument of over security or choosing one option over the other. The Sentinel does not state whether Wallace perfected its lien and went after the bond as well.

“There are other lawsuits/liens that will be filed, including one by … MacMillin that will cover all the [subcontractors],” said the president of DEW according to the Sentinel. “Two months from now, everybody will be paid,” he added.

—Michael Miller, managing editor

Transitioning from Electronic to Real-Time Payments

Writer and philosopher George Santayana once said, “Those who cannot remember the past are condemned to repeat it.” In other words, history repeats itself—an old adage that rings true today for seasoned credit managers.

The business-to-business (B2B) credit industry continues to evolve and lead longtime creditors to understand and gradually adopt changes to business operations, such as payment practices. Once upon a time, credit departments relied solely on paper (e.g., checks) for payment. Before long, companies became interested in “the next best thing” and started accepting electronic payments to make way for faster and safer transactions. Today, the same credit managers who witnessed that change are watching history repeat itself once again with another payment transition: real-time payments (RTPs).

According to The Clearing House, RTPs surfaced in the U.S. in late-2017 and are still slowly making their way into credit departments. Only recently did the Federal Reserve—which has used an ACH system since the early 1970s—announce its own plans for an instant RTP system, called FedNow, which won’t debut until sometime in 2023 or 2024. Similar to the adoption of electronic payments, RTP implementation will take time but may be easier than the switch from paper to electronic payments. In fact, Benny Cooley, CEO and founder of payment software solutions PaySett, told PYMNTS.com there won’t be as much of a push for financial institutions to use RTP unlike in the past with electronic payments.

“Financial institutions had what was considered a ‘push’ issue with checks in that they had to push the users of checks to transition from writing checks to originating transactions electronically,” Cooley told PYMNTS.com in August. “The transition from batch to real-time will occur faster because the technology has progressed rapidly to allow for real-time processing.”

This time around, businesses are insisting on RTP services from financial institutions; therefore, pulling financial institutions into the realm of RTP. Cooley noted the biggest difference between the shift from paper to electronic payments versus electronic payments to RTP is that the former required a major shift in companies “internal back-end systems.” Now, the technology is already in place.

Danita Ward, a credit manager at Kewaunee Scientific Corporation in Statesville, North Carolina, said her company accepts payment via checks, wire transfers, ACH and credit card. Although her company hasn’t adopted any RTP platform, Ward said a hypothetical platform would have to integrate into back-office systems for streamlined reconciliation, provide data for spend analytics and be easy and affordable in order for digital payments to transition at all and address corporates’ needs.

“Overall, the efficiencies gained via digital B2B buying don’t always extend to B2B payments, and that can be a major problem for buyers and suppliers alike,” Ward said. “B2B payments are notoriously manual, even as payments technology continues to evolve and procurement and B2B commerce technologies grow more sophisticated.”

—Andrew Michaels, editorial associate

Georgia Court of Appeals Affirms Superior Court’s Confirmation of Arbitration Award

The First Division of the Georgia Court of Appeals affirmed a superior court’s decision to confirm an arbitration award against Appellant Gainesville Mechanical, Inc. (“Gainesville”) because Gainesville failed to show that the arbitrator manifestly disregarded the law governing the “modified total cost” approach to damages.

The underlying dispute between Gainesville and Air Data, Inc. (“Air Data”) arose from a construction project, for which Gainesville hired Air Data to perform certain construction services. Gainesville also directed Air Data to work seven days a week for 10 hours a day for an extended period of time. Gainesville ultimately fired Air Data and hired another contractor to perform the remaining work. In total, Gainesville paid Air Data less than half of its contract price.

In his Final Award, the arbitrator found that a “cardinal change” of the contract occurred, because Air Data’s work was so drastically altered that it effectively performed duties that were materially different from those for which it originally bargained. Based on that finding, the arbitrator assigned damages using the “modified total cost” approach, which Air Data supported.

The arbitrator noted that many courts disfavor modified total cost claims unless four conditions are present, and went on to say that Air Data did not meet all four conditions. Therefore, the arbitrator did not award Air Data all of its claimed losses, but did award a substantial portion of them. Air Data confirmed its arbitration award against Gainesville in a Georgia superior court, and Gainesville appealed.

The Court of Appeals will not reverse an order confirming an arbitration award unless the appellant demonstrates that a statutory ground exists. Here, the only statutory ground relevant was whether Gainesville’s rights were prejudiced by the arbitrator’s manifest disregard of the law.

In its appeal to this Court, Gainesville argued that the arbitrator manifestly disregarded the law governing the “modified total cost” approach to damages. “[M]anifest disregard of the law requires (1) that the governing law alleged to have been disregarded is well defined, explicit and clearly applicable and (2) proof that the arbitrator was aware of the law but decided to ignore it.”

The Georgia Court of Appeals could find no Georgia decisions adopting jurisprudence regarding the “modified total cost method” of proving damages. Therefore, the Court found that Gainesville failed to show well-defined, explicit and clearly applicable law that the arbitrator allegedly disregarded. Further, the Court could not find that the arbitrator was aware of the law but decided to ignore it. An ambiguous arbitration award, or even an error by the arbitrator in interpreting the availability of compensatory damages under Georgia law, was not manifest disregard of the law.

For those reasons, the Court of Appeals affirmed the superior court’s decision to grant Air Data’s petition to confirm the arbitration award and its denial of Gainesville’s cross-petition to vacate the award.

Reprinted with permission.

Michelle J. Cuozzo, Esq., is an associate in the Construction Practice Group of Pepper Hamilton LLP, resident in the New York office.