In the News

December 26, 2019

 

Several states in the U.S. saw changes in their laws during 2019. Many of the laws changed the ways creditors do business with their customers, be it filing mechanic’s liens or collecting on past due balances. 

Five states—Georgia, Tennessee, Indiana, Washington and Florida—saw major changes in 2019.

Georgia
The role of affidavits of nonpayment changed with a ruling in the Georgia Court of Appeals. If an affidavit of nonpayment is not filed after a lien waiver document is signed, then the supplier’s claim against the owner is invalid, and so is the supplier’s claim against its own customer.

Unless an affidavit of nonpayment is filed, it is assumed the claimant has been paid up to 60 days after signing a lien waiver. Before this ruling, if an affidavit wasn’t filed, lien rights would be lost, but the claimant could still sue the company. Under this new ruling, if an affidavit is not filed, all lien rights across the contractor/supplier chain are lost.

If the claimant waits more than 60 days to file an affidavit of nonpayment, lien rights could be lost.

Tennessee
Tennessee saw a construction bill repealed this year when Gov. Bill Lee took office. Tenn. Code Ann. § 66-21-108, had granted real property owners the right to recover up to $100,000 from a supplier in the case of an invalid lien. The Georgia Senate also deferred a bill that would augment subcontractor lien and payment rights, allowing them to extend their lien rights from 90 days to 12 months

If real property owners took advantage of Section 108, they could have recovered up to $100,000 in “reasonable costs,” which included attorney’s fees and damages incurred by the owner.

Indiana
Indiana passed four acts in its 2019 legislative session that brought changes to the construction industry. The acts dealt with anti-indemnity, bonds, management and environmental regulations. 

Senate Enrolled Act 230 made indemnification between the general contractor and the property owner—should the subcontractor get injured on the job—more difficult. Indemnity clauses are still not required in construction or design contracts.

Public–private partnership (P3) project regulations were modified with House Enrolled Act 1374: Bonds are no longer required on P3s. This is similar to Indiana’s Little Miller Act, which shifts the burden away from creditors who need a bond claim but have trouble obtaining one.

Act 1214 made pre-qualifications mandatory for subcontractors, which placed a new set of red tape regulations on subcontractors when they begin on a project.

Act 1266 cut back on environmental restrictions on construction projects related to erosion and sediment control.

Washington
Procedures for small contractors’ performance and payment bonds on public projects changed with Senate Bill 5418 (SB 5418). The procedure on how to make the bond claims did not change, but the maximum amount for which small business can obtain a waiver for these bonds increased from $35,000 to $50,000.

SB 5418 made it easier for smaller contractors with little financial strength to issue a bond on their behalf to secure a job.

Florida
House Bill 1247 took effect Oct. 1, 2019, which amended statutes relating to construction bonds and actions by claimants. 

The forms for notices of nonpayment for private and public work requires more details about what was furnished, what’s been paid, what is expected to be furnished and what is expected to be paid in the future of the job. The notice of nonpayment extends to rental equipment and is now required to be made under oath. 

The notice of nonpayment must also be delivered within the timeframe rather than sent within the timeframe. The timeframes of no earlier than 45 days and no later than 90 days did not change.

Tampering with commercial construction documentation is a very serious offense. Incidents of such fraud varies across the industry, ranging from a contractor’s false claim of a completed contract to the creation of a fake company to win a bid. Credit managers are at the front lines of fraud detection on behalf of material suppliers, specifically, detecting the alteration of invoices. To avoid being duped, credit departments must create and use a checklist of warning signs and include guidelines of what to do if documents are fraudulent.

The Washington, DC-based International Anti-Corruption Resource Center (IACRC) identifies contractor or supplier fraud in falsifying, inflating and/or duplicating a commercial document for financial gain. While false invoices are considered those with goods and services not rendered, duplicate invoices are knowingly issued with the intent to defraud. THE IACRC listed the following as general red flags:

• Weak controls over the review and payment of invoices
• Discrepancies between contract or purchase order, receiving documents and invoices
• Discrepancies between contractor’s billings and supporting documents
• Invoice is in a round number amount if that is unusual
• Total payments to a contractor exceed total contract or purchase order amounts

Despite efforts to combat commercial construction fraud with technology and watchful eyes, cases continue to occur, some of which span years before detection or resolution. For example, in May 2018, The Washington Post (The Post) reported that a settlement of $20 million was reached between the U.S. Navy and U.K.-based Inchcape Shipping Services after the latter allegedly “bilked the Navy in a ship-supply contracting scandal at ports around the world.”

The lawsuit began in 2010 when it was filed by three of the shipping logistics company’s senior executives who resigned following their unsuccessful attempt to “spark action by company leadership,” Washington Business Journal (WBJ) reported last year. In 2013, the Navy suspended business with Inchcape and two years later, the U.S. government became involved with the whistleblower fraud suit. Prior to that, its contracts with the Navy exceeded $240 million, The Post noted.

WBJ states Inchcape allegedly overcharged Navy ships—ranging from small Coast Guard cutters to large aircraft carriers—for goods and services between 2005 and 2014 across ports in 66 countries throughout the Middle East, Africa and North and South America. Goods and services varied from pilot and tug arrangements to food and sewage removal.

“[Methods] included allegedly inflating the prices on multiple vendor invoices on work done in the Persian Gulf by 15% to 20% or more and pocketing the difference as profit,” WBJ reported. “And in Panama, the lawsuit alleged, Inchcape submitted false claims for Panama Canal tolls, in one example charging more than $14,000 for two Navy ships when the actual bill had been less than $7,000.”

Although it’s unfair to assume the Navy wasn’t using any fraud detection techniques, IACRC raises some questions with answers that will come in handy. Are paid invoices supported by contracts, purchase orders, receiving or inspection documents? Are there any discrepancies between invoices and supporting documents, contracts, purchase orders or receiving documents? Are there any unusual invoices, such as invoices in round numbers, or on unprinted forms? Detecting fraud is possible, but credit managers must be up for the task.

The food industry is an extremely volatile market due to a number of factors including trade agreements, the shelf life of products, weather, diseases and other regulations. This can make a credit manager’s job a lot more difficult especially when determining creditworthiness and making credit decisions. Earlier this month, credit insurer Atradius reviewed a dozen countries and their food markets in their latest Market Monitor series. Atradius took a deep dive into half the countries—Denmark, France, Germany, Italy, the Netherlands and the U.K.—while only scratching the surface of Australia, Belgium, Ireland, Mexico, Poland and Spain.

Overall, credit risk assessments tend to average out in the stable rating; however, with a closer look into each country, there are several issues that could affect the food market credit industry. “In general, the food sector continues to perform reasonably well, with a stable or even good sector performance assessment in many countries,” states the credit insurer.

Denmark, Germany and the U.K. have seen a deterioration of nonpayments over the last six months, and Denmark, Germany, the U.K. and Italy are predicted to see more deterioration of nonpayments in the coming six months.

Despite taking 30–60 days for payment and an increase in delays in Denmark, the number of delays are still low. Brexit has had a major impact on the Danish food sector, with the U.K. as one of the top three destinations for food exports.

Meanwhile, France has seen improvement in nonpayments over the last six months and will remain stable going forward. However, insolvencies are predicted to increase in 2020. Again, Brexit is a major issue for exporters as well as U.S. tariffs. According to the latest FCIB International Credit & Collections survey for France, respondents are granting longer payment terms and are reporting increasing payment delays. “Average payment term is 60 days, often [it] is necessary to have active follow ups to get payments,” said one respondent.

In Germany, Atradius reports an increase in fraud, specifically identity theft. Imposters are buying fish, fruits and vegetables to easily resell on credit terms, so the credit insurer is paying “close attention to the number of credit limits that are applied for within a short period, especially where the buyers are recently established and where management and/or shareholders have recently changed or the buyer’s business sector does not match with the goods ordered (e.g., a steel company ordering food items).” Germany is also expected to feel U.S. tariffs, which could impact the sector’s credit risk. Food producers and wholesalers pay within 30 days on average, according to Atradius, which lines up with what was seen in FCIB’s Germany survey where nearly half of respondents reported 0–30-day payment terms.

U.S. tariffs are not expected to have a large impact on Italy due to the low market share, about 10% of exports. Like Germany, credit limits are an important indicator when trying to determine if the application is fraudulent. According to Atradius, payment delays are expected in 2020, which mirrors what was seen in FCIB’s survey—a modest increase in delays; however, average days beyond terms did decrease from the previous survey. “Stick to your payment terms; expect a 15-day grace period,” advised one respondent.

U.S. tariffs on Dutch exports are also predicted to have a limited impact. Yet, one of the top exports, beer, could suffer if the tariffs continue to escalate. Beer and cocoa have not been impacted yet, and the dairy sector could see small losses. Payments, on average, take 45 days in the Netherlands.

Meanwhile, U.S. tariffs on European Union imports are expected to impact Scotland’s second-largest export, whiskey. Larger firms have the potential to disrupt the food supply chain by pushing for longer payment terms. Typically, payments in the U.K. take 45–60 days. According to FCIB’s U.K. survey, 82% of respondents grant terms up to 60 days.

Contractors and suppliers are sometimes challenged to secure a claim for past due payment with a lien on the project, all subject to lien laws that vary throughout the United States. In Arizona, as in most states, the contractor must have a sound legal basis to record a lien. More specifically, the contractor cannot record a lien while “knowing or having reason to know that the document is forged, groundless, contains a material misstatement or false claim or is otherwise invalid.” A.R.S. § 33-420(A).

From this sensible premise governing lawful liens, a question often arises concerning what amounts the contractor can include in the total lien amount. In particular, a lien is usually necessitated by a dispute over what the contractor is actually owed, even when there may be no dispute over the work actually completed. In some cases, this dispute may center upon change order work that the contractor completed, but without first obtaining proper written approval as required by the contract. In other words, the issue often arises regarding whether a contractor can include extra-contractual, additional and unapproved change work in the lien.

No published Arizona case has expressly addressed this issue. However, a combination of the lien statutes and cases interpreting lien law may be used to argue that a contractor cannot legally encumber the project with amounts it has billed for change order work that has not yet been approved. On the other hand, because lien statutes are liberally construed to favor contractors and suppliers broadly including “materials furnished or value provided,” sufficient backup for the change order claim may prove that the corresponding lien was legally valid and reasonable despite the owner’s refusal to pay. See, e.g., Allstate Utility Constr., LLC v. Town Bank of Ariz., 228 Ariz. 145, 149 ¶ 21 (App. 2011) (“We have repeatedly held that the mechanics’ and materialmen’s lien statutes are remedial and are to be liberally construed in favor of materialmen.” (internal quotation marks and citation omitted)).

There is, nonetheless, an argument that only approved written change orders can form the basis of a lien. For example, A.R.S. § 33-981(A) states that each person providing labor, materials, etc., has lien rights “whether the work was done or the articles were furnished at the instance of the owner of the building, structure or improvement, or his agent.” Under rules of statutory interpretation, this arguably means lien rights should be defined by the work specified in the governing contracts and what has been approved. A contractor or supplier cannot simply lien for any materials or work furnished, even if the owner or agent did not approve the work. Furthermore, A.R.S. § 33-993(A)(3) focuses on the terms and conditions of the contract, and unapproved change orders are not part of the contract. See also Tech. Constr., Inc. v. City of Kingman, 229 Ariz. 564, 569 ¶ 14 (App. 2012) (recognizing that, based on a contract providing for changes to the contract price, change orders modify the contract amount). However, the sticky issue is where the owner or his agent has orally approved the work, but a change order required by the contract has not been executed.

In one unpublished Arizona case, a trial court found “expressly disapproved” change orders were not owed. Farwest Dev. & Constr. of the SW, LLC v. St. Joseph Realty, LLC, 2009 WL 838262, at *2 ¶ 11 (Ariz. App. Mar. 31, 2009). However, the appellate court reversed the trial court on other grounds, specifically concerning remaining factual issues on a grant of summary judgment regarding whether the parties waived the contractual requirement to sign change orders. Id. at *4-5 ¶¶ 19-20. Other jurisdictions have more expressly ruled that the contractor or supplier risks recording a wrongful or invalid lien when including unapproved change orders. See, e.g., Roy Zenere Trucking & Excavating, Inc. v. Build Tech, Inc., 65 N.E.3d 340, 349 (Ill. App. Ct. 2016); Stroud-Hopler, Inc. v. Farm Harvesting Co., Inc., 2005 WL 3693342, at *9 (N.J. Super. Ct. App. Div. Jan. 24, 2006) (relying on the New Jersey lien statute’s definition of a “contract” and allowing liens only for work or materials furnished “in accordance with the contract.”)

Therefore, without any Arizona case law directly on point, contractors and suppliers have risks when recording liens that include amounts for unapproved change orders. While the lien statutes will be liberally construed in favor of the lienholder, there may be consequences including treble damages and attorneys’ fees unless the lienholder can show by credible testimony or evidence that the change order was approved and, therefore, amended the contract which would buttress the lien’s validity.

Reprinted with permission.

Rick Erickson, Esq., a leading partner in Snell & Wilmer’s construction practice group, has more than 20 years of experience representing clients in private dispute resolution, administrative and regulatory complaints, litigation and trial. Rick’s diverse litigation practice covers public and private projects, simple and complex claims and clients varying from owners and developers to contractors, subcontractors and design professionals.  His litigation experience also transcends well to writing the best contract documents for projects throughout the United States. 

Amanda Weaver, Esq., is a member of Snell & Wilmer’s construction practice group focuses on commercial litigation. She has handled numerous construction matters involving payment and surety claims, defects and project delays, and she has significant experience with discovery and motion practice in complex construction cases.