Category: Case Summaries

1
New Jersey Supreme Court Calls for More Specific Language in Arbitration Agreements: Atalese and Beyond
2
European Court of Justice overturns additional requirements for the marketing of construction products in German Building Rules List
3
Recent English Court Case on FIDIC – Stay Permitted to Allow Mandatory DAB Referral under FIDIC Silver Book
4
Adjudicator Has No Jurisdiction Because Of “A Very Strong Prima Facie” Case Of Fraudulent Misrepresentation At Appointment Stage
5
High Court Finds No Duty of Care From Builder to Owners Corporation
6
Expansion of Statute of Limitations in Illinois under 15th Place Condominium Association v. South Campus Development Team, LLC
7
Pennsylvania Supreme Court Rules that Subsequent Homeowners Are Not Entitled to Implied Warranty of Habitability
8
“2 Sign or Not 2 Sign:” Which Statute of Frauds Governs Oil & Gas Leases?
9
No License? No Problem. The Ninth Circuit Holds That Unlicensed Contractors May Maintain Claims For Compensation Under The Miller Act
10
No Compensation for Clandestine Employment in Germany!

New Jersey Supreme Court Calls for More Specific Language in Arbitration Agreements: Atalese and Beyond

By Christopher A. BarbarisiLoly G. Tor, and Christopher J. Archer, K&L Gates, Newark

Introduction:

A recent decision by the New Jersey Supreme Court in Atalese v. U.S. Legal Servs. Grp., and subsequent opinions by New Jersey’s state and federal courts applying Atalese, strongly suggest that arbitration provisions contained in contracts relating to construction and engineering projects and services will not be enforceable under New Jersey law unless they contain clear and unambiguous language signaling that the parties are surrendering their rights to pursue their claims in court.

The Atalese Decision

In its September 2014 opinion in Atalese, the New Jersey Supreme Court reversed the rulings of the lower courts and held that an arbitration provision in a consumer contract was unenforceable because it “did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court.”  Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430, 99 A.3d 306 (2014).  A detailed discussion of the Supreme Court’s holding in Atalese can be found in our October 2014 Commercial Disputes Alert.

Recent Decisions Applying Atalese

In the months since Atalese, New Jersey’s state and federal courts have already cited the Supreme Court’s opinion on several occasions and, in doing so, have rejected arguments that Atalese is limited to consumer contracts and that it does not apply to contracts involving sophisticated business parties and/or parties that are represented by counsel in connection with execution of the contract.  To the contrary, New Jersey’s Courts have expanded the Atalese requirement for arbitration provisions to apply to a broad variety of contracts types:

  • Asset Purchase Agreements: In Rosenthal v. Rosenblatt, the Appellate Division of the New Jersey Superior Court applied Atalese to an arbitration provision contained in an asset purchase agreement for the sale of a dentistry practice.  See A-3753-12T2, 2014 WL 5393243, at *4 (App. Div. Oct. 24, 2014).  The court held that the arbitration provision was unenforceable because it did not contain “clear and unambiguous language that plaintiff is giving up his right to bring his claims in court or have a jury resolve the dispute,” as required by the Atalese decision, despite stating that all disputes between the parties “shall be exclusively resolved as provided herein through mediation and arbitration.”  The court specifically stated that the Atalese requirement for arbitration applied even between parties engaged in sophisticated business transactions.
  • Condominium Purchase Agreements: In Dispenziere v. Kushner Cos. (the first published opinion to apply Atalese), the Appellate Division held that an arbitration provision contained in purchase agreements between a condominium developer and condominium unit purchasers was not enforceable because, like the provision involved in Atalese, it was “devoid of any language that would inform unit buyers such as plaintiffs that they were waiving their right to seek relief in a court of law.”  438 N.J. Super. 11, 18 (App. Div. 2014).  The Appellate Division expressly rejected the position that Atalese—which only involved causes of action pursuant to the New Jersey Consumer Fraud Act and the New Jersey Truth-in-Consumer Contract Warranty and Notice Act—is limited to claims for statutory violations and, instead, held that Atalese applies equally to common-law causes of action.  The Appellate Division also rejected the argument that Atalese should not apply when the parties are represented by counsel in connection with the execution of the contract.
  • Collective Bargaining Agreement: In the Appellate Division’s unpublished opinion in Kelly v. Beverage Works N.Y. Inc., the court applied Atalese to an employment discrimination case and held that an arbitration provision contained in a union employee’s collective bargain agreement (CBA) was unenforceable because the provision did not “put plaintiff on notice that he was waiving his right to try his claims in court.”  L-1285-13, 2014 WL 6675261 (App. Div. Nov. 26, 2014).  The Appellate Division specifically rejected the argument that Atalese applied only to “consumer service agreement[s],” explaining that it “discern[s] no reason to conclude that employees bound by a CBA should be charged with greater understanding of their rights than the average consumer.”

New Jersey’s federal courts have also applied Atalese on at least two occasions.  In Guidotti v. Legal Helpers Debt Resolution, the District Court of New Jersey held that an arbitration provision contained in an agreement to provide debt-adjustment services was unenforceable because it failed to advise the plaintiff of the provision’s effect and significance, “namely, that it bars [plaintiff] from seeking court relief.”  No. 11-1219, 2014 WL 6863183, *1 (D.N.J. Dec. 3, 2014).  In Ricci v. Sears Hldg. Corp., the District Court cited Atalese and held that an arbitration provision in an employment agreement containing the following language was enforceable: “[This agreement to arbitrate] constitutes a waiver of [the employee’s] right to bring the current action in a court of law and, instead, requires arbitration of [the employee’s] claims.”  No. 14-3136-RMB-JS, 2015 WL 333312, at *1, 5 (D.N.J. Jan. 23, 2015).

Moving Forward

On January 21, 2015, the defendant in Atalese filed a Petition for Writ of Certiorari with the United States Supreme Court, arguing that the New Jersey Supreme Court’s decision contradicts the plain language of the Federal Arbitration Act and conflicts with the decisions of other federal and state courts.  Whether the Court will grant the Petition in Atalese is questionable.  The New Jersey Supreme Court framed the question in Atalese as one of purely New Jersey contract law, and the United States Supreme Court receives approximately 10,000 petitions for a writ of certiorari each year but grants only 75–80.  For now, Atalese is binding precedent, and companies doing business in New Jersey should review their contracts to evaluate whether they comply with Atalese.  Companies should be mindful that they may face uphill battles enforcing arbitration provisions that were routinely enforced prior to Atalese.  Moreover, the opinions in Rosenthal, Dispenziere, Kelly, Guidotti, and Ricci demonstrate that courts will not limit Atalese to statutory claims, and may extend Atalese beyond consumer contracts.  Companies should also be mindful that Atalese will apply in federal court when the contract is governed by New Jersey law.

European Court of Justice overturns additional requirements for the marketing of construction products in German Building Rules List

By Christoph Mank and Eva Hugo, K&L Gates, Berlin

On 16 October 2014, the European Court of Justice[1] (ECJ) ruled that German law, which imposes additional authorization schemes on construction products even if they already bear the “CE” mark and are lawfully marketed in other member states of the European Union, violates the right on the free movement of goods on the single European market.

The facts

In the European Union, certain products are marked with the CE symbol to certify their compliance with product requirements under European Union law. Consequently, a CE-certified product is entitled to move freely on the European market and may be freely used for its intended purpose.

Nevertheless, German law, as reviewed by the ECJ, stipulates that CE-certified construction products are subject to additional approvals before their use and sale in the domestic market; such additional approvals are listed in building rules lists (Bauregellisten) A, B and C.

The present case solely referred to building rules list B and three construction products listed therein; namely, pipeline compressions, mineral wool insulating materials and gates, windows and exterior doors. All these construction products had in common was that they were marked with the CE symbol, which meant that they complied with requirements of the Construction Products Directive[2] of the European Union and, therefore, could be marketed and used freely on the European market. However, German public building law provides for additional national approvals for marketing the construction products on the German market.

Due to this practice, the European Commission received numerous complaints from manufacturers and importers who had difficulty in placing their construction products on the German market; the European Commission, therefore, launched infringement proceedings against Germany. Since Germany insisted during the preliminary procedure that the security of buildings cannot sufficiently be achieved by the CE marking alone, the European Commission decided to bring action before the ECJ.

The decision

The ECJ held that the additional approvals set out in building rules list B infringes article 4 paragraph 2 and article 6 paragraph 1 of the Construction Products Directive. According to those provisions, member states “shall not impede the free movement, placing on the market or use in their territory of products which satisfy the provisions of this Directive,” and were, correspondingly, CE-marked. The ECJ ruled that the German approval practice constitutes such an impediment.

The Court further stated that the Directive itself provides for specific procedures in the event that a member state considers the requirements of the Directive to be incomplete and insufficient. Due to the existence of those procedures, a member state is not allowed to arbitrarily impose its own additional requirements.

Consequences

Although the present decision refers only to the three aforementioned groups of construction products, the ruling will be applicable for all CE-marked construction products that are subject to further approvals according to German law. The European Commission, correspondingly, sees a precedent.

Nevertheless, it should be noted that the Court´s decision refers to the Construction Products Directive of 1989, replaced in 2013 by the Construction Products Regulation[3]. Hereafter, the CE marking no longer serves as a proof that the respective construction product complies with the requirements of European law. Now, it only shows that a declaration of performance has been issued by the manufacturer describing the performance of the construction product and its essential features; therefore, it is not clear whether, and to what extent, the member states are allowed to impose additional requirements under the new Construction Products Regulation. However, since the new Regulation also provides for special procedures in the event of incomplete and insufficient provisions, it can be assumed that member states will also not be allowed to impose their own additional requirements beyond the provided procedures. It remains to be seen if Germany will make use of those procedures.

Reactions to the present decision are quite different: while the European Commission and European associations welcome the decision with regard to the right of free movement of goods, German associations fear a decline in quality of construction products.


[1] Case no. C-100/13.

[2] Directive 89/106/EEC.

[3] Regulation EU 305/2011.

Recent English Court Case on FIDIC – Stay Permitted to Allow Mandatory DAB Referral under FIDIC Silver Book

By Mike Stewart and Camilla de Moraes, K&L Gates, London

Following on from our recent blog post discussing the case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) (which can be found here), there has been another recent decision in the English courts regarding the International Federation of Consulting Engineers (FIDIC) suite of contracts.  The case of Peterborough City Council v Enterprise Managed Services Ltd [2014] EWHC 3193 has confirmed that the referral of a dispute to a Dispute Adjudication Board (DAB) under FIDIC is mandatory and operates as a condition precedent to the dispute being referred to arbitration or litigation for final resolution.  The case also discusses the well know “gap” in the provisions of clause 20 of the FIDIC conditions where arbitration is chosen as the final method of dispute resolution.

Facts

Under the terms of the contract, Enterprise Managed Services Ltd (EMS) agreed to design, supply, install, test and commission a 1.5 MW solar energy plant on the roof of a building owned by Peterborough City Council (the “Council”).

The form of contract was the FIDIC General Conditions of Contract for EPC/Turnkey Projects (the “Silver Book”).  The works were completed in late 2011, and the Council alleged that the plant failed to reach the required output of 55kW.  Disputes then arose between the parties as to the value of EMS’s executed work and whether or not liquidated damages were payable to the Council for failure to meet the required output.

On 21 July 2014, EMS gave notice under the contract of its intention to refer the dispute to adjudication.  Despite this, on 11 August 2014, the Council issued proceedings.  Shortly afterwards, the Council wrote to EMS disputing that it was obliged to refer the dispute to the DAB.  On 27 August 2014, EMS issued an application to the court for an order to stay the action brought by the Council.

The Contract

Clauses 20.2–20.7 of the contract set out the procedure for dispute resolution by a DAB to be appointed on an ad hoc basis after any dispute has arisen.  Clause 20.8 stated that if at the time a dispute arose there was no DAB in place, “whether by reason of the expiry of the DAB’s appointment or otherwise”, then either party could proceed to litigation.

The Issues

The issues to be decided were:

i) Whether the contract required a dispute to be referred to adjudication by a DAB as a condition precedent to issuing court proceedings; and

ii) If so, should the court exercise its discretion and order that the proceedings commenced by the Council should be stayed?

In relation to the first issue, the Council argued that Clause 20.8 operated as an “opt-out” from DAB adjudication.  However, even if such a reference was mandatory, the Council argued that it would be a time consuming, expensive and ultimately unproductive exercise to conduct an adjudication which would almost certainly provoke a notice of dissatisfaction from one or other of the parties, and therefore, a stay should not be granted.

The Decision

In respect of the Council’s argument that Clause 20.8 operated as an ‘opt-out’ from DAB adjudication, the judge held that Clause 20.8 would “probably” only grant the parties a unilateral right to opt out of the DAB adjudication if the parties had agreed to appoint a standing DAB at the outset.  This was because an ad hoc DAB would only ever be appointed after a dispute had arisen.  Otherwise, Clauses 20.2 and 20.3 would have no application because, under those sub-clauses, there had to be a dispute before the process of appointing a DAB began.  Given that Clause 20.2 provided for ad hoc DAB appointments and on the Council’s argument Clauses 20.2–20.7 would have been rendered meaningless, the judge accepted EMS’s argument that the contract required disputes to be resolved by way of DAB adjudication prior to litigation.

As to the Council’s submission that the “rough and ready” process of adjudication was entirely unsuitable to resolve the dispute between the parties, although the judge agreed, he stated that this was an inherent feature of adjudication.  The judge, however, referred to the presumption that parties should be left to resolve their disputes in the manner provided for in their contract.  He stated that the factors and rival scenarios between the parties were finely balanced, and that the Council had failed to make out a sufficiently compelling case to displace the presumption and, accordingly, had failed to make out a sufficient case for resisting a stay.

It was held that the parties must be left to resolve their dispute in accordance with the contractual mechanism, namely adjudication.

“Gap” in FIDIC Clause 20

As part of its submissions, the Council argued that there is a gap in Clauses 20.4–20.7, such that these clauses should be unenforceable for lack of certainty.  This so-called “gap” has been the subject of much commentary.

Clause 20.4 of the FIDIC conditions provides that, where a party gives a notice of dissatisfaction after a DAB decision, then the decision must be given effect to (pending final determination).  It is therefore binding, but it is not final and binding.  The Council argued that if the unsuccessful party subsequently failed to comply with the DAB’s decision, then the only remedy for the successful party would be to refer the refusal to comply to a DAB.  The fact that the unsuccessful party is left without an effective remedy (other than to refer the original dispute to arbitration or litigation) is the “gap” which the Council argued rendered the particular clauses unenforceable.

The judge rejected the Council’s argument that Clauses 20.4–20.7 were unenforceable for lack of certainty.  The judge held that although the “gap” point was arguable if the contract contained an arbitration clause, it fell away if litigation was the forum for final dispute resolution.  This was because a court could intervene and order specific performance of the obligation to comply with the DAB’s decision (something which an arbitrator may not have jurisdiction to do).

Interestingly, there has been a recent case heard by the Swiss Federal Supreme Court where it was decided that, although the DAB procedure was a condition precedent to arbitration, the parties did not have to go through the process if doing so would amount to an abuse of rights/breach of the principle of good faith.  Given that there is no underlying principle of good faith in English law, it would be unlikely if such arguments were deployed before the English courts to rebut the presumption that parties should be left to resolve their disputes in the manner provided for in their contract.

Adjudicator Has No Jurisdiction Because Of “A Very Strong Prima Facie” Case Of Fraudulent Misrepresentation At Appointment Stage

By Mike R. Stewart and Mary E. Lindsay, K&L Gates, London

Eurocom Limited v Siemens PLC

[2014] EWHC 3710 (TCC)

http://www.bailii.org/ew/cases/EWHC/TCC/2014/3710.html

It is never easy to resist an action for enforcement of an adjudicator’s decision.  Speed and certainty are central tenets to the adjudication mechanism provided by the Housing Grants Construction and Regeneration Act 1996.  However, the judgment in the recent case of Eurocom Limited v Siemens PLC shows that the courts will not put enforcement of the adjudicator’s decision above basic legal principles.

The dispute arose in relation to a sub-contract allowing for the installation of communication systems in the London Underground.  Siemens terminated the sub-contract in August 2012.  A first adjudication took place and the decision made on 27 September 2012.  That decision provided that a net sum was due from Eurocom to Siemens.  Eurocom served a second notice of adjudication on 21 November 2013 and it was that adjudication that gave rise to these enforcement proceedings.

In the enforcement proceedings the judge considered, amongst other things, whether appointment of the second adjudicator was valid.

The adjudicator was appointed under the RICS’s nomination procedure.  This required Knowles, acting for Eurocom, to complete a form in which it was asked to identify “any Adjudicators who would have a conflict of interest” in the case (who would not thereby be appointed).  A number of adjudicators, the adjudicator in the first adjudication (who might very well and sensibly have been appointed as adjudicator in the second adjudication) and a firm of solicitors were listed in this section of the form.  The form was not initially shared with Siemens. 

However, it subsequently came to light and it transpired that the adjudicators identified did not in fact have a conflict of interest in the case.  Knowles accepted they did not “properly” answer the question asked by the RICS about conflicts of interest, but merely referred to people without any conflicts who they did not want to be appointed. 

Siemens’ primary case was as follows:

  • The application form sent to the RICS by Knowles seeking the appointment of an adjudicator misrepresented to the RICS that a number of individuals had a conflict of interest;
  • This was a false statement, made deliberately and/or recklessly by Knowles; and
  • A nomination based upon such a fraudulent misrepresentation is invalid and a nullity, such that the adjudicator has no jurisdiction.

The Court decided the point as follows (at para 65 of the judgment):

“… there is a very strong prima facie case that [Knowles] deliberately or recklessly answered the question “Are there any Adjudicators who would have a conflict in this case?” falsely and that therefore he made a fraudulent representation to the RICS as the adjudicator nominating body.”

The Court said that the consequence of this was as follows (at para 75 of the judgment):

“… I conclude that the fraudulent misrepresentation would invalidate the process of appointment and make the appointment a nullity so that the adjudicator would not have jurisdiction.”

The Court also agreed with Siemens’ alternative case that the completion of the form gave rise to a breach of an implied term to act honestly.  Here the Court referred to the judgment in Makers v Camden (at [29(7)]) that there might be an implied term “by which the party seeking a nomination should not suborn the system of nomination”.  Eurocom, through its advisors, had sought through fraudulent misrepresentation to influence the discretion to be applied by the appointing body, the RICS.  Eurocom should not benefit from this benefit and the appointment of the adjudicator was invalid.

The ramifications of this decision will be keenly monitored by the industry. 

High Court Finds No Duty of Care From Builder to Owners Corporation

by Sandra Steele, Belinda Montgomery, Marcel Marquardt, Matthew G. Sier, K&L Gates, Sydney

The High Court has held that a builder of a serviced apartment complex does not owe a duty of care in negligence for financial loss arising from defects in common property to an owner’s corporation (Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36).

The serviced apartments were built by the builder under a design and construction contract with a developer. The owner’s corporation was a subsequent owner of the land.

This is an important decision for the building and construction industry as it has defined the circumstances in which a commercial builder will be found liable for defective works in negligence. 

To read the full alert, click here

Expansion of Statute of Limitations in Illinois under 15th Place Condominium Association v. South Campus Development Team, LLC

By Daniel E. Raymond and Jesse G. Shallcross, K&L Gates, Chicago

General contractors and developers beware—suits for breach of express indemnity now have a longer shelf life in Illinois.

In 15th Place Condominium Association v. South Campus Development Team, LLC, the Appellate Court for First District of Illinois held that a claim for breach of an express indemnity clause contained in a construction contract is subject to a ten-year statute of limitations instead of four.[1]  The subject of the dispute was a contract between 15th Place Condominium Association (the “Association”) and South Campus Development Team (the “Developer”) to develop two condominium towers (the “Project”).  The Developer contracted with Linn-Mathes, Inc. (the “General Contractor”), who would act as general contractor.[2]  The contract between the Developer and the General Contractor included an express indemnity clause and a cause of action accrual provision.[3]  By 2003 and 2004, the Project was substantially completed, and, in 2005, the Developer turned over the property to the Association.[4] 

Unhappy with the Project, the Association sued the Developer for breach of the implied warranty of fitness and habitability, breach of fiduciary duty, and negligence in 2008.[5]  In turn, in 2011, the Developer filed a third-party complaint against the General Contractor for breach of express indemnity, among other claims.[6]  At the trial level, the General Contractor successfully argued that the Developer’s claim for breach of express indemnity was untimely and barred by the four-year statute of limitations for construction-related claims.[7] 

The appellate court, however, disagreed.  Relying on the Illinois Supreme Court’s ruling in Travelers Casualty & Surety Co. v. Bowman, the court overturned the trial court and applied the ten-year statute of limitations for contract claims.[8]  In Travelers, the Illinois Supreme Court instructed that when determining whether to apply the ten-year statute of limitations for contract claims or the four-year statute of limitations for construction-related claims, courts must look to the nature of the claim—meaning whether the claims emanates from construction-related activity or a contractual obligation.[9]  Applying this test to the express indemnity clause at issue, the court determined that the nature of the claim was for failure to indemnify, a contractual obligation, not from any “act or omission relating to construction activity.”[10]  Thus, the ten-year statute of limitations applied and the Developer’s claim for breach of express indemnity was not barred by the passage of time.


[1] 2014 IL App (1st) 122292.

[2] Id. ¶¶ 5-7.

[3] Id. ¶ 43.

[4] Id. ¶ 39.

[5] Id. ¶ 7.

[6] Id. ¶ 10.

[7] Id. ¶¶ 17-20.

[8] Id. ¶ 45.

[9] Id. ¶ 46.

[10] Id. ¶ 52.

Pennsylvania Supreme Court Rules that Subsequent Homeowners Are Not Entitled to Implied Warranty of Habitability

By Christopher A. Barbarisi and Loly G. Tor, K&L Gates, Newark

In Conway v. Cutler Group Inc.,[1]  the Pennsylvania Supreme Court reversed a decision by the Superior Court and held that the builders’ implied warranty of habitability does not run to subsequent purchasers of homes, significantly limiting homebuilders’ potential liability to subsequent owners.

In Conway, the homeowners, Michael and Deborah Conway, purchased a three-year-old home from the original owners, who had purchased the home new from the builder.  After allegedly discovering water infiltration and construction defects in the home, the Conways filed suit against the builder for breach of the homebuilders’ implied warranty of habitability.  The trial court dismissed the Conways’ complaint, finding that the Conways’ claim for breach of the implied warranty was barred due to lack of privity. On appeal, the Superior Court reversed, finding that the implied warranty of habitability should exist independently of a contract between the builder and homeowner because the warranty is based on public policy considerations, is designed to “equalize the disparate positions” of the builder and homeowner, and exists independently of any builder representations.

In reversing the Superior Court, the Pennsylvania Supreme Court considered the history of the implied warranty of habitability and its adoption by the Court in Elderkin v. Gaster.[2]  In Elderkin, the Court rejected the doctrine of caveat emptor and instead placed the burden of risk on a builder “‘that a home which he has built will be functional and inhabitable in accordance with contemporary community standards.’”[3]  The Court also recognized that the implied warranty in Elderkin was based on the existence of a contract between the builder and the homeowner (which, of course, does not exist with a subsequent purchaser) and was limited to situations where the parties are not in privity.  After discussing the varying decisions reached by courts in other jurisdictions on this issue, the Court declined to depart from its position that the implied warranty of habitability is grounded in contract and requires privity between the parties to be enforced.  It concluded that whether to extend the warranty of habitability to subsequent homeowners is a question of public policy properly left to the legislature.  Thus, unless and until Pennsylvania’s General Assembly decides otherwise, an action for breach of implied warranty of habitability requires contractual privity between the parties, eliminating a potential source of liability to homebuilders.
 
[1] J-41-2014 (Pa. Aug. 18, 2014).
[2] 288 A.2d 771 (Pa. 1972).
[3] J-41-2014 at *4 (quoting Elderkin, 288 A.2d at 777).

 

“2 Sign or Not 2 Sign:” Which Statute of Frauds Governs Oil & Gas Leases?

By George A. Bibikos, K&L Gates, Harrisburg and David I. Kelch, K&L Gates, Pittsburgh

In a recent decision, the Pennsylvania Superior Court resolved an open question of state law regarding which one of two alternative statutes of frauds apply to oil and gas leases, in the process making clear that for an oil and gas lease, only the grantor of the interest must sign. 

To read the full alert, click here

No License? No Problem. The Ninth Circuit Holds That Unlicensed Contractors May Maintain Claims For Compensation Under The Miller Act

By Heather W. Habes and Tyler J. Cesar, K&L Gates, Los Angeles

In a matter of first impression in Technica, LLC ex rel. United States v. Carolina Casualty Ins. Co., No. 12-56539, 2014 WL 1674108 (9th Cir. April 29, 2014), the Ninth Circuit held that California’s contractor’s licensing law, does not bar unlicensed contractors from recovering on Miller Act claims. The Ninth Circuit’s refusal to impose state law limitations on a contractor’s remedies under the federal Miller Act is consistent with prior rulings of the Supreme Court and the Eighth and Tenth Circuits. In the interest of uniform enforcement of federal law and the reduction of hurdles to recovery by federal subcontractors, the Ninth Circuit reversed the district court’s grant of summary judgment to the prime contractor and its surety.

The underlying dispute arose from work performed in connection with the federal work of improvement located in California on the ICE El Centro SPC – Perimeter Fence Replacement/Internal Devising Fence Replacement (the “Project”). Candelaria Corporation, as prime contractor, secured a payment bond from its surety, Carolina Casualty Insurance Company (“CCIC”), in connection with the Project. Candelaria’s sub-subcontractor, Technica, LLC (“Technica”) provided almost $900,000 worth of labor, material, and services to the Project, yet only received payments for this work in the amount of $300,000. Technica did not possess a California contractor’s license during its performance of the work at issue. Invoking its rights under the Miller Act to recover the outstanding amounts, Technica filed a complaint in district court against Candelaria and CCIC. Pursuant to California Business and Professions Code section 7031(a), which bars a contractor from recovering compensation for work that was performed without a license, Candelaria and CCIC sought, and were granted, summary judgment of Technica’s claims. Technica appealed.

On appeal, the Ninth Circuit emphasized that the purpose of the Miller Act is to provide a remedy to contractors and materialmen denied compensation on federal construction projects. The Miller Act requires a general contractor on a federal project to obtain a payment bond for the benefit of “persons supplying labor and material in carrying out the work provided for in the contract.” 40 U.S.C. § 3133(b)(2). Since it is the Miller Act, and not California state law, that provides Technica with a right to recover on the Project, the Ninth Circuit reasoned that the scope of this federal remedy should not be conditioned by state law. In reaching this conclusion, the Ninth Circuit drew upon the holding of the Supreme Court in F.D. Rich Co. Inc. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116, 127 (1974), and other similar Circuit Court decisions. In F.D. Rich, the Supreme Court relied upon the federal interest in uniform application of the law in determining that state law could not be used to provide an award of attorney’s fees to a Miller Act claimant when federal law provides no such right. F.D. Rich, 417 U.S. at 127-28. In Aetna Casualty & Surety Co. v. United States ex rel. R.J. Studer & Sons, 365 F. 2d 997 (8th Cir. 1966), the Eighth Circuit held that a Colorado law requiring a partnership to record an affidavit with the county recorder’s office was not applicable to the contractor’s Miller Act claim. Likewise, in Hoeppner Constr. Co. v. United States ex rel. E.L. Magnum, 287 F.2d 108 (10th Cir. 1960), the Tenth Circuit acknowledged that the Miller Act is highly remedial, and therefore the contractor’s remedies thereunder should not be limited by a South Dakota statute forbidding enforcement of a contract on behalf of a foreign corporation.

The Ninth Circuit’s decision does not change any current California law. Nonetheless, the decision is significant for its fresh look on the purpose of the Miller Act. Construction counsel should take note that courts may be unwilling to limit the remedies of contractors under the Miller Act in accord with state law requirements.

No Compensation for Clandestine Employment in Germany!

By Christoph Mank and Kristina Fischer, K&L Gates, Berlin

In Germany, it is prohibited by law to hire clandestine workers. But what happens if a principal nevertheless hires a clandestine worker and does not pay the agreed compensation? Is the clandestine worker entitled to claim his compensation before court? In a recent judgment dated 10 April 2014, the German Federal Court of Justice (“Bundesgerichtshof“) said “no“ and decided that clandestine employment must not be compensated.

The defendant was building serial houses; the plaintiff was instructed by the defendant to do electrical installations. As compensation, plaintiff and defendant had agreed that the defendant would pay a lump-sum of EUR 13,800 including VAT and another EUR 5,000 cash and without invoice. From the agreed amount of EUR 5,000, the defendant had paid EUR 2,300 but refused to pay the remaining EUR 2,700. The claim with which the plaintiff (inter alia) requested payment of these EUR 2,700 was, however, dismissed:

The agreement between the parties, obliging the defendant to pay the cash amount of EUR 5,000, is null and void. According to Section 134 of the German Civil Code, an agreement which violates a statutory prohibition is void, unless the statute leads to a different conclusion. In this case, the parties´ understanding has violated Section 1 no. 2 (2) of the German Act to Combat Clandestine Employment (“Schwarzarbeitsbekämp-fungsgesetz“), which classifies as clandestine employment the nonfulfilment of statutory tax liabilities. According to the Court, it was evident that the parties´ agreement to provide works without an invoice was meant to conceal the plaintiff´s turnovers from German tax authorities and to provide a price advantage for the defendant. Even if the „cash understanding“ referred to only a part of the agreement, the violation of Section 1 no. 2 (2) of the Act leads to a nullity of the entire agreement. As a consequence, the clandestine worker was not able to claim the agreed compensation from the principal.

What makes the decision of the German Federal Court of Justice particular? In a former decision of 1990, the Court had decided that although the agreement between principal and contractor was violating the (former) Law on Clandestine Employment the contractor was nevertheless entitled to claim restitution according to the value of his work. The Court argued that the principal who mostly is the economically stronger party, would otherwise be in unjust advantage if he was allowed to keep the clandestine worker´s performance without any consideration. Since 1990, the Laws on Clandestine Employment have tightened. Accordingly, in 2013, the Court heralded a change of its case law and ruled that a principal has no warranty claims against a clandestine worker, if the worker´s performance was poor, inadequate or insufficient. With its 2014 decision, the Court emphasized the importance to enforce the Laws on Clandestine Employment effectively: A person who deliberately violates the Law does not deserve to be protected by civil law. By denying the principal´s warranty claims on the one hand and the clandestine worker´s claim for compensation on the other hand, parties shall be restrained from concluding a prohibited clandestine agreement. Whether or not this judgment will have the expected deterrent effect on clandestine contractors and principals remains to be seen.

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