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Generating Claims

Posted By admin On July 8, 2013 @ 10:53 am In Business,Columns,In Court,In the Magazine | No Comments

shutterstock_51977686Subcontractor recovers profits and shared savings under Miller Act

The Miller Act requires general contractors on federal construction projects to furnish performance and payment bonds to secure performance and payment to all suppliers of labor and material. The Miller Act is subject to liberal construction to effect its intent of protecting those who furnish labor or materials for public works. Some cases have upheld the right of first-tier subcontractors to recover lost profits and other foreseeable damages resulting from the prime contractor’s breach of subcontracts, including shared savings from value engineering.

In Fisk Electric Co. v. Fidelity and Deposit Company of Maryland (Feb. 14, 2013), the U.S. District Court for the Eastern District of Louisiana upheld a judgment on a Miller Act claim in favor of a first-tier subcontractor, Fisk Electric, regarding payment for a diesel generator for a pumping station. The amount awarded included lost profits and shared savings.

The U.S. Army Corps of Engineers commissioned a project for a pump station in Jefferson Parish, La. The Corps hired prime contractor, Benetech LLC, to perform the work. Benetech hired subcontractor, CDM Constructors, Inc., under a lump-sum subcontract, including to procure and install a 2,865-KV diesel generator and related equipment for the pump station.

In late summer 2010, CDM obtained a quote of $2,352,317 (not including tax) from Stewart and Stevenson Power Products LLC for the generator.

Because CDM had a lump-sum subcontract, it did not add, and would not have been able to add, a profit margin to the approximate $2.3 million cost of the generator. Shortly after obtaining this quote, CDM was “abruptly” terminated and Benetech contacted Fisk to supply the generator. Benetech and Fisk executed a purchase order agreement, where Fisk agreed to supply the generator for $2,644,005. Later, Fisk received change directives from Benetech that increased the price to $2,710,792.

Fisk’s division vice president and general manager, Norman Clyne, testified the approximate $2.7 million price represented the cost of the generator plus engineering costs, interest, overhead, profit, and shared savings.

Clyne further testified the shared savings were an incentive for Fisk to purchase the generator for less than the $2.3 million that was quoted by CDM through Stewart and Stevenson. Clyne testified that Fisk succeeded by purchasing the generator for $2,090,800.00 from EMDI-Hunt LLC.

Clyne testified that Benetech saved more than $200,000 on the price of the generator. In other words, if Fisk had purchased the generator from Stewart and Stevenson, it would have cost close to $2.9 million (versus approximately $2.7 million from EMDI).

Fisk invoiced Benetech for the generator. When Benetech failed to pay, Fisk made demand under the Miller Act against Fidelity and Deposit Company of Maryland and Zurich American Insurance Co. (the “sureties”), which had issued a Miller Act payment bond in favor of Benetech. Although Fisk recovered $2 million on the payment bond, the sureties refused to pay the remaining $710,922 due under the purchase order agreement. Fisk filed suit against the sureties under the Miller Act for the remaining balance.

Fisk moved for summary judgment. Fisk argued it satisfied its obligations by supplying the generator to the project, and that because Benetech failed to pay after more than 90 days, it was entitled to recover on the payment bond for the full amount, including profit and shared savings.

The sureties paid $2 million to Fisk, but resisted paying the balance of $710,922 because they believed there were “questions about the cost of the generator.” They argued that Fisk and Benetech might have colluded to negotiate an artificially inflated price for the generator, with the expectation the cost would be borne by the sureties instead of Benetech. The sureties relied heavily on the fact that CDM obtained a quote to supply the generator for approximately $2.3 million, which was roughly $400,000 less than the approximately $2.7 million that Fisk charged under its purchase order agreement with Benetech.

The sureties also argued that collusion could be inferred by the “fuzzy math” and circumstances surrounding the transaction, in addition to an alleged lack of evidence that Fisk ever attempted to collect the purchase price from Benetech. Finally, the sureties argued they were prejudiced because Fisk failed to reasonably give them notice when it discovered Benetech would not pay.

bridgeUntitled-1The court found the sureties waived any affirmative defenses relating to fraud or collusion because they were not raised in their pleadings. In addition, the sureties failed to come forward with sufficient evidence to defeat Fisk’s motion for summary judgment. The sureties allegations of potential fraud and collusion were unsupported by any evidence, other than the price difference between the generators quoted by Stewart and Stevenson and EMDI. Further, the sureties did not present any evidence to contradict Clyne’s testimony that Fisk sought payment from Benetech.

Finally, the court found that Fisk made demand upon the sureties promptly after 90 days of non-payment as required by the Miller Act. Based on these findings, the court ruled in favor of Fisk and awarded the full amount owed of $710,992, plus costs and interest.

The Fisk matter highlights issues that can be raised in dealing with Miller Act payment bond claims, including the importance of demanding payment prior to making a bond claim, providing timely notice to the sureties of the claim, and what amounts are recoverable (here, lost profits that included shared savings).

Bryan-MorrowUntitled-1Navigating the waters of bond claims can be tricky and full of traps for the unknowledgeable, especially given the technicalities of state and federal law in this arena. Here, Fisk was able to prevail on its claim and recover all outstanding amounts, including lost profits and shared savings, while the sureties allegations of fraud and collusion were disregarded.

Attorney Brian Morrow is a partner in Newmeyer & Dillion LLP and a licensed civil engineer specializing in construction law, incl. road and heavy construction.brian.morrow@ndlf.com


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