Construction Law Toolbox : Mississippi Construction Lawyer & Attorney : Biggs, Ingram, Solop & Carlson, PLLC : MS & Southeast Construction Law Toolbox

The Mississippi Supreme Court recently decided an appeal concerning whether Miss. Code Ann. § 31-5-41 applied to a performance bond surety where the performance bond incorporates the terms and conditions of a construction contract. Miss. Code Ann. § 31-5-41 provides that all public or private construction contacts that contain a provision agreeing to "indemnify or hold harmless another person from that person’s own negligence is void as against public policy and wholly unenforceable." It also states that "[t]his section does not apply to construction bonds or insurance contracts or agreements."

In the case decided by the Court, the general contractor was sued by the owner of a building for alleged construction defects. The owner also sued the performance bond surety for breach of the performance bond and bad faith denial of its claims. The surety sought to enforce its indemnity agreement with the general contractor. However, the trial court denied the surety’s claim for indemnification finding its potential liability arouse out of its own negligence. The Mississippi Supreme Court reversed the trial court simply finding the language of Miss. Code Ann. § 31-5-41 provides that it does not apply to "contraction bonds or insurance contracts or agreements." The Court went on to state that "[t]his remains true even if the performance bond incorporates the construction contract by reference."

Even though the general contractor was unable to use Miss. Code Ann. § 31-5-41 as a defense against the surety’s claim for indemnity, this statutory provision does afford the general contractor protection against broad indemnity provisions in other construction related contracts.

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It can be unclear when a contractor bidding on a public construction project actually has a binding contract with a public entity. This question appears to have been addressed by the Mississippi district court in Northeast Mississippi Community College District v. Vanderheyden Construction Company. In that case, the community college had issued an advertisement for bids from qualified contractors for the construction of a new science and math building. The advertisement reserved the right to reject any and all bids. After bids were opened, Vanderheyden was declared the low bid. The Board of Trustees ("the Board") voted to award the contract to Vanderheyden but after the board meeting the second low bidder challenged the award alleging a number of deficiencies in Vanderheyden’s bid. Rather than risk a lawsuit by the second low bidder, the Board decided to rescind the award and readvertise. At the second bid opening the protester on the original procurement was the low bidder and Vanderheyden was the second low bidder.

The issue presented to the district court was whether the Board could properly rescind its prior award to Vanderheyden and readvertise the project. The district court concluded that "a public entity cannot reject all bids and readvertise the project after it has already accepted the lowest responsible bidder." In analyzing the actions of the Board, the district court when on to state:

[T]he court is of the opinion that once the board chose to accept Vanderheyden’s bid, the reserved right to reject any and all bids had not been exercised and it was no longer operative. To hold otherwise would be contrary to well-established principles of contract law and would permit the possibility of favoritism in public bidding, the very evil which the bidding process statutes were enacted to prevent.

Therefore, once a public entity has officially accepted a bid, there is a binding contract between the parties unless the public entity has expressly conditioned the award upon certain requirements.

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The U.S. Government Accountability Office ("GAO") has recently issued a report setting forth statistics for bid protests for the fiscal years 2007 through 2011. See GAO Report here. The report also contains a synopsis of a number of recent notable GAO decisions on various issues including Historically Underutilized Business Zones ("HUBZones") and Service-Disabled Veteran Owned Small Business Concerns ("SDVOSBC").

Both Christopher Solop and Lynn Patton Thompson file pre- and post-award bid protests and practice before the GAO and the United States Court of Federal Claims.

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Lynn Patton Thompson recently secured 2 wins for client W.B. Construction and Sons, Inc. before the General Accountability Office (GAO) in Washington, DC. The protests involved separate procurements and different issues, and Ms. Thompson prevailed on both.

On December 16, 2011, the GAO issued its public decision sustaining W.B. Construction’s protest of an award made by the Department of the Army for various construction and maintenance services at Fort Polk, Louisiana. The procurement was advertised as an 8(a) set-aside. When the Army announced award to an entity that was not certified as an 8(a) concern, W.B. Construction protested. You can read the full decision here.

On January 4, 2012, the GAO issued its public decision sustaining W.B. Construction’s protest of an award to Tanner Heavy Equipment, LLC by the Army’s Corps of Engineers. Award was to be made on the basis of the lowest, technically-acceptable bid. W.B. Construction submitted the lowest bid and was deemed technically acceptable. However, the Army refused award to W.B. Construction because its bid had omitted a price for one line item and was alleged to be unbalanced. GAO sustained W.B. Construction’s protest. As demonstrated by Ms. Thompson, omission of the price for one line item did not render W.B. Construction’s bid non-responsive, and the Army did not comply with applicable regulation in determining that W.B. Construction’s bid was unbalanced. You can read the full decision here.

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If you are bidding on a project for a school board and are aggrieved by the decision to award the contract to another party, you must appeal the order "within ten (10) days from the date of adjournment of the meeting at which the order is entered."  Miss. Code Ann. § 37-7-115. The procedure for appealing the award decision is the same as set forth in Miss. Code Ann. § 11-51-75 and requires preparing and filing a bill of exceptions with the circuit court.  Because of the short time within which to appeal the decision, a contractor must not delay in deciding whether to appeal or walk away and fight another day.

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On October 1, 2011, "redesignated" HUBZone areas will expire. These areas were previously set to expire at earlier dates, but in 2004, Congress extended and "grandfathered" their HUBZone status until the results of the 2010 Census were published. The original "redesignated" expiration date was June 1, 2011, but it was extended and now will take effect on October 1, 2011. The Small Business Administration is encouraging all currently-certified HUBZone concerns to assess the impact expiration of "redesignated" areas will have on their eligibility to remain in the HUBZone program, whether a concern’s principal office is currently located in a "redesignated" area or if it relies upon the employment of residents in redesignated areas to meet the "35%" rule.

The HUBZone program does not require termination of existing HUBZone contracts if a concern is no longer eligible after October 1, 2011. However, because a concern must be properly certified and eligible as of the date (a) it submitted its initial offer for the contract and (b) the date the contract was awarded, expiration of "redesignated" areas may impact pending offers. Also, regardless of whether a current HUBZone concern has an offer pending for a federal contract, it must always notify the SBA of any "material" change which could impact its HUBZone eligibility. Firms that will no longer qualify for the HUBZone program as of October 1, 2011, can voluntarily de-certify. If that is not done, the SBA will send proposed de-certification letters which must be responded to within thirty (30) days.

Concerns which voluntarily decertify or otherwise become non-compliant with the HUBZone program as of October 1, 2011, can re-apply after ninety (90) days have passed since the date of a voluntary decertification agreement or decertification.

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In an article published on June 9, 2011, by Brenda Redfern, employers were reminded that effective July 1, 2011, the Mississippi Employment Protection Act requires all Mississippi businesses to E-Verify all new employees. In conjunction with this statutory mandate, the Mississippi Department of Employment Security ("MDES") has announced it will E-Verify any prospective employees for employers who are looking to retain workers through MDES.  Click here to see the article published regarding this e-verify service in the Mississippi Business Journal on July 18, 2011.  An employer simply has to place a job order with MDES by calling 888-844-3511 or contacting a WIN Job Center. MDES will send a list of prospective employees, all of whom will be E-Verified. When an individual is hired, the employer simply notifies MDES and it will send an official "Certification of I-9 Completion" to the employer. This service can assist contractors in identifying potential employees and save many administrative hours and headaches.

In addition, MDES has also agreed to implement a process it calls "reversal referrals". This is where an employer identifies a prospective employee and can send him/her to a WIN Job Center where the individual is E-Verified. The name of the individual is sent back to the prospective employer by MDES and, if hired, MDES will send the required certification. Employees that use MDES for E-Verification may relieve themselves from potential liability under the Mississippi Employment Protection Act.

Contractors should consider taking advantage of this free service by MDES in these difficult economic times.

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During the course of construction, contractors will sometimes find that the owner and/or architect are demanding more work than the contractor reasonably interprets the plans and specifications to require. The typical owner and/or architect solution to the dispute is simply to tell the contractor its interpretation is incorrect and direct the contractor to proceed with what the contractor considers additional work. Later, the owner may attempt to rely upon the lack of a written change order authorizing the performance to deny compensation and/or time for performance of additional work.

Does the contractor walk off the job or proceed with the additional work notwithstanding this dispute? Most contracts require contractors to proceed with the work notwithstanding the existence of a dispute; otherwise, the contractor might be subject to a default termination. However, such provisions also typically require the owner to continue payments under the contract for undisputed work. The idea is to keep the project moving forward—i.e., to prevent the contractor from bringing the project to a halt pending resolution of disputed items and to prevent the owner from holding the contractor’s funds hostage pending the resolution of the dispute.The contractor must therefore generally proceed with the performance of additional work without immediate compensation for that work.

However, it does not mean that the contractor is performing the work gratuitously. The refusal of the owner to issue a change order for the additional work may not insulate it from liability. "[U]nder Mississippi law, where the owner orders the contractor to perform extra work outside the contract, the contractor is entitled to compensation for that work, despite the fact that no change order was issued." See Sentinel Industrial Contracting Corp. v. Kimmins Industrial Service Corp. In Sentinel, the Mississippi Supreme Court recognized the inherent inequity in allowing the contractor to demand a subcontractor perform extra-contractual work without a change order and then deny compensation because a change order had not been issued.

This same rationale should apply to the situation where an owner directs the contractor to perform work without a change order. When this occurs, the contractors must place the owner and/or architect on written notice of its objection to the additional work and reserve its right to recover the costs and/or time associated with the change order work. Simply stated, the duty to proceed does not entitle the owner to avoid paying for legitimate change order work even in the absence of a written change order.

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Mississippi contractors should know that Mississippi law (§15-1-41) allows a party to bring suit for defective construction within six (6) years “after the written acceptance or actual occupancy or use, whichever occurs first, of such improvement by the owner thereof.”   The last thing a contractor wants to be confronted with, especially if the contractor is no longer in business, is a demand or lawsuit to address allegedly defective work. This scenario may not have seemed likely five years ago, but with the downturn in the economy, many contractors are being forced to close their doors.  Don’t panic—yet. Your insurance or that purchased by your subcontractors where you were identified as an additional insured may provide you with defense and indemnity protection. 

When you do get a demand or served with a lawsuit from a former client alleging defective construction, you should contact your legal counsel and insurance agent. Your legal counsel can advise you how to respond to the demand or lawsuit and your insurance agent can help you find the policy in place when the project was constructed. You will then be in a position to notify your insurance carrier of the situation. Hopefully, your policy will either cover the claim of defective construction or pay for the cost associated with defending against the claim. If your insurance carrier or that of your subcontractor sends you a letter denying coverage, do not take no for an answer—at least not right away. You should have your attorney review the applicable policy language to verify whether there is coverage. 

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In an attempt to avoid liability for the various deficiencies in its plans and specifications, some architects and engineers rely upon the general disclaimers set forth in the contract documents. However, the United States Supreme Court has held these general disclaimers are unenforceable as a matter of law. In U.S. v. Spearin, the Supreme Court ruled that the Owner is responsible and affirmatively warrants the adequacy of its plans and specifications and that responsibility "is not overcome by the usual clauses requiring builders to visit the site, check the plans, and to inform themselves of the requirements of the work." Similarly, in Baldi Bros. Constructors v. U.S., the U.S. Court of Federal Claims ruled that such general contractual provisions, even including a provision which states the owner does not guarantee the statements of fact in the specifications, will not relieve the owner from liability for providing misleading information to the contractor

Neither the Owner nor the design professional can fully shield itself from liability for its errors and/or omissions in the plans and specifications through disclaimers in the contract documents. Likewise, disclaimers shifting the burden of costs associated with errors and/or omissions are also generally unenforceable. A contractor is therefore typically entitled to rely on the representations in the plans and specifications, but the contractor should nevertheless perform a reasonable site inspection and review of the plans and specifications so that obvious errors and/or omissions can be addressed prior to bidding.

When a contractor does find itself confronted with such general disclaimers and the owner and/or architect nonetheless issues a directive to proceed, the contractor must document its position with regard to the error and/or omission to protect its position. The lack of such documentation may substantially impair, if not be fatal, to the contractor’s claim for additional compensation and/or time.

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By now, most employers have heard of the federal "E-Verify" program which is designed to identify and prohibit employment of illegal aliens. In the 2008 legislative session, the Mississippi Legislature adopted the "Mississippi Employment Protection Act" ("MEPA") which has features similar to the "E-Verify" Act, but is broader in its application.

Unlike federal law, the MEPA applies to every employer. An "employer" is defined as "any person or business that is required by federal or state law to issue a United States Internal Revenue Service Form W-2 or Form 1099 to report income paid to employed or contracted personnel in Mississippi." In other words, the MEPA applies to virtually everyone.

So what must the employer do under the MEPA? "Every employer shall register and utilize the status verification system [i.e., the federal E-Verify Program] to verify the federal employment authorization status of all newly hired employees." There are no exceptions! So if you are a small business and hire just one new employee, you are still covered and expected to verify the employment authorization status of the employee. Under the law, employers in the state of Mississippi shall only hire U.S. legal citizens or legal aliens. The E-Verify Program is the authorized means by which employers can verify the employee’s status.

The MEPA was implemented in stages since its adoption. However, effective July 1, 2011, the MEPA is fully implemented and, as mentioned previously, applies to all employers.

What are the consequences for failing to comply? Substantial! Any contract with the state or other public body can be cancelled and you can be ineligible for any public contracts for up to three years. You can also lose any license, permit, certificate or other document issued by any public entity which gives you the right to do business in Mississippi for up to one year. Effectively, these consequences could put you out of business, even if you do not hire an illegal alien! The mere failure to follow the verification requirements could subject you to these penalties.

Can the state do this? Yes. On May 26, 2011, the United States Supreme Court handed down a decision affirming similar laws in Arizona. In the case of Chamber of Commerce of the U.S.A. v. Whiting, the U.S. Supreme Court upheld Arizona’s law which the Court concluded did not preempt the federal law, but instead merely imposed licensing conditions on businesses operating within the state. The Supreme Court further concluded that nothing prevented states from making mandatory the federal E-Verify program. The MEPA appears to be consistent with the U.S. Supreme Court’s ruling and, therefore, would likely be upheld.

Bottom line: Comply with the MEPA. If you have not already registered for E-Verify, do so now and learn how to use it so that you will be ready on July 1^st.

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As part of the Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA"), Congress required federal, state and local governments to withhold 3% on payments made to government contractors and some others from payments made for property or services. Implementation of the law was set to take effect January 1, 2011, but was delayed until January 1, 2012. The IRS just released its final regulations related to the law. The good news for contractors is that the IRS has delayed implementation until January 1, 2013.

The delays in implementation have resulted at least in part from the passage of the American Recovery and Reinvestment Act. However, unless the law is repealed, the deferment will come to an end and contractors should begin preparing now for its eventual implementation since your cash flow will be impacted. The law is a flat withholding on the gross amount irrespective of any other conditions such as whether the contractor owes any back-taxes or whether the contractor even expects to have taxable income.

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Parties frequently include arbitration clauses in their construction documents. In such instances, when a dispute arises, the party with a claim may ultimately need to pursue it by filing a demand for arbitration. When the arbitration clause requires compliance with the American Arbitration Association’s ("AAA") Construction Industry Arbitration Rules, or another alternative dispute organization, the claimant can simply file a demand for arbitration with that organization. When the agreement does not specify an alternative dispute organization or a method for the initiation of arbitration, the claimant must rely upon the procedures set forth in the Mississippi Construction Arbitration Act ("the Act"), Miss. Code Ann. §§ 11-15-101, et seq. (Rev. 2004). Under the Act, the claimant shall:

...within the time specified by the contract, if any, file with the other party a notice of an intention to arbitrate which notice shall contain a statement setting forth the nature of the dispute, the amount involved, and the remedy sought....

According to the Mississippi Court of Appeals, such a "demand for arbitration" must be initiated within three (3) years from the time the cause of action accrues. This issue was addressed by the Court of Appeals in Haycraft v. Mid-State Construction Company, Inc. In that case, Haycraft filed suit against Mid-State sometime in 1994. Mid-State filed a motion to have Haycraft’s complaint dismissed because the agreement between the parties included a provision that permitted Mid-State to require arbitration. The court therefore dismissed Haycraft’s lawsuit.

Approximately six years later Haycraft filed an application for arbitration. Mid-State filed an objection to Haycraft’s demand for arbitration with the circuit court. The court found Haycraft’s application for arbitration untimely based upon the general three (3) year statute of limitation found at Miss. Code Ann. §15-1-49 (Rev. 2003). The Court of Appeals agreed and found Haycraft’s right to demand arbitration began when its cause of action accrued. It was therefore Haycraft’s obligation to initiate an application for arbitration within three (3) years from that date or its cause of action would be barred by the statute of limitation. Because Haycraft did not timely pursue its right to arbitrate, Haycraft’s claim was barred.

The key point to remember is that a claimant must act timely to preserve its right to arbitration. A demand or application for arbitration must be timely submitted to the opposing party or the claim’s right to relief may be barred by the three (3) year statute of limitation.

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In the 2010 session, the Mississippi legislature substantially rewrote the laws regarding limited liability companies ("LLCs").  One requirement of particular importance is that all LLCs must file an annual report no later than April 15^th each year.  The reporting requirement differs depending upon whether the entity is a Mississippi LLC or a non-Mississippi LLC which is qualified to do business in Mississippi.

Mississippi LLCs:

If the entity is a Mississippi LLC, the report may be filed online by going to the following web page: LLC Annual Report.  After submission of the report online, there is no need to mail anything to the Mississippi Secretary of State and there is also no filing fee.

Non-Mississippi LLCs:

If the entity is one which was originally formed in another jurisdiction and then qualified to do business in Mississippi, you cannot file online.  In that case, go to LLC Annual Report and complete the information in the form online.  You then need to print out the form and mail it to the Mississippi Secretary of State, Business Services Division, P.O. Box 136, Jackson, MS 39205-0136with a check in the amount of $250.

Time is running out, so remember to file your report no later than April 15^th!  And watch our blog or check with the Mississippi Secretary of State for additional updates regarding changes in the LLC Act and the impact it has on you!

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