Wait Just a Minute--No Certificate of Responsibility may Entitle Contractor to Recovery Under Quantum Meruit or Unjust Enrichment

On May 28, 2013, I published a blog entitled "No Certificate of Responsibility—No Payment for Work Performed" based upon a May 21, 2013, decision from the Mississippi Court of Appeals. [click here for decision]  On June 6, 2013, the Mississippi Supreme Court issued a decision suggesting that an unlicensed contractor may be entitled to recovery under the theory of quantum meruit or unjust enrichment. [click here for decision]

In Ground Control, LLC v. Capsco Industries, Inc., et al., the general contractor was W.G. Yates and Sons Construction Company ("Yates"), the subcontractor was Capsco Industries, Inc. ("Capsco") and its subcontractor was Ground Control, LLC ("Ground Control").  Neither Capsco nor Ground Control held a Certificate of Responsibility from the Mississippi State Board of Contractors.  Neither Yates nor the Owner was a party to the contract between Capsco/Ground Control.  Yates terminated Ground Control for default due to safety issues and Ground Control sued for payment of work performed under its contract with Capsco.  The trial court had determined that because the contract was null and void under Miss. Code Ann. § 31-5-15, Ground Control was not entitled to payment for the work it had performed. Ground Control appealed.

The Mississippi Supreme Court began its analysis by stating that "[t]his Court has never determined whether a party to an illegal contract is barred from recovery under theories of unjust enrichment or quantum meruit." It went on to find as follows:

Capsco knowingly solicited Ground Control to enter into an unlawful contract, allowed Ground Control to perform a substantial part of the work, made an interim payment to Ground Control, and obtained payment from Yates for Ground Control’s work.  To allow Capsco to use the void contract to shield itself from any obligation to pay for the work performed by Ground Control is unconscionable.  Enforcing the statute in such a way as to preclude any recover is inequitable, invites fraudulent activity, and violated the Remedy Clause of our State Constitution. See Miss. Const. art. 3, § 24.

Although the contract is void pursuant to Section 31-3-15, Ground Control should not be precluded from having the opportunity to proceed in court under a claim for the value of what it expended in labor and supplies on the project.  We do not address the issue of other penalties, if any that may be appropriate for the trial court to address.

Interestingly, the Mississippi Supreme Court did not mention Ace Pipe Cleaning, Inc. v. Hemphill Const. Co., Inc. and Federal Ins. Co., but the Ground Control decision seems to suggest Ace Pipe Cleaning, Inc. is now overruled.

There is now a glimmer of hope for those who have failed to comply with the statutory requirement for a Certificate of Responsibility.  However, recovery under quantum meruit may not be without the assessment of a civil penalty by the Mississippi State Board of Contractors under Miss. Code Ann. § 31-3-21(4) or criminal penalty or fine under Miss. Code Ann. § 31-3-21(1). [click here for statute]

When all the dust has settled, the rule of thumb remains that before soliciting bids or entering into a construction contract in Mississippi, check with the Mississippi Board of Contractors to determine if a Certificate of Responsibility is required.

Definitive Responsibility Requirement in Solicitation Upheld by Mississippi Court of Appeals

The Mississippi Court of Appeals has recently recognized the validity and enforceability of a definitive responsibility requirement set forth in a solicitation for the construction of a prison. [click here for a copy of decision] The solicitation required that prospective bidders "[p]rovide [a] list of prior construction experience with references on successful correctional facilities projects within the last [five] years having a minimum construction contract amount of eight[-]million dollars…each for no less than two…separate projects…Failure to do so may be cause for rejection." Desoto County Board of Supervisors rejected the apparent low bidder and second low bidder who did not satisfy the solicitation’s requirement and awarded it to the third low bidder for a price premium of $283,100.00. The disappointed bidders challenged the decision to award the contract to the third low bidder but the Court affirmed the decision finding the definitive responsibility requirement to be reasonable and enforceable.

There are two lessons to be learned from this. The first lesson is to protest such a definitive responsibility requirement as unduly restrictive of competition and try to convince the procuring agency to eliminate or "loosen" the standard. The second lesson is to make sure you can satisfy the criteria set forth in the solicitation or face the prospect of having your bid rejected as non-responsive.

No Certificate of Responsibility--No Payment for Work Performed

How would you feel if you performed thousands of dollars of work on a construction project and were then told you would not be paid anything?  That is exactly what has happened with a recent decision from the Mississippi Court of Appeals.  The Court’s opinion makes it absolutely clear that any contract entered into in violation of Miss. Code Ann. §31-3-15 is null and void.  [click here for decision]  This means if a contractor does not have a Certificate of Responsibility (“COR”) from the Mississippi State Board of Contractors for work in excess of $50,000 on a private or public project, the contract is null and void and the contractor is not entitled to ANY compensation under ANY legal theory if it performed work without the appropriate COR.  

In this particular case, the subcontractor did not have a COR but entered into a contract with the prime contractor.  When the subcontractor sued for payment, the prime contractor claimed the subcontract was null and void and refused to pay the subcontractor.  The trial court agreed and the Mississippi Court of Appeals affirmed the decision.  

This decision is an important reminder for prime contractors and subcontractors at all tiers to make sure that you have the required COR for the work to be performed.  If there is any doubt, contractors should contact the Mississippi State Board of Contractors at (601) 354-6161, (808) 880-6161 or visit their website at www.msboc.us.  

 

Arbitrator's Decisions Upheld by Mississippi Court of Appeals

Arbitration has found some favor in the construction industry with parties over the last decade in part because of its finality. Unlike civil litigation, the right to appeal an arbitrator’s award is extremely limited under the Mississippi Construction Arbitration Act, Miss. Code Ann. §11-15-101, et seq. The specific grounds for vacating an arbitrator’s award are set forth in Miss. Code Ann. § 11-15-133(1).  Click here to read Miss. Code Ann. § 11-15-133(1).

The Mississippi Court of Appeals recently considered a challenge to an arbitrator’s award which was confirmed by the circuit court. (It appears from the opinion that the arbitration was governed by the Construction Industry Arbitration Rules for the American Arbitration Association.) The appellant objected to the arbitrator’s decision not to grant appellant a continuance when requested and also prohibiting appellant from introducing evidence that it had not produced during discovery. The Court found that the refusal to grant the continuance was justified by the appellant’s dilatory conduct in refusing to pay its half of the arbitration cost and its four changes in legal counsel. The Court also found the arbitrator acted within its authority when it denied appellant’s admission of evidence where it failed to produce any documents during the discovery period or prior to the arbitration.

Once again, the lesson to be learned is that while arbitration is a more informal proceeding than litigation, there are procedural rules that govern arbitration. When an arbitrator renders a decision on these procedural matters, the courts will be inclined to enforce such decision because of the extremely narrow scope of appellate review.

Mississippi District Court Finds Mississippi Stop Payment Statute Unconstitutional

On April 12, 2012, United States Magistrate Judge S. Allan Alexander issued an order and opinion finding Mississippi’s "stop payment" statute, Miss. Code Ann. §85-7-181 (1972) unconstitutional stating:

 

[T]he court is compelled to hold that Mississippi’s stop notice statute violates due process by authorizing what is in practical effect the prejudgment attachment of funds without prior notice and hearing, or an acceptable post-seizure remedy.  Consequently, §85-7-181 is facially unconstitutional...

 

The decision has been appealed.  Because the district court’s decision is based upon an "Erie guess", the State courts in Mississippi are not bound to follow the district court’s decision.  Nonetheless, subcontractors that have previously relied upon "stop payment" rights may see this decision cited by general contractors and owners to challenge a stop payment notice.

 

It will be interesting to see how this decision develops on appeal. Stay tuned for more information.

WHEN IS AN INSURED "MADE WHOLE"?

A basic tenet of law is that when one party is injured by another party the innocent party is entitled to be "made whole." This concept in its simplest terms means that the innocent party should be awarded damages sufficient to put the innocent party back in the position it was in before the injury occurred. Often, the innocent party has insurance which will provide compensation to the innocent party until a recovery from the wrongful party can be obtained. The insurance company holds what is called a "right of subrogation" to any funds the innocent party receives from the wrongful party—a concept entitled to prevent the innocent party from double recovery (i.e., recovery from both the insurance company and the wrongful party).

In the case of Armstrong and Hill v. Miss. Farm Bureau Ins. Co., Armstrong and Hill were both injured in an automobile accident. Farm Bureau made payments to Armstrong and Hill under an insurance policy. Armstrong and Hill sued the negligent party and obtained a judgment which they collected from the negligent party. Farm Bureau took the position that it was entitled to receive the funds the negligent party had paid pursuant to Farm Bureau’s right of subrogation. Conversely, Armstrong and Hill took the position that Farm Bureau was not entitled to the money because their damages were higher than what they had been awarded by the jury in the trial and, therefore, they were not "made whole."

In a case of first impression, the Mississippi Supreme Court decided what "made whole" means in a factual setting of this kind. The Court ruled that the jury had decided what dollar amount of damages were necessary to make Armstrong and Hill "whole" when the verdict was rendered. Since it was a jury verdict, Armstrong and Hill could not contend that their damages were higher and re-litigate the issue with Farm Bureau. Thus, since Farm Bureau had already paid Armstrong and Hill, Farm Bureau was entitled to the funds paid by the negligent party.

This decision still leaves unanswered what would happen if the insurance company pays more than the jury awards. We’ll have to await that answer for another Court ruling.

Forum Selection Clauses

The Mississippi  courts will enforce forum selection clauses when the intent is clear and unequivocal.  When confronted with challenges to the enforcability of a forum selection clause, the  first step in analysis is whether it is mandatory or permissive. Titan Indemnity Company v. Hood, 895 So.2d 138, 146-47 (Miss. 2005) (.pdf). The determination of what language is considered mandatory as opposed to permissive was carefully examined and discussed in Bently v. Mutual Benefits Corp., 237 F.Supp.2d 699 (S.D. Miss. 2002) (.pdf). In Bently, the district court was tasked with determining whether to enforce a forum selection clause with language strikingly similar to the language found in SCP’s terms and conditions. Its analysis followed the two-step inquiry articulated by the Fifth Circuit in Caldas & Sons, Inc. v. Willingham, 17 F.3d 123 (5th Cir. 1994) (.pdf). As to whether the forum selection clause was mandatory or permissive, the district court reasoned that "a mandatory forum selection clause has express language limiting the action to the courts of a specific locale which is clear, unequivocal and mandatory." Bently, 237 F.Supp.2d at 702 (emphasis added). The district court when on to cite a number of decisions discussing the importance of limiting language in the forum selection clause to obviate any uncertainty with regard to the exclusivity of the chosen forum.

If the forum selection clause is considered mandatory, the second step in the legal analysis requires the court to consider (1) whether "Its incorporation into the contract was the result of fraud, undue influence or overweening bargaining power; (2) [t]he selected forum is so gravely difficult and inconvenient that the resisting party will for all practical purposes be deprived of its day in court; or (3) [t]he enforcement of the clause would contravene a strong public policy of the forum in which the suit is brought, declared by statute or judicial decisions." Titan Indemnity Company v. Hood, 895 So.2d 138,146-47 (Miss. 2005).