What?! I thought being named as an additional insured gave me coverage for any defective construction by my subcontractor.

Contractors frequently require subcontractors to specifically name the contractor as an additional insured in the subcontractors’ commercial general liability (CGL) policies. The "proof" of compliance frequently provided to the contractor is the Certificate of Insurance. Contractors can generally rely upon benefits of being an additional insured when there is a problem with the subcontractor’s work that causes property damage. It may also provide the contractor with the cost of a defense where it has been sued by the owner for the subcontractor’s defective work and property damages. However, timing is critical. Both the Mississippi Supreme Court and the Firth Circuit Court of Appeals have opined that "ongoing operations" coverage may not give the contractor coverage as an additional insured for damage that arises after the subcontractor has completed its work.

In Noble v. Wellington Assoc., Inc, [Link to Decision] the contractor hired a subcontractor to perform site work for a home. After the home was completed the owners experienced settlement and substantial cracks in the home. The contractor claimed the insurance carrier had a duty to defend it against claims for defective construction under the subcontractor’s CGL policy as an additional insured. The insurer argued that the defects did not develop until after the subcontractor had completed its site work and there was no duty to defend or coverage. The contractor argued it was the subcontractor’s "ongoing operations" during construction that ultimately resulted in the damage to the home. The Mississippi Supreme Court concluded "in order for ‘ongoing operations’ to have any meaning, it cannot encompass liability arising after the subcontractor’s work was completed".

The same conclusion was reached by the Fifth Circuit Court of Appeals in Carl E. Woodward, L.L.C v Acceptance Indemnity Insurance Company. [Link to Decision] Here, the allegation was that the subcontractor’s failure to comply with the plans and specifications caused the construction defect which manifested after a condominium complex was completed. The subcontractor’s additional insured endorsement limited coverage to "ongoing operations". The Fifth Circuit found, much like the Court in Noble, that "liability for construction defects, while created during ongoing operations, legally arises from completed operations." The contractor was therefore left to pay the defense cost when it believed it would be protected by the subcontractor’s additional insured endorsement.

The lesson to be learned from these decisions is that contractors must obtain a copy of the insurance policy and additional insured endorsement to ensure that there is coverage not only for "ongoing operations" but also "completed operations". Relying upon a certificate of insurance alone as evidence of coverage may lead to an unhappy finding that there is no coverage at the very time you need it. Further, absent an additional insured endorsement that includes "completed operations" coverage, the contractor may be left without the insurance coverage for defective construction by its subcontractor.

New Mississippi Lien Law, SB 2622-A Summary of the Vast Changes

The Legislature has completely rewritten the Mississippi lien law for commercial and residential projects.  Senate Bill 2622 has now been sent to the Governor for his signature and provides lien rights to prime contractors, subcontractor and material suppliers. [Link to SB 2622]  The new lien law will require those seeking to file a lien to comply carefully with strict notice and filing requirements.  An error in complying with these requirements could lead to a “claim of lien” being ineffective or unenforceable. 

Some of the key points in the new lien law are:

     

  • There are no lien rights if a contractor has provided a payment bond. (Miss. Code Ann. §85-7-431)

     

  • To have lien rights the party filing a "claim of lien" must be properly licensed by the Mississippi State Board of Contractors.  However, it should be noted that there are counties and municipalities that also have licensing requirements. (Miss. Code Ann. §85-7-403)

There are numerous ways that a contractor and/or subcontractor or materialman can lose its "claim of lien", including:

     

  • If the contractor fails to provide a list of subcontractors to the owner within a reasonable period of time after requested or if the subcontractor fails to furnish a list of its subcontractors to the contractor within a reasonable period of time after requested (Miss. Code Ann. §85-7-407).

     

  • If lien claimant fails to file its "claim of lien" within ninety (90) days following the last labor, services or materials provided (Miss. Code. Ann. §85-7-405(1)(b)).

     

  • If a subcontractor not in privity with the contractor fails to send written notice to the contractor, or, if there is no contractor, to the owner, within thirty (30) days after the first delivery of labor, services or materials to the property. (Miss. Code. Ann. §85-7-407(2))

     

  • If the owner has made payment to the contractor in reliance upon a lien waiver issued by the lien claimant (Miss. Code Ann. §85-7-413(1)(a)).

     

  • If a "payment action" is not commenced within one hundred eighty (180) days after the "claim of lien" is filed, the "claim of lien" is unenforceable (Miss. Code Ann. §85-7-421(1)).

The basic requirements for filing a "claim of lien" are set forth in Miss. Code Ann. §85-7-405.  If a party fails to comply with any of the requirements the "claim of lien" shall not be effective or enforceable.  The filing of a "claim of lien" is not intended to prejudice a party’s right to arbitration.

     

  • The right to claim a lien cannot be waived in advance of furnishing labor, service or materials (Miss. Code Ann. §85-7-419).

     

  • The "special lien" granted by the statue to contractors, subcontractors and materialmen is limited to the amount due and owning under the terms of the express or oral contract, subcontract or purchase order (Miss. Code Ann. §85-7-403(3)).  The "special lien" also includes interest (Miss. Code Ann. §85-7-403(4)).

     

  • A judgment secured in a "payment action" to enforce a "claim of lien" is limited to a judgment in rem against the property and does not impose any personal liability upon the owner (Miss. Code Ann. §85-7-405(1)(d)(ii)).

     

  • If payment is made by the owner in reliance of a lien waiver or statements of the contractor, the aggregate lien amount of the subcontractors and materialmen not in privity with the contractor shall not exceed the unpaid balance of the contract price between the owner and the contractor at the time the first notice of lien is filed (Miss. Code Ann.§85-7-405(5)(a)).

     

  • Party seeking to assert a "claim of lien" must be in "substantial compliance" with the contract, subcontract or purchase order (Miss. Code Ann. §85-7-405(1)(a)).

     

  • "Claim of lien" must be filed in the chancery court of the county by a contractor, subcontractor or materialman where the property is located and within ninety (90) days of the last labor, services or materials provided.  It must also contain certain language notifying the owner of its right to contest the lien and be sent to the owner and contractor within two (2) days after it is filed (Miss. Code Ann. §85-7-405(1)(b)).

     

  • A subcontractor or material supplier not in privity with the contractor, or, if there is no contractor, with the owner, must provide notice within (30) days following the first delivery of labor, services, or materials as a condition precedent to filing a "claim of lien" (Miss. Code Ann. §85-7-407(2)).

     

  • The "claim of lien" can be amended at any time provided there is compliance with certain procedures (Miss. Code Ann. §85-7-405(1)(e)).

     

  • All liens under Miss. Code Ann. §85-7-403 have equal priority.  If the proceeds are insufficient to satisfy all liens, distribution is on a pro-rata basis (Miss. Code Ann. §85-7-403(3)(d)).

     

  • A "payment action" (lawsuit) to enforce the "claim of lien" must be commenced within one hundred eighty (180) days from the date of the filing of the "claim of lien" (Miss. Code Ann. §85-7-405(1)(c)).  This period can be shortened by the owner or contractor filing a "Notice of Contest of the Lien". (See, Miss. Code Ann. §85-7-423(1))

     

  • A lis pendens notice must be filed with commencement of the "payment action" and furnished to the owner and contractor (Miss. Code Ann. §85-7-405(1)(d)(ii)).

     

  • The court in its discretion may award reasonable costs, interest and attorney’s fees to the prevailing party in an action against the owner to enforce a lien against the property (Miss. Code Ann. §85-7-405(3)(c)).

     

  • The statute provides a procedure for "bonding off" a lien.  The amount of the bond is required to be one hundred ten percent (110%) of the amount of the "claim of lien" (Miss. Code Ann. §85-7-415).

There are also substantial penalties for not complying with certain aspects of the lien law and filing a false "claim of lien".

     

  • The penalty for filing a knowingly false "claim of lien" is three (3) times the value of the "claim of lien" (Miss. Code Ann. 85-7-429).

     

  • The penalty for not paying a subcontractor after securing a waiver and release of lien without good cause is three (3) times the amount claimed on the face of the waiver and release (Miss. Code Ann. §85-7-407(3)).

     

  • There is a penalty of three (3) times the actual damages suffered by an owner, purchaser or lender if the contractor falsely and knowingly submits a statement that the agreed price or reasonable value of the labor, services or materials has been paid or waived in writing by the lien claimant. (Miss. Code Ann. §85-7-413(1)(b))

     

  • There is a penalty for failing to cancel a "claim of lien" if not accomplished within fifteen (15) days after fully paid of not less than $500/day plus reasonable attorney’s fees and costs. (Miss. Code Ann. §85-7-421(3))

Residential projects require a slightly different process.  Lien claimants on residential projects must give the residential owner a pre-lien notice at least ten (10) days notice before filing a "claim of lien". (Miss. Code Ann. §85-7-409(2))

This is just a taste of what the new Mississippi lien law contains and is neither intended to be a complete summary of the new lien law nor should it be solely relied upon in filing a "claim of lien".  The new statues are filled with hoops to jump through and hazards for those who have not carefully read it.  If you have any questions about this Mississippi’s new lien law you can contact Christopher Solop at csolop@bislawyers.com, Lynn Thompson at lynnthompson@bislawyers.com or go to the website for Biggs, Ingram & Solop, PLLC at www.bislawyers.com.

Senate Bill No. 2622--Proposed Legislation Changing Mississippi Lien Law

The Mississippi construction industry is about to undergo a radical change to its lien law in response to the Fifth Circuit’s decision in Noatex Corp. v. King Construction of Houston, LLC, 732 F.3d 479 (5th Cir. 2013). Noatex affirmed a district court’s ruling that Mississippi’s "stop payment" statute was unconstitutional because it included no due process.  Construction Law Toolbox reported on this decision on October 15, 2013 [Click here to view Noatex post].  Rather than revise the "stop payment" law to cure the due process issue, legislators have decided to re-write Mississippi’s lien laws.  Senate Bill No. 2622 was introduced and would extend lien rights to second tier subcontractors and suppliers who currently have no lien or "stop payment" rights in Mississippi. [Click here to view SB No. 2622] This legislation can be followed by logging into www.legislature.ms.gov/. ‎

Biggs, Ingram & Solop, PLLC’s construction attorneys Christopher Solop and Lynn Thompson are closely monitoring the legislation. When a new lien law is passed lenders, owners, contractors, subcontractors and suppliers will need to understand the intricacies of all lien rights, including effectively filing a lien, penalties for false representation of actual and conditional payments; defending or eliminating a claim of lien, deadlines for initiating litigation or arbitration of a claim of lien, and penalties for false liens.

Oral contracts - be careful what you say.

There are plenty of different ways that a contractor can get in trouble with an owner or its subcontractors.  One is to talk too much and wind up entering into a separate enforceable oral contract.  The existence of an oral contract is a factual issue that will be decided by a jury or a judge in a trial without a jury, also known as a bench trial.  However, the formation of a contract requires three (3) simple elements: (1) an offer, (2) acceptance of the offer, and (3) consideration. If those elements are proven by one of the parties, an enforceable contract may have been formed and someone may have to pay.  There are some limited situations in which the law requires that a contract be in writing.  Nevertheless, the best course of action is to speak with caution so that there is no opportunity to argue that an oral contract was made.

And remember, the statute of limitations for an oral contract is three (3) years. Miss. Code Ann. §15-1-29. So, you may want to watch what you agree to do or you may lose sleep for quite some time until the statute of limitation expires.

Fifth Circuit Court of Appeals Upholds Determination that Mississippi "Stop Notice" Statute is Unconstitutional

On October 10, 2013, the Fifth Circuit Court of Appeals affirmed a district court determination that Mississippi Code Annotation § 85-7-181 is unconstitutional. As prime contractors and owners know, an owner’s receipt of a stop-payment notice or "stop notice" could bring the flow of contract payments to a grinding halt. Miss. Code Ann. §85-7-181 required an owner to hold sufficient funds, otherwise due to a prime, to cover the amount alleged to be due and owing to a first-tier subcontractor who sent written notice that it was claiming the benefits of the "stop-payment" notice statute. Depending upon the amount of contract funds still remaining in the owner’s hands, if the owner paid the prime over the notice and thereby diminished sufficient funds available to pay the subcontractor, the stop-payment notice statute made the owner directly liable to the subcontractor. Owner-compliance, as intended by the statute, gave subcontractors (at least the first-tier) their only powerful tool to enforce payment rights on private, un-bonded projects.

The "stop-notice" statute has been in place for year, but on April 12, 2012, the Northern District of Mississippi ruled the statue unconstitutional on its face because it deprived prime contractors of property without due process. Noatex, an unlicensed California prime contractor, was hired by Auto Parts Manufacturing Mississippi ("APMM") to build an auto parts manufacturing facility. Noatex got into a billing dispute with its Mississippi subcontractor, King Construction of Houston, L.L.C. When King Construction sent a stop-payment notice to APMM asserting it was due over $260,000 from Noatex, that amount became bound in the hands of APMM. Noatex filed a declaratory judgment action, challenging the stop-payment notice statute as facially invalid and invalid as applied. The State of Mississippi, through the Attorney General’s Office, intervened in support of the stop-payment notice statute. Judge S. Allan Alexander agreed with Noatex, holding that simply by giving written notice of an alleged debt a contractor’s payment became bound in the hands of the owner—with no hearing before the money was bound—and thus the contractor was deprived of its property without due process.

The Fifth Circuit upheld Judge Alexander’s analysis. Among other things, the Fifth Circuit noted that the statute is "profound in its lack of procedural safeguards": no posting of a bond, no showing of exigent circumstances, and no sworn statement setting out the facts of the dispute. You can read the decision here.

Unless there are changes to the current stop payment law or the United States Supreme Court agrees to consider this issue, if appealed by the Mississippi Attorney General, there will be no "lien rights" for first-tier subcontractors. Only contractors with a direct contractual relationship with the owner will have lien rights.  Subcontractors may want to seek legal counsel concerning how to address stop payment notices that were to be filed or have been filed and to determine other remedies that may be available if their prime has failed to make payment.   

Who can be a "Qualifying Party" for a Contractor's Certificate of Responsibility - Update

On May 13, 2009, I published a blog titled "Who can be a "Qualifying Party" for a Contractor’s Certificate of Responsibility". [Click to view blog post] The blog article states that the requirement for a contractor’s Certificate of Responsibility for a public contract is $50,000 and a private contract is $100,000. Since the writing of that blog article, the statute has been amended and effective July 1, 2010, a Certificate of Responsibility is required on all contracts, both public and private, in excess of $50,000.

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.  

 

Failure of Prime Contractor to Comply With "Percentage of Work" Requirements Entitles Government to Damages

In a case of first impression, the United States Civilian Board of Contract Appeals upheld a contracting officer’s final decision assessing damages against a prime contractor that failed to comply with the requirement to perform at least 50% of the on-site work. On a contract awarded by the Federal Highway Administration ("FHWA"), prime contractor, Singleton Enterprises ("Singleton") subcontracted the vast majority of its work to Talley Construction ("Talley"). Singleton’s only employees on-site were supervisors, which Singleton apparently borrowed from Talley but paid directly. It was unclear whether Singleton had paid for equipment used on the site, but the CBCA determined that whether or not Singleton had paid for equipment costs, it still performed substantially less than 50% of the value of on-site work.

The FHWA decided that if Singleton did not perform the on-site work, it was not entitled to the benefit of the unit prices it charged for that work. Talley was essentially acting as prime contractor so the FHWA decided it should only pay Singleton what Singleton was paying Talley. To calculate its damages, once the final quantities were determined, the FHWA multiplied Talley’s unit price to Singleton for the work, which was less than Singleton’s unit price to the FHWA for the work. Singleton had already been paid more than the FHWA would have paid based on Talley’s pricing. The appeal upheld not only the FHWA’s decision that it was entitled to recoup its "overpayment" damages from Singleton for not meeting the percentage of work requirement but also the reasonableness of the FHWA’s method of calculating its damages for that breach.

The decision notes that it has no precedential value. However, in similar circumstances, contractors should expect both the Department of Transportation and the Civilian Board of Contract Appeals to act as they did here. See Singleton Enterprises v. Department of Transportation, CBCA No. 2716, June 14, 2012.

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.

Only One Bite at This Apple: The Exclusive (Maybe) Remedy of Workers' Compensation

In Mississippi, workers’ compensation laws replace traditional negligence actions against the employer in exchange for a no-fault system of payment to the employee. This exclusivity of remedy is the product of the "bargain" underlying the workers compensation laws. According to that bargain, the benefit to workers is compensation for all work-related injuries without reference to fault of either the employee or employer. Employees, in return, surrender the right to pursue "all other liability." Employers benefit by having the amount they have to pay to any worker capped. Employers in turn agree to assume the financial burden (through insurance) of all work-related injuries without reference to fault.

The exclusive remedy creates immunity to suits for damages by the employee against the employer but only if the employer actually provides the insurance required by the statutes. If the employer is required to provide insurance and fails to do so, then the employee may pursue a claim under the workers’ compensation act or can sue the employer for damages. The employee gets to decide which route to take and, if a suit for damages is filed, the employer is even prohibited from asserting that the employee assumed the risk or contributed to the injury.

The penalty for failing to maintain required workers compensation insurance gets even stronger. The employer (including the president, secretary and treasurer if the employer is a corporation) can be subject to criminal prosecution for a misdemeanor which carries a potential penalty of $1,000 and/or imprisonment of up to one year, in addition to the recovery to which the employee is entitled. A civil penalty up to $10,000 can also be assessed by the Mississippi Workers Compensation Commission.

For contractors, the burden is even greater. General contractors are considered "statutory employers" of the employees of subcontractors. If the subcontractor provides workers compensation insurance, then the general contractor gets the same protections as the subcontractor has. However, if the subcontractor does not provide workers compensation insurance, the general contractor is statutorily responsible to provide the insurance and be liable for payment or compensation to the injured employee.

The potential consequences (damages, fines and jail time) for failure to provide required insurance are too great to ignore. General contractors cannot assume that subcontractors are carrying workers compensation coverage. As a matter of routine, general contractors should require proof of such insurance, together with an acknowledgement from the insurance provider that coverage will not be cancelled without advance written notice to the general contractor. It is also wise for the general contractor to require that the subcontractor’s coverage add the general contractor as an additional named insured.

Do you have coverage under your Commercial General Liability Policy for Defective Subcontractor Construction?

Less than one week after placing readers on alert about the pending decision of Architex Association, Inc. v. Scottsdale Insurance Company, the Mississippi Supreme Court has issued its decision in that case addressing the following narrow issue with regard to a Commercial General Liability ("CGL") policy:

Whether the intentional act of hiring subcontractors by an insured general contractor precludes the possibility of coverage?

The Court found "that under Scottsdale’s CGL policy, the term ‘occurrence’ cannot be construed in such a manner as to preclude coverage for unexpected or unintended ‘property damage’ resulting from negligent acts or conduct of a subcontractor unless, otherwise excluded or the insured breaches its duties after loss." Slip Op. at page 27. Thus, "[f]aulty workmanship, defective work, et al., may be accidental, intentional, or neither." Slip Op. at page 23.

The United States Court of Appeals for the Fifth Circuit in ACS Construction Company v. CGU, 332 F.3d 885 (5th Cir. 2003) had previously concluded that since hiring a subcontractor is a deliberate and intentional decision by a general contractor, any subsequent act by the subcontractor must be intentional and not covered under the definition of an "occurrence". The insurance industry has used ACS to deny coverage for defective work by subcontractors, even though many general contractors purchased policies and paid premiums with the understanding that their CGL policy would provide coverage.

The Mississippi Supreme Court’s decision in Architex brings clarity to the issue stating that "[w]hile the alleged ‘property damage’ may have been ‘set in motion’ by Architex’s [the general contractor] hiring of the subcontractor, the ‘chain of events’ may not have ‘followed a course consciously devised and controlled by [Architex], without the unexpected intervention of any third person or extrinsic force.’" In other words, hiring a subcontractor will not preclude coverage under a CGL policy.

Even if the insurer does not unequivocally agree that there is coverage under the CGL policy, the insurer may agree to defend the general contractor under reservation of rights. This means the insurer will pay the general contractor for the cost associated with defending the claim of defective workmanship. This does not mean the insurer gets to select the attorney to defend the claim, it means the insurer must pay for the attorney the general contractor selects to defend the claim. Therefore, it would be wise for the general contractor to select a construction lawyer to defend the claim rather than the insurer’s preferred attorney who is likely to have experience in defending slip and fall cases and car wrecks and not complex construction defect cases.

The Architex decision is good news for general contractors. However, the decision also admonishes general contractors that there are other reasons for denial of coverage such as failure to give timely notice of a potential claim. Slip Op. at page 12, fn. 11. This means that general contractors should place their insurance carrier/agent on written notice of any potential claim for which the CGL policy might arguably provide coverage. Otherwise, coverage may ultimately be denied.

CAN I RELY ON MY SUBCONTRACTOR'S CERTIFICATE OF INSURANCE?

Every contractor generally requires proof of insurance from its subcontractors, especially with respect to worker’s compensation insurance. In satisfaction of this contractual requirement, subcontractors commonly provide a certificate of insurance to the prime contractor. Is the certificate of insurance sufficient? It may not be.

Many certificates of insurance contain a disclaimer that the certificate is for informational purposes only and does not extend the policy. The disclaimer is a warning that you must look at the policy itself for specific coverage.

In Complete Roofing Services, et al. v. Doherty Duggan & Rouse Insurors, 5th Circuit Court of Appeals (5th Cir. 2009), a certificate of insurance was issued to a general contractor, but the worker’s compensation coverage denoted in the certificate was limited to occurrences only in Georgia. The subcontractor’s employee was injured in Mississippi. The court determined that the "Georgia only" policy did not provide coverage for the injured employee. As a result, the general contractor’s worker’s compensation was required to cover the claim. In this case, it was a catastrophic claim costing the worker’s compensation carrier over $1,000,000.

The best business "policy" is to always obtain and read the actual insurance policy itself. In reviewing the policy, take into consideration the circumstances related to each particular project. For example, consider the following factors: Is the subcontractor from another state? If so, are the subcontractor’s employees from another state or local? Is the subcontractor’s insurance policy state specific? If so, does it cover the state where the project is located? Will any leased employees be used for the project? If so, does the insurance policy cover leased employees or is other insurance required? Are there any warnings or disclaimers in the policy? If so, take heed and consider whether other additional insurance is necessary.

Although the Complete Roofing Services case dealt with a contractor/subcontractor relationship, these basic rules apply to any situation where one party contractually requires insurance from another party. The bottom line is this: get the full policy and read it. This applies to your own insurance policy as well!

(D. Drew Malone is a member of Robinson, Biggs, Ingram, Solop & Farris, PLLC who practices in the area of insurance defense. Drew personally handled this case and contributed to drafting this blog.)

No Certificate of Responsibility = Null and Void Contract

On July 21, 2009, the Mississippi Court of Appeals made it clear that any contract entered into by a party with an unlicensed contractor is null and void. United Plumbing & Heating Company v. AmSouth Bank (Ct. App. No. 2007-CA-01194). This is the first reported decision that addresses the interpretation of Miss. Code Ann. § 31-3-15. This statute provides in pertinent part as follows:

No contract for public or private projects shall be issued or awarded to any contractor who did not have a current certificate of responsibility issued by said board [of contractors] at the time of submission of the bid…Any contract issued or awarded in violation of this section shall be null and void.

In United, the general contractor [United] entered into a contract with an owner [Wee Care] for the construction of a building. The contractor and its subcontractors were not paid for their work. The owner filed bankruptcy and the contractor filed suit against the lender [AmSouth] to recover its contract balance. AmSouth filed a motion for summary judgment arguing that because United did not have a valid certificate of responsibility, the contract was null and void. United argued that it did hold a certificate of responsibility, even though the certificate was issued in a classification different from the type of work being performed for Wee Care. The trial court granted summary judgment in favor of AmSouth. United appealed the decision but the Mississippi Court of Appeals affirmed the trial court’s ruling finding:

[T]he contract entered into between United and Wee Care was null and void because United failed to possess the appropriate certificate of responsibility for the type of work it undertook to perform. Having found that United’s contract with Wee Care was void, it follows that any contractual obligations AmSouth [the lender] may have owed [United or] the subcontractors are also void.

(emphasis added). If a contractor or subcontractor does not have a current certificate of responsibility, it may find itself in the position of having furnished labor and material on a project and not being paid. This could result in a financial disaster for one party and a windfall for the other party.

United makes it abundantly clear that owners, contractors and subcontractors should always check Mississippi State Board of Contractors to determine if the contractor or subcontractor holds a license for the work to be performed. It is also prudent for a party to confirm with the licensed entity that the qualifying party is currently an "owner, or a responsible managing employee, or a responsible managing officer, or a member of the executive staff…" See, Who Can be a "Qualifying Party" for a Contractor’s Certificate of Responsibility? Posted on this blog site by Christopher Solop, May 13, 2009.  (The State Board of Contractors has recently proposed an amendment to Rule L shortening the period to replace a qualifying party after the individual holding the certificate of responsibility leaves the employment of the company from 180 days to 90 days. This change will take effect on October 8, 2009.)

 

When is Enough, Enough - The "Shaken Faith Doctrine"

 

Contractors are occasionally confronted with a subcontractor that just cannot seem to get the job accomplished in a timely or satisfactory manner. Despite repeated warnings, the subcontractor’s performance may not improve. Because termination is an extreme remedy, contractors are generally hesitant to terminate a subcontractor. But when is enough, enough? The Court of Appeals for Mississippi provided some guidance on this issue in Byrd Brothers, LLC v. Herring, 861 So.2d 1070 (Miss. Ct. App. 2003).

In Byrd, the contractor retained a subcontractor to perform plumbing work on a condominium complex. Shortly after the plumbing work commenced there was a dispute concerning the scope of work to be performed by the plumbing subcontractor. There were also issues with the quality of the work performed by the plumbing subcontractor. The contractor repeatedly requested the plumbing subcontractor remedy the deficiencies. However, the plumbing subcontractor failed to adequately address the concerns complaining the contractor was "being too picky". When the contractor discovered billing irregularities, the plumbing subcontractor was asked to leave the project site. The contractor later requested the plumbing subcontractor meet to discuss his performance issues and completion of the project but the plumbing subcontractor refused unless the contractor immediately paid him some money. When this did not occur, the plumbing subcontractor refused to meet and did not to return to the project. The contractor retained another plumbing subcontractor to complete the work.

The original plumbing subcontractor sued the contractor for the subcontract balance and the contractor asserted a counterclaim against the plumbing subcontractor for the cost to complete the plumbing work. The trial court found in favor of the subcontractor. In reversing the trial court judgment and ordering a new trial, the Mississippi Court of Appeals articulated the following legal principle:

A party who has breached or failed to properly perform a contract has a responsibility and a right to cure the breach. The non-breaching party must give him a reasonable opportunity to cure the breach. However, the right to cure is not unlimited.

Where the breach is a material one, the non-breaching party has a right to end the contract, but in doing so he is also obligated to minimize his damages. Likewise, when the conduct of the breaching party has been of such a nature as to cause a loss of confidence or "shaken faith," the offended party is entitled to end the contract, but he remains responsible for mitigating damages.

 

(Citations omitted.)

The Byrd decision highlights the importance of providing a breaching party the opportunity to cure its breach. One warning may not be enough. Contractors need to be vigilant in their efforts to document incomplete and deficient performance and afford adequate opportunities for the subcontractor to "do the right thing". If the subcontractor fails to timely and satisfactorily respond to the contractor’s demands to cure the incomplete and/or deficient work, the cumulative impact of the incomplete and/or deficient work and the lack of responsiveness on the part of the subcontractor may result in a lack of confidence, i.e. "shaken faith", sufficient to entitle the contractor to complete the work and mitigate its damages.

Who Can be a "Qualifying Party" for a Contractor's Certificate of Responsibility?

To perform any public contract of at least $50,000 or private contract of at least $100,000, a contractor must hold a Certificate of Responsibility issued by the Mississippi State Board of Contractors.  It makes no difference whether the "contract" to be performed is a prime contract or subcontract at any tier.  Miss. Code Ann. 31-3-15.

Moverover, Mississippi law does not permit the "borrowing" of certificates of responsibility.  Only a responsible managing officer, employee, or member of the executive staff of the applicant for the certificate can serve as its qualifying party.  The statutes creating the State Board of Contractors, which governs the licensing of contractors, and that Board's regulations implementing those statutes are designed to prevent one person from serving as the qualifying party for entities in which he or she has not personal or managerial stake or responsibility.  To allow otherwise would dilute the requirements which are meant to ensure the integrity, financial capacity, and technical capability of all entities performing construction in Mississippi.

Miss. Code Ann. 31-3-1 defines a "certificate of responsibility" as a "certificate numbered held by a contractor issued by the board under the provisions of this chapter after the payment of the special privilege license tax..."

Miss. Code Ann. 31-3-13(a) defines who can be the "qualifying party" or an applicant of a certificate of responsibility, whether such application is for a new certificate or a renewal certificate.  Specifically, it states:

The board shall take applicants under consideration after having examined him or them and go thoroughly into the records and examinations, prior to granting any certificate of responsiblity.  If the applicant is an individual, examination may be taken by his personal appearance for examination or by the appearance for examination of one or more of his responsible managing employees; and if a co-partnership or corporation or any other combination or organization, by the examination of one or more of the responsible managing officers or memebers of the executive staff of the applicant's firm, according to its own designation.

The intent clearly is that a qualifying party be a responsible managing employee for or officer of the applicant, whether it's a sole proprietorship or corporation.  The true "responsibility" for which the certificate is issued cannot be determined otherwise.  In construing this requirement the State Board of Contractors promulgated the following regulation which, again, leaves no doubt that the "qualifying party" must be intimately involved in the management and/or ownership of the entity claiming him or her as their qualifying party.  Rule L states:

When the qualifying party terminates employement with the Certificate holder, the Mississippi State Board of Contractors must be notified in writing, by the qualifying party and the Certificate holder, within thirty (30) days of the disassociation and another party must qualify within one hundred eighty (180) days or Certificate holder will be subject to suspension or revocation of its Certificate of Responsibility.

(Emphasis added).

Thus, where a purposed "qualifying party" for Company A is neither a managerial employee nor an officer of that company but, in fact, owns or is the officer of another, unrelated Company B, but Company B routinely serves as a subcontractor to Company A, Company A and its purported "qualifying party" are in violation of MIssissippi law and the Rules and Regulations of the State Board of Contractors.  (This is typically done where owners of two companies do not want to commingle business assets, finances, or interests, but they do want to pursue and perform contracts together.)  Company A's Certificate of Responsibility is null and void as a matter of law.

 

Checklist for Mississippi Construction Contractors

If you have ever been the apparent low bidder on a public construction project and had your bid rejected because of an irregularity in the bid documents, you are not alone.  What is even more frustrating, and will make you fighting mad, is when the public agency decides to waive the same irregularity of a competitor when you are the second low bidder.  Perhaps the best way to avoid this situation is to make sure that you have completed your bid in strict accordance with the instructions to bidders.  I know it is difficult to focus on all the particulars when less than an hour before the bid is to be submitted subcontractors and suppliers are sending in prices or changing the ones previously provided.  Here is a simple bid checklist that may help you avoid those last minute mistakes.

  • Read the "Instruction to Bidders" when you obtain a copy of the solicitation to make sure that there are no unusual or different bid requirements. 
    • Pre-Bid Conference
    • Bid Bond
    • Site Visit
    • Listing of Subcontractors
  • Prepare the bid envelope in advance, identifying (1) the project, (2) the person to whom the bid is to be submitted, (3) the location where the bid is to be submitted and (4) the date and time for the submission of the bid.  ALWAYS PLACE CERTIFICATE OF RESPONSIBILITY NUMBER ON THE OUTSIDE OF THE ENVELOPE.
  • Complete the bid form and check to determine whether all the blank spaces for prices are completed with a dollar amount or a "---" or "-0-".
  • Check your addition and multiplication for unit prices and total bid price.
  • Acknowledge all Amendments/Addenda to the solicitation.
  • List subcontractors, if required.
  • Sign and date the bid documents.
  • Check the bid bond, if required, to make sure that it is in the correct amount and proper form.
  • Place bid documents and bid bond, if required, into envelope and submit.

In the event you are determined to be the apparent low bidder, and your bid is not more than ten percent (10%) above the amount of funds allocated for the project, it is likely that you will be awarded the contract.