• payments were made to a friend of a commissioner,
• payments were made without a valid contract,
• the contract was not properly recorded,
• the contract was not effectively approved, or
• the county failed to comply with public works bidding laws.

In light of such complaints, county officials may ask: Should they seek reimbursement? Would a court even permit recovery of such payments?

These questions have been addressed in case law, including the 2003 case of Howard v. Brantley County, 260 Ga.App. 330. In that case, the county made several payments to a contractor even though there was no written contract, and no contract was approved by the county or entered on the minutes. In fact, the county did not publicly bid the work pursuant to the county roadwork statute.

After paying $190,600 to the contractor, the county filed suit for money had and received. At trial, the county moved for summary judgment and won because, among other things, the contract was not publicly bid and was not recorded on the minutes.

Money Had and Received vs. Voluntary Payment Doctrine

The contractor argued that, even if the county did not follow the public works laws, it should be permitted to keep the payments based on the voluntary payment doctrine. In fact, the contractor had precedent showing that this argument was successful against a county in a similar — but still different — situation.

The case, Twiggs County v. Oconee Elec. Membership Corp., 245 Ga.App. 231 (2000), involved a county that made payments for utility relocation despite the absence of any contract. The county paid the full amount due but later decided the payments were improper. Specifically, it argued that the purported contract was void because, among other things, it was not in writing and was not entered on the minutes.

In response, the utility asserted the voluntary payment doctrine as a defense. Ultimately, the court ruled in the utility’s favor — the voluntary payment doctrine prevailed to deny the county’s recovery. As noted below, however, the court recognized the limited scope of its ruling.

Voluntary Payment Doctrine is a Limited Exception

In the Brantley County case, the court reached a different conclusion based on a different set of facts. It ruled that the voluntary payment doctrine did not apply, and that the contractor must return the payments.

The difference in the cases rests on a number of factors outlined in the Twiggs County case. The court listed the following factors in favor of applying the voluntary payment doctrine (against the county):

• the county delayed for more than two years to assert its rights to recovery;
• the county’s failure to record the contract on the minutes was due to the board’s failure to discharge its official duty;
• there was no claim that the county exceeded its authority by entering into the contract; and
• there was no evidence of fraud.

The court also distinguished the circumstances in the Twiggs County case (denying recovery by the county) from an affirmative claim for recovery against the county. For claims of affirmative recovery against the county, the “essential requirements of a valid contract cannot be waived.”

In contrast, the Brantley County case involved an illegal and ultra vires contract because the county failed to comply with the public bidding requirements. Ironically, the court held, “Where public funds are illegally paid out by county officials or by some agency of the county, it is proper for the county to bring a suit for the recovery of same.”

Implications

The above cases illustrate the importance of strictly complying with statutes governing public works and contracting authority. The failure to do so may have disastrous consequences for the county (or other public owner) and the contractor. It not only places the county at risk for claims from the contractor, but also at risk for claims from subcontractors, suppliers, and laborers. While the county in the Brantley County case was successful in recovering the improper payments, the risk arising from non-compliance is far too great to ignore.

Background on EPC Contracts

In the energy-construction industry, contracts that require one party to design and install the project are quite common.  They are typically referred to as engineering, procurement, and construction contracts, or EPC contracts.  While they are common, they represent huge sources of potential liability.  If any part of the project does not result as originally planned, the design-contractor is almost certain to face a serious lawsuit. 

Background of the Case

In a recent case before the Georgia Court of Appeals, a design-contractor entered into two contracts with a plant owner.  The first contract required design, and the second required installation, of a custom energy system to generate heat energy to power the owners’ plant.  Excess heat would power a boiler and turbine to produce electricity for use or sale.

The project experienced several problems.  It was unable to meet applicable emissions requirements, and it did not produce enough steam to generate the level of electricity required by the contracts.  The owner ultimately filed suit against the design-contractor.

Did the Design-Contractor Breach the Contract?

At trial, the jury sided with the owner and rendered an award of over $8.4 million.  The jury based the award, in part, on evidence of the following installation defects:

• Where the design called for alloy materials, the contractor installed carbon steel nuts, which disintegrated at the high temperatures found on the project; and
•  The design-contractor misaligned the expansion joints in the primary air heater of the system, which caused the system to leak thermal energy and created enough force to shear bolts off the system.

Based on these deficiencies, the jury found that the design-contractor breached the installation contract, and the Court of Appeals affirmed the award. 

Did the Breach Justify $8.4 Million in Damages?

The jury awarded the owner several types of damages, including direct repair damages, ongoing maintenance costs, delay damages, and the cost of a new boiler that was not originally called for by the contract.

The jury relied on testimony of the cost to fix the defects and replace damaged equipment.  While the appellate court could not exactly recalculate the jury’s damages figure, it held that evidence admitted at trial supported the range of damages awarded by the jury.  In reaching this conclusion, the court held that the jury may have found that the owner was entitled to delay damages because the project was not able to begin operation until almost one year after the scheduled completion date. 

Finally, a substantial portion of the damages awarded by the jury included the cost to procure and install a stand-alone boiler.  In the lawsuit, however, the contractor argued that awarding the cost of a new boiler was inappropriate because (i) the contract did not require the boiler, (ii) installation of the boiler would place the owner in a better position than set forth in the contract, and (iii) the cost was disproportionate to the loss in value caused by the defects. 

In response to the contractor’s arguments, the court sided with the owner because damages for defective construction claims include “the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value.”  The court concluded that the jury was authorized to find that the only way to remedy the defects was to install the additional boiler.  Moreover, the contractor had the opportunity to argue to the jury that the new boiler would place the owner in a better position than called for by the contract.  Accordingly, the jury presumably considered these arguments but, nevertheless, ruled in favor of owner. 

Implications

The implications of this case should not come as a surprise to those in the energy-related construction industry.  First, from the design-contractor’s perspective, EPC contracts and similar contracts pose huge potential risks.  In the traditional structure of construction projects, by contrast, the construction and design responsibilities are typically assumed by two or more entities.  This typical delivery structure (sometimes referred to as design-bid-build) spreads the risk around.  In an EPC contract, the design, construction, and installation responsibilities are centralized and assumed by one entity. 

As this case illustrates, the concentrated risk profile of an EPC contract or similar contract can result in damages of high magnitude.  Unless the contract contains adequate protections, the design-contractor assumes liability for the performance of the project, which is sometimes subject to performance guaranties.  Accordingly, the design-contractor has unlimited exposure to liability to bring the project into compliance with the performance standards in accordance with the terms of the contract.  This exposure can be mitigated by including provisions in the EPC contract for limited liability and waiver of consequential damages.

From the owner’s perspective, EPC contracts can provide great delivery systems for building the project.  As in this case, the owner has a single point of responsibility and if a dispute arises, it brings lawsuit against only one party.  The owner is not caught in the crossfire between the designer and contractor because they are the same entity.  One drawback, however, is that the owner must play an active role in the design and construction phases of the project.  An option to accomplish this is to hire a construction manager.  By contrast, in the normal construction delivery scenario, the architect purports to fill the role of a neutral party, to a certain extent. 

As demonstrated by the recent case, design-construction contracts raise significant risk-allocation issues.  It highlights the importance of contract drafting and addressing these issues before executing the contract. 

Depending on the characteristics of a claim, the AAA Construction Industry Arbitration Rules establish four procedural tracks.  For smaller claims, the Fast Track Procedure is an extremely efficient manner of resolving claims.  The Fact Track Procedure is available where no claim or counterclaim exceeds $75,000 (excluding interest, attorney fees, and costs). 

Summarized Timeline

To maintain efficiency, the Fast Track Procedure establishes limits on the schedule, hearings, and discovery.  The schedule is limited in a number of ways.  The defendant’s answer is generally due within seven (7) calendar days after notice of the filing of the demand is sent by AAA.  While the parties can increase or decrease their claim or counterclaim (if any), they must do so before seven (7) days prior to the first scheduled hearing.  After the arbitrator is appointed, a new or different claims or counterclaims may not be submitted without the arbitrator’s consent.  Even the selection of the arbitrator is conducted in a summarized procedure. 

Within ten (10) days after confirming the arbitrator, the parties will hold a preliminary telephone management hearing.  The arbitrator will set the time limits and procedures so that the arbitration and hearing will be completed within the summarized timeline. 

No or Limited Discovery

Generally, no discovery is permitted under the Fast Track Procedure.  The arbitrator has the authority, however, to permit discovery upon the request of a party in exceptional circumstances.  In any event, the parties must exchange all exhibits, affidavits, and other information they intend to submit at the hearing, and identify all witnesses to be called, no later than five (5) business days prior to the arbitration hearing. 

Expedited Hearing and Award

The arbitration hearing must be held no later than 45 calendar days after the preliminary telephone conference, unless the parties and the arbitrator agree otherwise. 

The hearing itself is also simplified.  It is limited to one day, but for good cause shown, the arbitrator may schedule one additional day.  If extended time is granted, it may be conducted by telephone conference or other means.  Moreover, where the matter involves a claim of $10,000 or less, the arbitration will be decided solely on the basis of submitted documents, and no hearing will be permitted.

An award will be issued no more than 14 calendar days after completion of the hearing. 

Exceptions

There are a few exceptions that will render the Fast Track Procedure inapplicable.  If a claim or counterclaim is amended to exceed $75,000, the case will be conducted under other procedures, unless all parties agree otherwise.  The arbitrator may reassign the matter to another procedure (e.g., Regular Track Procedure or Large Complex Case Procedures) if the case is to be decided by more than one arbitrator, or if the parties agree to vary the procedures to be inconsistent with the Fast Track Procedure (e.g., agreement to more than a 1-day hearing). 

Implication

Contractors and subcontractors (at any tier) should check their contracts to see if they incorporate the AAA Rules.  If so, the Fast Track Procedure may apply to smaller claims.  In that case, contractors and subcontractors should consider taking advantage of the expedited and efficient procedures for pursuing claims under the AAA’s Fast Track Procedure.

Liens are statutory creations that may be filed against an owner’s property interest, as long as the lien claimant strictly complies with the lien law.  However, in some instances, even if the claimant does everything correctly, the lien will not overcome a previously filed lien or security interest. 

Case Background

A recent opinion by the Georgia Court of Appeals addressed the issue of priority in connection with a contractor’s lien.  To purchase property, Owner obtained a loan and gave a bank a security interest in the property.  Owner hired Contractor to perform work on the property.  After Contractor performed the work, and when Owner had trouble paying off the bank loan, Owner and a bank executed a modification agreement for security deed, but did not file the modification agreement. The “modified” security deed provided that the bank would be entitled to additional amounts (“Foreclosure Costs”) if Owner defaulted on the bank loan.  

After Owner failed to pay for Contractor’s work, Contractor filed a lien on the property.  Shortly thereafter, Owner failed to pay on the bank loan, and the bank then foreclosed on the property and attempted to sell it at auction.   When no third parties bid on the property, the bank acquired it via a bid credit at less than the amount owed on the bank loan. 

Contractor believed that the property’s fair market value was higher than the bank’s purchase price, and that the excess value should have been applied toward Contractor’s lien.  The bank responded that any excess value was eliminated by Foreclosure Costs, which were recoverable pursuant to the unrecorded modification agreement.  Contractor disagreed and filed suit against the bank to recover the disputed excess.

Priority of Liens Vis-a-Vis Security Deeds

In general, a “bona fide holder of a security deed executed before the first material was furnished, and therefore necessarily prior to the recording of the materialman’s claim of lien, will take priority of the lien, even if the security deed itself was not recorded until after the first material was supplied.” 

In this case, Contractor did not dispute that the original security deed was filed before it worked on the project.  Contractor argued, however, that the “modified” security deed should not have priority over its lien, in part, because it was never filed in the property records. 

“Modified” Security Deed Does Not Lose Priority Vis-a-Vis Contractor’s Lien

The court disagreed with Contractor and ruled that the “modified” security deed still had priority over Contractor’s lien.  The court reasoned that a security deed may be modified without affecting its priority where it is merely modified, not cancelled.  In this case, the security deed was merely modified.  The court further held that the failure to file the modification agreement did not affect its superior priority.  As a result, the modified security deed kept its priority over Contractor’s lien.  And the bank’s entitlement to Foreclosure Costs (as permitted by the modification agreement) eliminated any excess to which Contractor otherwise would have been entitled. 

Implications

The case illustrates that contractors, subcontractors, and suppliers cannot always depend on liens against property to recover payment from the owner.  Even if a lien claimant jumps through all the hoops, it still may find itself behind a bank with a superior interest in the property.  Accordingly, before performing substantial work or providing expensive materials, it is advisable to check the property records for any existing security interest or other liens on the property to be improved. 

In addition, lien claimants should provide notice of beginning work to the owner and, if applicable, contractor by a statutory Notice to Contractor.  Such a notice is not only required by the lien law, it would provide further evidence of the lien claimant’s beginning work on the project, which is necessary to establish the lien claimant’s priority. 

Further, a potential claimant may also need to check whether a prior security interest has been modified by an unfiled modification agreement.  As this case illustrates, such modification agreements could increase the prior claim amount — which would decrease the lien claimant’s possibility of recovery. 

Background on Section 179D

Section 179D of the tax code provides a deduction for installation of “energy efficiency commercial building property” (“Eligible Property”).  Eligible Property includes property involved with improving energy efficiency of:

• interior lighting systems;
• heating, cooling, ventilation, and hot water systems; or
• building envelopes.

The deduction amount is equal to the cost of Eligible Property, subject to a maximum of $1.80 per square foot.   In addition, installation of Eligible Property must result in a minimum percentage of energy savings. 

 In certain circumstances, however, Eligible Property that does not meet the minimum energy-savings percentage may still qualify for a tax deduction.  The partial deduction is limited to $0.60 per square foot. 

Recent Guidance

The IRS recently modified guidance for these partial deduction projects in Notice 2012-22.  The Notice provides an additional set of energy savings percentages that, if met, will qualify a project for a partial Section 179D deduction. 

While the guidance increases the energy-savings percentage for interior lighting systems, it reduced the percentage for heating, cooling, ventilation, and hot water systems.  The percentage for building envelopes stayed the same.  A chart is provided on page 7 of the Notice for quick reference.  

Implications

Owners and facilities managers should consider the Section 179D deduction as an additional incentive to implement their energy efficiency projects.  Furthermore, architects and design-builders may even qualify for the deduction for energy efficiency projects on public buildings.  Whoever gets the deduction, they should get started soon: the Section 179D deduction will sunset on December 31, 2013.

For additional resources on energy efficiency projects, click here.

Background

In City of Hoschton v. Horizon Communities, a city negotiated with a developer (“Horizon”) for the construction of a sewage pump station to accommodate the needs of Horizon’s new development, as well as other unrelated developments.  In exchange, the developer would recoup construction costs from (i) other developers using the station and (ii) the city through future sewer connection and tap fees. 

The city enacted an ordinance addressing construction of the pump station which read:

Developer shall [construct and] dedicate the new sewer infrastructure to the city but reserves the right to recoup a portion of the investment from subsequent development on a lot tap basis on or before June 6, 2010.

Subsequently, a new developer (“Elite”) began negotiations with the city for another unrelated development.  A city official told Elite to pay a connection fee of $200,000 to the city for an upgrade of a separate pump station.  However, the city decided to abandon the other pump station, and instead began flowing Elite sewage to the Horizon pump station. 

Trial Court Grants Mandamus

Horizon responded with a mandamus claim.  It sought an order requiring the city to comply with the ordinance to pay construction costs allocated to Elite’s usage of the Horizon pump station.  In other words, Horizon asked to recoup the percentage of construction costs associated with Elite’s usage.  After an evidentiary hearing, the trial court granted a mandamus absolute and ordered the city to pay $191,631 (based on Elite’s usage capacity), plus costs of litigation and attorney fees. 

Entitlement to Mandamus

The city appealed arguing, among other things, that mandamus was not appropriate.  It claimed that the ordinance did not create a legal obligation on the city to act.  The Supreme Court did not agree.

The Supreme Court initially explained that “Mandamus will issue against a public official only where the petitioner has demonstrated a clear legal right to relief or a gross abuse of discretion.”  The duty to be enforced “must be a duty arising by law, either expressly or by necessary implication.”  The law “must not only authorize the act be done, but must require its performance.” 

Applying the above rules to the ordinance, the Supreme Court agreed with the trial court.  Namely, in exchange for Horizon’s construction of the pumping station, the city was obligated to reimburse Horizon for its construction costs in proportion to the capacity used by other developments.  Furthermore, the Supreme Court upheld the trial court’s award of attorney fees and costs after a finding of bad faith.

• Read the bill here or here. 
• Read more about the Georgia Energy Savings Performance Contracting Act here. 
• Read more about energy savings contracts and energy efficiency projects here.

Finally, GEFA has issued the 2012 Georgia Energy Report, which can be viewed here or here.  Among other things, the report discusses Georgia’s current and anticipated sources of energy and prospects for energy efficiency and conservation. 

The Prompt Pay Act

Georgia’s Prompt Pay Act (the “Act”) generally provides additional remedies to a contractor or subcontractor where they perform construction work on property and the owner of the property fails to remit payment within statutory deadlines.  Where the Act applies, it provides for an award of attorney fees and interest on late payments.  In Electric Works CMA, Inc. v. Baldwin Technical Fabrics, Inc., the court explained that attorney fees are recoverable without the necessity of showing bad faith.

Background on the Case

A contractor provided electrical services during 2006 and submitted invoices to the owner for such services.  When the owner failed to pay, the contractor informed the owner it would seek interest on unpaid invoices and attorney fees and costs under the Georgia Prompt Pay Act.  After a jury trial, the trial court entered judgment in favor of the contractor for the unpaid invoices, but declined to award interest and attorney fees, citing the owner’s lack of bad faith.

Applicability of the Prompt Pay Act

The Act applies where a contractor or subcontractor improves non-residential real property, performs construction services, or performs construction management services for an owner, including private owners and most public owners.  Contractors and subcontractors are entitled to payment within set statutory deadlines, subject to certain additional requirements such as compliance with the contract and subcontract payment conditions. 

Is Bad Faith Required Under the Prompt Pay Act?

The contractor appealed the trial court’s denial of attorney fees under the Act.  The Act provides that “the prevailing party is entitled to recover a reasonable fee for the services of its attorney.”  The trial court believed that this provision required a showing of bad faith, similar to other statutory bases for recovery of attorney fees.  The Court of Appeals disagreed and reversed the ruling.  It abided by the plain language of the statute and refused to read a bad-faith requirement into the statute.  The court held, “entitlement to attorney fees under the Prompt Pay Act does not require a showing of bad faith.”  Therefore, it directed the trial court to enter judgment for the contractor in the amount of the unpaid invoices with interest, plus attorney fees. 

More information about GlobalCon 2012 is available here.  To read more about AHC’s Energy Construction Practice Group, click here.

Background

The case arose from the construction of a residential development that allegedly increased the amount and velocity of water runoff on a neighboring community.  Owners in the neighboring community (“Adjacent Owners”) filed suit against Developer for negligence, nuisance, and continuing trespass. 

 The homeowners association of the development (“Homeowners Association”) had since executed an Assignment Agreement with Developer in which Homeowners Association assumed responsibility for the operation of the development, including detention facilities.  The Assignment Agreement also required Homeowners Association to indemnify Developer for claims, costs, and damage arising from the construction, maintenance, repair, or operation of the development, including the detention facilities. 

 Lawsuit and Appeal

 When Adjacent Owners asserted their claim, the Developer filed a third-party claim for indemnity against Homeowners Association.  The Court of Appeals held that the indemnity provision in the Assignment Agreement violated Georgia’s anti-indemnity statute.  Developer appealed the issue to the Georgia Supreme Court.

 The Anti-Indemnity Statute

 Under Georgia’s anti-indemnity statute, a construction-related contract generally cannot require one party to indemnify another party for damages arising out of the other party’s sole negligence.  The purpose of the statute is to prevent parties involved in construction from shifting the liability for their sole negligence to another party, subject to certain exceptions. 

 The court noted that Georgia’s anti-indemnity statute is construed much broader than similar statutes in other states.  The rule applies when a contract (1) relates in some way to the construction, alteration, repair, or maintenance of certain property and (2) contains a provision that requires one party to indemnify another party for the latter party’s negligence. 

 The Indemnity Provision is Void

 Applying these standards, the Supreme Court held that the contract was within the broad reach of the anti-indemnity statute.  “Though the assignment does not itself set forth terms of a construction project, it is a vehicle through which existing rights and responsibilities vis-a-vis past construction have been assigned and assumed.” 

 The court then considered whether the indemnity provision was the type prohibited by the anti-indemnity statute.  The provision required Homeowners Association to indemnify and hold harmless Developer for “any” or “all” claims, costs, and damages arising from the subject of the parties’ contractual relationship, “no matter the origin of the claim or who is at fault.”  The Supreme Court ruled that the anti-indemnity statute rendered the provision void and unenforceable. 

 How Does the Case Affect Me?

 The court’s broad interpretation of the anti-indemnity statute should prompt all participants in the construction industry to consider its effect on their contracts and risk evaluation.  Indemnity provisions in contracts that relate to construction – whether past, present, or future construction – may have limited effect in light of the case.  Participants in the construction industry should, therefore, review their contracts and consider the anti-indemnity statute’s effect on various potential circumstances.  Furthermore, participants who previously felt a sense of protection or confidence in a contractual indemnity provision should reassess their risk profile in light of the limited impact of such clauses.