A Brief Update on the Mexican Government Contract Litigation System

The Mexican legal system treats differently disputes with respect to civil contracts (those executed by and between individuals) and disputes regarding administrative contracts (those executed by and between an individual and the public administration). A challenge to an administrative contract follows special rules relevant to the jurisdiction depending on the type of administrative act performed during the execution of a contract.

Until 2018, when the act (or omission) to be challenged in an administrative contract was lack of payment, the courts empowered to resolve the dispute were, like in a private contract, the civil or commercial courts.

However, in June 2018, Second Section of the Mexican Supreme Court of Justice issued a criterion changing the way to demand payments derived from administrative contracts, especially those governed by the Public Works and Related Services Law and the Acquisitions and Leasing for the Public Sector Law.  The criterion stated that lack of payment in administrative contracts cannot be separated from the nature of the conduct that caused the breach, which is administrative. As a consequence, a claim of breach for nonpayment was required to be brought in the administrative forum.

The judicial criterion changed the paradigm, forcing civil and/or commercial judges to reject these claims immediately, generating delays in such cases. Contractors were forced to bring several actions in order to force the administrative forum to issue a position regarding the provenance or non-provenance of the payment claim.

According to the judicial criterion, only when this situation arose or when the silence of the contracting authority creates a right or denies it, does the Contractor have a right to bring a claim before an administrative forum, which is quite different from the civil or commercial courts. As can be inferred, to get to the point that the individual is in a position to file a lawsuit, takes much longer.

Several litigators, including the author, believe that the judicial criterion is unfortunate because of, among other reasons, the issue related to time.

However, a more recent criterion (published February 19, 2021) declared the non-applicability of the previous one for contracts executed under the Mexican Petroleum Law (Law of Pemex). Under this law, it is stated that the civil and commercial principles of law are interchangeably applicable and the relationship between an individual and Pemex, when the relationship derives from a contract governed by the Law of Pemex, has a commercial nature.

This recent criterion is important because it signals a change affecting the commercial nature of the contracts ruled by laws like the Law of the Federal Electricity Commission (Law of CFE), which contains similar provisions regarding the interchangeable applicability of the commercial and civil principles to such law.

Also, the recent criterion resumes the old practice regarding the way to make a payment claim – at least payments derived from the contracts executed by and between Pemex and CFE – allowing litigators to submit payment claims directly to the civil or commercial courts as a civil lawsuit.

The foregoing will help the individual contractor in, at least, two ways. First, it gives the contractor the security that its claim can be brought as a civil lawsuit, having the opportunity to sue the contracting authority when appropriate; and second, it expedites resolution of payment disputes by allowing easier access to civil or commercial Court.

Presumably, the Mexican Judicial System will resume the old criterion regarding the appropriate way to claim the payment of administrative contracts, which means that the way to claim payments in administrative contracts will be by commercial trials. However, as of today, it will be necessary to attend to the specific law that governs the corresponding contract.

Author Juan Pablo Sandoval García is an Associate at COMAD, S.C. (www.comad.com.mx). His email address is jpsandoval@comad.com.mx.

A Contractor's Second Chance - The Massachusetts Supreme Judicial Court Relaxes Rules to Establish Contract Performance & Equitable Claims

In G4S Tech. LLC vs. Mass. Tech. Park Corp., SJC-12397, -- N.E.2d --, (Mass. June 13, 2018) the Supreme Judicial Court of Massachusetts clarified that to recover under the contract itself “complete and strict performance requirements” only applies to the provisions regarding “the design and construction work," but that for breaches of other provisions ordinary contract principles of materiality control.  The Supreme Judicial Court also overturned a line of cases that established the rule that intentional violations of contract provisions “precluded a finding of good faith to fully perform,” barring quantum meruit claims.  The Supreme Judicial Court articulated its new rule, “that intentional breaches, even those involving material breaches, alone are not dispositive of the right to equitable relief, at least when such breaches do not relate to the construction work itself.”

This contract dispute arose from a construction project to build a fiber optic network spanning 1,200 miles and 123 communities throughout western and central Massachusetts.  Massachusetts Technology Park Corporation (MTPC) received funding for this project from both state and federal government funding. MTPC awarded G4S Tech. LLC (G4S) the design-build project for a total contract value of $45.5 million.  Due to restraints imposed by the federal government based on its funding, the project had to be completed within a certain period of time. Thus the contract had several provisions regarding G4S’s liability and responsibility for not completing specified portions of the project by specific deadlines.  The project was completed over one year after the specified project deadline, however, the facts are disputed as to whether GS4 or MTPC was at fault for the delay.  Due to the delays in completion, MTPC refused to pay G4S the last $4 million owed under the contract,  withholding the amount as liquidated damages for the delays.  Further, MTPC later discovered that G4S violated a provision requiring that the subcontractors be paid on time, instead G4S delayed paying subcontractors until after their fiscal quarters closed, to show “a more favorable cash flow in its quarterly reports.”  G4S brought claims under breach of contract and quantum meruit theories, MTPC then brought a fraud claim against G4S.

Massachusetts’s rule for performance of construction contract terms is “that a contractor cannot recover on the contract itself without showing complete and strict performance of all its terms…” G4S argued that this rule was outdated and the Supreme Judicial Court should adopt the “materiality rule” per the Restatement (Second) of Contracts.  While the Supreme Judicial Court declined a wholesale adoption of the Restatement, it did clarify that this rule is limited only to “the design and construction work” and that other provisions “should be analyzed pursuant to ordinary contract principles, including the materiality standard[.]"  That said, in this case, the complete and strict performance requirement controlled because “paying subcontractors on time was an essential and inducing feature of the contract between MTPC and G4S.”  The Court noted that a public works project "prompt" payment is a "legislative purpose" and the Recovery Act's purpose, under which this project was funded, was to maximize jobs and improve the economy. By not properly paying the subcontractors, G4S was clearly frustrating that purpose.  The Supreme Judicial Court subsequently upheld the trial court’s granting of summary judgment to MTPC as to the contract claim.

Turning to G4S’s quantum meruit claim, historically, a line of Massachusetts cases supported the rule that “[g]enerally, ‘[i]n the absence of special exculpating circumstances and intentional departure from the precise requirements of the contract is not consistent with good faith in the endeavor fully to perform it, and unless such departure is so trifling as to fall within the rule de minimis, it bars all recovery.’”  The Supreme Judicial Court decided, after sources have long criticized and questioned the rule, that “intentional breaches, even those involving material breaches, alone are not dispositive of the right to equitable relief, at least when such breaches do not relate to the construction work itself.”  Under this new rule, the Supreme Judicial Court reversed the granting of summary judgment to MTPC as to the quantum meruit claim due to disputed factual questions as to which party caused the delay in completion of the project.

Lastly, the Supreme Judicial Court reversed the trial court’s decision to dismiss MTPC’s fraud claim under a duplicative damages analysis. The Supreme Judicial Court determined that there were “separable and distinguishable acts forming the basis of recovery under the breach of contract and fraud claims.”  Accordingly, the Supreme Judicial Court remanded the quantum meruit and fraud claims to the Superior Court.

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Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island.  She thanks Brenna Riley, a rising 3L at Roger Williams University in Bristol, Rhode Island, for this noteworthy case review.

Pay-if-Paid Enforced Opening Door to Subcontractor Claim Against Owner

 

https://libeskind.com/work/the-ascent-at-roeblings-bridge/

In Superior Steel, Inc. v. Ascent at Roebling's Bridge, LLC, No. 2015-SC-000204-DG, 2017 WL 6380218 (Ky. Dec. 14, 2017), a subcontractor and a sub-subcontractor sued the general contractor and owner for the failure to pay for extra work. The general contractor and owner cross-claimed against the other for, inter alia, indemnification.  At the jury trial, the subcontractors recovered under theories of implied contract and unjust enrichment.  All parties appealed, in particular, as to the pay-if-paid jury instruction. The Court of Appeals vacated the judgment and remanded.  In turn, all parties petitioned to the Supreme Court of Kentucky.

 

The key questions in the petition were whether the pay-if-paid provision was enforceable as between the general contractor and subcontractors and, if so, whether the subcontractors could pursue the owner directly for payment notwithstanding the lack of privity between owner and subcontractors.

 

The Supreme Court concluded that, as a result of the pay-if-paid clause, the general contractor had not breached subcontract for the failure to pay for the subcontractor's extra work.  The relevant subcontract provisions stated:

• "no compensation . . . for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved"
• And more directly - "payment [to] the Contractor from the Owner for the Subcontractor Work is a condition precedent to payment by the Contractor to Subcontractor. The Subcontractor hereby acknowledges that it relied on the credit of the Owner, not the Contractor for payment of the Subcontract Work."

Reading these together, the Supreme Court agreed that the general contractor's receipt of payment from owner was a condition precedent to its obligation to pay the subcontractors.  Because the general contractor did not receive payment from the owner, there could be no breach. The Court did note that "pay-if-paid clauses have fallen out of favor in some states, [but] the prohibition against their use has come from the legislature rather than the courts." In Kentucky, no such statutory prohibition existed.

 

However, because the subcontractors were left with no useful contract remedy against general contractor, the Court held that the subcontractors were not barred from bringing unjust enrichment claims against the owner.  The Court acknowledged that typically “unjust enrichment is unavailable when the terms of an express contract control.”  But noted that, here, the "adequacy" of a "legal remedy" (or the "actual realization of that contractual remedy") was absent due to the "contractual gridlock" caused by the owner.  Indeed, if the contract was the only avenue for the subcontractors to obtain relief, that result would allow the owner to take advantage of its own failure to pay after receiving "a substantial benefit" from the subcontractors' work.

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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She practices construction law at Pierce Atwood, LLP in Providence, Rhode Island. 

 

Risky (shifting) Business: Pay-if-Paid Provision Enforced to Subcontractor's Detriment

In Baker Concrete Const., Inc. v. A. Pappajohn Co., No. FSTCV166028187S, 2017 WL 4106383, at *1 (Conn. Super. Ct. 2017), at issue was the age-old dispute of non-payment for work performed.

The Baker Court first recounted the direct avenues for collecting on a construction project when payment is not made in the regular course: "[A] mechanic's lien may be available, and in connection with public works projects, a payment bond is statutorily required given the unavailability of a mechanic's lien in such projects."   That said, "[d]epending upon the equity in the property . . . a mechanic's lien may be insufficient (especially if a project has been financed with a mortgage placed on the property as a first lien)." Even with these direct avenues along with filing suit, insolvency of the parties in the project chain can thwart any collection efforts of the lower tier contractors.  In addition, contractual language, for example a pay-if-paid provision, too can arrest an unpaid party's effort to be paid. The Baker Court considered the requirements for applying such provisions. In Baker, the general contractor-subcontractor contract stated, in pertinent part, that:

Progress payments to the Subcontractor for satisfactory performance of the Subcontractor's Work shall be made only to the extent of and no later than ten (10) working days after the receipt by the Contractor of payment from the Owner for the Subcontractor's Work. The Subcontractor agrees that the Contractor shall be under no obligation to pay the Subcontractor for any Work until the Contractor has been paid by the Owner . . . The Subcontractor expressly acknowledges and agrees that payments to it are contingent upon the Contractor receiving payments from the Owner.

By its plain language, this pay-if-paid provision appeared to foist all risk of the owner's potential insolvency onto the subcontractor.  For its part, the subcontractor argued that "the provision is a timing issue (or should be interpreted and applied as such) rather than a risk-shifting provision." In other words, notwithstanding that the general contractor was not paid by the owner in a reasonable period of time after the work was performed by the subcontractor, the subcontractor was still entitled to be paid.  The court disagreed.

After disposing of a burden of proof argument raised by the subcontractor, the Baker Court resolved the contract interpretation question. It examined the caselaw and observed that where the provision does not explicitly "creat[e] a condition precedent to payment" the courts will construe the provision as "setting the time of payment" rather than establishing a defense to payment. However here, the contingency was explicit and moreover the contract provision also put the risk of insolvency explicitly onto the subcontractor: "The Subcontractor expressly accepts the risk that it will not be paid for the Work performed by it if the Contractor, for whatever reason, is not paid by the owner for such Work. The Subcontractor states that it relies primarily for payment for Work performed on the credit and ability to pay off the Owner and not of the Contractor[.]"

In light of the foregoing the Baker Court held that there was no ambiguity in the terms and therefore the contract's pay-if-paid provision would be enforced as written.  The court summed up the reality of working in the construction industry (and frankly any industry): "It is clear that the defendant [contractor] took advantage of its superior bargaining position in this contract; the plaintiff [subcontractor], however, seemingly made a conscious decision to [get the job by] sign[ing] a contract containing this risk-assumption provision which, in these unfortunate circumstances, has come into play."

As an aside, observe that Connecticut's statutory prompt payment provisions do not preclude contractual pay-if-paid clauses. See Conn. Stat. 42-158i et seq.

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The author, Katharine Kohm, Esq. is a committee member for The Dispute Resolver.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. 

Texas Jury Sentences General Contractor to Three Years in Prison for Fraudulent Nonpayment of Subcontractors

The Dallas Morning News reports that a jury in Fort Worth, Texas recently gave the principal of a general contractor a three-year prison sentence for fraud in connection with his failure to pay amounts due to subcontractors for work performed on the construction of a car dealership. According to the article, the Tarrant County District Attorney's Office stated that the criminal conviction, which came after a week-long trial, was the first of its kind in the country.

The press release from the Tarrant County District Attorney's Office offers some additional details about the case. It states that the general contractor had submitted payment applications to the owner claiming all subcontractors were being paid. This turned out not to be the case, as subcontractors filed seven liens totaling about $100,000 against the owner's property. The owner filed a complaint against the general contractor's principal with the Tarrant County District Attorney's Office. The principal was then indicted, arrested, and tried on a felony charge of making a false statement to obtain property or credit.

The defendant had no prior felony convictions, and therefore faced punishment ranging from probation to ten years in prison. During the punishment phase, prosecutors presented evidence of prior civil lawsuits against the defendant filed by subcontractors, as well as repeated bankruptcy filings to avoid liability. After considering this evidence, the jury sentenced the defendant to three years in prison with a $10,000 fine.

As civil defense attorneys, we often view potential liability for nonpayment on construction projects in civil, rather than criminal terms. Has anyone else experienced situations where criminal charges were asserted? Is this the type of conduct that merits criminal punishment rather than civil liability for damages?