Category: Contracts

Mediation vs. Arbitration Provisions in a Contract

All provisions of a contract are relevant, no matter how innocuous they appear to be and no matter how many times you are told that they are “just boilerplate.” Mediation and arbitration provisions often are deemed to fall in the “boilerplate” category, but the impact of these provisions cannot be understated.

Taking a step back, in the event of a dispute between contract counterparties, the underlying contract often provides an avenue for resolution of such dispute, which may require that the parties pursue such matter in court, through arbitration or by other means, including mediation. While most parties are familiar with the concept of litigation, the differences between mediation and arbitration are less well-known. Among the many relevant factors distinguishing between mediation and arbitration, the following three factors should be considered:

  1. Mediation in the United States is non-binding, meaning that a party is not obligated to follow the determination of a mediator. Arbitration, on the other hand, may be binding.

  2. From a timing standpoint, the mediation process is more expeditious, often being completed anywhere from one to three months after the process is initiated, depending upon the complexity of the issues and the parties’ agreements. Arbitration proceedings often last as long as a lawsuit with a formal discovery process and other formalities that commonly would be part of a lawsuit.

  3. From a cost perspective, mediation is more economical, largely due to the speed of the process and less legal formalities. This generally bodes well for the parties if they agree to abide by the determination of the mediator or view such decision as indicative of how an arbitrator or judge ultimately would rule on a matter. But since mediation is non-binding, parties may view this process as an unnecessary delay and waste of resources.

© 2023 Chuhak & Tecson P.C.

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NLRB Determines Confidentiality and Non-Disparagement Provisions to be Unlawful in Severance Agreements

The National Labor Relations Board (the NLRB or the Board) issued a decision earlier this week that purports to ban confidentiality and non-disparagement provisions from most employee severance agreements.

In McLaren Macomb, the Board scrutinized severance agreements an employer gave to 11 employees who had recently been laid off. The confidentiality provision stated that the terms of the severance agreement were confidential and must not be disclosed to anyone with few exceptions (e.g., the employees’ spouses). The non-disparagement provision barred the employees from making statements to anyone that could disparage or harm the image of the employer or its officers, directors, employees, etc. These provisions are obviously common in severance agreements.

Among other things, the Board determined that both provisions unlawfully prevented the former employees from speaking out about working conditions and compensation (including the severance) offered by the employer and assisting with NLRB and other government investigations. Historically, the NLRB has gone back and forth on whether such provisions are lawful. However, the position taken this week is the NLRB’s most aggressive position to date. Specifically, the Board determined that the mere inclusion of such provisions in a severance agreement is unlawful because they have a deterrent and chilling effect on worker’s rights, even if the employee does not sign the agreement or the employer does not enforce the provisions against an employee who breaches confidentiality or disparages the company after signing.

It is important to note that this decision has some limitations:

  • First, it does not apply to “supervisors” (as defined by the NLRA) or to independent contractors. Who is a “supervisor” under the NLRA involves several factors, including whether the employee has the authority to hire, fire, discipline, or direct the work of another employee. Therefore, it is clear that executives and upper-level management are not covered by this ruling, and, depending on the circumstances, middle and even lower level managers may not be covered either.
  • Second, some have questioned whether a smartly worded disclaimer may permit employers to include limited confidentiality and limited non-disparagement provisions in severance agreements given to rank-and-file employees. For instance, in the past, employers often included a broad statement that the severance agreement is not intended to and in fact does not infringe upon any rights the employee may have under the NLRA. Unfortunately, the Board did not specifically address this issue, but, given the aggressive position taken in the Board’s decision this week, there is definitely some risk of liability even with such disclaimers. That determination should be made based on the employer’s risk-tolerance, along with the circumstances of the individual severance agreement, and is best determined by speaking with legal counsel.

The NLRB General Counsel is expected to release additional guidance on this issue in the coming months. Until that happens, employers should seriously consider this decision when drafting severance agreements.

© 2007-2023 Hill Ward Henderson, All Rights Reserved
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Upcoming Proposed Changes to DOL’s Independent Contractor and Overtime Rules

The Department of Labor’s Wage and Hour Division is expected to propose new rules on independent contractor classification and overtime entitlement requirements in the coming weeks.  The proposals would alter the qualifications for certain employees to receive overtime payments under the Fair Labor Standards Act when they work in excess of 40 hours in one week.

The Fair Labor Standards Act (“FLSA”) grants the Department of Labor authority regarding overtime eligibility under the statute.  Currently and among other considerations, employees are non-exempt under the FLSA when they earn less than a guaranteed $684 per week or $35,568 per year.  If the DOL raises this salary threshold, as it is considering, an even larger swath of the workforce could be entitled to overtime payments.

The proposals follow President Biden’s withdrawal of former President Trump’s independent contractor rule in May 2021, which had not yet taken effect when President Biden took office.  However, United States District Judge Marcia A. Crone held in March 2022 that the DOL had not properly followed the requirements for withdrawal as set forth in the Administrative Procedure Act.  In so holding, Judge Crone gave the Trump administration’s independent contractor rule the effect of law as if it had gone into effect in March 2021, as scheduled. The Biden administration’s proposed changes to the existing rule will likely affect the salary basis and exemption requirements of the employee versus independent contractor misclassification analysis under the FLSA.  Employers should prepare for these upcoming changes by reviewing their employee job descriptions and time record procedures.  Employers should also engage counsel to re-examine their employee classifications at large to ensure their exempt employees are truly exempt under the current rules and that they understand that changes may need to be implemented when the new rules take effect.

Article By Holly H. Williamson and Savannah R. Gibbs of Hunton Andrews Kurth

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Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

Pay-When-Paid Provisions Still Unenforceable in New York State

While New York State’s Prompt Payment Act (“PPA”) provides a potential workaround for the invalid pay-when-paid provisions that appear in many construction contracts, a recent decision from the State’s Appellate Division narrows, if not closes, that loophole.

In the construction industry, it is common for a general contractor to include “pay-when- paid” or “pay-if-paid”1 clauses in its contracts with subcontractors, essentially allowing the general contractor to avoid paying its subcontractors for their work until it receives payment from the owner and forcing subcontractors to assume the risk that the owner will fail to pay the general contractor. In 1995, New York State’s highest court in West- Fair Electric Contractors v. Aetna Casualty & Surety Co. invalidated such practice, declaring that pay-when-paid provisions are void and unenforceable as contrary to public policy. 87 N.Y.2d 148, 159 (1995). The Court found that pay-when-paid provisions prevent a subcontractor from enforcing its rights under New York State’s Lien Law because if the owner failed to pay the general contractor, then payment to the subcontractor would never be due, which is a “necessary element of the subcontractor’s cause of action to enforce its lien against the owner.” Id.; see also N.Y. Lien Law § 34 (holding that “[n]otwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable”).

Despite the holding in West-Fair, contractors continue to include pay-when-paid in contracts, and until recently the PPA offered a workaround to validate these seemingly invalid provisions.

In 2002, the New York State Legislature passed the PPA in order to facilitate the prompt payment to contractors and subcontractors. N.Y. Gen. Bus. Law § 756-a. The PPA contains a provision, however, that seems to provide an alternative to the disallowed pay-when-paid provision in construction contracts. Section 756-a(3)(b)(i) states:

Unless the provisions of this article provide otherwise, the contractor or subcontractor shall pay the subcontractor strictly in accordance with the terms of the construction contract. Performance by a subcontractor in accordance with the provisions of its contract shall entitle it to payment from the party with which it contracts. Notwithstanding this article, where a contractor enters into a construction contract with a subcontractor as agent for a disclosed owner, the payment obligation shall flow directly from the disclosed owner as principal to the subcontractor and through the agent.

N.Y. Gen. Bus. Law § 756-a(3)(b)(i) (emphasis added).

While the provision does clearly state in its second sentence that a subcontractor is entitled to payment “from the party with which it contracts,” the third sentence concerning agency seems to provide a way around the West-Fair Court’s clear mandate that pay-when-paid provisions are void, as long as the contractor is acting as an “agent for a disclosed owner.” Id. In that situation, the PPA arguably mandates that the payment obligation to the subcontractor flows directly from the owner, and not the general contractor. This principal-agent relationship is merely a reflection of the common law rule that an agent for a disclosed principal “will not be personally bound unless there is clear and explicit evidence of the agent’s intention to substitute or superadd his personal liability for, or to, that of his principal.” Mencher v. Weiss, 306 N.Y. 1, 4 (1953). Theoretically, the agency exception should not impair a subcontractor’s Lien Law rights because it can still file and enforce a mechanic’s lien, but it shifts the responsibility for payment from the general contractor to the owner, giving the general contractor a defense to the subcontractor’s nonpayment claims.

Until recently, not much has been said about the PPA’s agency provision. In March 2022, however, New York’s Appellate Division in Bank of America, N.A. v. ASD Gem Realty LLC rejected a general contractor’s claim that it was acting as an “agent for a disclosed owner” pursuant to § 756-a(3)(b)(i), holding that the general contractor was liable to the subcontractor regardless of whether or not the owner had paid the general contractor. 205 A.D.3d 1, 8-12 (1st Dep’t 2022). In that case, an owner (ASD Gem Realty LLC and ASD Diamond Inc., together “ASD”) hired a general contractor (Sweet Construction Corp. or “Sweet”) to perform construction and renovation work at its property. Id. at 3. ASD solicited proposals for the installation of partitions for the project and selected plaintiff Arenson Office Furnishings, Inc. (“Arenson”), who then entered into a subcontract with Sweet. Id. The subcontract provided that “[a]ll work to be performed pursuant to the ATTACHED SCOPE LETTER . . . and ‘SCC General Requirements.’” Id. at 4 (alterations in original). The Scope Letter contained the following clause: “Subcontractor understands that Contractor is acting as an agent for the Owner, and agrees to look only to funds actually received by the Contractor (from the Owner) as payment for the work performed under this Subcontract.” Id.

As it so happened, ASD ran into financial difficulties and Arenson did not receive payment from either ASD or Sweet. Id. at 5. While Arenson filed a mechanic’s lien against the property and commenced a lien foreclosure action, there was no surplus available to pay either Sweet or Arenson after the construction lender obtained a judgment of foreclosure and conducted a foreclosure sale of the property. Id. Arenson then filed a complaint against Sweet for violation of the PPA, claiming Sweet failed to pay Arenson for the stated reason that Sweet had not been paid by ASD. Id.

In response, Sweet argued that it was not liable to Arenson because Sweet was acting as an agent for ASD; Sweet was merely complying with ASD’s directive to hire Arenson. Id. Sweet claimed ASD told Sweet that ASD would be responsible for paying Arenson and, citing the subcontract’s payment language, claimed that Arenson could only expect payment from ASD, not Sweet. Id. Sweet also relied on § 756-a(3)(b)(i) of the PPA, arguing that pursuant to the third sentence, Sweet was only an agent for a disclosed owner and therefore was exculpated from personal liability. Id. at 6. Sweet argued that the agency provision of this section negated the second sentence of the provision (entitling the subcontractor to payment from “the party with which it contracts”). Id. (quoting N.Y. Gen. Bus. Law § 756-a(3)(b)(i)).

The lower court rejected those arguments, holding that the subcontract language was an unenforceable pay-when-paid clause and that the exception in the PPA at § 756- a(3)(b)(i) clearly provides (in its second sentence) that a subcontractor is entitled to payment “from the party with which it contracts” (and Sweet contracted with Arenson). Id. The lower court also explained that the PPA and related case law demonstrate that an unpaid subcontractor is entitled to multiple sources of payment, perhaps explaining any conflict between the second and third sentence of § 756-a(3)(b)(i). Id. at 6.

The Appellate Division in turn held that the lower court correctly determined that Sweet was not an agent for an undisclosed principal. Id. at 7. The Court relied on the fact that the signature line in the subcontract did not “indicate that Sweet signed the contract as agent on behalf of a disclosed principal or reflect any limitations,” and that the referenced SCC General Requirements included indemnifying Sweet, obtaining liability insurance in Sweet’s favor, and recognizing Sweet’s authority to issue safety violations and correct unsafe conditions. Id. at 7-8. The Court “reject[ed] Sweet’s attempt to divide a single contract into one that creates an agency for purposes of payment but not for any other purpose,” reaffirming “that the ‘dual roles’ of general contractor and agent are inconsistent.” Id. at 8 (quoting Blandford Land Clearing Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 260 A.D.2d 86, 95 (1st Dep’t 1999)).

As for the PPA, the Court also held that § 756-a(3)(b)(i) was inapplicable because, as explained, Sweet was not ASD’s agent and its interpretation of that provision “overlooks the entire purpose of the PPA and turns the statute on its head.” Id. at 11. The Court explained that the provision is actually designed to provide the subcontractor “with the panoply of statutory benefits and remedies that ordinarily would have inured to the contractor had the contractor acted on its own behalf, instead of as the owner’s agent,” and therefore, the “subcontractor is entitled to all of the article’s benefits and remedies that would have ordinarily flowed to the contractor.” Id. at 11-12. The Court pointed out that the principles of West-Fair applied to this case as well, even if West-Fair did not involve an agent relationship, because the central issue in both cases was forcing a subcontractor to assume the risk of an owner’s failure to pay its contractor. Id. at 12.

Therefore, despite clear language that Sweet was acting as an agent for the Owner, and despite Arenson’s agreement “to look only to funds actually received by the Contractor (from the Owner) as payment for the work performed under this Subcontract,” id. at 4, the Court found that this PPA exception to otherwise invalid pay- when-paid clauses did not apply.

In sum, contractors should be wary when attempting to use § 756-a(3)(b)(i) in conditioning payment to a subcontractor on payment from an owner, especially if the contractor is really just trying to separate its payment obligations from its general contracting responsibilities. Thus far, it appears New York State courts will not be sympathetic to such an arrangement, despite any potential carve out in the PPA.

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© 2022 Phillips Lytle LLP

FOOTNOTES

1 While there is a difference between “pay-when-paid” and “pay-if-paid,” for purposes of this article, the two phrases are used interchangeably to mean a condition in a contract in which payment by the contractor to the subcontractor is contingent on the owner first paying the contractor. See Bank of Am., N.A. v. ASD Gem Realty LLC, 205 A.D.3d 1, 6 n.3 (1st Dep’t 2022).

The COVID-19 Change Order

During the pandemic it has become common for contractors to submit change orders to owners seeking reimbursement for COVID-19 related expenses and costs.  This is especially true for large construction projects.  These “COVID-19 Change Orders” seek reimbursement for everything from masks, dividers, hand sanitizer and other items required to follow and implement CDC guidelines (or to comply with state and local orders) for maintaining a safe work environment.  COVID-19 Change Orders also seek reimbursement for extended general conditions caused by having less workers on site because of social distancing requirements, lost time caused by shorter working hours, and lost time associated with CDC mandated hygiene breaks and temperature checks. On larger projects, COVID-19 Change Orders can escalate into millions of dollars and are often submitted without warning towards the end of a project when final completion and the payment of retainage are approaching.

For owners and contractors that are trying to complete their projects, many of which have been delayed or suffered from cost overruns, these unexpected COVID-19 Change Orders can be very problematic and hard to navigate.  Owners will argue that increased costs associated with the pandemic have affected all businesses, not just contractors.  Contractors will respond that these are real costs that they must pay to operate.  Often, the justification for reimbursement is not black and white because it is hard to find a specific contractual provision that addresses such an unprecedented situation, which causes uncertainty and strained relations between owners and contractors at the end of a project.

The justifications asserted for COVID-19 Change Orders vary from project to project and are sometimes asserted as an event of force majeure or more commonly as a general change in site conditions.  While many force majeure clauses expressly apply to acts of God, pandemics and government shutdowns, that is not the end of analyzing whether the clause applies.  While the application of a force majeure clause to these situations is highly dependent on the wording of such a clause, most require that performance be completely prevented and do not recognize commercial impracticability as a justification for delay.  There were a small number of projects that were shut down at the beginning of the pandemic by state and local orders in stricter jurisdictions, but for the most part complete shutdowns were uncommon because of various exceptions to such orders for businesses broadly defined as “essential.”  As the pandemic extended through late 2020, and into 2021, shutdowns became non-existent.  Finally, many force majeure clauses don’t allow for the reimbursement of costs for implementing required protective measures, they simply allow for an extension of the contract time.

As a result, many contractors have turned to other contractual provisions, such as language related to changes in site conditions or clauses related to change orders in general.  But prior to the pandemic these provisions were not drafted with this circumstance (a virus) in mind.  Instead, they usually apply to changes in “physical” conditions at the site that are specifically described, like subsurface conditions, otherwise concealed physical conditions or hazardous materials found at the site.   Making the argument that a virus is an unknown “physical” condition at the site can be a challenge since the virus is airborne, not necessarily part of the site itself and not unique to the site.  In addition, because many of these clauses require the approval of the owner or are only triggered by specific conditions, they may not support a unilateral change order.

Because of the ambiguity surrounding COVID-19 Change Orders, many owners will initially be reluctant to cover such reimbursements for their contractors.  Aside from the specific language in their construction contracts, Owners should consider other factors when deciding whether to reject, accept or partially accept COVID-19 Change Orders, including the risk of strained relations with its contractor, distractions at the project and the costs of a potential dispute with its contractor.  If there are remaining construction contingency funds available, and the project has otherwise run smoothly, the owner should consider offering all or part of it at the end of the project to avoid a dispute.  Likewise, contractors should be thoughtful and thorough when deciding whether to seek reimbursement for project costs associated with COVID-19, and make sure the costs at issue were necessary and can be verified.  Finally, if the contractor received government loans or payments because of the pandemic, including funds from the Paycheck Protection Program, it should strongly consider not seeking reimbursement from the owner.

Article By Richard F. Whiteley, Phillip L. Sampson Jr., and Stacianne M. Wilson of Bracewell LLP

For more coronavirus legal news updates, click here to visit the National Law Review.

© 2022 Bracewell LLP

Joint Trusts: A Useful Tool for Some Married Couples

Though not a silver bullet for every situation, in appropriate circumstances, a Joint Revocable Living Trust (“Joint Trust”) can provide a married couple with significant benefits and simplify the administration of assets upon death or incapacity.

The Probate and Estate Administration Process

In order to illustrate the benefits that can be achieved with a Joint Trust, it’s helpful to first understand the typical probate and estate administration process that occurs when a person dies.

When a person dies with a Will, the designated Executor in the Will typically submits the original Will for probate in the Estates Division of the Clerk of Superior Court in the county where the decedent resided at the time of death.  “Probate” is the legal process by which the court validates the submitted document as the legal Will of the decedent.  When offering the Will for probate, the designated Executor typically also files an application with the court to be appointed as Executor of the estate and granted Letters Testamentary, which is the legal document confirming the Executor’s authority to act for the decedent’s estate.

If a person dies without a Will, the decedent’s spouse or nearest relative typically files an application with the court in the county where the decedent resided at the time of death seeking to be appointed as Administrator of the estate and granted Letters of Administration which is the legal document confirming the Administrator’s authority to act for the decedent’s estate.

Once the court appoints an Executor or Administrator of the estate, as the case may be, that person is referred to as the “Personal Representative” of the estate and is charged with several duties and obligations.  Actions required of the Personal Representative include:

  • Taking control of the decedent’s assets;
  • Filing an inventory with the court identifying the value of all of the decedent’s assets to the penny;
  • Publishing a notice to creditors giving them three months to file claims with the estate;
  • Satisfying any creditors’ claims;
  • Distributing all remaining assets to the decedent’s beneficiaries; and,
  • Filing an accounting with the court to report to the penny what occurred with all of the assets.

The court supervises the process at every step along the way and must ultimately approve all actions taken in the course of the estate administration before the Personal Representative will be relieved of their appointment.

Movement Away from Probate

Over the last few decades, a trend has developed in the estate planning community to attempt to structure a person’s affairs so that no assets will pass through a probate estate supervised by the court.  That trend has developed in response to a public perception that the court supervised process is not only unnecessary but also yields additional costs.  For instance, additional fees must be paid to attorneys and other advisors to prepare the inventory, accountings, and other documentation necessary to satisfy a court that the estate was properly administered.  Also, in North Carolina, the court charges a fee of $4 per $1,000 of value that passes through the estate, excluding the value of any real estate.  Currently, there is a cap on this fee in the amount of $6,000, which is reached when the value of the estate assets equals $1,500,000.

Additionally, all reporting made to the court about the administration of an estate is public record, meaning that anyone can access the information.  The public nature of the process is why news organizations often are able to publish articles soon after a celebrity’s death detailing what assets the celebrity-owned and who received them.  Such publicity causes concern for many people because they fear that their heirs will become targets for gold-diggers.  This has further strengthened the trend away from court supervised estate administration.

Several techniques are available to avoid the court supervised estate administration process.  These include:

  • Registering financial accounts as joint with rights of survivorship;
  • Adding beneficiary designations to life insurance or retirement accounts; and,
  • Adding pay-on-death or transfer-on-death designations on financial accounts.

However, because it is rarely possible to utilize those techniques to fully exempt a person’s assets from the court supervised estate administration process, the most commonly used avoidance device is the Revocable Living Trust.

The Revocable Living Trust

A Revocable Living Trust is essentially a substitute for a Will.  To create a Revocable Living Trust, a person typically transfers the person’s assets to himself or herself as trustee and signs a written trust document that contains instructions as to what the trustee is to do with those assets while the person is alive as well as upon death.  The trust document also identifies who should take over as successor trustee when the person is no longer able to serve due to death or incapacity.

During life, the person’s assets in the trust may be used in any way the person, as trustee, directs, and the person may change the instructions in the trust document in a similar manner as one can change a Will.  If the person becomes incapacitated, the successor trustee is instructed to use the trust assets for the person’s care.

At death, the successor trustee wraps up the person’s affairs by utilizing the trust assets to satisfy all of the person’s liabilities and distributes the remaining assets to the beneficiaries identified in the trust document.  No court supervises the process, so no court fees are incurred.  Moreover, advisors’ fees related to preparing court filings are avoided.  Also, the administration of the trust is a private matter with nothing becoming public record.  This process often results in a much better outcome for the person’s beneficiaries as compared to having the assets pass through the court supervised estate administration process.

The Joint Trust

Typically, when a married couple utilizes a Revocable Living Trust-based estate plan, each spouse creates and funds his or her own separate Revocable Living Trust.  This results in two trusts.  However, in the right circumstances, a married couple may be better served by creating a single Joint Trust.

A Joint Trust tends to work best when a couple has the following characteristics:

  • The couple has a long, stable relationship;
  • Divorce is not a concern for either spouse;
  • The couple is willing to identify all assets as being owned one-half by each of them;
  • No creditors’ claims exist, whether current or contingent, for which the creditor could seek to collect from only one spouse and not the other;
  • Neither spouse has children from a prior relationship;
  • Each spouse is comfortable with the surviving spouse having full control over all of the assets after the death of one of the spouses; and,
  • The value of the couple’s assets is less than the federal estate tax exemption amount.  For deaths occurring in 2022, this amount is $12.06 million (or $24.12 million per couple) reduced by any taxable gifts made during life.

A couple who meets these criteria could establish a Joint Trust by transferring their assets to themselves as co-trustees and signing a trust document to provide instructions as to what the co-trustees are to do with the assets.  Typically, while both spouses are alive and competent, they retain full control over the trust assets and can change the trust document at any time.  If one of the spouses becomes incapacitated, the other spouse continues to control the trust and can use the trust assets for the couple’s care.

After the death of one of the spouses, the Joint Trust will continue.  The surviving spouse would continue serving as trustee and have full control over the trust assets.  No transfers of assets are required at the first death because all assets are already in the Joint Trust.

Upon the death of the surviving spouse, the designated successor trustee wraps up the surviving spouse’s affairs by utilizing the Joint Trust assets to satisfy any liabilities and distributes the remaining assets as directed in the trust document.

The following are some of the benefits afforded by a Joint Trust:

  • Throughout this entire process, there is no court involvement.  This minimizes costs and promotes privacy.
  • The couple no longer has to worry about whether a particular asset is owned by one of the spouses or by one of the spouses’ separate Revocable Living Trusts.  All assets are simply owned by the Joint Trust.
  • Since only one trust is ever created, no transfers need to be made after the death of the first spouse to die.  This simplification in the administration process minimizes advisors’ fees and other costs and is a key advantage of using a Joint Trust.

A Joint Trust can possibly yield even more benefits in certain situations.  For instance, it may be possible to characterize some or all of the assets in a Joint Trust as community property.  The benefit of having assets characterized as community property is that such property will receive a full basis adjustment for income tax purposes (commonly referred to as a “step-up” in basis) at the death of the first spouse to die as opposed to only one-half of the property receiving such a basis step-up.

Additionally, it may be possible to include asset protection features in the Joint Trust so that any real property owned by the trust would be afforded the same protection as real property owned by a married couple as tenants by the entireties.  Such protection prevents a creditor of just one spouse from enforcing the liability against the real property owned by the couple.  Though the details of these benefits are beyond the scope of this article, they demonstrate that a Joint Trust potentially can provide additional advantages beyond those listed above.

Conclusion

In the right circumstances, utilizing an estate plan that involves a Joint Trust can simplify a married couple’s affairs and, as a result, make the administration process easier after death and ultimately lower costs.  Any couple interested in a Joint Trust should contact competent counsel to assist them in evaluating whether the technique is appropriate for them.

Article By Zachary F. Lamb of Ward and Smith, P.A.

For more family, estates and trusts legal news, click here to visit the National Law Review.

© 2022 Ward and Smith, P.A.. All Rights Reserved.

The Intersection of the Bipartisan Infrastructure Law and Davis-Bacon Act Requirements for Federal Contractors and Subcontractors

On November 15, 2021, President Joe Biden signed the $1.2 trillion Infrastructure Investment and Jobs Act into law, which is popularly known as the Bipartisan Infrastructure Law (“BIL”).

The BIL is estimated to create an additional 800,000 jobs.  The United States Department of Labor (“DOL”) contends that such new jobs will “expand the middle class, revitalize our nation’s transportation, communications and utility systems and build a more resilient, reliable, and environmentally sound future.”  The White House asserts that the BIL will provide protection to “critical labor standards on construction projects,” as a substantial portion of the construction projects included in the BIL will be subject to requirements of the Davis-Bacon Act (“DBA” or the “Act”).

While the BIL provides new revenue sources and opportunities for construction projects, federal contractors and subcontractors should ensure that their businesses comply with the DBA’s prevailing wage rates and labor standards requirements.

Scope and Coverage of DBA

In its simplest form, the DBA, enacted in 1931, requires federal contractors and subcontractors to pay prevailing wage rates and fringe benefits to certain construction workers employed on certain federal contracts.  The DOL’s Wage and Hour Division (“WHD”) administers and enforces the Act’s requirements on federally funded and assisted construction projects.  The DBA applies to contracts:

  1. Which the Federal Government or the District of Columbia is a party;

  2. For the construction, alteration, or repair, such as painting and decorating, of public buildings and public works to which the Federal Government or the District of Columbia is a party;

  3. Involving the employment of mechanics, laborers, and other workers that engage in manual or physical labor (except for individuals performing administrative, clerical, professional, or management work such as superintendents, project managers, engineers, or office staff); and

  4. Which are in excess of $2,000.

With respect to the DBA applying to federal contracts above $2,000, this value threshold only applies to the initial federal contract.  If the threshold is met, however, then the DBA applies to any lower-tier subcontracts even if the value of the subcontract is less than $2,000.

Requirements for Contractors and Subcontractors

There are various requirements for federal contractors and subcontractors under the DBA, which the United States Supreme Court has described as “a minimum wage law designed for the benefit of construction workers.”  The Act was designed to protect construction workers’ wage standards from federal contractors who may base their contract bids on wage rates that are lower than the local wage level.  Under the DBA, federal contractors and subcontractors are required, among other things, to do the following:

  1. Pay covered workers who work on the work site the prevailing wage rates and fringe benefits that are listed in the applicable wage determinations, which are provided by the WHD (the prevailing wage rate consists of both the basic hourly rate of pay and any fringe benefits to bona fide third-party plans, which may include medical insurance; life and disability insurance; pensions on retirement or death; compensation for injuries or illness resulting from occupational activity; or other bona fide fringe benefits – bona fide fringe benefits, however, do not include payments made by employer contractors or subcontractors that are required by other federal, state, or local laws such as required contributions to unemployment insurance);

  2. Maintain accurate payroll records for employees that must be submitted to the contracting agency on a weekly basis (within seven days following the regular pay date for the particular workweek), which must include the following for covered employees: (i) name; (ii) classification; (iii) daily and weekly hours worked; and (iv) deductions made and actual wages paid (there are additional recordkeeping requirements for federal contractors who employ apprentices or trainees under approved DOL programs);

    • Federal contractors and subcontractors are also required to preserve the payroll records for three years following the completion of the covered work, provide accessibility to the records upon request by the DOL or its representatives, and allow the DOL or its representatives to interview employees during work hours.

    • Federal contractors and subcontractors can use the WHD’s Form WH-347 to satisfy the weekly reporting requirements.

  3. With respect to prime or general contractors, they must ensure that specific contract clauses and the applicable wage determinations are inserted into any lower-tier subcontracts (the contract clauses cover the following: (i) construction wage rate requirements; (ii) withholding of funds; (iii) payrolls and basic records; (iv) apprentices and trainees; (v) compliance with requirements under the Copeland Act; (vi) requirements for subcontracts; (vii) contract termination – debarment; (viii) compliance with construction wage rate requirements and related regulations; (ix) disputes concerning labor standards; and (x) certification of eligibility); and

  4. Post a notice of the prevailing wages as to every classification of worker and an “Employee Rights under the DBA” poster in a prominent location that is easily accessible to the covered workers at the work site.

Practical Consideration in Compliance with DBA

Federal contractors and subcontractors should ensure that covered workers are properly classified for the work such individuals perform and paid in accordance with the prevailing wage rate for their classification.

Employers will often face recordkeeping challenges when they have nonexempt employees who perform covered (manual) work and non-covered (administrative) work in the same workweek.

In such instances, the employer must determine whether the employee is salaried or paid hourly.  If the employee is salaried, the employer must determine whether the employee’s salary is greater than or equal to the prevailing wage rate for the employee’s classification.  If not, the employer contractor is required to increase the employee’s pay for the week the covered work is performed.

Likewise, if the employee is paid hourly, then the employer must ensure the employee’s hourly rate is greater than or equal to the prevailing wage rate for the employee’s classification.

Federal contractors and subcontractors could face various consequences due to their failure to comply with the DBA, ranging from termination of the federal contract and debarment to a contracting agency withholding money due to the contractor to cover back wages due to employees as well as criminal prosecution.  Accordingly, federal contractors and subcontractors should consult with legal counsel to ensure they comply with the various DBA requirements for any covered contracts.

Article By Xavier D. Lightfoot and Devon D. Williams of Ward and Smith, P.A.

For more government contracts legal news, click here to visit the National Law Review.

© 2022 Ward and Smith, P.A.. All Rights Reserved.

By Law, Everything Is Possible In California

The California Civil Code includes a number of decidedly gnomic provisions.  Section 1597 is one of these.  It purports to answer the question of what is possible:

Everything is deemed possible except that which is impossible in the nature of things.

The problem with the statute is that it doesn’t fully answer the question because to know what is possible, one must know what is impossible and the statute doesn’t provide a definition of impossibility.  In this regard, I am reminded of the following lines from James Joyce’s Ulysses: 

But can those have been possible seeing that they never were?  Or was that only possible which came to pass?

But why define what is possible?  The reason is that Civil Code requires that the object of a contract must, among other things, be possible by the time that it is to be performed.  Cal. Civ. Code § 1596.  When a contract that has a single object that is impossible of performance, the entire contract is void.  Cal. Civ. Code § 1598.

Happy Bloomsday!

Today is Bloomsday.  Joyce chose June 16, 1904 as the day on which most (but not all) of the action in Ulysses takes place.  It is called Bloomsday because the hero of the novel is Leopold Bloom.  It was on June 16, 1904 that Joyce and his future wife, Nora Barnacle, had their first date (and intimate contact).

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Finn’s Hotel in Dublin, where Nora worked in 1904

Article By Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP

For more legislative legal news, click here to visit the National Law Review.

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP

GovCon Fraud Grounded: Whistleblower Receives Reward for Reporting Aviation Equipment Government Contracting Fraud

The United States Department of Justice settled a case against aviation equipment defense contractor Airbus Defense and Space Inc. (ADSI) for charging improper fees on government contracts. Under the terms of the settlement, the defense contractor paid $1,043,475 to resolve False Claims Act allegations. A former employee of the government contractor reported these improper fees and will receive $157,220 of the government’s recovery.

According to the allegations, the contractor included an unapproved cost rate on contracts, did not accurately disclose fees, and worked out a storage overbilling scheme with a third-party contractor, causing the government to pay more for storage than necessary. To disguise an additional and sometimes undisclosed indirect cost rate, the contractor added what they called an “Orlando Factor” to various price proposals for 62 contracts. Indirect cost rates are a complex portion of government contracting arrangements whereby a contractor attempts to obtain reimbursement for their company’s operational costs. From 2016-2017, this aviation equipment contractor’s “Orlando Factor” was applied in addition to their indirect cost rate approved by the federal agencies with which they were contracting.

The allegations further describe additional fees the contractor tacked onto equipment acquisitions in violation of federal acquisition regulations. Moreover, the contractor listed an unverified affiliate fee on its proposals. Finally, the contractor inflated storage costs by a factor of 10, resulting in General Dynamics passing on $80,000 in storage fees to the U.S. Navy instead of $8,000 in fees.

Defense contracting fraud harms taxpayers; inflating the cost of obtaining equipment can make defense budgets spiral out of control. This particular contractor seems to have found multiple ways to hide costs and pad proposals so as to turn a profit above and beyond their cost of doing business.

A former employee of ASDI reported these fraudulent practices and is being rewarded for speaking up, including receiving funds to pay for their expenses, attorneys’ fees, and costs. The Department of Justice needs whistleblowers to report government contracts fraud. Last year, only 35 defense fraud cases were filed by whistleblowers. With $720 billion spent, more fraud is out there.

© 2021 by Tycko & Zavareei LLP
For more articles on Government Contracts, visit the NLR

Government Contracts, Maritime & Military Law type of law section.

Feuding Business Partners in Private Companies: Considering Arbitration to Resolve Partnership Disputes

It is common for private company co-owners to have disagreements while they operate their business, but they typically work through these disputes themselves.  In those rare instances where conflicts escalate and legal action is required, business partners have two options—filing a lawsuit or participating in an arbitration proceeding.  Arbitration is available, however, only if the parties agreed in advance to arbitrate their disputes.  Therefore, before business partners enter into a buy-sell contact or join other agreements with their co-owners, they will want to consider both the pros and the cons of arbitration.  This post offers input for private company owners and investors to help them decide whether litigation or arbitration provides them with the best forum in which to resolve future disputes with their business partners.

Arbitration is often touted as a faster and less expensive alternative to litigation with the additional benefit of resulting in a final award that is not subject to appeal.  These attributes may not be realized in arbitration, however, and there are other important factors involved, which also merit consideration.  At the outset, it is important to emphasize that arbitrations are created by contract, and parties can therefore custom design the arbitration to be conducted in a manner that meets their specific needs.  The critical factors to be considered are: (i) speed—how important is a quick resolution to the dispute, (ii) confidentiality—how desirable is privacy in resolving the claims, (iii) scope—how broad are the claims to be resolved, (iv) expense—how important is it to limit costs, and (v) finality—is securing a final result more desirable than preserving the right to appeal an adverse decision.

Speed—Prompt Resolution of Dispute

Arbitrations generally resolve claims more promptly than litigation, but that is not always the case as arbitration proceedings can drag on if the arbitration is not subject to any restriction on when the final hearing must take place.  One way to ensure that an arbitration will promptly resolve the dispute, however, is to require an end date in the arbitration agreement.  Specifically, the parties can state in their arbitration provision that the final arbitration hearing must take place within a set period of time, perhaps 60 or 90 days of the date the arbitration panel holds its first scheduling conference.  The arbitrators will then set a date for the final hearing that meets this contractual requirement.  Similarly, in the arbitration provision, the parties can also specify the length for the hearing (no more than 2-3 days), and they can also impose limits on the extent of discovery, including by restricting the number of depositions than can be taken.

If securing a prompt resolution of a dispute with a business partner is important, this result can be assured by requiring that all claims are arbitrated, particularly if the parties specify in the arbitration provision that the final hearing must take place on a fast track basis.

Confidentiality—Arbitration Conducted Privately

Litigation takes place in a public forum and, as a result, all pleadings the parties file, and with only rare exceptions, all testimony and other evidence presented at any hearings and at trial will be available to the public.  Therefore if a business partner wants to avoid having future partnership disputes subject to public scrutiny, arbitration provides this protection. But looking at this from another perspective, a minority investor may want to decline to arbitrate future claims against the majority owner if the owner is sensitive to adverse publicity.  The threat of claims being litigated in a public lawsuit may provide the investor with leverage in the negotiation and settlement of any future claims the investor has against the majority owner.

Scope of Dispute—How Much Discovery Required

Determining the scope of a future dispute with a business partner is difficult to do at the time that business partners enter into their contract when any future claims are unknown.  The downside arises in the arbitration context, because one of the parties may desire broad discovery of the type that is permitted in litigation, which may be necessary to defend against certain types of contentions, such as claims for fraud, personal injury and other types of business torts.  In an arbitration proceeding, discovery is typically more restricted, and it may further be limited by the arbitration provision, which caps the number of depositions and narrows the scope of document discovery.  Under these circumstances, the defending party (the respondent) may be hamstrung by these discovery limitations in defending against the claimant’s allegations in arbitration.

To avoid prejudice to the respondent from restrictions on discovery in arbitration, the parties may decide to agree that not all claims between them would be subject to arbitration.  For example, the parties could agree that all claims related in any way to the value and purchase of a departing partner’s interest in the business would be subject to arbitration, but that other claims of a personal nature (e.g., claims for discrimination, wrongful termination) would be litigated in court rather than arbitrated.  This splitting of claims in this manner may not be practical, but is something to be discussed by the parties when they enter into their agreement at the outset.

Expense of Dispute Resolution

As discussed above, business partners can limit the expense of resolving future claims between them by requiring a fast track arbitration hearing and also by limiting the scope and the extent of allowed discovery.  For example, if the parties require a final arbitration hearing to take place in 90 days after the initial scheduling conference, limit the hearing to two days and permit no more than three fact witness depositions per side.  They will have likely achieved a significant reduction of the cost of resolving their dispute.

The issue of cost requires additional analysis, however, because if the parties are not of equal bargaining power, the partner with more capital may not agree that arbitration is the best forum to resolve disputes with a less solvent partner.  The wealthier partner may believe that he or she would prevail over the less well-capitalized partner in a “war of attrition.” This factor may be so significant that it causes the wealthier partner to reject the arbitration of future disputes in favor of resolving of all future claims by or against the other partner through litigation.

Finality of Arbitration Awards

There is no right of an appeal in arbitration and the grounds for attacking an arbitration award in a court proceeding after the arbitration concludes are narrow and rarely successful.  This finality element may thus be an important factor in selecting arbitration as the forum for resolving partnership disputes with the goal of ending the dispute without having it linger on.

There is another concern here, however, that also bears considering.   The conventional wisdom among trial lawyers is that arbitrators are prone to “split the baby” by not providing a strict construction of the written contract or the controlling statute at issue.  Instead, the belief is that arbitrators are inclined to include something for both sides in the final award in an attempt to be as fair as possible, which results in mixed bag outcome.   That has not been my personal experience, but it is true that if the arbitration award is not fully consistent with the contract or a governing statute, there is no right to appeal the decision.  The bottom line is that, at the end of the arbitration, the parties will have to live with the result, and there is no available path to challenge an unfavorable/undesired outcome.

Conclusion

The takeaway is that arbitration is not a panacea.  It can be structured to take place faster and more cost-effectively than a lawsuit, and it will also be held in private and not be subject to public scrutiny.  But, business partners also need to consider other factors in arbitration, such as specific limits on discovery that may be problematic and the finality of the arbitrators’ decision, which may not be viewed as fully consistent with the partners’ contract or in strict accordance with the applicable law.   To the extent that business partners do opt for arbitration, they should craft the arbitration provision to make sure its terms closely align with their business goals.

© 2020 Winstead PC.

ARTICLE BY Ladd Hirsch at Winstead.
For more on business conflict resolution, see the National Law Review Corporate & Business Organizations law section.