Construction Litigation

The Delaware Supreme Court recently analyzed the standard of excusable neglect sufficient to vacate a default judgment.  In the case of Christiana Mall, LLC v. Emory Hill and Company (opinion here), Christiana Mall sought to overturn the Superior Court’s finding that it could not vacate a default judgment entered against it.  The judgment was the result of a mechanic’s lien claim brought by Emory Hill against the mall and one of its tenants, MrFruz.  MrFruz was obligated to defend and indemnify Christiana Mall in the action pursuant to the terms of the lease between the parties.

After the complaint was filed, McFruz advised Christiana Mall that it was attempting to resolve the claim and that it had secured an extension of time for it and the Mall to answer the Complaint.  In fact, MrFruz never obtained an extension for the Mall.  Moreover, Emory Hill had advised MrFruz that it did not believe MrFruz was negotiating in good faith and therefore it and the Mall must answer the complaint to avoid a default.  Following the deadline to answer the complaint, Emory Hill filed a direction for entry of default against MrFruz and Christiana Mall.  Thereafter, the Mall sought to vacate the default—MrFruz filed for bankruptcy protection.

The Superior Court denied Christiana Mall’s motion to vacate the default.  The Court found that there was excusable neglect, however it denied Christiana’s motion to vacate on the basis that granting such relief would substantially prejudice Emory Hill.  On appeal, the Supreme Court affirmed the Superior Court judgment, however it found that Christiana Mall’s conduct was not excusable neglect.

Christiana’s conduct demonstrated indifference to the Superior Court proceedings …. Christiana did not engage or consult with its own counsel upon receipt of the Complaint because it relied on the representations of the attorney for Mrfruz, based on Mrfruz’s obligation to defend and indemnify Christiana. [The mall] believed, based on that obligation and [MrFruz’s] November 27, 2012 email, that Mrfruz was engaged in good faith negotiations with Emory Hill and that both Christiana and Mrfruz had an extension of time to answer.

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We hold that it is not excusable neglect for a party, relying on a codefendant to defend and indemnify it, to disregard its obligations to the court, fail to monitor the docket in the proceedings, fail to verify extensions of time, and fail to ensure that its own interests were being properly represented and protected. In this case, Christiana did all of these things. Therefore, Christiana failed to demonstrate that its neglect was excusable. For that reason, its motion to set aside the default judgment was without merit and should have been denied on that basis.

This opinion provides important guidance to commercial property owners who should be advised that it is not sufficient to rely upon the representations of their tenants.  For more on mechanic’s liens in Delaware, please review my Guide to Mechanic’s Lien.

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Seth Niederman is a partner with the law firm Fox Rothschild LLP. Seth practices in Fox Rothschild’s Wilmington, Delaware office. You can reach Seth at 302-622-4238, or sniederman@foxrothschild.com.

Construction projects often involve a web of contracts between project owners, prime contractors, subcontractors and sub-subcontractors. Privity of contract rarely exists between all parties. The rights of a subcontractor or sub-subcontractor can include relief against parties that they are not in privty of contract with. For example, a lien action allows a subcontractor to assert a claim against the property owner regardless of whether a contract exists between the owner and the subcontractor. Recently, in the case of Exterior Erecting Services, Inc. v. Metroplolitan Regional Counsel of Carpenters of the Philadelphia Vicinty et al., the Sussex County Superior Court held that the reverse is not necessarily true – i.e. a property owner or prime contractor cannot assert a claim pursuant to a subcontract unless they are a party to that subcontract. Moreover, the Court held that an agreement to pay a sub-subcontractor by way of joint check from the prime contractor to the subcontractor and sub-subcontractor does not establish privity of contract. Rather, this ‘joint check agreement’ pertains only to the manner in which the sub-subcontractor chose to be paid – not the intent of the prime contractor to step into a contractual relationship with the sub-subcontractor.

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Seth Niederman is a partner with the law firm Fox Rothschild LLP. Seth practices in Fox Rothschild’s Wilmington, Delaware office. You can reach Seth at 302-622-4238, or sniederman@foxrothschild.com.

Governor Markell recently signed into law House Bill No. 109, which amends Delaware’s laws regarding Building Construction Payments.  The legislature summarizes the changes to the statute as follows:

The primary purpose of this Act is to provide a party (a contractor, a subcontractor or a material supplier) with the right to file a legal action against a contractor or an owner who has improperly withheld the payment of money to force settlement or for other reasons unrelated to a lawful dispute. Often the value of these claims and the cost of litigation do not justify filing litigation. Moreover, the current statute is often unclear and confusing, which has resulted in difficulties for the Courts in applying the statute and overseeing the related litigation.

The Act further seeks to provide clear language that will allow parties to pursue claims under the statute and recover an amount equal to the amount wrongfully withheld plus attorneys fees, if it is determined that the contractor or owner withheld payment in bad faith. Additionally, this Act seeks to expand the applicability of the Chapter to encompass various construction services offered on present day projects which may not have been offered when the Chapter was originally enacted.

In sum, the revisions to the Chapter are primarily focused on three areas: (1) applying the Chapter to all services provided on construction projects; (2) coordinating the various sections so they work cohesively, making such sections easier to apply; and (3) addressing relevant issues that the Courts have historically struggled with in applying the statute.

Two notable revisions which may be of interest to construction litigants:

1.  The amendments clarify when fees and costs may be awarded and the standard for awarding fees.  Specifically, the revised statute provides,

§ 3508.  Attorneys’ fees and litigation costs.

(a)  If arbitration or litigation is commenced to recover payment and it is determined that the owner, contractor or subcontractor has failed in good faith to comply with the payment terms of the contract or this title, the arbitrator or the Court, whichever applicable, may award the amount determined to have been wrongfully withheld, plus an amount equal to the amount wrongfully withheld, as additional damages.  An amount shall not be deemed to have been wrongfully withheld to the extent that it bears a reasonable relationship to the value of any disputed amount or claim held in good faith by the owner, contractor or subcontractor against whom the contractor or subcontractor is seeking to recover payment.

(b) The party commencing arbitration or litigation shall have the burden of proof that payment has been wrongfully withheld.

(c)  Absent any agreement to the contrary between or among the parties, the arbitrator or the Court in any proceeding arising under this chapter may award to the substantially prevailing party its reasonable attorneys’ fees, arbitration or court costs and expenses, and expenses for expert witnesses if applicable.  Any award of attorneys’ fees shall not be limited by 10 Del. C. § 3912.

2.  The amendments add a clause which prohibits construction contracts from requiring that the parties litigate in a foreign jurisdiction or apply the law of a foreign jurisdiction.  Specifically, the revised statute provides,

It shall be against public policy and shall be void and unenforceable for any provision of a construction contract to … [r]equire the contract, subcontract, agreement or understanding between a contractor and subcontractor to be subjected to the laws of a State other than Delaware or require litigation, arbitration, mediation or other dispute resolution procedures to occur in or be governed by the laws of a State other than Delaware.

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Seth Niederman is an attorney with the law firm Fox Rothschild LLP. Seth practices in Fox Rothschild’s Wilmington, Delaware office. You can reach Seth at 302-622-4238, or sniederman@foxrothschild.com.