Spring 2010 Issue

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CONSTRUCTION CONTRACTS: NO DAMAGE FOR DELAY CLAUSE

By James L. Rudolph, Esq.

In general, the courts in Massachusetts enforce valid no damage for delay clauses in contracts. However, in rare instances in Massachusetts the courts recognize three exceptions in which a valid no damage for delay clause may be set aside: (1) where a defendant’s acts are arbitrary or capricious; (2) where the delay is unreasonable in length; or (3) where by its words or conduct the defendant waived the no damage for delay provision.

Regarding the first exception, arbitrary and capricious behavior, the courts in Massachusetts have been reluctant to use this exception to set aside a valid no damage for delay clauses except in the most egregious and compelling circumstances. One rare instance was when the Massachusetts Supreme Court (SJC) held that a contractor may recover even when there is an exculpatory delay provision if the owner’s acts were arbitrary and capricious and unreasonably hampered and delayed the contractor. In that case, the no damage for delay provision provided the plaintiff with the sole remedy of the right to seek an extension of time should there be a delay. The SJC found that the defendant’s refusal to grant such an extension was arbitrary and capricious and that the no damage for delay clause was therefore unenforceable. One factor the SJC may have relied in finding that the defendant’s actions were arbitrary and capricious, in addition to the fact that the defendant provided no reason for refusing to grant an extension to the plaintiff, was the defendant’s seemingly purposeful use of the no damage for delay provision as leverage against the plaintiff. According to the court, the defendant, the Commonwealth of Massachusetts, used the “delay provisions to whipsaw the contractor.”

Regarding the second exception, delays unreasonable in length, the courts have also been reluctant to use this exception to set aside a valid no damage for delay clause. In another case, the SJC indicated that it might consider that where a delay is “unreasonable in length” a plaintiff may be compensated even though there exists no damage for delay clause. This case also involved a no damage for delay clause which provided that in the event of a delay the plaintiff only had the right to seek an extension of time. Although the SJC ultimately found that an eight (8) month delay was not unreasonable, it did so after making two (2) observations. First, the SJC noted that the delay was not caused by the defendant. Second, the SJC noted that the plaintiff was aware of the possibility of delay at the time the contract was entered into. According to the SJC, the plaintiff knew that the project was contingent on the completion of another project – the construction of the Turnpike — before the work could commence and therefore was aware that there might be a delay. It is possible that if the delay had been caused by the defendant (and not by the owner) and could not have been anticipated by the plaintiff, then an eight month delay might have been sufficient for the SJC to find that this equitable exception applied. However, there appear to be no cases in the Commonwealth where this equitable exception has been successfully invoked.

Regarding the final exception waiver, the courts have found that in certain instances a defendant by his words or deeds may waive enforcement of a no damage for delay clause. The Appeals Court ruled in one case that where a defendant had paid the plaintiff $122,726 for “extra costs due to job delays” such actions by the defendant waived its right to later rely on a no damage for delay clause in the contract to avoid paying the plaintiff additional monies. The Appeals Court found that this one substantial payment alone by the defendant to the plaintiff was sufficient to serve as a waiver.

Finally, it should be noted, that some plaintiffs have attempted to avoid the problems posed by a no damage for delay clause in a contract by claiming in the complaint that they are seeking damages for “hindrance” or “interference” and not “delay.” This strategy, in general, has usually not proven successful. However, in the recent case of Dowd Plumbing Corp v. ODF Hoon Peabody, the judge differentiated delay claims from hindrance, interference and loss of productivity claims and ruled that these claims can exist separately from delay claims. The court noted that the case before it was not a “delay” claim even though the case may have had components of delay; rather, it was more akin to a claim for “hindrance or obstruction” in the performance of the work.

WINDS OF CHANGE–WHY TODAY IS THE RIGHT TIME TO BUY

By Andrew M. Apfelberg, Esq.

The next few months may prove to be one of the few times that true fortunes will be made or lost. This period of emergence from a turbulent recession is presenting a historic opportunity for mergers and acquisitions in virtually every industry. The coming months provide a tailwind for buyers through: (1) valuations coming back down to Earth, (2) deal structures becoming buyer-friendly, (3) a significant number of owners needing or wanting to sell, (4) fewer buyers in the market and (5) financing starting to be available again.

Over the past few years there were many more buyers than sellers, leading to a seller’s market and driving up valuations. According to the Thomson SDC M&A Database, in 2007 the median EBITDA multiple for transactions under $250 million across all industry sectors was 8.3. Sellers demanded substantially all of the consideration in cash at the closing and looked less favorably on other forms of consideration or delayed payouts. Many potential buyers could not compete in this environment.

Then the recession happened. Deal flow dropped and valuations returned to the same level as we experienced in the first couple years of this decade. According to the Thomson SDC M&A Database, halfway through 2009, the same EBITDA multiple referenced above dropped by 25% to 6.2.

Despite the reduced valuations, there are still many willing sellers, Some business owners are fatigued from the current climate of uncertainty. Others are approaching an age of retirement and do not have a successor in place. Some worry that the capital gains tax rates will be raised. Others are doing fine, but know that they have taken the business as far as they are able to and that it requires the skills or resources of another to take it to the “next level.”

The missing ingredient to a completely buyer-friendly environment has been financing. For most of 2009, lenders were not interested in putting out new money or, when they were, it was on challenging terms. While far from the relatively free flowing leverage of two years ago, the past few months have seen senior and mezzanine lenders coming back to the plate.

To help our clients to succeed as buyers in this environment, we have become more creative in structuring transactions. One method we have employed is having a significant portion of the purchase price paid after the closing, often in the form of promissory notes and earn-outs. Another method is paying a meaningful portion of the purchase price in stock (often with significant restrictions and redemption rights). A third method was developed recently when a client was confronted with what seemed like an insurmountable obstacle to the highly desirable purchase of a competitor, primarily though an earn-out structure.

As the selling entity was a C-corporation, its shareholder would have been subject to a substantial tax bill as a result of structuring the transaction as an asset purchase. With some help from the tax advisors to the selling shareholder, we were able to restructure the transaction as a purchase of only a small pool of assets for a modest amount of cash, a reasonable lease with a purchase option for the balance of the assets and a significant bonus to the shareholder of the seller as part of his employment agreement with our client post-closing, The bonus was structured as a percentage of the acquired entity’s EBITDA for a finite number of years. While the selling shareholder would have to recognize this bonus as ordinary income instead of capital gains, it would only be subject to personal taxes, rather than double taxation at the personal and corporation level. Our client was thrilled because it transformed this obstacle into a hurdle which it could jump and, in fact, provided it with the potential added benefit of being able to expense the bonus payments.

We urge our clients to take advantage of the buyers’ market to be found in the next couple of months by making the intelligent, bold moves required to grow their companies beyond the point at which their competitors can pose a meaningful threat. Just because waters are still a little choppy does not mean that they cannot be navigated. In fact, those with the vision and steady hand at the tiller to keep moving forward instead of dropping anchor will find themselves in favorable waters much more quickly.

Andrew Apfelberg is a partner with the law firm of Rutter Hobbs & Davidoff of Los Angeles, California and like, Rudolph Friedmann LLP, is a member of the International Society of Primerus Law Firms.

CREDIT CARD ACT

Recently, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the Credit CARD Act) went into effect. Congress saw a pressing need to protect consumers from abusive fees, penalties, interest rate increases, and other unjustified changes in the terms of credit card accounts. A new hike in the penalties for violators of the Act will provide extra incentive for compliance.

A few of the highlights of the Act are:

* The Act prohibits rate increases on existing balances due to “any time, any reason” or “universal default,” and severely restricts retroactive rate increases due to late payments.

* Contract terms must be clearly spelled out and must remain in place for all of the first year. Companies may continue to offer promotional rates with new accounts or during the life of an account, but these rates must be clearly disclosed and must last at least six months.

* Institutions are required to give credit card holders a reasonable time to pay the monthly bill–at least 21 calendar days (up from 14) from the time of mailing.

* Credit card companies are required to apply excess payments first to the highest interest balance (usually for new purchases), as most consumers would expect them to do but which some companies have not done because it is not as profitable.

* The Act ends the confusing practice by which issuers use the balance in a previous month, even if all or a part of it was paid off, to calculate interest charges on the current month. Many consumers likely were not even aware of this particular practice, called “double-cycle” billing.

Credit card holders will find it easier to avoid over-limit fees because institutions now have to obtain a consumer’s permission to process transactions that would place the account over the limit. So that consumers can better avoid unnecessary costs and manage their finances, creditors must give consumers clear disclosures of account terms before consumers open an account and clear statements of the activity on consumers’ accounts afterward.

The Act contains new protections for college students and young adults, formerly a favorite target for blanket marketing of credit cards. Among other things, there is a new requirement that no card be issued to anyone under 21 unless he or she submits a written application, with either the signature of a co-signor over 21 or information showing independent means for repaying the credit card debt.

FIRM NEWS

Jon Friedmann recently obtained a defense verdict for an RF client in a Suffolk County Superior case involving the purchase of olive oil and other food products from Italy. The Court ruled that the Plaintiff had failed to establish that the goods in question had in fact been delivered, putting in question, whether the delivery company had actually committed forgery. It admitted that it was unable to find the delivery receipt from one of the shipments and as a result the case when to trial.

Rudolph Friedmann Obtains Decision That Keeps World-Class Restaurant Open

Jim Singer of our litigation department, with the assistance of Herb Weinberg, our bankruptcy expert, obtained a favorable decision for a restaurant client who was forced into bankruptcy last summer as a result of certain action of its landlord. After a full day hearing before the Bankruptcy Court, Jim was able to convince the Judge that his client had provided adequate assurance as to its ability to cure its prior defaults and perform its future obligation under its lease. The landlord, who had another tenant for the restaurant space which would result in a substantial payment to the landlord, has been extremely aggressive fighting the tenant almost every step of the way so the tenant would have to move. The landlord was represented by one of the largest firms in Boston and had three attorneys at the hearing on the tenant’s motion to assume its lease. The Judge noted the great efforts the tenant’s principal had put into creating, in the court’s words, “a truly world-class restaurant.” If we had lost the motion, the restaurant would have had to close down. Congratulations to Jim and Herb!

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