Opinion
CIVIL ACTION No. 09C-12-115-JOH.
Submitted: July 27, 2010.
Decided: November 15, 2010.
Upon Motion of Plaintiff for Judgment on the Pleadings — DENIED .
Upon Motion of Defendant for Judgment on the Pleadings — DENIED .
Upon Converting Plaintiff's Motion for Judgment on the Pleadings to a Motion for Summary Judgment — DECISION RESERVED .
Victoria K. Petrone, Esquire, of Logan Associates, LLC, New Castle, Delaware, Attorney for Plaintiff.
James J. Sullivan, Jr., Esquire, of Buchanan Ingersoll Rooney PC, Attorney for the Defendant.
MEMORANDUM OPINION
Commonwealth Construction Co. ("CCC") has sued Red Clay Consolidated School District ("Red Clay") claiming statutory interest is due because of Red Clay's untimely payments on a construction project. Red Clay's response is that CCC's application for interest was made untimely under the provisions of the parties' contract and is waived. Also, it argues that the statute upon which CCC relies does not require interest to be paid. It has moved for judgment on the pleadings. In turn, CCC has moved for judgment on the pleadings arguing that under an applicable statute it is entitled to claim interest and that the statute prevails over the contract. Further, it contends its request for interest payments was timely.
The Court finds that any contractual bar to CCC's application for interest contravenes applicable statutes. CCC made timely requests but an issue remains about the amount due CCC.
Factual/Procedural Background
Red Clay contracted with CCC to do extensive renovations at the A.I. duPont High School. The contract price was $8 million. As the contract was for work on a public school, it was — and the parties do not dispute — that it was a "public works contract." The contract provided that CCC would be paid in stages.
CCC's complaint is that Red Clay did not pay two of its payment applications within the time limit statutes provided for public works contracts. Specifically, CCC seeks interest on Applications 18 and 22. As to Application 18, CCC alleges it submitted it on August 30, 2007 but that it was paid in four separate parts, January 28, 2008, April 10, 2008, April 30, 2008 with final payment on June 5, 2008. As to Application 22, CCC states it submitted it on January 3, 2008 but was paid in two parts, namely, April 4, 2008, and final payment on June 5, 2008. In its complaint, CCC cites 29 Del. C. § 6916(d) as requiring payment within thirty (30) days of presentment, and interest if not timely paid.
After receiving the final payments on the two applications on June 5th, CCC submitted a request for a change order for interest on June 11, 2008. Red Clay denied this request.
In its original motion for judgment on the pleadings, Red Clay argued that the contractual provisions barred CCC's claim because it had to submit its interest claim prior to the final payments. Given its submission was six days after, Red Clay says it was untimely. It also argued that there is no statutory entitlement to interest.
When responding to Red Clay's motion and making its own motion for judgment on the pleadings, CCC cited 29 Del. C. § 6516(d) and (f) since it apparently realized that § 6916 had been repealed.
Because of the confusion, particularly over the various statutory provisions cited, the Court ordered additional briefing about the applicability of § 6516(f). Both parties submitted simultaneous briefs. In its brief CCC submitted material outside of the pleadings. Red Clay needs an opportunity to respond.
Super. Ct. Civ. R. 12(c); Appriva Shareholders Litigation Co. v. ev3, Inc., 937 A.2d 1275 (Del. 2007).
Parties Contentions
Based on the supplemental briefing the parties agree that the applicable statute is 29 Del. C. § 6516(f). Red Clay maintains its contention, however, that the Court need not reach the statute as the contractual provisions alone bar CCC's interest claim. Its argument is that the contract required CCC to submit its claim for interest prior to June 5th. Since it did not, no interest is due, the claim having been waived. Should § 6516(f) apply, Red Clay contends that its language does not mandate payment of interest.CCC's claim rests on the statute. It argues it submitted its claim for interest within the time frame the statute allows after final payment has been made. Final payment was made on June 5th and CCC submitted its interest claim on June 11th. It asserts it could not have known how much interest was due for the two payment applications until after the final payment was made on June 5th.
Applicable Standard
On a motion for judgment on the pleadings, if matters outside the pleadings are presented and not excluded, the motion is converted to a motion for summary judgment and is disposed of as one for summary judgment under Rule 56. When such materials are presented the Court must give all parties a reasonable opportunity to present all pertinent material needed for a motion for summary judgment.
Super. Ct. Civ. R. 12(c); Brown v. Colonial Chevrolet Co., 249 A.2d 439, 441-2 (Del. Super. 1968).
Super. Ct. Civ. R. 12(c); Appriva Shareholders, supra at 3.
Discussion
The resolution of CCC's entitlement to interest, if any, revolves around two things: the statute and the parties' contract.The parties now agree, after supplemental briefing, that 29 Del. C. § 6516(f) applies. It provides:
(1) The agency agent, by mutual agreement, may make progress payments on contracts of less than 90 days and shall make monthly progress payments on all other contracts as provided for in this paragraph.
The agency agent shall approve or disapprove an estimate of the work submitted for payment within 7 days from the date of submission of the written application for payment. If the agency agent approves the estimate of work, such estimate shall be certified for payment. If the agency agent disapproves the estimate of work, the agency or the agency agent shall issue a specific written finding within 21 days from the submission of the applicant for payment setting forth those items in detail in the estimate of the work that are not approved for payment under the contract. The agency may withhold 150% of the amount of the expenses the agency reasonably expect to incur, as approved by the Director of the Office of Management and Budget, in correcting the deficiency set forth in the written finding. The progress payments shall be paid on or before 21 days after the estimate of work is certified and approved. If the approval of a federal agency is required, the payment shall be deemed timely if the payment is made within 10 days of a required federal agency's approval.
(2) An agency agent, contractor or subcontractor may decline to approve and certify a billing or estimate or a portion of a billing or estimate for any of the following reasons:
a. Unsatisfactory job progress;
b. Defective construction work of materials not remedied;
c. Disputed work or materials;
d. Failure to comply with material provisions of the contract;
e. Third party claims filed or reasonable evidence that a claim will be filed;
f. Failure of the contractor or subcontractor to make timely payments for labor, equipment, or materials;
g. Damage to the agency, contractor, subcontractor;
h. Reasonable evidence that the construction cannot be completed for the unpaid balance of the construction contract; or
i. Retainage of funds.
(3) The retainage, as allowed by § 6992(d)(5) of this title, shall be retained by the agency as a guarantee for complete performance of the contract, to be paid to the contractor within 60 days after completion or filing notice of completion of the contract or within 30 days of a required federal agency's final approval or certification. Retention of payments by an agency longer than 60 days after final completion and acceptance requires a specific written finding by the agency of the reason justifying the delay in payment. Such written finding shall be furnished by the agency within 10 days after completion or filing notice to the contractor or within 10 days of the required federal agency's final approval or certification. No agency may retain any moneys after 60 days in an amount exceeding 150% of the necessary amount to pay the expenses the agency reasonably expects to incur in order to pay or discharge the expenses determined by the agency in the finding justifying the retention of moneys.
(4) If a progress payment to a contractor is delayed by more than 21 days after the date of the agency agent's approval or the final payment to a contractor is delayed by more than 60 days after the date of the final submission, the contractor may require the payment of interest by such agency, except for periods of time during which payment is withheld pursuant to paragraph (2) of this subsection, beginning on the twenty-second day for progress payments and on the sixty-first day for final payment; provided, however, that:
a. Presentation is deemed made when an invoice or bill is received by that agency or agency agent, provided that the invoice or bill is received in a form consistent with the State Accounting Manual and regulations issued by the Director of the Office of Management and Budget and the Secretary of Finance. Such forms shall be included in the project's bid documents.
b. The contractor may not require interest with respect to any portion of such invoice or bill if such portion is controverted on reasonable grounds by the state agency or agency agent, provided that the agency notifies the contractor in writing, within the 21-day period for progress payment or 60 days for final payments, of the reason or reasons for controverting the invoice or bill.
c. A vendor may require that interest under this subsection commence from the end of the 21-day period for progress payments or the 60-day period for final payment and continue until payment. All interest charges under this chapter shall be paid by the agency receiving the goods or services from the contractor. Such interest shall be calculated by the contractor in dollar amounts and expressly billed as such to the agency receiving goods or services from the contractor.
d. A contractor may require that interest under this subsection accrue on the unpaid balance at a rate not to exceed 2 percent above the prime interest rate as established by the Federal Reserve.
e. Agencies liable for interest payments under this subsection shall be authorized to make such payments from amounts appropriated for "contractual services" in the event an unencumbered balance shall exist in such line. In the case of agencies of public or higher education, such payment shall be made from local funds or state general funds not restricted to another purpose. The Office of Management and Budget shall establish procedures according to which interest payments under this subsection are recorded separately from other expenditures for contractual services.
f. Interest payments to be made by the agency receiving goods or services may be imposed upon a different agency when, in the sound discretion of the Director of the Office of Management and Budget and the Controller General, the receiving agency demonstrates that some other agency or agencies bear greater responsibility for causing the delay which occasioned the payment of interest, in which case the responsible agency or agencies shall reimburse the receiving agency for interest charges.
(5) The agency, contractor or subcontractor may change the time periods outlined in this subsection only if:
a. Prior written approval is given by the Director of the Office of Management and Budget;
The question of the applicability of this statute arises because of the contract between the parties had. Red Clay points to and relies upon § 49.5 of the contract which states:
No Claims After Final Payment. In no event shall claims be made after Final payment is made under Article 43, SUBSTANTIAL COMPLETION, FINAL COMPLETION; FINAL PAYMENT.
In addition, Red Clay relies upon § 48.1 of the contract which provides:
Written Notice of Any Claim Required. It is an express condition of Contractor's right to make a claim or to receive any recovery or relief under or in connection with the Contract, that Contractor submit a written notice of potential claim to the District in accordance with the provisions of this Article; provided, however, that with respect to requests for relief within the scope of Article 47, CHANGES, the Contractor shall submit a Change Order Request in accordance with the provisions of Article 47 before initiating a claim under this Article 48 an the following Article 49.
Red Clay's argument, in effect, is that CCC had to submit a notice of a potential claim of interest due, without stating how much, when it was not timely paid. And, it asserts this notice would have to be given before the final payment was made or knowing, obviously, when it would be paid in the future. Since it is undisputed that CCC did not submit its invoice/change order for interest due until six days after final payments were made, these contractual provisions, standing alone, totally bar CCC's interest claim.
These contractual provisions contradict the language of § 6516(f)(4). First, no party has suggested or provided evidence that Red Clay disputed anything in the substance of CCC's work reflected in applications 18 and 22 covered. The statute provides a process for the resolution of disputes between a contractor and a public agency. And if there is a dispute, the payment due "clock" does not begin to run. Second, § 6516(f) places no requirement on a contractor, such as CCC, to submit an application for interest prior to the delayed final payment. Third, Red Clay has not shown, submitted, or argued that it had permission from the Director of the Office of Management and Budget to contractually change the statutory deadline wherein an interest claim can be made to the deadline in the contract. Such permission, if granted, would allow it to foreclose an interest claim being made after final payment to one where the contractor had to submit a claim prior to final payment without specifying the amount of interest due.
29 Del. C. § 6516(f)(2), (3).
"It is well-settled law that a contract entered in circumvention of the law is invalid and unenforceable (citation omitted). Where contractual provisions circumvent statutory law, the statute overrides the contract."
Thayer v. Tandy Corp., 533 A.2d 1254 (Table) (Del. 1987); 1987 WL 3745 at 1 (Del.) citing Shaw v. Aetna Life Ins. Co., 295 A.2d 374, 387 (Del. Super. 1978); accord Hennegan v. Cardiology Consultants, P.A., 2008 WL 2943397 (Del. Super.).
Section 6516(f) is a legislative recognition of two matters. One, unless there is a dispute over an invoice, bill or payment application, State agencies are to make payment in a timely fashion. This is good public policy. The State rightfully wants to avoid a reputation for not timely paying its bills. This would chill contractors from seeking State contracts and reduce the number of competitive bids inevitably driving up costs to the taxpayers.
The second matter which this statutory provision recognizes is the unique financial circumstances of contractors. Because of how they do business — the need to timely pay their suppliers, subcontractors, and employees — with frequent tight cash flow issues they frequently confront, they must be paid promptly.
In short, there is clear compelling public policy behind § 6516(f). Red Clay and any other public agency governed by this provision cannot contractually circumvent it. Yet, that is what the contract at issue did. Further, it is presumed that the public agency, such as Red Clay in this case, is aware of the need to pay its contractors in a timely fashion. It must also be cognizant that failure to pay bills in a timely fashion may prompt an application for interest and later some pressing questions from the Office of Management and Budget about why it incurred this obligation.
CCC timely submitted its application for interest due under the statute. The statute does not mandate it seek interest but leaves that choice up to the contractor, not the public agency. CCC has elected to exercise its option and it is due interest.
There remains, however, the issue of precisely how much interest is due. Part of that determination is dependent on application submission and receipt dates. In its supplemental brief, CCC submitted an exhibit showing its interest calculations and an affidavit stating when various documents were submitted. But since Red Clay's supplemental briefing was filed the same day, it has had no chance to respond. In addition, the Court is unsure that CCC's calculations of interest due are in full mathematical compliance with the statute. Further, Red Clay, again because of the simultaneous briefing and CCC's going beyond the purpose of that briefing, has not had a chance to obtain necessary details.
The upshot is that there can be no judgment on the pleadings for either party. The Court is able to resolve the legal issues raised, but now that additional materials have been supplied, there is a motion for summary judgment at hand. Such a motion cannot be granted either since genuine issues of material fact now exist.
At the moment, based on the Court's resolution of the legal issues, the factual issues appear to be ones which can, nevertheless, be resolved short of trial. The Court, therefore, is directing discovery on the various dates and amounts due and any related issues. That discovery is to be completed in forty-five (45) calendar days from the date of this decision.
Conclusion
For the reasons stated herein:
1. Plaintiff Commonwealth Construction Company's motion for judgment on the pleadings is DENIED. Its motion for judgment on the pleadings is converted to a motion for summary judgment. Due to the outstanding factual issues for which additional discovery is needed, the Court reserves the decision on the converted motion. Discovery is ordered to be undertaken and completed within forty-five (45) days hereof. Supplemental briefing, if any, is to be simultaneously filed on the 10th day following the close of that discovery window.
2. Defendant Red Clay Consolidated School District's motion for judgment on the pleadings is DENIED.
IT IS SO ORDERED.