Opinion
C. A. N18L-11-009 KMM
03-04-2024
SUPPI CONSTRUCTION, INC., Plaintiff/Counterclaim defendant, v. EC DEVELOPMENTS I, LLC, a Nevada corporation, FRONTIER BUILDING CORP., a Florida corporation, PANDA RESTAURANT GROUP, INC., a California corporation, PANDA EXPRESS, INC., a California corporation, MBOS CONCESSIONS, LLC, a Delaware limited liability company, Defendants, and FRONTIER BUILDING CORP., Counterclaim plaintiff.
Date submitted: February 23, 2024
Suppi Construction, Inc.'s Motion in Limine, DENIED in part as moot and Withdrawn in part, without prejudice.
Frontier Building Corp.'s Motion in Limine, DENIED in part; GRANTED, in part.
ORDER ON MOTIONS IN LIMINE
Kathleen M. Miller Judge
I. Factual Background
A. The Contract
In September 2017, Frontier Building Corp. ("Frontier"), as general contractor, entered into a Subcontract Agreement (the "Contract") with Suppi Construction, Inc. ("Suppi"), for the "construction of Panda Express" on Kirkwood Highway in Wilmington, Delaware. The Contract required Suppi to "comply with all federal, state, and local governmental rules, regulations, ordinances and codes, and requirements imposed by any and all local, state and federal agencies.. .."
Contract, § 2.06.
The Contract provides that it is governed by the substantive and procedural law of Florida. Section 12.09 of the Contract includes a dispute resolution process. The parties must first attempt to resolve a dispute between themselves or through mediation, if Frontier so chooses. If the dispute is not resolved, at Frontier's "sole discretion and option," the dispute "will be presented to binding private arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association" or other rules selected by Frontier. The arbitration is to be held in Miami-Dade County, Florida. The parties are to share in the cost of the arbitrator(s), but otherwise, each will bear its own costs of arbitration, including attorneys' fees.
Id., § 12.08.
Id., § 12.09.a.
Id., § 12.09.b.
If Frontier does not demand arbitration, the Contract provides that any litigation must be filed in the courts in Miami-Dade County, Florida. If litigation is pursued, under Section 12.09.c., the prevailing party is entitled to an award of reasonable attorneys' fees, costs, and expenses.
Finally, the Contract provides that if any provision thereof is held to be invalid, such a finding shall not affect any other provision of the agreement that can be given effect without the invalid provision.
Id., § 12.06.
B. The dispute
Suppi began performance under the Contract and the parties entered into certain change orders. The scope of Suppi's work was expanded through change orders to include, among other things, the construction of a Delaware Department of Transportation ("DelDOT") turn lane (the "Turn Lane").
A dispute arose over the Turn Lane. Suppi asserts that the design for the Turn Lane was defective, in that it would not allow for proper drainage as required by code and regulations. Suppi expressed its concerned to Frontier and DelDOT. According to Suppi, DelDOT agreed that the design plan did not meet DelDOT standards and therefore, Suppi requested a revised plan.
Suppi further asserts that it hired a subcontractor to proceed with the paving portion of the Turn Lane, and Frontier instructed the subcontractor to make certain "field modifications" that "may or may not have to be redone" due to standing water issues or DelDOT requirements. Frontier, it is alleged, agreed not to hold this subcontractor responsible if the work needed to be redone. Yet, Frontier continued to demand that Suppi construct the Turn Lane as designed, and would hold Suppi responsible if any issues arose with improper drainage. When Suppi balked, Frontier terminated the Contract.
According to Suppi, Frontier then engaged Suppi's subcontractor to complete the Turn Lane, which did not drain as required and therefore, Frontier engaged another contractor to correct and complete the Turn Lane.
II. Procedural Background
This case has a long and somewhat tortured history, with several amendments to the scheduling order.
Suppi filed this action in November 2018, asserting five counts against Frontier: (i) mechanics lien; (ii) breach of contract; (iii) quantum meruit; (iv) unjust enrichment; and (v) violation of 6 Del. C. § 3501, et seq. (the "Prompt Payment Act"). Suppi asserted that Frontier wrongfully terminated the Contract and sought damages of "$114,647.98, together with pre and post-judgment interest, plus cost of this action." This request was reiterated in the prayer for relief clause. In the statutory violation count, Suppi sought an award of amounts "wrongfully withheld together with attorney's fees pursuant to 6 Del. C. § 3501 et seq." In the prayer for relief clause relating to this count, Suppi specifically requested damages and an award of attorneys' fees pursuant to 6 Del. C. §§ 3506(e) and/or 3509(a).
D.I. 1, ¶ 19.
Id., ¶ 34.
Frontier responded to the complaint on March 28, 2019, with a motion to dismiss under Superior Court Rule 12(b)(3). Invoking the choice-of-law and forum selection provisions, Frontier asserted that pursuant to Section 12.08 of the Contract, Florida law applied and pursuant to Section 12.09 of the Contract, the dispute must be mediated, arbitrated, or litigated (as applicable) in Florida.
D.I. 12.
Suppi responded to the motion on April 30, 2019, asserting, among other things, that under 6 Del. C. § 3507(e)(5), the Florida choice-of-law and forum selection clauses in the Contract are void and unenforceable.
D.I. 14.
On May 7, 2019, Frontier withdrew its motion, without prejudice to its option to elect arbitration or to seek a stay pending arbitration.
D.I. 17.
On April 24, 2020, Frontier filed its answer, denying Suppi's allegations, and raising eight affirmative defenses. The answer did not raise or preserve any issue with respect to arbitration. Frontier also asserted a counterclaim, alleging that Suppi breached the Contract by failing to construct the Turn Lane in accordance with the Contract and the drawings, among other things. Frontier sought an award of damages in an amount to be determined at trial. In its prayer for relief, Frontier sought an order dismissing the complaint and awarding Frontier "its costs and reasonable attorney's fees in connection the defense of this action."
D.I. 25.
Id.
In September 2021, Suppi filed a motion in limine ("Suppi's Motion") seeking to prevent Frontier from presenting any evidence regarding the cause for termination of the Contract, including expert testimony. Frontier responded on October 6, 2021.
D.I. 81.
D.I. 86.
Also in September 2021, Frontier filed a motion in limine ("Frontier's Motion") seeking to exclude evidence of attorneys' fees because Suppi is not entitled to contractual attorneys' fees or an award of attorneys' fees or damages under the Prompt Payment Act.
D.I. 79.
In October 2021, the parties responded to the motions. The motions in limine remained pending until the pretrial conference.
D.I. 86, 87.
The parties then engaged in mediation and worked towards a resolution. A dispute arose over whether a settlement had been reached, which resulted in motion practice. On December 8, 2022, the Court denied Suppi's Motion to Enforce Settlement Agreement.
D.I. 125.
In early 2023, the parties again engaged in mediation, which did not result in a resolution.
D.I. 129.
Apparently in response to Frontier's Motion, on March 20, 2023, Suppi filed a motion to amend its complaint to "moot any technical argument" that it had not properly asserted a claim for contractual attorneys' fees. Suppi requested leave to amend the complaint to specify that it was requesting attorneys' fees in its breach of contract count.
D.I. 132.
Frontier responded to the motion to amend, arguing that Suppi had no right to contractual attorneys' fees because Section 12.09 only applied to litigation filed in Florida. Because Suppi filed its complaint in Delaware, Frontier argued, Suppi could not invoke this contractual fee shifting provision. Frontier further argued that Suppi waived any right to invoke Section 12.09 because: (i) the original complaint asked for attorneys' fees only in the statutory count; (ii) Suppi did not seek to amend the complaint when the Frontier Motion was filed in September 2021; (iii) while the initial pretrial stipulation filed in October 2021 indicated that the parties claimed entitlement to contractual attorneys' fees, Suppi indicated that no amendments to pleadings were required; and, (iv) Suppi had not raised this provision in over 4 years.
D.I. 137.
On April 6, 2023, the Court granted Suppi's motion to amend. On April 14, 2023, Suppi filed an Amended Complaint to add "attorneys' fees" to the relief requested in the breach of contract count and in the prayer for relief relating to the contract count.
D.I. 139.
The Second Amended Complaint, the operative pleading, was filed on August 25, 2023. This amendment added a request for prejudgment interest on certain counts.
D.I. 142.
The parties filed an Amended Pretrial Stipulation on February 16, 2024. The Court held a pretrial conference on February 23, 2024, at which the parties presented argument on Suppi's Motion and Frontier's Motion.
D.I. 155.
III. Analysis
A. Suppi's Motion
Suppi seeks to preclude Frontier from offering any expert testimony on the Turn Lane design plans. At the pretrial conference, Frontier confirmed that it does not intend to offer such expert testimony. Therefore, this portion of Suppi's Motion is moot and therefore denied.
D.I. 81.
Suppi's Motion also seeks to preclude any evidence of the cause for termination of the Contract because, it asserts, it cannot be liable for the consequences of the Turn Lane design defects under the Spearin Doctrine. Therefore, Frontier had no right to terminate the Contract.
The Spearin Doctrine arises out of United States v. Spearin, 248 U.S. 132 (1918), and is essentially an implied warranty by the owner that if the contractor complies with the drawing specifications, the work would be sufficient, and the contractor would not be liable for any design defects. See Rhone Poulenc Rorer Pharm. Inc. v. Newman Glass Works, 112 F.3d 695, 697 (3d Cir. 1997).
Frontier argues that the Spearin Doctrine applies only to government contracts, not private contracts, as here. It further argues that even if the doctrine applies to private contracts, it does not preclude liability because Suppi did not construct the Turn Lane in compliance with the design plans.
The Court need not decide the applicability or scope of the Spearin Doctrine because at the pretrial conference Suppi agreed to withdraw this portion of the motion, without prejudice. The Court further ruled that it would benefit from a fully developed factual record before determining whether the Spearin Doctrine applies and if so, the scope of its application here. Accordingly, the parties will address these issues in their post-trial briefing.
B. Frontier's Motion
1. The parties' contentions
Frontier asserts that it learned on the eve of the close of discovery that Suppi's request for attorneys' fees was based on the contractual fee shifting provision under Section 12.09.c. of the Contract. Frontier contends that Suppi would not be entitled to contractual attorneys' fees because the litigation was not filed in Florida, as required by the Contract. It further argues that if Suppi were permitted to seek contractual attorneys' fees, it would be prejudiced because it made the determination not to seek arbitration based on its understanding and the complaint that Suppi was not seeking contractual attorneys' fees.
Frontier's argument that the Complaint does not expressly seek attorneys' fees in connection with the breach of contract count is moot in light of the Court's ruling on Suppi's motion to amend.
Frontier also argues that Suppi is not entitled to attorneys' fees or damages under the Prompt Payment Act because the act does not apply to Suppi's claim. It argues that Suppi was contracted to perform site work and not work in connection with construction of a building, a requirement for the act to apply. Additionally, even if the act applies, Frontier argues that Section 3506(e) applies only to interest payments and there are no allegations that it did not make interest payments and thus, Suppi cannot assert a right to attorneys' fees under that section. Suppi also cannot recover under Section 3509, Frontier continues, because Suppi has made no showing of bad faith under Section 3509(a) and Section 3509(b) applies only to arbitrations.
See 6 Del. C. § 3501 ("'Contractor' includes ... [a] subcontractor ... who enters into any contract ... to furnish labor and/or materials in connection with the erection, construction, completion, alteration or repair of any building or for additions to a building..").
Suppi responds that under Section 3507(e)(5) of the Prompt Payment Act, it is against public policy to require arbitration or litigation of a dispute governed by the act to occur in any state other than Delaware, and therefore the Florida forum selection provision in the Contract is void and unenforceable. Additionally, the Contract contains a severability clause, and therefore, Suppi argues, the forum selection provision may be stricken from the agreement, but the fee shifting provision remains enforceable.
As to the application of the Prompt Payment Act, Suppi argues that its scope of work was in connection with construction of a building and therefore, the act applies to its claim. Further, while Section 5306 is titled "Interest penalties on late payments," the text of Section 3506(e) makes clear that an award of attorneys' fees applies to claims for late payments, and is not limited to late interest payments, as Frontier argues. Suppi also argues that it is entitled to damages under Section 3509(a) and Frontier's bad faith is a question of fact that must await trial.
2. Discussion
i. Contractual attorneys' fees
a. The severability clause
Section 12.09.c. of the Contract contains a fee shifting provision. It provides:
if [Frontier] does not choose to utilize arbitration as allowed herein, all claims, disputes, and other matters in question relating to the Subcontract, the Project, and/or the Subcontract Work shall be resolved via litigation in the Florida state courts located in Miami-Dade County, Florida and the Parties agree that the exclusive venue for any and all litigation arising out of this Agreement, shall be the Florida state courts located in Miami-Dade County, Florida. THE PARTIES FURTHER EXPRESSLY AND UNEQUIVOCALLY AGREE TO WAIVE
THEIR RIGHT TO A TRIAL BY JURY. The Parties further submit to the exercise of personal jurisdiction within the State of Florida. In the event that [Frontier] does not choose to utilize arbitration to resolve a Dispute, the prevailing party in any resulting litigation shall be entitled to an award of reasonable attorney's fees and all costs and expenses incurred including those awarded by law from the time litigation is commenced until any and all appeals are final.
Contract, § 12.09.c. (emphasis in original).
Where parties agree to a forum selection in their contract, Delaware courts are inclined to enforce the contract provision unless it is shown that enforcing it would be unreasonable or it is invalid. The Prompt Payment Act provides that it "shall be against public policy and shall be void and unenforceable for any provision of a ... subcontract agreement to" require that a claim be governed by the laws of a state other than Delaware or to require arbitration or litigation to occur in a state other than Delaware. Thus, if the Prompt Payment Act applies to the Contract, the Florida choice-of-law and forum selection provisions are void and unenforceable.
See, The Capital Group Companies, Inc. v. Armour, 2004 WL 2521295, at *3 (Del. Ch. Nov. 3, 2004); Ingres Corp. v. CA, Inc., 8 A.3d 1143, 1146 (Del. 2010).
The Court ruled at the pretrial conference that whether Suppi is covered by the Prompt Payment Act is a factual dispute that must await a more fully developed record at trial. The parties advised the Court that it would be beneficial to them to have the Court's ruling on whether certain damages are available. Thus, to the extent that the discussion below is dictum, it is judicial dictum intended to provide guidance to the parties. See Soares v. Continental Motors, Inc., 2021 WL 6015701, at *9 (Del. Super. Dec. 17, 2021) (noting the contrast between obiter dictum, which are statements not necessary to the determination of a case and judicial dictum, which are statements made after careful consideration and for future guidance in the litigation); see also In re Viacom, Inc. S'holders Litig., 2020 WL 7711128, at *12 (Del. Ch. Dec. 30, 2020) (same).
However, simply because some part of a contact is illegal (and thus void) does not mean that the entire contract is unenforceable. Severability clauses are generally enforceable in Delaware. A clear and unambiguous severability clause permits the Court to sever the invalid language while enforcing the remainder of the agreement that does not violate the law.
Evans v. State, 872 A.2d 539, 552 (Del. 2005).
Menkes v. St. Joseph Church, 2011 WL 1235225, at *4 (Del. Super. Mar. 18, 2011); Balooshi v. GVP Global Corp., 2022 WL 576819, at *11 (Del. Super. Feb. 25, 2022) ("If the parties 'expressed in the contract directly' an unambiguous severability clause - then the Court may sever and enforce the lawful terms.").
The Contract contains a severability clause. Section 12.06 of the Contract provides: "If any provision of this Subcontract shall be held invalid, its invalidity shall not affect any other provisions of this Subcontract that can be given effect without the invalid provision, and for this purpose the provisions of this Subcontract are hereby declared to be severable."
Emphasis added.
The parties do not dispute the validity of the severability clause, but rather, they dispute its scope. Suppi argues that only the Florida forum selection (and choice-of-law) provision should be excised from Section 12.09.c. Frontier argues that if the Florida forum selection "provision" is invalid, then all of Section 12.09.c. is invalid; meaning that the prevailing party fee shifting provision must also be excised. Thus, the Court must determine what the parties intended by the Contract's severability provision.
Delaware adheres to an objective theory of contract interpretation. The parties' intent is determined from the four corners of the document, unless the agreement is ambiguous. Section 12.09 of the Contract provides for a dispute resolution scheme. First, if the parties are unable to resolve the dispute on their own, Frontier has the option to require that the dispute be submitted to mediation. Next, if the dispute is not resolved, Frontier has the option to require that the dispute be submitted to binding arbitration under the Construction Industry Arbitration Rules of the American Arbitration Association (or some other rules chosen by Frontier).If Frontier chooses to invoke the arbitration clause, each party is responsible for its own attorneys' fees; there is no fee shifting. Finally, if Frontier does not invoke the arbitration clause and litigation is filed, the prevailing party is entitled to an award of attorneys' fees.
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
GMG Cap. Invests., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 779-80 (Del. 2012).
Contract, § 12.09.a.
Id., § 12.09.b.
Id., § 12.09.c. ("shall be entitled to an award of reasonable attorney's fees").
As Frontier would have it, none of Section 12.09.c. would be enforceable if the Florida forum selection provision is void. But to strike the entire clause would be contrary to the parties' intention as expressed in the Contract. The severability clause requires that an invalid provision not affect those provisions that can be given effect without the invalid provision. The Court should excise only the invalid portion, if possible, in order to give effect to the parties' intention. Reading Section 12.09 as a whole, each subsection can be given effect without the invalid Florida forum selection provision. Indeed, if Frontier had chosen to require arbitration, it could have proceeded under the Construction Industry Arbitration Rules of the American Arbitration Association, for example, as the parties contemplated, just in a different location. Similarly, the litigation provision can be given effect without the invalid Florida forum selection provision. The parties' agreement to a bench trial and the prevailing party fee shifting provision can also be honored in Delaware. There is no need to strike the entire dispute resolution scheme. Thus, excising only the Florida forum selection provision gives effect to the parties' intention.
See Handler Corp. v. State Drywall Co., Inc., 2007 WL 3112466, at *2-3 (Del. Super. Sept. 27, 2007) (excising from an indemnification clause only the void provision which required contractcounterparty to indemnify the company for its own negligence and enforcing the remainder of the clause); Menkes, 2011 WL 1235225, at *4 (same).
GMG Cap. Invests., 36 A.3d at 779 ("court must construe the agreement as a whole").
b. Frontier's alleged prejudice
Frontier argues that it will be prejudiced if Suppi is permitted to seek contractual attorneys' fees because had Frontier known that Suppi was seeking such fees, it could have exercised its right under the Contract to compel arbitration. Had Frontier exercised that right, contractual attorneys' fees would not have been available under Section 12.09.b. of the Contract.
Suppi responds that it would be prejudiced if it is precluded from seeking contractual attorneys' fees. It asserts that Frontier knows the Contract contains a fee shifting provision; it has known since at least October 2021 that Suppi was specifically seeking contractual fee shifting; and Frontier relied on this same contractual provision when it requested attorneys' fees in its answer and counterclaim. Thus, there is no surprise and Suppi should be permitted to pursue its claim.
Delaware public policy favors resolution of disputes through arbitration. However, a contractual arbitration right may be waived. "Waiver of arbitration is a matter of intention and to constitute a waiver there must be an intentional relinquishment of a right with both knowledge of its existence and intention to relinquish it." When a party actively participates in litigation or takes other action inconsistent with arbitration, waiver may be found.
Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908, 913 (Del. 1989).
Because of this public policy, Delaware courts have required a showing of waiver by clear and convincing evidence. See Zaret v. Warners Moving & Storage, 1995 WL 56708, at *1 (Del. Ch. Feb. 3, 1995); see also James Julian, Inc. v. Raytheon Serv. Co., 424 A.2d 665, 668 (Del. Ch. 1980) ("waiver is not to be lightly inferred."). However, in Morgan v. Sundance, Inc., 596 U.S. 411 (2022), the Supreme Court ruled that the policy favoring arbitration was an acknowledgement of the Federal Arbitration Act's commitment to overrule courts' longstanding reluctance to enforce arbitration agreements. 596 U.S. at 418. Arbitration agreements, however, are to be given no special treatment and therefore, it was error for lower courts to expand the policy to favor arbitration. Thus, arbitration agreements are as enforceable as other agreements, "but not more so." Id. The Court of Chancery has recognized that, at least under the federal arbitration act, Morgan is binding and therefore, a higher standard of proof is not required. Gandhi-Kapoor v. Hone Cap. LLC, 307 A.3d 328, 346-47, 359 (Del. Ch. 2023).
James Julian, Inc., 424 A.2d at 665 (citation omitted).
Wilshire Rest. Group, Inc. v. Ramada, Inc., 1990 WL 195910, at *2 (Del. Ch. Dec. 5, 1990).
Frontier clearly knew of the arbitration provision. While it reserved the right to seek enforcement of the arbitration clause in its May 2019 withdrawal of its motion to dismiss, it has taken no action to do so. To the contrary, Frontier has taken actions inconsistent with its right to arbitration. Specifically, Frontier: (i) did not raise the right to arbitration in its answer; filed a counterclaim seeking recovery for breach of contract; responded to and served discovery requests; took and defended depositions; filed a motion for summary judgment on the quantum meruit and unjust enrichment counts; and, filed a pretrial stipulation in October 2021. While Frontier identified in the Pretrial Stipulation and Amended Pretrial Stipulation that a legal issue to be decided is whether Suppi's claims are subject to binding Florida arbitration, in the last four-plus years Frontier never sought to stay or dismiss this action based on the arbitration clause.
By its actions, Frontier clearly waived its right to seek to enforce the arbitration clause. If Frontier wanted the benefits of arbitration (no fee shifting provision) it must have been willing to accept its burdens (no or limited discovery). Allowing Frontier to seek to enforce the arbitration provision at a later date would allow it to have it both ways - the discovery benefit of litigation (and increasing Suppi's fees), without the possibility of fee shifting. It will not be permitted to do so.
See Zaret, 1995 WL 56708 (plaintiff waived right to arbitration by filing litigation and participating in discovery for six months); Wilshire Rest. Group, 1990 WL 195910 (plaintiff waived right to arbitration by filing litigation and engaging in discovery for four months); W.R. Ferguson, Inc. v. William A. Berbusse, Jr., Inc., 216 A.2d 876 (Del. Super. 1966) (defendant waived right to arbitration by failing to raise it in its answer and waiting over nine months to raise the issue). The Court's finding of waiver is the same whether the clear and convincing standard or a lesser standard applies.
See Wilshire Rest. Group, 1990 WL 195910, at *3. See also, for example AAA Construction Industry Arbitration Rule R-24(d) ("There shall be no other discovery, except as indicated herein, unless so ordered by the arbitrator in exceptional cases.").
Frontier's second argument is essentially that Suppi should be estopped from asserting contractual attorneys' fees because Frontier made a decision not to pursue arbitration based on its understanding that Suppi was not seeking such fees. Because Frontier relied on that state of play in making its decision, it is now prejudiced by Suppi's claim for these fees, it asserts. But Frontier has no basis to expect that the claims would stay static during the course of the case. Even if the contractual attorneys' fees provision was raised late in the case, amendments are freely granted under Rule 15 and thus, the landscape can change, at least somewhat. Frontier does not get to fully participate in litigation and then raise the arbitration clause when it does not like how the litigation is proceeding.
See Wilshire Rest. Group, 1990 WL 195910, at *3 (finding Wilshire waived its right to arbitration where it "decided (for tactical reasons best known to it) to litigate its entire dispute with Ramada in the Superior Court, but later changed its mind after Wilshire found Ramada's defensive tactics not it its liking."). To be clear, the finding that Frontier waived its right to arbitration is made independent of whether the Prompt Payment Act applies.
ii. The Prompt Payment Act
Suppi seeks an award of damages and attorneys' fees under the Prompt Payment Act. It seeks attorneys' fees under Sections 3506(e) and damages and attorneys' fees under Section 3509. Frontier argues that Section 3506(e) applies only to interest payments and because there are no allegations that Frontier failed to make interest payments, Suppi cannot recover under that Section. Section 3509(a) damages are available only if the contractor wrongfully withheld payments. Frontier claims it had the right to withhold payments because Suppi did not complete the Contract. It further asserts that attorneys' fees are available under Section 3509(b) only if the dispute was submitted to arbitration and therefore, Suppi cannot recover under that section in this action. Each section is addressed below.
a. Damages under Section 3509(a)
Section 3509(a) provides:
If arbitration or litigation is commenced to recover payment due under § 3507 of this title and it is determined that the owner, contractor or subcontractor has failed to comply with the payment terms of § 3507 of this title, the arbitrator or court shall award damages due equal to the amount that is determined by the arbitrator or court to have been wrongfully withheld. 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.
This subsection allows for an award of damages equal to the amount of payments wrongfully withheld. Thus, a claimant could recover "double" damages.
Frontier argues that as a matter of law, it was permitted to withhold payments from Suppi because there is a reasonable dispute over Suppi's work. Therefore, Frontier was permitted to withhold the payments as an offset. Accordingly, Frontier cannot be liable for damages under this subsection.
Additionally, Frontier argues that there has been no showing that it did not withhold payment in good faith and therefore, for this reason, it also cannot be liable under Section 3509(a).
Suppi responds that its claim is over $114,000 and the alleged setoff is only approximately $47,000 and thus, there is a large portion of the payments due Suppi "to which Frontier has offered no defense." Suppi continues, Frontier did not perform an analysis of how much should be withheld or provide the notice required under Section 3506(d).
Whether Frontier withheld payments in good faith is a factual dispute that must await a fully developed record at trial. Therefore, Frontier's Motion in this ground is denied.
b. Attorneys' fees under Section 3506(e)
This statute provides:
§ 3506. Interest penalties on late payments.
(e) If it is determined by a court of competent jurisdiction that a payment withheld pursuant to paragraph (a)(3) or subsection (d) of this section was not withheld in good faith for reasonable cause, the court may award reasonable attorney's fees to the prevailing party. In any civil action brought pursuant to this section, if a court determines after a hearing for such purpose that the cause was initiated, or a defense was asserted, or a motion was filed or any proceeding therein was done frivolously or in bad faith, the court shall require the party who initiated
such cause, asserted such defense, filed such motion or caused such proceeding to be had to pay the other party named in such action the amount of the costs attributable thereto and reasonable expenses incurred by such party, including reasonable attorney's fees.
Thus, under the statute, if a court finds that payments were withheld in bad faith (that is, not in good faith for reasonable cause), the court may award attorneys' fees to the prevailing party. Further, if a court finds that any party prosecuted or defended an action brought under the statute frivolously or in bad faith, the court may award fees and expenses incurred as a result of such actions. "The statute places the burden of proof on the entity withholding payments to establish it was done in good faith."
Rodman Constr. Co., Inc. v. BPG Residential Partners, V, LLC, 2013 WL 656176, at *16 (Del. Super. Jan. 8, 2013).
Id.
Nason Constr., Inc. v. Bear Trap Comm., LLC, 2008 WL 4216149, at *8 (Del. Super. Aug. 20, 2008).
Bad faith involves "some kind of dishonest motive or purpose. There is, thus, the implication of an element of scienter. Additionally, '[i]n prompt payment disputes, the phrase is understood to mean that substantial and justifiable reason existed to withhold payments.'" Thus, a finding that payments were withheld because of an honest dispute would weigh in favor of a good faith finding. "A determination, however, that defendants were instead holding payments 'hostage' as bargaining leverage against plaintiffs in disputes unrelated to the contract or generally as a sharp-elbowed negotiation tactic would lead to the opposite conclusion."
Rodman Constr., 2013 WL 656176, at *16.
Id.
Id.
Frontier relies on Griffin Dewatering Corp. v. B.W. Knox Constr. Corp. to support its argument that Section 3506 relates only to interest payments. The court in Griffin Dewatering Corp. in addressing what is now subsection (f) of 3506 ruled that the section applied only to interest payments. The court went on to rule, however, that the plaintiff was not entitled to attorneys' fees under Section 3506 because it did not "show that the payments were withheld, or causes were asserted, in bad faith." Thus, the court construed this section to apply to "payments" not just late interest payments.
2001 WL 541476 (Del. Super. May 14, 2001).
At the time of this decision, what is now subsection (f) was subsection (e).
Id., at *10.
Accordingly, if the elements of Section 3506(e) are satisfied, the prevailing party may be awarded attorneys' fees. Similarly, if the Court finds that some or all of litigation was pursued in bad faith or frivolously, the Court may award attorneys' fees incurred as a result of such behavior.
See Nason Constr., 2008 WL 4216149 (awarding reasonable attorneys' fees pursuant to Section 3506 due to defendant's bad faith in attempting to avoid paying its contractual obligations for dishonest and improper purposes); Rodman Constr., 2013 WL 656176 (finding defendant did not have a right to withhold sums due plaintiff, but it did so in furtherance of its agenda to put financial pressure on plaintiff and therefore, awarded attorneys' fees under Section 3506). Compare Foraker v. Voshell, 2022 WL 2452396 (Del. Super. July 1, 2022) (finding that although some payments were not made in 30 days, there was a good faith dispute over the work at issue, and therefore, the request for attorneys' fees was denied) and DDP Roofing Serv. Inc. v. Indian River Sch. Dist., 2010 WL 4657161 (Del. Super. Nov. 16, 2010) (finding that contractor's decision to withhold payment was a mistake, but not deceitful and therefore, attorneys' fees were not awarded).
Frontier further argues that there has been no showing that it has acted in bad faith and therefore, even if attorneys' fees are recoverable, an award is not warranted here and thus, Suppi should be precluded from presenting its claim for fees. Whether a party has acted in bad faith is a fact-intensive inquiry. Therefore, a determination of bad faith will have to await development of the factual record at trial. Thus, Frontier's Motion on this ground is denied.
c. Section 3509(b)
To the extent that Suppi is seeking an award of attorneys' fees under Section 3509(b), Frontier's Motion is granted. By its plain terms, Section 3509(b) applies only in connection with an arbitration. Accordingly, Frontier's Motion is granted on this ground.
Nason Constr., 2008 WL 4216149, at *1.
IT IS HEREBY ORDERED.