Client Alerts
July 17, 2018

The Ultimate Battle to Enforce Timely Payments

Stites & Harbison Client Alert, July 17, 2018

by Stites & Harbison, PLLC

A recent study reports that 88 percent of contractors receive slow payments on construction projects nationwide.1 The report further finds that untimely payments cause lower tier subcontractors to shoulder approximately $40 billion dollars each year in additional financing costs—just to meet operating expenses.2

Proactive measures like negotiating more favorable contract provisions, providing early notice of claims, and complying with state lien requirements can mitigate some of the risks associated with untimely payments. However, contractors are often confronted with the decision of how to recover when an upstream party refuses to pay—facing a delicate balance of enforcing contractual rights without severing successful business relationships.

One contractor’s ongoing battle to enforce its rights against a project owner is illustrated in Synergy Project Mgmt. v. City of San Francisco, currently pending in the US District Court for the Northern District of California.3

In 2003, Synergy Project Management, Inc., established a successful and growing business performing complex commercial projects—specializing in construction management, mass excavation, shoring, grading, paving, and utility services. Synergy developed a consistent relationship with the City of San Francisco by performing over 50 projects in the City’s most congested and utility-dense areas.

However, in 2009, 2010, and 2012, Synergy initiated three independent lawsuits to recover amounts it was owed by the City on three separate projects. After years of litigation, Synergy allegedly prevailed, finally being award amounts that were due under the contracts. But the costs of litigation and years of waiting for past due payments financially choked Synergy—it lost its bonding capacity, was forced to layoff employees, and was on the brink of collapse. Because Synergy could no longer bond projects as a prime contractor, it turned to subcontract work on projects similar to the ones it previously managed. It was then that the City allegedly took actions to retaliate against Synergy for the 2009, 2010, and 2012 lawsuits.

For example, in 2015, Synergy subcontracted with Ghilotti Brothers, Inc. to perform work on the highly visible and complex Haight Street Sewer Replacement Project for the City. During the course of construction, Synergy encountered unmarked and unexpected utility lines. After several gas lines were damaged, there was significant attention and criticism from neighborhood residents. In response, the City publicly blamed Synergy and directed the prime contractor to terminate the subcontract. Synergy objected to its termination and the City commenced administrative proceedings to effectuate Synergy’s termination.

Simultaneously with the administrative proceedings, Synergy alleges that the City embarked on a public campaign to harm Synergy’s reputation, and constructively debar Synergy from future projects. In one instance, Synergy claims that the City announced its intent to use Synergy as a scapegoat for problems with the Haight Street Project, although the replacement subcontractor encountered many of the same unforeseen conditions. And, in 2016, the City rejected Synergy’s bid to serve as a subcontractor on another sewer project even though Synergy submitted the most qualified and lowest bid.

In 2017, with the company effectively shut down, Synergy instituted a new lawsuit against the City of San Francisco, among others, asserting claims for interference with contractual relations, interference with prospective economic advantage, violation of substantive due process rights, and violations of due process of law under 42 U.S.C. §§ 1983. The City moved for dismissal on all counts.

While Synergy’s claims for tortious interference and violations of Section 1983 were dismissed, the District Court found support for Synergy’s broader due process claims.4 Accordingly, as of the court’s May 16, 2018 decision, Synergy continues to pursue its claims for violations of its constitutional right to due process, including claims that:

  • Synergy was denied due process based on the City’s retaliation against Synergy for its exercise of its constitutionally protected right to access to courts and its right to petition the courts for redress of its grievances, and to exercise its right to free speech, without being subject to retaliation;
  • Synergy had a right to do business with the City and the City’s de facto debarment of Synergy deprived Synergy of that interest; and
  • Synergy had a protectable liberty and property interest in the work it was to perform on the Haight Street Project, the Van Ness Project, the bidding process for the City contracts, and in its good reputation. Synergy suffered reputational harm when the Defendants publically issued false statements wrongfully blaming Synergy for problems that occurred with the Haight Street Project and removal of Synergy from the Haight Street Project.

While this case is still in the early stages of litigation, it illustrates the stress that untimely payments place on contractors. And, if Synergy is able to prevail, the unique causes of action may provide additional protection for subcontractors asserting their rights to timely payments without retaliation.

¹Construction Payments Report 2018, Contract Simply, July 6, 2018.
²[1] Id.
³[1] Synergy Project Mgmt. v. City & City of San Francisco, N.D. Cal. Case No. 17-cv-06763-JST.
4[1] Synergy Project Mgmt. v. City & City of San Francisco, Case No. 17-cv-06763-JST, 2018 U.S. Dist. Lexis 82817, 2018 WL 2234596 (May 16, 2018).

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