Choose Wisely: Louisiana Prompt-Pay Claim Excluded Due to Choice-of-Law Provision

Choose Wisely: Louisiana Prompt-Pay Claim Excluded Due to Choice-of-Law Provision[1]

Max Foote Construction Company, LLC v. MWH Constructors, Inc.[2]

On October 25, 2018, the U.S. District Court for the Eastern District of Louisiana granted a motion to dismiss Louisiana prompt-pay claims, yet denied the motion to dismiss New Jersey prompt-pay claims.

Background

Montgomery Watson Harza (“Harza”) entered into a subcontract with American Water Operations and Maintenance — the general contractor — to complete a demolition and removal project of two water treatment plants as well as the design and construction of new wastewater treatment plants in Vernon Parish, Louisiana.  Harza entered into a subcontract agreement with Max Foote Construction Company (“Max”) to complete work on the project.   After some difficulties in performing work on the project, Harza sent Max a letter terminating the subcontract and accused Max of abandoning the project.  In response, Max filed suit against Harza and alleged wrongful termination, violation of the prompt-pay statutes pursuant to the subcontract, and sought to recover the unpaid balance owed by Harza.  Harza successfully removed the action to the Eastern District of Louisiana due to complete diversity between the parties,[3] and subsequently filed a motion to dismiss the complaint.  In filing the motion to dismiss, Harza argued that federal law governed the prompt-pay claims — which invalidated Max’s prompt-pay claims pursuant to the Louisiana and New Jersey statutes.[4]

Analysis of the Court

First, the court completed a choice-of-law analysis to determine whether New Jersey law or Louisiana law applied.  A federal court exercising diversity subject-matter jurisdiction applies the choice-of-law rules of the state in which it sits to determine which substantive law will apply.[5]  Additionally, when exercising federal-question subject-matter jurisdiction, a federal court applies federal common law choice-of-law principles to determine which substantive law will apply.[6] However, when a case obtains subject-matter jurisdiction based on both diversity and federal question, the court will follow the choice-of-law rules of the state in which it sits.[7] Therefore, the Louisiana Eastern District applied Louisiana’s choice-of-law rules instead of the rules of New Jersey.  Pursuant to the Louisiana Civil Code, contractual parties can choose the law upon which their contract will rely upon — unless that law contradicts the public policy of Louisiana.[8]   As a result, the court reasoned that although the location of the project occurred in Louisiana, New Jersey law would govern the contract unless an exception of the Federal Acquisition Regulations (“FAR”) applied.  Harza argued that the third FAR exception applied;[9] therefore, the federal Prompt Pay Act applied to Max’s prompt-pay claims.

During its analysis, the court rejected the argument that the federal Prompt Pay Act applied to the subcontract.  First, the court noted that the subcontract was not substantially based on the federal Prompt-Pay Act since a separate section of the contract specified the terms under which payment would be provided.  Additionally, the court emphasized that the subcontract did not require that Max’s prompt-pay claims be brought only under federal law.  Finally, the court reasoned that although the federal Prompt-Pay Act confers rights and duties between federal contractors and subcontractors — the cause of action would lie with the federal government.[10]

Although the court reasoned that the FAR exception did not apply, the court noted that the Prompt Pay Act allows a subcontractor to assert breach of contract and prompt-pay claims against a contractor under state law.  As a result, since the subcontract provided that New Jersey law would be binding, the court allowed the prompt-pay claim pursuant to N.J. Stat. Ann. § 2A:30A-2 to go forward while dismissing the prompt-pay claim pursuant to La. R.S. 9:2784.

Conclusion

This decision should remind subcontractors to understand the ramifications of choice-of-law provisions within construction contracts.  It is unwise to assume that Louisiana law will apply simply because the project occurred in Louisiana.  Additionally, Louisiana law will honor the choice-of-law provisions of a contract between two parties — even if the contract designates the law of another state to govern the contract.  A choice-of-law provision is important to not only determine which law is applicable to the issues within the case, but the applicable law can create different responsibilities for the claimants.[11]

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[2]   No. CV 18-2584, 2018 WL 5297744, at *1 (E.D. La. Oct. 25, 2018).

[3]   Harza and Max are citizens of different states.

[4]   N.J. Stat. Ann. § 2A:30A-2 (West); La. Stat. Ann. § 9:2784.

[5]   Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 498-97 (1941).

[6]   Haynsworth v. The Corporation, 121 F.3d. 956, 962 (5th Cir. 1997).

[7]   Totalplan Corp. of Am. v. Colborne, 14 F.3d. 824, 832 (2d Cir. 1994).

[8]   La Code. Art. 3540.

[9]   For the Federal Prompt-Pay Act to apply, the subcontract must incorporate the federal Prompt Pay Act and be substantially based on the FAR.  Because the subcontract contained a clause that was identical to the federal Prompt-Pay Act, Harza contended that the federal act applied to Max’s claims.

[10]   See RAMJ Constr., L.L.C. v. Seola Enter., Inc., 2018 WL 3232781, at * 3 (M.D. La. July 2, 2018) (citing Masonry Sols. Int’l, Inc. v. DWG & Assocs., Inc., 2016 WL 1170149, at *4 (E.D. La. Mar. 25, 2016).

[11]   La. R.S. 9:2784 states that if the contractor or subcontractor without reasonable cause fails to make any payment to his subcontractors and suppliers within fourteen consecutive days of the receipt of payment from the owner for improvements to an immovable, the contractor or subcontractor shall pay to the subcontractors and suppliers, in addition to the payment, a penalty in the amount of one-half of one percent of the amount due, per day, from the expiration of the period allowed herein for payment after the receipt of payment from the owner, whereas N.J. Stat. Ann. § 2A:30A-2 does not require the same 14-day timer.