Fed. Eng’rs & Constructors Inc. v. Relyant Global LLC, No. 3:19-CV-73-KAC-JEM, 2022 U.S. Dist. LEXIS 95617 (E.D. Tenn., May 27, 2022)

This case arises out of the renovation of a U.S. Air Force dormitory in Missouri. The U.S. Army Corps of Engineers hired Relyant Global LLC to act as the prime contractor. Relyant subcontracted with Federal Engineers and Constructors, Inc. (FE&C). Relyant later terminated its subcontract with FE&C. FE&C filed suit against Relyant, and Relyant moved for judgment on the pleadings.

FE&C’s amended complaint included a claim for violation of the federal Prompt Payment Act (PPA). FE&C asserted that Relyant’s failure to pay FE&C entitled it to recover an interest penalty. Relyant argued that the subcontract did not include any provision requiring Relyant to pay interest on late payments, and no private right of action existed under the federal PPA to implicitly incorporate such a provision. In response, FE&C advanced a creative theory of liability — “FE&C is not bringing a private right of action under the federal Prompt Payment Act, but is instead seeking enforcement of a contractual penalty.” Under FE&C’s theory, it was entitled to recover interest under a subcontract provision that generally incorporated all “terms and conditions … required by law.” The court rejected FE&C’s creative theory, finding that it was not supported by the cause of action actually pled.

FE&C’s amended complaint also included claims for violation of the Tennessee PPA. FE&C argued that the Tennessee PPA applied because the subcontract included a choice of law provision, stating: “This agreement shall be construed and interpreted in accordance with the laws of the State of Tennessee, U.S.A.” Relyant argued that the Missouri PPA applied because the project was located in Missouri. The court applied the choice of law rules of the forum in which it sat — Tennessee. For claims sounding in contract, Tennessee applies the law of the state where the parties executed the contract. But if the contract contains a choice of law provision, the courts will enforce it “so long … there is a material connection between the law and the transaction, and the chosen law is not contrary to the fundamental policies” of a state whose law would otherwise govern. The court held that subcontract’s choice of law provision was enforceable because Relyant failed to identify a Missouri policy contrary to the Tennessee PPA.

With this backdrop, the court looked at FE&C’s specific claims that Relyant violated Sections 103 and 104 of the Tennessee PPA by withholding 10% retainage from each invoice and by not placing that amount in a separate escrow account. The subcontract provided that Relyant “may retain … a maximum of ten percent (10%) of the amount of each invoice.” The court found that the express terms of the parties’ agreement controlled because Section 103 only applied to “construction contracts on any project in this state,” and the project was not in Tennessee. The subcontract was silent as to whether retainage must be placed in an escrow account. However, Section 104 of the Tennessee PPA provides that a “retained amount shall be deposited in a separate, interest-bearing, escrow account … .” Compliance with Section 104 is “mandatory, and may not be waived by contract.” Because the subcontract incorporated Section 104’s mandatory requirement that any retainage be deposited in an escrow account, and FE&C alleged that Relyant withheld 10% retainage without placing the funds in escrow, the court held that FE&C properly pled a claim for violation of Section 104.

FE&C also sought to recover attorney’s fees and costs against Relyant for its PPA claim. Under Tennessee law, a party may only recover attorney’s fees if a specific contractual or statutory provision creates a right to recovery. The subcontract contained a provision requiring each party to bear its own fees, which conflicted with the Tennessee PPA’s requirement that fees be awarded against a non-prevailing party acting in bad faith. Under Tennessee law, where a choice of law provision invalidates an express contractual provision, the court generally presumes that the conflicting choice of law provision was a mistake and applies the express contractual provision. However, if the express provision would be invalid under the chosen state law and under the law of the state that would govern in the absence of a choice of law provision, “the doctrine of mistaken choice of law will not be employed to permit the parties to overcome the policy of both states.” The court found that because neither the relevant pleadings nor the parties’ briefing contained sufficient facts to determine which state’s law would apply in the absence of the choice of law provision, a material issue of fact existed, and allowed FE&C’s claim for attorney’s fees to proceed.