Act 294 of December 2006 doubled the amount of fines the Planning Board of Puerto Rico can levy on a business or individual that fails to comply with its regulations or orders. The limit was raised from $5,000 to $10,000. Along with the Regulations and Permits Administration (ARPE) the Planning Board regulates land developement in the Island
A recent case illustrates the vital importance of the wording used in a performance bond. When two separate contractors engage in a joint venture and things go awry, performance bonds linked to their work will come into play. Failing to procure a proper bond can create financial chaos. So before signing above the dotted line, the contractor needs to read beyond the title of the document and learn what are the actual duties and obligations under the bond. See, Constructora Andrade Gutierrez v. American International Insurance, Court of Appeals 1 Cir.
The case involves Puerto Rico law, an insurer and two construction companies; Constructora Andrade Gutierrez (CAG) from Brazil and C&M based in the Dominican Republic. The controversy centered around a performance bond for construction in Haiti. C & M and CAG originally joined forces to bid on a highway project and - “In the event that their joint venture won the contract, CAG agreed to provide 100% of the guarantees for performance and payment to the Republic of Haiti and C & M agreed to provide a counter-guarantee to CAG for C & M's participation in the project."
Owners of a project typically require from construction companies several types of bonds. To bid, the construction company must post a bid bond guaranteeing it will comply with the terms of the bid if awarded. With the performance bond, the constructor pledges that it will complete the awarded contract faithfully and according to its terms. As required, CAG provided Haiti with a performance bond. To cover C& M’s obligations with CAG, C & M purchased a bond with American International Insurance Company (AIICO). AIICO’s bond provided in its wording that "it was an irrevocable and unconditional guarantee . . . for the completion by the contractor (C&M) of its obligations to (CAG) pursuant to the stipulations of the contract dated May 6, 1996."
AIICO and C&M later entered into a side agreement regarding the performance bond it had issued to the benefit of CAG. It stipulated that C& M had to indemnify AIICO for all losses incurred if CAG executed or demanded payment under the bond. Furthermore, C & M was automatically liable to AIICO for any losses as soon as CAG asserted a claim against AIICO; regardless of whether or not AIICO had made payment. C & M further agreed that AIICO could recover from C & M any disbursements made to CAG it in good faith; whether or not such liability existed.
As the court adeptly defined it – “The sweeping language [could] be reduced to five words: "If we pay -- you pay." With the contract, C & M forfeited whatever possibility it had to control - in some way- how and when AIICO would pay the bond; at the same time remaining fully accountable for all payments made. SO, if CAG made a claim to AIICO and AIICO decided to pay, C & M had to pay back AIICO; even if C & M understood it had fully complied with its obligations.
During the course of business C & M and CAG tried in vain to settle disputes that ensued. At the end, CAG notified AIICO that C & M was in default and demanded payment. AIICO initially denied payment. CAG sued AIICO in the U.S. District Court for the District of Puerto Rico, under diversity jurisdiction to recover the amounts that AIICO refused to pay. AIICO filed a third-party complaint against C & M who in turn asserted cross claims against CAG (later dismissed because of contractual arbitration requirements).
On February 26, 2003, the Court entered summary judgment, against AIICO for $1,407,000, plus other assessments “finding that the bond issued by AIICO was in actuality an unconditional guarantee essentially payable on demand.” AIICO appealed but eventually settled and paid CAG $1.6 million. C & M filed for appeal.
The AIICO bond stated that “We the undersigned, American International Insurance Company of Puerto Rico, hereby establish in the name and for the account of C.M. Constructora, S.A., an irrevocable and unconditional guarantee in the amount of FIVE MILLION SIX HUNDRED NINETY-SIX THOUSAND THREE HUNDRED TWENTY-TWO and 42/100 United States dollars (US$ 5,696,322.42). " The court viewed the phrase "irrevocable and unconditional" not as a performance bond but as "the typical language of a letter of credit designed to serve as a guarantee to the beneficiary against harm caused by a contractual default, and completely independent of any other contractual obligation."
The court reasoned that “the only conditions for payment [were]. . .: (1)
that CAG provide AIICO with “written notification ··· prior to the expiration
date” of
Never assume the contents of a performance
bond. While bonds may share a similar purpose, the specific provisions,
rights and obligations vary. Read the
fine print. For example some bonds may call for opportunities to cure
before default can be declared. Others require that a particular procedure
be followed.
The language of the AIICO bond crippled C & M because, it did not matter whether CAG complied with its end of the deal. If CAG declared C&M in default, AIICO had to disburse the funds automatically; this despite an audit revealing that “CAG was responsible for cost overruns. . . and that C&M's resulting losses far exceeded the amounts C&M had agreed to pay. . . .” Even under these seemingly lopsided circumstances, C & M could not prevent the Surety from paying the amounts demanded.
The government has repeatedly announced it is taking steps to streamline the process in which construction permits are awarded. Over 34 agencies regulate more than 100 different permit related issues. Ecological and left wing groups are suspicious and not receptive to the idea. Let’s explore why.
The administration is cognizant that its bloated bureaucracy of paper-pushing dependents neither creates nor promotes economic development. Worse that failing miserably at promoting new investments during past years, the government's operations (executive and legislative) obstruct private business initiatives. So, perhaps in an effort to get out of the way, the government is apparently considering fresh new ideas that may ultimately save businesses time and money.
The level of construction activity is considered by many a measurement of progress but in Puerto Rico that premise may not necessarily be true. For decades, our little Island has been the object of relentless and senseless development. Fueled by profit and speculation, mountains are leveled, forests are depleted, species threatened, creeks are filled, beaches are constructed and then closed to the public. Concrete and asphalt crisscross the Island in a hurry as if nature was a nuisance to everyone. In this once lush tropical Island, cement is now the common denominator. The stunning beauty of a valley is seen by many developers as a big dollar sign. Too often they build upon a collective disregard for our social and historical fabric. Not surprisingly, we continually see massively dull and intrusive projects placed anywhere a profit can be made. Furthermore, continually spiraling prices keep the majority of the population off limits from attractive coastal and beach developments. Middle class see these projects as an assault to their way of life by foreigners and the wealthy. No wonder new tourist developments raise so much anger and distrust.
I cannot help but compare Puerto Rico with other developed countries- and notice that their forests, beaches, greenery have all survived hudreds of years of development; nature, tradition and history are universally respected. In contrast, here we learn of what latest development caused what. Just recently, the media reported that access to the historical San Geronimo Fort was being encroached by another private development. Some scientists estimate that if the current construction trend continues, 90% of the Island will be covered in cement and stripped of its remaining natural beauty.
Beaches and coastal areas are becoming frontlines for ecological disputes. Interests groups, some armed with scientists, lawyers and well-documented studies are battling developers and enjoying some success. They are also gaining widespread support. Those who favor them realize that unchecked development deeply affects everyone’s quality of life; and the less land we have, the more selective the government need to become when awarding permits. Ironically, the quarrels raised by environmental groups are becoming a unifying force among a population historically polarized over political options.
A faster permitting process is a great idea but it should not operate in a vacuum. It's not how fast the permit can be obtained but also whether the project involved fits into the grander scheme of things. The government-through irresponsible or corrupt officials- has been a full conspirator to the chaotic development. It must now act responsibly on this issue. Speeding the process without evaluating past shortcomings can greatly accelerate the urban assault. This requires a thorough and honest evaluation of past failures; it needs to re-examine proper use of our remaining land; be open to critics on the Plan de Uso de Terrenos (the Island Master Plan for land use); it needs take into consideration scientific evidence and the will of the people; and create changes that will ensure a consistent and uniform policy.
A true commitment to protect the Island demands socially responsible development. Ultimately, real progress is measured by the quality of our lives not by the amount of dollars to be made.
