QUALIFYING FOR ADDITIONAL INSURED STATUS

Posted on May 31, 2014May 31, 2014 by Edward Garber

Additional Insured status is a vital part of risk management in construction. I’ve previously discussed additional insured status under general liability policies in https://floridaconstru.wpengine.com/understanding-your-rights-as-an-additional-insured/ and https://floridaconstru.wpengine.com/make-sure-additional-insured-coverage-is-for-completed-operations/.

The recent decision in King Cole Condominium Association, Inc. v. Mid-Continent Casualty Co., 2014 WL 2191944 (S.D.Fla. 2014), further elaborates on additional insured status under a general liability (CGL) policy. In this case, a condominium unit owner injured herself while the condominium was undergoing construction work. The unit owner sued the association and the general contractor the association hired to perform the work. As it pertained to the association, the unit owner contended that the association was negligent including being negligent for selecting the general contractor that caused her injuries. The general contractor, as typically is the case, had a CGL policy. The association tendered the defense of the unit owner’s claims to the contractor’s liability insurer as an additional insured; however, the insurer denied coverage. The association then sued the insurer seeking a declaratory judgment asking for the court to declare that it was an additional insured under the contractor’s policy and, thus, the insurer had a duty to defend and indemnify the association in the unit owner’s action against the association and general contractor.

The dispositive issue in this dispute was whether the association should qualify as an additional insured under the general contractor’s liability policy. The association claimed it was an additional insured because any liability assessed against it was directly attributable to the defective condition created by the general contractor that caused the unit owner’s injuries. The insurer countered that the association would only qualify as an additional insured with respect to liability directly attributable to the general contractor’s performance at the condominium.

The additional insured endorsement in the contractor’s policy provided that an additional insured was:

“Any person or organization for whom the named insured has agreed by written “insured contract” to designate as an additional insured subject to all provisions and limitations of this policy …

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability directly attributable to your performance of ongoing operations for that insured.”

The general contractor’s liability policy further contained a definition for the term “insured contract” that provided:

“f. That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for “bodily injury” or “property damage” to a third person or organization, provided the “bodily injury” or “property damage” is caused, in whole or in part, by you or by those acting on your behalf. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”

Based on this policy language, the Southern District stated that for the association to qualify as an additional insured under the general contractor’s policy, it must establish (a) its contract with the general contractor was an insured contract within the meaning of the policy and (2) the association only sought coverage as an additional insured under the policy regarding liability directly attributable to the general contractor’s performance, i.e., the additional insured status is for vicarious liability or negligence directly caused by the contractor for which the association was sued. If the association failed to provide either requirement, then it failed to qualify as an additional insured.

The contract between the association and general contractor provided that the general contractor would identify the association as an additional insured. Presumably, this contract met the definition of an insured contract within the meaning of the policy as it likely required the contractor to indemnify the association for bodily injury and property damage caused by the contractor’s performance. Thus, the crux of whether the association qualified as an additional insured under the contractor’s policy turned on whether the unit owner was suing the association for liability directly attributable to the general contractor’s performance (i.e., vicarious liability).

To determine whether the unit owner’s claims contained allegations triggering vicarious liability, the Southern District looked to the allegations in the unit owner’s underlying complaint against the association and contractor. In analyzing the unit’s owner complaint and finding that the association did not qualify as an additional insured, the Southern District held:

“Florida law requires a claimant to specifically plead vicarious liability as a separate cause of action. Because Satarsky’s [unit owner] complaint contains no separate cause of action for vicarious liability, the Court rejects King Cole’s [association] contention. Furthermore, even if Florida procedural law did not apply or if the separate cause of action requirement was not the law in Florida, there is nothing in the complaint to suggest that Satarsky sued King Cole for vicarious liability. To the contrary, the allegations against King Cole all relate to its own alleged negligence. Therefore, under the facts here, Mid–Continent has no duty to defend or indemnify King Cole with respect to the Satarsky lawsuit.”

King Cole Condominium Association, supra (internal citations omitted).

This case contains a couple of important take-aways:

Additional insured status is not designed to protect the additional insured for its OWN negligence. Rather, it is designed to defend and indemnify the additional insured for the negligence directly caused / attributable to the primary insured; hence, the Southern District explaining that the underlying complaint by the unit owner needed to trigger vicarious liability such that the association was being sued for the negligence of the contractor.

To determine whether an insurer has a duty to defend, the court will look to the allegations in the underlying complaint. In this instance, the underlying complaint asserted claims against the association for its own negligence, but not for vicarious liability associated with the negligence of the contractor. When preparing a complaint in which a party is seeking insurance coverage, it is important to plead allegations that may give rise to potential coverage.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

DESIGN-BUILD PROJECT DELIVERY IN FLORIDA (AND LICENSING EXEMPTIONS)

Posted on May 31, 2014May 31, 2014 by Edward Garber

Under a design-build project delivery, typically the general contractor contracts with the owner to be responsible for both the design and construction of the project. This benefits the owner because if there is a design or construction issue–whether causing an increase in budget, a defect, or a delay–the owner can point to the contractor since it is the entity responsible for both disciplines. This benefits the contractor (in addition to the owner) because it is now working closely with the design professional so their interests are aligned and the contractor can have more control over value engineering or cost savings implementation and obtaining answers to requests for information or approvals to submittals and shop drawings. Since the contractor is fully accountable for both the design and construction, it is working closely and collaborating with the design professionals to improve the efficiency in the construction process. Furthermore, since the contractor is responsible for the design, it has more flexibility fast-tracking the construction in phases even though the complete design is not finalized. By fast-tracking the construction and overlapping the construction with the design, the contractor is ideally in a position to efficiently meet scheduling and production requirements.

A contractor is able to offer and perform design-build services because there is an exemption under the required licensing statutes for a contractor, architect, and engineer that allow these entities to negotiate / contract for design-build work as long as they are engaging a licensed professional to perform those tasks in which they are not licensed. For instance, a contractor is exempt from the requirement of being a licensed architect when contracting and offering design-build work as long as the contractor engages a licensed architect to perform the design. This is set forth in Florida Statute s. 481.229(3) that provides:

“Notwithstanding the provisions of this part, a general contractor who is certified or registered pursuant to the provisions of chapter 489 is not required to be licensed as an architect when negotiating or performing services under a design-build contract as long as the architectural services offered or rendered in connection with the contract are offered and rendered by an architect licensed in accordance with this chapter.”

Similarly, while less common, an architect or engineer is exempt from the requirement of being a licensed contractor when contracting and offering design-build work as long as these design professionals engage a licensed contractor to perform the construction. This is set forth in Florida Statute s. 489.103(16) that provides:

“An architect or landscape architect licensed pursuant to chapter 481 or an engineer licensed pursuant to chapter 471 who offers or renders design-build services which may require the services of a contractor certified or registered pursuant to the provisions of this chapter, as long as the contractor services to be performed under the terms of the design-build contract are offered and rendered by a certified or registered general contractor in accordance with this chapter.”

Despite these exemptions, recently the Florida Board of Architecture and Interior Design in Diaz & Russell Corp. v. Department of Business and Professional Regulation, 39 Fla. L. Weekly D 1125a (Fla. 3d DCA 2014), charged a general contractor for improperly performing services as an architect (when it was not a licensed architect) simply because the general contractor was offering design-build services. Basically, the Florida Board of Architecture maintained that the contractor needed to identify the designated architect in its proposal to the owner offering the architectural services. On appeal, the Third District Court of Florida correctly reversed this ruling because there is nothing that requires the contractor to identify the architect or engineer at the time of the proposal / contract just like there is nothing requiring the architect or engineer to identify the contractor at the time of the proposal / contract. The statutory exemption would simply require the contractor to engage a licensed architect to perform the design, which was not an issue in this case because the contractor properly hired an architect to prepare the design.

A SUPPLIER AND SUBCONTRACTOR’S PURSUIT OF ATTORNEY’S FEES IN MILLER ACT PAYMENT BOND ACTION

Posted on May 29, 2014May 29, 2014 by Edward Garber

While the Miller Act does not provide a statutory basis for the recovery of attorney’s fees, this does not mean that attorney’s fees cannot be recovered in a Miller Act payment bond action against the surety and prime contractor. If the underlying contract between the claimant and its customer provides for the recovery of attorney’s fees, this can support a basis to recover attorney’s fees against the surety and prime contractor in a Miller Act payment bond action.

The Eleventh Circuit in U.S. f/u/b/o Southeastern Municipal Supply Co., Inc. v. National Union Fire Ins. Co. of Pittsburg, 876 F.2d 92 (11^th Cir. 1989), held that a subcontractor’s supplier could recover attorney’s fees against the Miller Act surety based on a contractual provision between the supplier and the subcontractor. Other federal circuits have found similarly. See GE Supply v. C&G Enterprises, Inc., 212 F.3d 14 (1^st Cir. 2000) (supplier to prime contractor entitled to recover attorney’s fees based on attorney’s fees provision included in invoices sent to contractor with each delivery); U.S. f/u/b/o Maddux Supply Co. v. St. Paul Fire & Marine Ins. Co., 86 F.3d 332 (4^th Cir. 1996) (surety liable to supplier for attorney’s fees and interest based on subcontractor’s credit application with supplier); U.S. f/u/b/o Carter Equipment Co., Inc. v. H.R. Morgan, Inc., 554 F.2d 164 (5^th Cir. 1977) (finding that equipment rental supplier to subcontractor could recover attorney’s fees against surety based on contractual provision between supplier and subcontractor).

In pursuing a Miller Act action, it is good practice to look at the underlying contract, purchase order, or documentation forming the agreement to determine if there is a contractual basis to recover attorney’s fees. If there is, this basis should be specifically pled in the complaint against the Miller Act surety (as well as the prime contractor as the principal of the bond) to support a basis to recover attorney’s fees. This contractual basis should not be overlooked. In addition, suppliers and subcontractors on federal projects may want to ensure that such a contractual basis is included in their respective agreements in the event that a Miller Act action needs to be pursued. While suppliers will typically have a contractual provision in their agreement with their customer that allows them to recover attorney’s fees in collection efforts, there are circumstances where a prime contractor may not want to include an attorney’s fees provision in its subcontract. One reason for this may be because the prime contractor does not want to give the subcontractor a basis to recover attorney’s fees in a Miller Act action. Although this may not help the prime contractor in a lawsuit initiated by the subcontractor’s supplier (where there is a contractual provision for attorney’s fees between the supplier and subcontractor), the lack of a contractual basis could force a subcontractor to consider how it wants to proceed knowing it does not have a basis to recover attorney’s fees in its Miller Act action.

ENFORCEABILITY OF CONTRACT AS A WHOLE TO BE DETERMINED BY ARBITRATOR AND NOT A BASIS TO VACATE ARBITRATION AWARD

Posted on May 23, 2014May 23, 2014 by Edward Garber

Arbitration is a form of dispute resolution that parties elect in their contracts. With respect to construction contracts, the arbitration provision may provide that the parties will submit their dispute to the American Arbitration Association. A benefit to arbitration is that the dispute will be decided by an arbitrator or panel of arbitrators that theoretically have expertise in the subject matter of the dispute. A downside is that there is no great avenue to appeal or vacate an arbitrator’s award (absent very limited circumstances) even if a party believes the arbitrator misapplied the law.

An example of this downside can be found in The Village of Dolphin Commerce Center, LLC v. Construction Service Solutions, LLC, 39 Fla. L. Weekly D1065a (Fla. 3d DCA 2014), where an owner hired a contractor to construct a warehouse. At the time of contract, the contractor was not licensed. The contractor became licensed after the execution of the contract. The contractor proceeded with construction and, due to a payment dispute, recorded a construction lien. The contractor also filed a demand for arbitration with the American Arbitration Association pursuant to its contract. The owner answered the demand for arbitration and asserted as a defense that the contract was unenforceable pursuant to Florida Statute s. 489.128 which provides, “As a matter of public policy, contracts entered into…by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.” Section 489.128 further provides that, “[i]f a contract is rendered unenforceable under this section, no lien or bond claim shall exist in favor of the unlicensed contractor….”

The owner further filed a lawsuit in circuit court asking the court to declare that that the contractor’s claim of lien was unenforceable since the contractor was unlicensed at the time of contract. The contractor asserted a counterclaim (although it is uncertain what claims were asserted) and moved to compel arbitration; the circuit court stayed the action and compelled the parties to arbitrate the dispute.

During arbitration, the owner never objected to the arbitrator’s jurisdiction to rule on whether the contractor’s lack of license at the time of contract prevented it from enforcing the contract and the construction lien. “The rules of the American Arbitration Association specifically state that any objection to the panel hearing an issue must be submitted with the answering statement or it is determined that the panel will have jurisdiction.” The Village at Dolphin Commerce Center, supra.

The contractor prevailed in the arbitration and moved to enforce the arbitration award in circuit court. The owner moved to vacate the award based on the unenforceability of the contract and lien under s. 489.128 (because the contractor was not properly licensed at the time of its contract with the owner). The trial court affirmed the arbitration award and the owner appealed.

The issue on appeal was whether the arbitrator had jurisdiction to determine the enforceability of the contract and the lien pursuant to s. 489.128. The Third District held that it did:

“[T]he issue of enforceability was submitted to the panel and neither party objected. As such, based on the AAA [American Arbitration Association] rules, the panel had jurisdiction to determine the issue. To ask the trial court to revisit the issue would require the trial court to step into an appellate position. The Florida Arbitration Statutes do not provide for such. Pursuant to section 682.13, Florida Statutes, the authority of the trial court to vacate an arbitration award is very narrow.”

The Village at Dolphin Commerce Center, supra.

The Third District, relying primarily on the United States Supreme Court’s decision in Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204 (2006), as well as other Florida appellate decisions, maintained that when a party is challenging the legality / enforceability of a contract as a whole (versus only the arbitration provision), that determination MUST go to the arbitrator and not the court. For this reason, the Court held, “Those cases make clear that a trial or appellate court’s view that an arbitration panel wrongly decided the issue of illegality of a contract, and specifically illegality of a contract under section 489.128, is not a basis to vacate an arbitration award.” The Village at Dolphin Commerce Center, supra.

Now, there are interesting take-aways from this ruling that need to be considered:

If a party is arguing that a contract that contains an arbitration provision is unenforceable as a whole (such as being unenforceable because the contractor was not licensed at the time of contract), that determination should go to the arbitrator and not the court. Yet, even the Third District noted that the Fourth District in Jupiter Medical Center, Inc. v. Visiting Nurse Association of Florida, Inc., 72 So.3d 184 (Fla. 4^th DCA 2011), entered a ruling that conflicted with the United States Supreme Court (and, thus, the instant ruling) by stating: “If [a] contract is found to be illegal, a prior arbitration will not prevent the trial court from vacating the award.” The Village at Dolphin Commerce Center, supra, quoting Jupiter Medical Center, Inc., 72 So.3d at 186. How should this be reconciled with the instant ruling? If a party in arbitration under the rules of the American Arbitration Association wants to preserve its argument that the arbitrator does not have jurisdiction to rule on the enforceability of the contract and lien under s. 489.128, it needs to (a) timely object to the arbitrator’s jurisdiction in accordance with the American Arbitration Association’s rules to ensure this argument is not waived and (b) hope that the court agrees with the Fourth District’s ruling in Jupiter Medical Center that a court can vacate an arbitration award if a contract is found to be illegal. More than likely, however, the court will do exactly what the Third District did in The Village at Dolphin Commerce Center by holding that the arbitrator has the authority to determine the enforceability of a contract when the legality of the contract is be challenged as whole.

If a party wants to have the ability to appeal a ruling, particularly a ruling that involves a potentially incorrect application of the law, that party should NOT agree to a contract that contains an arbitration provision. There is no discussion in this case (and the appellate court likely did not know) why the arbitration panel overlooked the fact that the contractor was not properly licensed and/or the reasons it found that s. 489.128 did not apply. It did appear from the opinion, however, that the contractor was not properly licensed at the time of the contract and that s. 489.128 should have applied.

Determine whether the party being hired is licensed at the time of contract. Also, if a party is required to be licensed at the time of contract, it should get licensed in order to avoid having the other party to the contract argue that the contract and/or lien is unenforceable.

Recently, I discussed the Second District Court’s opinion in Snell v. Mott’s Contracting Services, Inc., 39 Fla. L. Weekly D1053a (Fla. 2d DCA), where the Court held that the contractor’s lien was unenforceable because the contractor did not timely enforce the lien in court after receiving a Notice of Contest of Lien. (See https://floridaconstru.wpengine.com/dont-forget-to-timely-foreclose-the-construciton-lien-in-court/). There is no discussion in The Village at Dolphin Commerce Center whether the contractor ever moved to foreclose its lien in court. Most likely, it asserted a lien foreclosure action in its counterclaim against the owner in court that was stayed pending the arbitration. However, if it did not, then there would remain an issue as to how the lien is enforceable if it was not timely foreclosed on in court.

DON’T FORGET TO TIMELY FORECLOSE THE CONSTRUCITON LIEN IN COURT!

Posted on May 22, 2014May 22, 2014 by Edward Garber

A Notice of Contest of Lien under Florida Statute s. 713.22 is a vehicle that will shorten the statute of limitations for a lienor to foreclose on a recorded construction lien from one year to 60 days from the date the lien is contested. A copy of a Notice of Contest of Lien is identified below. An unwary lienor that fails to timely foreclose on its claim of lien in court will be deprived of its lien rights!

The recent decision in Snell v. Mott’s Contracting Services, Inc., 39 Fla. L. Weekly D1053a (Fla. 2d DCA), illustrates such an unwary lienor. In this case, a contractor recorded a claim of lien on a residential project. The owner then filed a lawsuit against the contractor and the contractor moved to dismiss or stay the action based on an arbitration provision in the contract. The owner then filed a Notice of Contest of Lien to shorten the contractor’s statute of limitations to foreclose on the lien to 60 days. The contractor, however, never moved to foreclose its lien in court; the court compelled the dispute to arbitration.

The contractor prevailed in arbitration and the arbitrator found that the contractor was the prevailing party under Florida Statute s. 713.29 that entitles a prevailing party in a lien action to its attorney’s fees (i.e., a party that prevails on the significant issues in the action).

However, the two issues on appeal were: (1) whether the contractor could be entitled to its attorney’s fees under s. 713.29 when it failed to timely foreclose on its lien in court after it received the Notice of Contest of Lien and (2) whether the arbitrator, absent express agreement of the parties, had authority to determine entitlement to attorney’s fees.

As it pertains to the first issue, the Second District found that because the contractor failed to comply with s. 713.22 by foreclosing on its lien in court within 60 days after the lien was contested, the contractor was not entitled to attorney’s fees pursuant to s. 713.29. Stated simpler, the contractor was not entitled to attorney’s fees because it no longer had lien rights since it failed to timely foreclose on its lien in court within 60 days after the lien was contested by the owner.

As it pertains to the second issue, the Second District found that an arbitrator has no authority / jurisdiction to determine a party’s entitlement to attorney’s fees unless the parties to the arbitration expressly waive the right to have a court determine entitlement.

This cases raises a few important points:

Even if there is an arbitration provision in a contract, it is still imperative that a lien foreclose action be filed in court! File the lien action and simultaneously move to stay the lien foreclosure action pending the arbitration.

If you receive a Notice of Contest of Lien, do not forget that it operates to shorten the statute of limitations to foreclose on the lien to 60 days. Otherwise, the lien will not be enforceable.

If you want an arbitrator to determine the entitlement to attorney’s fees, it is good practice to ensure that the parties to arbitration expressly agree to grant the arbitrator this authority and waive the court’s authority to determine entitlement.

NOTICE OF CONTEST OF LIEN

To: (Name and address of lienor)

You are notified that the undersigned contests the claim of lien filed by you on ___, (year) , and recorded in ___ Book ___, Page ___, of the public records of ___ County, Florida, and that the time within which you may file suit to enforce your lien is limited to 60 days from the date of service of this notice. This ___ day of ___, (year) .

Signed: (Owner or Attorney)

For more information on Notice of Contests of Lien, please see: https://floridaconstru.wpengine.com/oh-no-a-lien-is-recorded-what-are-some-of-my-options/.

LIQUIDATED DAMAGES PROVISIONS IN SUBCONTRACTS (PARTICULARLY SUBCONTRACTS FOR PUBLIC PROJECTS)

Posted on May 18, 2014May 18, 2014 by Edward Garber

The assessment of liquidated damages should be a consideration to contractors on all projects, specifically public (federal and state) projects where the prime contract routinely contains a liquidated damages provision for delays to the completion of the project. Many times, the subcontract will contain a provision that will allow the prime contractor to pass-through liquidated damages assessed by the government (owner) to the responsible subcontractor. Well, what if the government did not assess liquidated damages? Can the prime contractor still assess liquidated damages against a responsible subcontractor in accordance with the subcontract? The opinion in U.S. f/u/b/o James B. Donahey, Inc. v. Dick Corp., 2010 WL 4666747 (N.D.Fla. 2010), would allow a prime contractor to assess liquidated damages against a subcontractor even if the government did not assess liquidated damages against the prime contractor.

In this case, a prime contractor entered into a contract to design and build four buildings at the Pensacola Navy Station and provided a Miller Act payment bond. The prime contractor hired a subcontractor to perform the plumbing and mechanical work. Due to delays the general contractor believed were caused by the subcontractor, it withheld substantial payment from the subcontractor. The prime contractor contended that the subcontractor caused 63 days of delay to the occupancy of the Visitors Quarters building and 32 days of delay to the Aviation Rescue Swimmers School building. The subcontract provided that in the event of delays, liquidated damages would be assessed in the amount of $5,400 per day for delay to the Aviation Rescue Swimmers School and $24,898 per day for delay to the Visitors Quarters.

The subcontractor filed a Miller Act lawsuit against the prime contractor and its surety (amongst other causes of actions). The prime contractor filed a counterclaim based on the liquidated damages that it assessed against the subcontractor, an amount in excess of what it was withholding. The subcontractor moved for summary judgment arguing that the liquidated damages provision was unenforceable (and the prime contractor could not assess liquidated damages) because the provision was a pass-through provision; thus, because the government did not assess liquidated damages against the prime contractor, the prime contractor could not assess liquidated damages against the subcontractor. The subcontractor further argued that the liquidated damages provision is unenforceable because it is being treated as a penalty because the subcontractor is not being provided the benefit of extensions of time granted by the government to the prime contractor that would negate delays. The prime contractor countered that nothing in the subcontract stated that liquidated damages could only operate as a pass-through claim, that being that the government had to assess liquidated damages before the prime contractor could assess liquidated damages against the subcontractor. The prime contractor further countered that the extensions of time granted by the government were irrelevant since they did not pertain to the subcontractor’s scope of work or affect the subcontractor’s milestone completion dates.

The Northern District of Florida agreed with the prime contractor and denied the subcontractor’s motion for summary judgment because it found the liquidated damages provision enforceable. The Northern District explained as it pertained to the subcontractor’s Miller Act payment bond claim:

“In considering a Miller Act claim, the trier of fact must thus look to the subcontract to determine the amount due. ‘[I]f the subcontract provides for a condition precedent to payment, or a part thereof, which is not fulfilled, the subcontractor cannot recover labor and material expenditures against the surety on the payment bond.’ In other words, if there has been a default by the subcontractor, the general contractor may assert recoupment or setoff as a defense. Because there is a genuine issue of material fact regarding the timeliness of Donaghey’s [subcontractor] performance and, therefore, Donaghey’s entitlement to the amounts withheld by Dick [prime contractor], summary judgment is inappropriate as to Donaghey’s Miller Act claim.”

Dick Corporation, 2010 WL at *3 quoting U.S. f/u/b/o Harrington v. Trione, 97 F.Supp. 522, 527 (D.C.Colo. 1951).

Stated differently, the Miller Act payment bond surety was entitled to rely on the prime contractor’s assessment of liquidated damages as a set-off / recoupment defense to the subcontractor’s Miller Act claim. Also, if there were other conditions precedent that the subcontractor failed to comply with, the Miller Act surety would be entitled to many of these defenses as well.

The Northern District further maintained that a liquidated damages provision under Florida law will be enforceable if the provision does not operate as a penalty, meaning damages upon a breach must not be readily ascertainable at the time of the contract and must not be grossly disproportionate to any damages reasonably expected to follow from the breach. Dick Corporation, 2010 WL at *4 quoting Mineo v. Lakeside Village of Davie, LLC, 983 So.2d 20, 21 (Fla. 4^th DCA 2008). The Court held that the liquidated damages provision did not operate as a penalty and it was not intended to operate only as a pass-through mechanism. See, e.g., U.S. f/u/b/o Sunbeam Equip. Corp. v. Commercial Constr. Corp., 741 F.2d 326, 328 (11^th Cir. 1984) (“The fact that the Navy did not assess liquidated damages as such against Commercial [prime contractor], would not foreclose recovery of delay damages, if Commercial could demonstrate that damages arising out of the subcontract with Sunbeam [subcontractor] were not otherwise compensated.”)

There are three important take-aways from this opinion:

Liquidated damages provisions in subcontracts can operate as more than a pass-through provision for liquidated damages assessed by the government (owner). These provisions can operate as a mechanism to assess liquidated damages against the subcontractor even if the government / owner has not assessed liquidated damages against the prime contractor. Prime contractors and subcontractors need to keep this in mind when drafting and negotiating liquidated damages provisions. If the intent is for the provision to only operate as a pass-through provision, this intent should be clearly stated in the subcontract. If the intent is for it to operate more than as a pass-through provision, then this risk needs to be considered by the subcontractor.

Liquidated damages are typically going to be deemed enforceable if they are not intended to operate as a penalty.

A Miller Act payment bond surety will be entitled to rely on set-off / recoupment affirmative defenses contained within the subcontract including, without limitation, the prime contractor’s assessment of liquidated damages or other delay damages against the subcontractor pursuant to the subcontract.

HAS A MATERIAL BREACH OF CONTRACT OCCURRED? CONSULT COUNSEL TO BEST DETERMINE RIGHTS!

Posted on May 17, 2014May 17, 2014 by Edward Garber

When a dispute arises, whether it is a payment dispute or otherwise, parties sometimes point the finger to the other party to argue that the other party breached the contract. What exactly does this mean? For a breach of contract to occur, the breach (or nonperformance) must be a MATERIAL BREACH. See Abbot Labs, Inc. v. Gen. Elec. Capital, 765 So.2d 737, 740 (Fla. 5^th DCA 2000). A material breach is one that goes to the essence of the contract versus a minor aspect of the contract. See Covelli Family, L.P. v. ABG5, L.L.C., 977 So.2d 749, 752 (Fla. 4^th DCA 2008). The Covelli Family Court explained:

“To constitute a vital or material breach, a party’s nonperformance must go to the essence of the contract. A party’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach.”

Id. (internal quotations and citations omitted).

Stated similarly:

“To constitute a vital or material breach a defendant’s nonperformance must be such as to go to the essence of the contract; it must be the type of breach that would discharge the injured party from further contractual duty on his part. Corbin, supra, s 1104. A defendant’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach. Corbin states, at s 1104, pp. 562-565:

‘. . . The injured party, however, can not maintain an action for restitution of what he has given the defendant unless the defendant’s non-performance is so material that it is held to go the ‘essence’; it must be such a breach as would discharge the injured party from any further contractual duty on his own part. Such a vital breach by the defendant operates, with respect to the right of restitution, in the same way that a repudiation of the contractual obligation would operate. A minor breach by one party does not discharge the contractual duty of the other party; and the latter being still bound to perform as agreed can not be entitled to the restitution of payments already made by him or to the value of other part performances rendered.‘”

Beefy Trail, Inc. v. Beefy King Intern, Inc., 267 So.2d 853, 857 (Fla. 1972) citing and quoting Corbin on Contracts, Vol. 5.

In numerous circumstances, nonpayment can constitute a material breach. See Scott v. Rolling Hills Place Inc., 688 So.2d 937 (Fla. 5^th DCA 1996) (finding that developer first breached contract by not paying engineer that discharged engineer of performance obligations). However, it is important for parties to consider that nonpayment does not automatically in of itself constitute a material breach. For instance, did the contract have a pay-if-paid clause? Did the party claiming nonpayment satisfy contractual conditions precedent to payment? Was the nonpaying party withholding money due to a performance issue such as defective or incomplete work? Was the payment late by a few days or was it never paid? Is the payment amount a relatively insignificant amount? Does the payment amount concern disputed amounts such as change orders or disputed defective or incomplete work? These are all questions that need to be a considered before a party takes an extreme position that it will no longer perform under the contract due to the nonpayment. A party should consult their written contract and counsel before taking any extreme position that the other party materially breached the contract to best determine the strategy and lay the foundation for the position.

The case of Marshall Const., Ltd. v. Coastal Sheet Metal & Roofing, Inc., 569 So.2d 845 (Fla. 1^st DCA 1990), illustrates the ramifications of a party without a written contract taking an extreme position due to nonpayment. In this case, a general contractor entered into a contract to repair and replace roofs on three buildings at a Florida State Hospital. The general contractor then entered into an oral contract with a roofing subcontractor. During construction, a water leak arose with the new roof installed on one of the buildings. Both the general contractor and subcontractor appeared to agree that the new roof was defective and needed to be replaced. However, the subcontractor could not finance the repair / replacement work without getting paid for the work it had performed. The subcontractor was not paid for the work performed and determined that it would not perform any more work until it was paid. As a result, the general contractor terminated the subcontractor and hired a new roofing subcontractor to finish the balance of the roofing work and replace the defective roof. The subcontractor then sued the contractor for breaching their oral contract. The trial court ruled in favor of the subcontractor; the First District Court of Appeal reversed maintaining that the subcontractor actually committed the material breach:

“It is undisputed that Coastal [roofer] failed to install the roofing system on the east wing as required under the contract. When Coastal refused to repair the roof without further payment, it committed a material breach. Marshall [general contractor] was entitled to treat the breach as a discharge of its duty to pay Coastal until such time as Coastal repaired the defective roof and fulfilled its contractual duties. In light of the fact that the terms of the [general contractor’s] contract [with the owner] required substantial completion by July 25, 1988, and that Coastal refused to return to work until it was paid, Marshall was completely justified in determining that a material breach had occurred and ordering Coastal off the job.

We find no substantial, competent evidence to support a finding that Marshall [general contractor] breached the contract. The undisputed evidence demonstrates that Coastal [roofer] committed a material breach of the contract. This breach excused Marshall’s obligation to pay Coastal until the roof was repaired. We therefore reverse and remand for a new trial on damages and liability.”

Marshall Const., 569 So.2d at 848 (internal citations omitted).

Now, this case demonstrates why oral contracts are disfavored because rights and obligations are amorphous. Nothing is clearly defined and there is no written agreement to consult. If there was a written contract, most likely there would be a pay-if-paid provision in which the general contractor’s payment to the subcontractor was conditioned on its receipt of payment from the owner. It is uncertain whether the owner paid the general contractor for the defective work; if the owner did not, then the general contractor’s payment obligation would not have been triggered. But, let’s assume the owner did pay the general contractor. Well, the subcontract most likely contained a clause pertaining to defective work that would authorize the subcontractor to fix the work at its own costs and also entitle the general contractor to withhold sums as the result of incomplete or defective work. For instance, the standard form agreement between a contractor and subcontractor published by the ConsensusDocs (Document 750) contains the following provisions:

3.22.2.1 If the Architect/Engineer or Contractor rejects the Subcontract Work or the Subcontract Work is not in conformance with the Subcontract Documents, the Subcontractor shall promptly correct the Subcontract Work whether it had been fabricated, installed or completed. The Subcontractor shall be responsible for the costs of correcting such Subcontract Work, any additional testing, inspections, and compensation for services and expenses of the Architect/Engineer and Contractor made necessary by the defective Subcontract Work.

10.1.1 NOTICE TO CURE If the Subcontractor refuses or fails to supply enough properly qualified workers, proper materials, or maintain the Progress Schedule, or fails to make prompt payment to its workers, subcontractors or suppliers, or disregards laws, ordinances, rules, regulations or orders of any public authority having jurisdiction, or otherwise is guilty of a material breach of a provision of this Agreement, the Subcontractor shall be deemed in default of this Agreement. If the Subcontractor fails within three (3) business Days after written notification to commence and continue satisfactory correction of the default with diligence and promptness, then the Contractor without prejudice to any other rights or remedies, shall have the right to any or all of the following remedies:

10.1.1.1 supply workers, materials, equipment and facilities as the Contractor deems necessary for the completion of the Subcontract Work or any part which the Subcontractor has failed to complete or perform after written notification, and charge the cost, including reasonable overhead, profit, attorneys’ fees, costs and expenses to the Subcontractor;

10.1.1.2 contract with one or more additional contractors to perform such part of the Subcontract Work as the Contractor determines will provide the most expeditious completion of the Work, and charge the cost to the Subcontractor as provided under Clause 10.1.1.1; or

10.1.1.3 withhold any payments due or to become due the Subcontractor pending corrective action in amounts sufficient to cover losses and compel performance to the extent required by and to the satisfaction of the Contractor.

These provisions would hurt a subcontractor’s argument that it should get paid for work performed, including defective work performed, so that it could finance the repairs.

Again, before extreme positions are taken, a party should absolutely consult their written contract to determine rights, obligations, and risks they agreed to. Having a lawyer involved on the front end during the contract negotiation can help a party negotiate and/or appreciate the risks they are agreeing to. Even if a lawyer was not involved on the front end, having the lawyer involved when difficult issues arise during the course of construction will allow a party to preserve rights / arguments and take positions or avoid positions based on a determined strategy. As the expression goes, “An ounce of prevention is worth a pound of cure!”

TERMINATION FOR CONVENIENCE IN FEDERAL GOVERNMENT CONTRACTS

Posted on May 13, 2014May 13, 2014 by Edward Garber

Termination for convenience clauses are standard (and required) contractual clauses in federal government contracts and will be read into the contract even if not specifically incorporated. See G.L. Christian and Assocs. v. U.S., 160 Ct.Cl. 1 (Ct.Cl. 1963). The clause allows the government to terminate the contract at its discretion if it is in the government’s interest to do so. Yet, even though the government (through the contracting officer) has discretion to exercise the termination for convenience provision, it cannot do so with “bad faith” or with an “abuse of discretion”, although proving that that the government acted in bad faith or abused its discretion is extremely challenging because government officials are presumed to act in good faith. See T&M Distributors, Inc. v. U.S., 185 F.3d 1279 (Fed. Cir. 1999). The Court of Federal Claims explained this challenging legal standard to establish that the government improperly exercised its termination for convenience provision:

“The Federal Circuit—and the former Court of Claims—have recognized that an improper termination for convenience may give rise to a breach of contract claim when the agency (1) terminates the contract in bad faith or (2) abuses its discretion in its decision to terminate the contract. If a contractor can demonstrate that the agency’s termination for convenience was improper, the contractor will not be limited to damages identified in the termination for convenience clause. In such a case, traditional common law damages for breach of contract will be available to the contractor.

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Contractors face a high burden of proof for demonstrating an agency acted in “bad faith” by terminating the contract for convenience. To establish a breach based on bad faith in this context, the contractor must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor.

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In determining whether the CO clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.” TigerSwan, Inc. v. U.S., 110 Fed.Cl. 336, 345 (Fed.Cl. 2013) (internal citations omitted).

One instance of bad faith / abuse of discretion could arise if the government terminates the contractor simply to acquire a better bargain or price from another contractor. See Krygoski Const. Co., Inc. v. U.S., 94 F.3d 1537, 1541 (Fed. Cir. 1996) (“A contracting officer may not terminate for convenience in bad faith, for example, simply to acquire a better bargain from another source.”). Another instance of bad faith / abuse of discretion may exist if the government contracts with a party knowing full well that it has no intent to honor the terms of the contract. See Torncello v. U.S., 231 Ct.Cl. 20 (Ct.Cl. 1982).

This bad faith / abuse of discretion component to the exercise of termination of convenience provisions may also be applied if a prime contractor terminates a subcontractor on a federal project. See Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221 (10^th Cir. 1999) (explaining that if subcontractor proved termination was in bad faith it could have recovered breach of contract damages).

An example of standard termination for convenience language for fixed sum contracts is included in the Federal Acquisition Regulations, 48 CFR 52.249-2:

“(a) The Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government’s interest. The Contracting Officer shall terminate by delivering to the Contractor a Notice of Termination specifying the extent of termination and the effective date.” (See also 48 CFR 52.249-6 which provides for standard termination for convenience language for cost-reimbursement contracts).

The termination for convenience language in the Federal Acquisition Regulations is substantially longer than what was provided above, but the point is that the government can simply terminate for convenience if it is in its interest.

When a fixed sum contract is terminated for convenience, the contract “is essentially converted into a cost reimbursement contract.” White Buffalo Const., Inc. v. U.S., 52 Fed.Cl. 1, 3 (Fed.Cl. 2002). The Federal Acquisition Regulations–sections noted above–govern what costs a contractor is entitled to recover when the contract is terminated for convenience. Basically, “[t]he clause limits the contractor’s recovery to costs incurred prior to the termination, a reasonable profit on the work performed, and certain additional costs associated with the termination. Anticipatory profits and consequential damages are not recoverable.” Best Foam Fabricators, Inc. v. U.S., 38 Fed.Cl. 627, 637-38 (Fed.Cl. 197). Thus, when a contact is terminated for convenience, the contractor cannot recover anticipated profits on the balance or unperformed part of the construction work. To recover these damages, the contractor will need to argue that the government breached the contract by exercising the termination for convenience provision in bad faith or with an abuse of discretion. These damages are a major reason why a contractor would argue that the government wrongly exercised the termination for convenience provision. See TigerSwan, 110 Fed.Cl. at 345.

If a contractor on a federal project is terminated for convenience or believes it will be terminated for convenience in the immediate future, it is imperative for that contractor to seek counsel to determine its rights. These rights can include assistance in determining the recoverable costs under the Federal Acquisition Regulations and whether to pursue breach of contract damages for a wrongful termination for convenience for damages that would not be covered under the Federal Acquisition Regulations.

SUPPLIER’S BURDEN OF PROOF IN A MILLER ACT PAYMENT BOND CLAIM

Posted on May 10, 2014May 10, 2014 by Edward Garber

Unknown What does a supplier need to do to prove a Miller Act payment bond claim? A supplier must prove the following elements:

“(1) the plaintiff supplied materials in prosecution of the work provided for in the contract; (2) the plaintiff has not been paid; (3) the plaintiff had a good faith belief that the materials were intended for the specified work; and (4) the plaintiff meets the jurisdictional requisites of timely notice and filing [of the Miller Act].” Jems Fabrication, Inc., USA v. Fidelity & Deposit Co. of Maryland, 2014 WL 1689249 (5^th Cir. 2014).

As you can see, the burden of proof for a supplier in a Miller Act claim is not overly challenging, especially if the supplier has delivery or shipping tickets establishing that it delivered materials to the specific project and/or that its customer ordered the materials for the specific project. If there is a purchase order with the supplier and its customer for the project that would also help support that the materials were supplied for purposes of that project. And, if the supplier’s customer’s contract / subcontract requires the customer to supply those same materials for the project, that also helps to support that the materials were intended for the prosecution of the work. But, importantly, it is irrelevant whether the supplier actually delivered the materials to the project or that the materials were incorporated into the project. See U.S. f/u/b/o Carlson v. Continental Cas. Co., 414 F.2d 431, 433 (5^th Cir. 1969) (affirming summary judgment in favor of supplier where supplier showed it had good faith that the materials were supplied for specific project although supplier did not establish that materials were actually incorporated into project).

But, even though the materials do not necessarily have to be incorporated into the project, the supplier’s claim will still be subject to the standard that the materials were supplied for the prosecution of the work provided for in the contract and that the supplier had a good faith belief that the materials were intended for the specified work. For example, in Erb Lumber Co. v. Gregory Industries, Ltd., 769 F.Supp. 221 (E.D.Mich. 1991), the supplier’s customer opened an account with the supplier for multiple projects. However the supplier’s claim for unpaid materials for the specific federal project at-issue included materials supplied AFTER the project was certified as complete and were likely used for one of its customer’s other projects. For this reason, the court expressed, “Indeed, given that contract work was certified as complete prior to any delivery materials by Erb [supplier], it is impossible for any of the materials to have been provided in prosecution of the contract work….Good faith delivery is not a substitute for supplying materials in prosecution of work provided for in the contract.” Erb Lumber, 769 F.Supp. at 225.

If you are a supplier, it is important to understand your burden of proof and the elements you need to prove in a Miller Act payment bond claim. If you are a surety or prime contractor defending the surety, it is also important to understand the supplier’s burden of proof to appropriately defend the claim and evaluate a potential resolution to the claim if it appears clear the materials supplied were used in the prosecution of the work.

For more information on the preservation of a Miller Act payment bond claim, please see: https://floridaconstru.wpengine.com/miller-act-payment-bond-and-third-tier-subs-or-suppliers/.

GARDEN VARIETY PAYMENT DISPUTE BETWEEN OWNER AND CONTRACTOR

Posted on May 8, 2014May 8, 2014 by Edward Garber

Payment disputes between owners and contractors are common. The recent case of Hibachi Grill, Inc. v. Arki Construction, Inc., 39 Fla. L. Weekly D954a (Fla. 3d DCA 2014), illustrates two common scenarios that exist in the payment dispute: (1) the contractor claims it is owed the full contract price for substantially performing the work and (2) the owner wants to setoff amounts that it paid directly to subcontractors.

This case turned on the contractor’s approximate $32,000 breach of contract claim against the owner for unpaid contract balance for building out leased space. Both the owner and contractor agreed that the owner paid approximately $14,000 directly to subcontractors. The owner argued that this amount should reduce the contractor’s $32,000 claim; however, the trial court entered a judgment for the contract balance that did not include this set-off. The Third District agreed that the owner’s direct payment to subcontractors should reduce the contractor’s claim; otherwise, the contractor would receive a windfall since it no longer has to pay those subcontractors.

The owner further argued that the contractor’s unpaid contract balance claim should be further reduced by “lost profit” that was included in the contractor’s unpaid contract balance claim. To support this argument, the owner relied on inapplicable cases where contracts were breached BEFORE substantial performance of the contract was achieved. However, when the contractor substantially performs, it is entitled the full contract price subject to appropriate deductions. In the instance case, the deduction was the payment the owner made directly to subcontractors. In other situations, the owner could deduct deficient work from the contract price. See, e.g., Wm. Dejon Developers, Inc. v. Panhandle Grading & Paving, Inc., 538 So.2d 88 (Fla. 1^st DCA 1989) (deducting from full contract price of roadwork the amount of the contractor’s deficient work); Oven Development Corp. v. Molisky, 278 So.2d 299 (Fla. 1^st DCA 1973) (discussing that contractor that substantially performs is entitled to full contract price subject to proper deductions from the owner supported by competent evidence of the contractor’s breaches).

This case would support an owner’s position that it can pay subcontractors directly to reduce the amount owed to the contractor. In many situations, this is totally acceptable. The contractor may agree to the payment owed to the subcontractors either through a direct payment or joint check. In other situations, such as when the subcontractor properly preserved lien rights, the owner may want to preserve its right to pay those subcontractors in consideration of releases of lien to ensure its property does not get liened by the subcontractor. However, what about the situation where the owner pays a subcontractor that otherwise has no lien rights? According to this case, the owner could do so to reduce its payment to the contractor since the contractor would owe that money to the subcontractor. Yet, by the owner doing so, especially if it does so unilaterally, it prevents the contractor from potentially resolving a dispute with the subcontractor that the owner is not fully informed about (and which could include work that formed a basis as to the owner’s dispute with the contractor). And, it prevents the contractor from negotiating a final payment amount with the subcontractor so that it can, in turn, negotiate a final payment amount with the owner that is less than its contract balance. So, while this case explains the windfall to the contractor without the deduction for the owner’s direct payment to subcontractors, that windfall may not always be the case.

And, this case demonstrates the importance of how a contractor that substantially performed should present its damages. A contractor that substantially performs is entitled to the contract price subject to applicable deductions that the owner proves with competent evidence (e.g., deficient work, payment to subcontractors, etc.).