Monthly Archives: August 2014

THE CLEVER ACCORD & SATISFACTION DEFENSE

Posted on by

UnknownA dispute concerning amounts owed (whether owed from an owner to contractor, a contractor to subcontractor, a subcontractor to supplier, etc.) is routine on a construction project.  Even in these disputes, the party responsible for owing  money may recognize there is an undisputed amount actually owed to the other party, although not the amount the other party claims.  While I am a believer in tendering undisputed funds, sometimes there are clever and strategic ways to tender that money.

 

For instance, the defense of accord and satisfaction is a defense that the party receiving the money deposited the money in full satisfaction of a disputed claim.  The decision in St. Croix Lane Trust & M.L. Shapiro, Trustee, v. St. Croix at Pelican Marsh Condominium Association, 2014 WL 3882458 (2d DCA 2014), while not a construction dispute, illustrates strategy in tendering money in full satisfaction of a claim and then relying on the defense of accord and satisfaction.  In this case, a condominium association foreclosed on a unit for unpaid assessments.  The unit was sold at a foreclosure sale to a Trust for $100.  The $100 was insufficient to pay the association the amount of its foreclosure judgment so the association sent a letter to the Trust advising that the Trust owed the association unpaid assessments that accrued on the unit prior to the foreclosure sale (in excess of $30,000).   The Trust disputed the amount it owed and thought it owed $840.  In this regard, the Trust sent a letter to the association (through counsel) stating, “[I]n a good faith effort to resolve this matter I have enclosed herewith a check in the amount of $840.00….Be advised and warned, this check is tendered in full and final satisfaction of all claims made against the Trust and the property….”  Despite this letter accompanying the check, the association negotiated the check and then threatened to foreclose a lien it recorded against the Trust’s unit due to the dispute.    The Trust filed a lawsuit seeking declaratory relief whether it owed the association any money. An argument it raised was accord and satisfaction since the association negotiated the $840 check clearly sent in full satisfaction of all claims.

 

On appeal, the Second District agreed with the Trust that accord and satisfaction applied to discharge the Trust of any more monies owed relating to the dispute.  The Second District relied on Florida Statute s. 673.3111 that provides:

 

“(1) If a person against whom a claim is asserted proves that that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, that the amount of the claim was unliquidated or subject to a bona fide dispute, and that the claimant obtained payment of the instrument, the following subsections apply.

 

(2) Unless subsection (3) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.”

 

Furthermore, Florida case law defines an accord and satisfaction as follows:

 

 “An accord and satisfaction results as a matter of law when the creditor accepts payment tendered on the expressed condition that its receipt is deemed to be a complete satisfaction of a disputed issue. This court has long held that cashing a check containing language that it is in full payment of the debtor’s obligations creates an accord and satisfaction with regard to the claim for which payment was tendered.”

United Auto Ins. Co. v. Palm Chiropractic Center, Inc., 51 So.3d 506, 509 (Fla. 4th DCA 2010) (internal citation omitted)

 

 

If you are trying to devise clever strategy to set up an accord and satisfaction defense, you can send undisputed money with an accompanying letter clearly expressing that the money is in full and final satisfaction of the claim / dispute.  Or, clearly delineate this point on the check.  The recipient should not negotiate the check and should instead return it.  If the money is truly undisputed, the paying party can always re-tender that money to take that undisputed amount off the table without conditioning it as a full settlement of the claim. But, if the check is negotiated, as it was in this case, the party has just set up an accord and satisfaction defense!

 

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.

 

A BUILDER’S RISK INSURANCE TIDBIT

Posted on by

imagesCT1IPCAYBuilder’s risk insurance is a form of all-risk property insurance that protects an owner’s property / project from perils during the course of construction subject to the exclusions identified in the policy. Sometimes there is the question when negotiating a contract between an owner and general contractor whether to name the contractor as an additional named insured (along with the owner) and/or a loss payee under the builder’s risk insurance policy procured by the owner.  A contractor prefers, and should prefer, to be included as a named insured and/or loss payee to ensure it is protected and paid for a covered loss during construction. In reality, it is much better for the contractor to be identified as a named insured; being identified as a loss payee simply means the contractor can be paid insurance proceeds (it can be named on the check), but it is not an insured under the policy.

 

 

Each of the standard form construction agreements contain slightly different language regarding a contractor’s interest under a builder’s risk policy procured by the owner.  For example, the AIA would require the builder’s risk insurance to include the interests of the owner, the general contractor, subcontractors, and sub-subcontractors.  Ok; this makes sense but it does not specifically require the owner to name these entities as named insureds under the policy and/or loss payees. Rather, the AIA contains language that allows the owner to adjust the claim as a fiduciary with the payment made to the owner as a fiduciary.  The ConsensusDOCS provide better language for the contractor that would require the owner to name the contractor as a named insured.  Again, being identified as a named insured is preferable as it allows the contractor to assert a builder’s risk claim directly against the policy as an insured.  And, from an owner’s perspective, sometimes it is preferable to allow the contractor to assert a claim for a loss associated with a peril that may be covered even if the peril is due to the negligence of the contractor.  While the standard form contracts require the owner to bear the cost of the deductible, an owner may want to shift that deductible to the contractor if the contractor is seeking to recoup losses under the policy for a peril due to its negligence.

 

Finally, the standard form contracts do contain a waiver of subrogation for losses against the owner, contractor, subcontractors, etc. to the extent covered by property insurance.  This means that the property insurer is waiving rights to recoup insurance proceeds it paid associated with a claim against a third party included in the waiver of subrogation provision.  This provision should not be deleted as the contractual waiver of subrogation benefits both the owner and contractor.

 

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.

 

 

ARE YOU FAMILIAR WITH SUBCONTRACTOR DEFAULT INSURANCE (SUBGUARD)?

Posted on by

UnknownAre you familiar with subguard?  If not, subguard is an insurance product also known as subcontractor default insurance.  It is an insurance product obtained by the general contractor and subcontractors are enrolled by the contractor into the subguard program; the general contractor does the prequalification based on the subcontractors and suppliers it wants to utilize.  The general contractor can recover its losses (direct and indirect) from defaulting subcontractors (including consequential losses, losses from defective work, losses from a defaulting subcontractor’s non-payment to others, etc.).  Subguard is typically more cost effective than requiring subcontractors to obtain performance bonds and allows the general contractor to recover losses (above a deductible) much quicker than if there was a subcontractor performance bond.  (Subguard is not the only subcontractor default insurance product on the market, but it is perhaps the most recognized product.  For purposes of this article, subguard will refer to all subcontractor default insurance products.)

 

Large general contractors on large-scale projects prefer subguard versus requiring subcontractors to obtain performance bonds considering general contractors are in a position to prequalify subcontractors and remedy a potential subcontractor default (without having to jump through the required performance bond hoops that could result in further financial loss to the contractor while the claim is being investigated by the surety).    Unlike a performance bond where there is the principal, the surety, and the obligee, with subguard, there is only the general contractor–the insured that obtains the subguard–and the insurance company.  Subcontractors, while enrolled in the program, are not parties to the policy; the general contractor is the only party that can submit a claim on the subguard policy.

 

Subguard is a first party insurance policy but it works different than a typical first party insurance policy.  The general contractor obtains a subguard policy with a policy limit and (large) per claim deductibles / self-insured retentions.  The policy is written for a set period of time (in numerous instances the 10 year statute of repose period).  When there is a claim, after the general contractor pays its deductible, there is a co-pay requirement where the general contractor and subguard insurer share in the losses until the general contractor pays a retention aggregate amount which is the capped amount the general contractor will have to pay relating to a claim.  Once the cap has been paid, the subguard insurer pays the balance of the claim up to the policy limit.  The sentiment is with a large deductible and co-pay requirement until an aggregate amount is paid, the general contractor has more incentive to prequalify subcontractors, manage the work, and eliminate subcontractor default since the contractor has a vested financial interest to prevent the default from occurring.  For example, a subguard policy can have a large deductible of $500,000, a retention aggregate of $1,000,000, and require the contractor to pay 20% of the loss after the $500,000 deductible.  So, if a subcontractor default costs the contractor $2,500,000, the contractor will pay the first $500,000 and then 20% of the remaining $2,000,000 up to its retention aggregate.  In this example, the contractor would have to pay another $400,000 (20% of the $2,000,000), which would be a total of $900,000 and below its retention aggregate of $1,000,000.  The subguard insurer would be responsible for the remaining portion of the claim.

 

Additionally, a contractor that is well equipped at managing subcontractor defaults may procure a subguard policy with a retrospective premium agreement. This is advantageous to the experienced contractor because deposit premium (sometimes referred as the experience portion of the premium) can be returned to the contractor based on no subcontractor defaults or minimal claims on the policy that the deposit portion of the premium would be applied to.

 

From an owner’s perspective, subguard is not a substitute for requiring the general contractor to obtain a performance and payment bond.  A major reason being that the owner is not an insured under the policy.  With that said, subguard is a valuable alternate to requiring subcontractors to obtain performance and payment bonds and is a product on large projects by large contractors that an owner should consider since most of the work will be performed by subcontractors (and, as mentioned above, it is typically more cost effective than requiring subcontractors to be bonded).  With subguard, the general contractor is bearing the risk (with no excuses) for subcontractor default since it obtained an insurance product to specifically cover this risk (and the direct and indirect losses associated with this risk) and, thus, is incentivized to best manage the trades and eliminate default.

 

Check out this presentation for more information on subcontractor default insurance as an alternative to subcontractor performance bonds.

 

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.

 

 

A “LOSS RUNS” IS…

Posted on by

Loss-Runs-ExampleEver hear the terms “loss runs” or “loss runs report?”  These are actually common terms in the insurance industry. Insurance companies generate loss runs reports that reflect a history of the claim activity on your policies.  In other words, loss runs reports document claim history on a particular policy which is taken into consideration when an insurance company is underwriting a policy (including renewing a policy) and determining rates  / the premium for the policy.  The loss runs report will itemize the respective claims and will include the amount paid on a claim or held in reserve (set aside) to cover the claim provided the claim remains open.  The amount an insurer pays out on claims in addition to the amount held in reserve to cover claims are important determinations that affect the rate / premium of the policy.

 

An insured interested in their loss runs history or interested in procuring insurance can obtain their loss runs history from their insurer (or requesting directly from their broker).  Understanding claims history is important which is why requesting this important piece of underwriting information can be beneficial to you.

 

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.

DIFFERING SITE CONDITIONS: TYPE I & TYPE II CLAIMS

Posted on by

imagesIt is not uncommon for contractors, especially foundation and civil contractors, to encounter unanticipated site conditions.  These conditions are known as “differing site conditions.”    In government contracting, there is a differing site conditions clause (F.A.R. 52.236-2 shown at the bottom of this posting that is routinely incorporated into prime contracts and subcontracts through flow-down provisions) that identifies two types of differing site conditions.

 

Type I differing site conditions are “subsurface or latent physical conditions at the site which differ materially from those indicated in the contract.”  F.A.R. 52.236-2.  Type II differing site conditions, on the other hand, are “unknown physical conditions at the site, of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract.”  Id.

 

If a contractor complies with the differing site conditions clause and proves the differing site condition, it should be entitled to an equitable adjustment from the government.  The objective behind the differing site conditions clause is to prevent contractors from including fluff in their prices to account for contingencies and unknown conditions since the government will equitably adjust the contract based on these conditions.  In reality, though, the contractor still bears the burden of proving the differing site condition which is oftentimes more challenging than it sounds.  It is important for contractors to understand the difference between Type I and Type II differing site conditions so that they know what is necessary to support an appropriate adjustment to their contract (from a dollar and time standpoint).

 

 

I. Type I Differing Site Condition (subsurface or latent conditions differing materially from contract):

 

There are six elements to a Type I differing site conditions claim that a contractor must prove:

 

“(1) that the contract affirmatively indicated subsurface conditions upon which the contractor’s claims are based; (2) that the plaintiff acted as a reasonably prudent contractor in interpreting the contract documents; (3) that the contractor reasonably relied on the indications of subsurface conditions in the contract; (4) that the subsurface conditions actually encountered differed materially from subsurface conditions indicated in the contract; (5) that the subsurface conditions encountered were reasonably unforeseeable; and (6) that the contractor’s claimed excess costs were solely attributable to the materially different subsurface conditions.”

Weston/Bean Joint Venture v. U.S., 115 Fed.Cl. 215, 218 (Fed.Cl. 2014).

 

These conditions are in addition to the initial notice requirement that the contractor must give the contracting officer before proceeding with the alleged additional work.  See Id. at 218, n.2 citing F.A.R. 52.236-2.  Timely notice should always be given, especially notice before the work commences, to take away any argument that notice was not properly or timely provided to the government.

 

The contractor should also submit any request for equitable adjustment or claim based on the six elements.  This means the contractor needs to point out the subsurface or latent conditions that were indicated in the contract documents and the reasoning / factual basis supporting the different subsurface conditions that the contractor encountered.  This is important because a contractor will not succeed with its Type I differing site conditions claim without showing what the contract indicated. As the United States Court of Federal Claims explained:

 

“A contractor cannot prevail on a claim for a Type I differing site condition unless the contract indicated what that condition would be.  However, the indication in the contract need not be explicit or specific if it provide[s] sufficient grounds to justify a bidder’s expectation of latent conditions materially different from those actually encountered. There must be reasonably plain or positive indications in the bid information or contract documents that such subsurface conditions would be otherwise than actually found in contract performance ….  Determining what the contract indicated requires contract interpretation performed by stepping into the shoes of a reasonable and prudent contractor and decid[ing] how such a contractor would act in interpreting the contract documents.”

All Power, Inc. v. U.S., 60 Fed.Cl. 679, 684 (Fed.Cl. 2004) (internal citations and quotations omitted).

 

The contractor should also endeavor to separately cost code and track its costs (manpower, equipment, subcontractor(s), etc.) solely relating to the differing site condition.

 

 

 

 II. Type II Differing Site Condition (unknown physical conditions at the site differing materially from those ordinarily encountered and generally recognized): 

 

There are three elements to a Type II differing site conditions claim that a contractor must prove: “(1) the condition must be unknown to the contractor; (2) unusual; and (3) materially different from comparable work.”  All Power, 60 Fed.Cl. at 685.  Type II claims are harder to prove because the contractor carries a heavier burden “since there is a greater duty to conduct pre-bid inquiries or reasonable site inspections inasmuch as recovery is available only if the condition is unknown, which means it would not have been revealed upon inquiry or during a reasonable site investigation.”  Totem Construction, ASBCA 35985, 1990 WL 224243 (1990).

 

Similar to a Type I claim, the contractor must provide timely notice and endeavor to separately cost code and track the additional work it incurs in furtherance of supporting a request for equitable adjustment or claim.

 

 

52.236-2 Differing Site Conditions.-                                                                                                                                                                                               
(a) The Contractor shall promptly, and before the conditions
are disturbed, give a written notice to the Contracting
Officer of—
(1) Subsurface or latent physical conditions at the site
which differ materially from those indicated in this contract;
or
(2) Unknown physical conditions at the site, of an
unusual nature, which differ materially from those ordinarily
encountered and generally recognized as inhering in work of
the character provided for in the contract.
(b) The Contracting Officer shall investigate the site conditions
promptly after receiving the notice. If the conditions
do materially so differ and cause an increase or decrease in the
Contractor’s cost of, or the time required for, performing any
part of the work under this contract, whether or not changed
as a result of the conditions, an equitable adjustment shall be
made under this clause and the contract modified in writing
accordingly.
(c) No request by the Contractor for an equitable adjustment
to the contract under this clause shall be allowed, unless
the Contractor has given the written notice required; provided,
that the time prescribed in paragraph (a) of this clause for

giving written notice may be extended by the Contracting Officer.

(d) No request by the Contractor for an equitable adjustment
to the contract for differing site conditions shall be
allowed if made after final payment under this contract.

 

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.

DON’T INCLUDE AN ARBITRATION PROVISION IN YOUR CONTRACT IF YOU DON’T WANT TO ARBITRATE!

Posted on by

images-1Arbitration as the method of dispute resolution is based on your contract.  If you don’t want to arbitrate, do not (I repeat, do not) include an arbitration provision.  If you ultimately have no choice and need to agree to a contract that includes an arbitration provision, understand that this provision will be enforced unless the parties agree to waive it.

 

The recent case of Bari Builders, Inc. v. Hovstone Properties Florida, LLC, et al., 39 Fla. L. Weekly D1648a (Fla. 4th DCA 2014), exemplifies what happens if you include an arbitration provision.  In this case, a condominium association sued the developer for construction defects.  The developer (that may have also served as the general contractor / home builder) third-partied in its subcontractors.  However, there was a binding arbitration provision in the subcontract.  Subcontractors, therefore, moved to compel arbitration of the developer’s claims against them.  The developer, naturally, did not want to arbitrate its third-party claims against subcontractors when it was being sued by the condominium association.  It makes more sense to wrap up the disputes in one matter.  The developer tried to argue around arbitration by arguing that the arbitration provision in its contract was ambiguous because another place in the contract said, “In all actions the parties waive the right to jury and agree to determination of all facts by the court.”   The Fourth District Court of Appeal disagreed with the developer’s ambiguity argument and reconciled this language:

 

“[T]he jury waiver language in the subcontract does not render the arbitration provision ambiguous, as the two provisions can be reconciled in favor of arbitration.  Read together, the provisions provide that the parties agree to submit any ‘controversy or claim’ to arbitration and, thereafter, any award may be reduced to judgment in court without the right to a jury trial.  Additionally, in the event that the parties choose to waive their right to arbitration, the clause provides that any ‘action’ in court will be in the form of a bench trial.”

Bari Builders, supra.

 

As shown in this case, courts will favor arbitration when there is an arbitration provision in the contract.  If parties prefer arbitration, and specifically if arbitration is preferred by a general contractor, the contract should include language that in the event the general contractor is sued by the developer or association (or any third-party), the general contractor, at its sole discretion, can waive arbitration and the parties are bound to the forum governing the dispute against the general contractor.  In other words, the general contractor has the authority to join in the subcontractor to any dispute it is involved in irrespective of the arbitration provision.

 

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.

THE IMPORTANCE OF AN EFFECTIVE NOTICE OF COMMENCEMENT ON YOUR LIEN RIGHTS

Posted on by

imagesContractors, subcontractors, and suppliers need to appreciate the importance of an EFFECTIVE Notice of Commencement.    This recorded document, among other things, governs the priority of YOUR lien rights on a private construction project because a construction lien RELATES BACK in time to an effective Notice of Commencement.

 

The Notice of Commencement is recorded in the public records where the project is located.  It is a statutory form (per Florida Statute s. 713.13) and gives the lienor the required information about the project so that the lienor can preserve its lien / bond rights.  A copy of the Notice of Commencement form is included at the bottom of this posting.   The Notice of Commencement must be recorded within 90 days of construction otherwise the Notice is invalid.

 

The Notice of Commencement is effective for 1 year unless a different expiration date is specified.  If a project is going to last longer than a year, a more realistic expiration date should be specified.  However, the Notice of Commencement can be amended at any time within its effective period to extend the expiration date.  The amended Notice of Commencement should reflect that it is amending the original Notice of Commencement that is recorded (and specify the book and page of the recording) and a copy must be served by the owner on the contractor and any other lienor that served a Notice to Owner to preserve its lien rights “before or within 30 days after the date the amended notice is recorded.”  Fla. Stat. s. 713.13(5)(b).

 

In demonstrating the importance of an effective Notice of Commencement, Section 713.13(6) provides:

 

“Unless otherwise provided in the notice of commencement or a new or amended notice of commencement, a notice of commencement is not effectual in law or equity against a conveyance, transfer, or mortgage of or lien on the real property described in the notice, or against creditors or subsequent purchasers for a valuable consideration, after 1 year after the date of recording the notice of commencement.”

 

 

What does this mean?  The best way to explain is to apply this statutory language to the following facts of a condominium project:

 

Construction loan recorded on 1/1/09.

Notice of Commencement recorded on 5/1/09.  It is only effective for 1 year and an amended Notice was never recorded.

On 6/15/10 a mortgage is recorded on a condominium unit.  When this is recorded, the unit owner’s mortgagee secures a release from the construction lender relating to the lender’s mortgage relating to the unit.

On 7/1/10 a construction lien is recorded.

 

Under this factual pattern, the lienor that recorded a lien would absolutely want its lien to take priority over the unit owner’s mortgage.  The lienor will argue it takes priority since the lien should relate back to the Notice of Commencement that was recorded prior to the mortgage on the unit.  But, wait.  The Notice of Commencement expired before the lien was recorded and an amended Notice of Commencement was never recorded.  This means the lien takes priority as of the date it is recorded and, thus, the mortgage on the condominium unit takes priority.

 

Now, let’s add another realistic wrinkle to this fact pattern.  Let’s say the Declaration of Condominium (the instrument creating the condominium) is recorded on 6/1/10, before the lien is recorded.

 

The Declaration of Condominium would need to be recorded before mortgages are recorded on individual units.  For the construction of a new condominium, the lien would apply to the ENTIRE condominium property provided the lien relates back to the Notice of Commencement.  This is because the lien would take priority before the Declaration of Condominium was even recorded.  But, if the Notice of Commencement expired, then the Declaration of Condominium would take priority over the lien since the Declaration of Condominium would have been recorded first (since the lien would not relate back to the Notice of Commencement).  This means that the lien would not apply to the entire condominium property, but would more equitably apply to each unit based on the unit’s pro rata share of the common expenses. See Fla. Stat. 718.121.  In other words, if the lien is $100,000 and there are 100 units each responsible for 1% of the condominium association’s budget, each unit would be responsible for the principal amount of $1,000 in order to discharge the lien relating to the unit. And, mortgages on the individual units may take priority over the lien potentially nullifying the value of the lien based on the equity in the units.

 

Notably, even if a lien relates back to the Notice of Commencement and takes priority over the Declaration of Condominium, a court may still find the equitable result is that each unit is only liable for its pro rata share of common expenses.  See Southern Colonial Mortgage Co., Inc. v. Medeiros, 347 So.2d 736 (Fla. 4th DCA 1977).  However, this equitable approach should arguably not apply because the lien would attach to the entire condominium property and the lienor should be entitled to foreclose that property including all units since the lien would have priority over any mortgage and deed associated with those units.  At this point, the unit owner should look to its title insurance policy.

 

UnknownTake-aways:

 

  • Make sure the Notice of Commencement is recorded within 90 days from the start of construction.  If not, there will be a strong argument that the Notice is not valid.  This means that a lien would not be able to relate back to the Notice.

 

  • Make sure the lien is recorded within an effective Notice of Commencement.  If not, the lien will not relate back to the Notice, but will take priority as of the date it is recorded.  This is a big difference.

 

  • If the Notice of Commencement is on the verge of expiring, prepare and send a letter to the owner advising the owner that it needs to record an amended Notice of Commencement to ensure the parties are performing construction within an effective Notice of Commencement.

 

  • Understand the potential priority of your lien based on the recording of the Notice of Commencement, any amended Notice of Commencement, the Declaration of Condominium, and other recordings that may impact the priority of your lien if the Notice of Commencement expired.

 

 

 

 

NOTICE OF COMMENCEMENT

State of _____

County of _____

The undersigned hereby gives notice that improvement will be made to certain real property, and in accordance with Chapter 713, Florida Statutes, the following information is provided in this Notice of Commencement.

1. Description of property: (legal description of the property, and street address if available).

2. General description of improvement: __________.

3. Owner information or Lessee information if the Lessee contracted for the improvement:

a. Name and address: __________.

b. Interest in property: __________.

c. Name and address of fee simple titleholder (if different from Owner listed above): __________.

4. a. Contractor: (name and address) .

b. Contractor’s phone number: _____.

5. Surety (if applicable, a copy of the payment bond is attached):

a. Name and address: __________.

b. Phone number: _____.

c. Amount of bond: $_____.

6. a. Lender: (name and address) .

b. Lender’s phone number: _____.

7. Persons within the State of Florida designated by Owner upon whom notices or other documents may be served as provided by Section 713.13(1)(a) 7., Florida Statutes:

a. Name and address: __________.

b. Phone numbers of designated persons: __________.

8. a. In addition to himself or herself, Owner designates __________ of __________ to receive a copy of the Lienor’s Notice as provided in Section 713.13(1)(b), Florida Statutes.

b. Phone number of person or entity designated by owner: _____.

9. Expiration date of notice of commencement (the expiration date will be 1 year from the date of recording unless a different date is specified) _____.

WARNING TO OWNER: ANY PAYMENTS MADE BY THE OWNER AFTER THE EXPIRATION OF THE NOTICE OF COMMENCEMENT ARE CONSIDERED IMPROPER PAYMENTS UNDER CHAPTER 713, PART I, SECTION 713.13, FLORIDA STATUTES, AND CAN RESULT IN YOUR PAYING TWICE FOR IMPROVEMENTS TO YOUR PROPERTY. A NOTICE OF COMMENCEMENT MUST BE RECORDED AND POSTED ON THE JOB SITE BEFORE THE FIRST INSPECTION. IF YOU INTEND TO OBTAIN FINANCING, CONSULT WITH YOUR LENDER OR AN ATTORNEY BEFORE COMMENCING WORK OR RECORDING YOUR NOTICE OF COMMENCEMENT.

 

 

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.

HOME OFFICE OVERHEAD (EICHLEAY) AND GOVERNMENT-CAUSED STANDBY

Posted on by

images-1JMR Construction Corp. v. United States, 2014 WL 3418445 (Fed.Cl. 2014) is a good federal government contracting case discussing a prime contractor’s challenging burden to support unabsorbed home office overhead damages caused by a government-caused delay.  The United States Court of Federal Claims described unabsorbed home office overhead damages and the required elements (under the Eichleay methodology) for a prime contractor to prove these damages:

 

The term “home office overhead” refers to the general administration costs of running a business, such as accounting and payroll services, general insurance, salaries of upper-level management, heat, electricity, taxes, and depreciation. These are indirect costs, expended for the benefit of the whole business, [and thus] by their nature cannot be attributed or charged to any particular contract.

***

Contractors typically recoup these indirect costs by allocating them to individual contracts in proportion to those contracts’ direct costs. But, in the event of a government-caused delay or suspension of work, the stream of direct costs against which to assess a percentage [of home office overhead] is decreased. The resulting shortfall is termed unabsorbed home office overhead.

***

The Circuit has held that the so-called Eichleay formula is the sole method through which contractors are able to recover unabsorbed home office overhead. The Eichleay formula requires that contractors satisfy several strict prerequisites. First, the contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay. Second, the contractor must show that it incurred additional overhead expenses, either because the contract’s performance period was extended or because the contractor would have finished prior to the un-extended performance period’s close. Third, the contractor must establish that it was required to remain on standby for the duration of the delay. [Standby does not require the prime contractor to prove that it was completely idle but that its work was significantly slowed such that it was performing minor tasks.]

***

In order to establish standby, contractors must demonstrate three things. First, the contractor must show that the government caused delay was not only substantial but was of an indefinite duration. Second, the contractor must demonstrate that, during the delay, it was required to return to work at full speed and immediately [once the suspension period is over.  If the prime contractor is given a reasonable period of time to remobilize after the suspension is lifted, it will not be able to satisfy this requirement]. Third, the contractor must show a suspension of most if not all of the contract work. If the contracting officer has issued a written stop work order proving these elements the contractor can utilize that order to provide direct evidence of standby. Otherwise, these elements can be proven through indirect evidence.

***

If the contractor can make a prima facie showing of the standby elements, the burden of production shifts to the government to show either that it was not impractical for the contractor to obtain replacement work during the delay, or that the contractor’s inability to obtain or perform replacement work was caused by a factor other than the government’s delay.

JMR Construction, supra, at *5-7 (internal quotations and citations omitted); see also P.J. Dick, Inc. v. Principi, 324 F.3d 1364 (Fed.Cir. 2003) (finding that contractor could not support claim for unabsorbed home office overhead as it could not support it was on standby).

 

The Federal Circuit Court of Appeals summarized these requirements by the following questions:

 

In short, a court evaluating a contractor’s claim for Eichleay damages should ask the following questions: (1) was there a government-caused delay that was not concurrent with another delay caused by some other source; (2) did the contractor demonstrate that it incurred additional overhead…; (3) did the government CO [contracting officer] issue a suspension or other order expressly putting the contractor on standby; (4) if not, can the contractor prove there was a delay of indefinite duration during which it could not bill substantial amounts of work on the contract and at the end of which it was required to be able to return to work on the contract at full speed and immediately; (5) can the government satisfy its burden of production showing that it was not impractical for the contractor to take on replacement work (i.e., a new contract) and thereby mitigate its damages; and (6) if the government meets its burden of production, can the contractor satisfy its burden of persuasion that it was impractical for it to obtain sufficient replacement work. Only where the above exacting requirements can be satisfied will a contractor be entitled to Eichleay damages.

P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1373 (Fed.Cir. 2003).

 

In JMR Construction, the prime contractor was hired to build an aircraft maintenance facility.  The prime contractor sued the government pursuant to the Contract Disputes Act for government-caused delays. The period of delay the prime contractor was seeking to recover damages for was January 16, 2009 (day after the government occupied the facility) through September 4, 2009 (completion).

 

 

The government took occupancy of the facility on January 15, 2009.  The prime contractor continued to perform work after this date, although its workforce slowed down.   On February 3, 2009, the prime contractor demobilized its jobsite trailer and was finishing the balance of its work including the manufacturing and installation of a permanent power converter and the installation of ceiling lights in one of the rooms.  Temporary stopgap measures had been implemented to address these electrical issues that likely allowed the government to utilize the facility.

 

The government moved for summary judgment as to the prime contractor’s entitlement to unabsorbed home office overhead damages. The Court broke the prime contractor’s unabsorbed home office overhead claim into two discrete periods: (1) January 16, 2009 (day after the government took occupancy) to February 3, 2009 (when the contractor demobilized jobsite trailer) and (2) February 4, 2009 to September 4, 2009 (period when the permanent power and room lighting were being installed).  Because the contracting officer never issued a standby notice, the prime contractor had the burden to prove by indirect evidence the factors (referenced above) supporting its entitlement to unabsorbed home office overhead.

 

First Period: 1/16/09-2/3/09

 

The Court did not grant summary judgment during this period because there was a disputed issue of fact as to materiality of the work the prime contractor was performing during this time period.  The prime contractor contended the work it was performing was minor whereas the government contended the work was material. If the work is deemed material (or more than just minor tasks) the prime contractor’s unabsorbed home office overhead claim will fail since it was never on standby or suspended.  If it was minor, the prime contractor would still need to prove the elements of standby. Although the Court declined to grant summary judgment based on this disputed factual issue, it seems from the Court’s ruling during the second time period (below) that the prime contractor will have difficulty proving the elements of standby.

 

Second Period: 2/4/09-9/4/09

 

The Court granted summary judgment on the prime contractor’s claim for unabsorbed home office overhead during this period because the prime contractor could NOT prove the elements of standby. In particular, the prime contractor could not prove it was required to resume work at full speed and immediately once the “suspension period” was over.  The prime contractor did not appear to maintain any personnel or equipment on site during this period that eliminated any argument that it was required to return to work with any degree of urgency once the suspension was lifted.  The prime contractor also utilized a subcontractor to perform the incomplete electrical work, and the use of subcontractors can limit a prime contractor’s ability to prove standby since it was only monitoring the work and not actually required to return to work at all.  And last, temporary stopgap measures were implemented relating to the lighting that negated the time sensitivity of the remaining work meaning there was no urgency for the contractor to resume work immediately.

 

Eichleay-formulaFinally, even assuming the prime contractor could support its entitlement to unabsorbed home office overhead, the Court did not go into any discussion regarding the Eichleay formula–the specific formula utilized to determine the allocable unabsorbed home office overhead associated with a government-caused delay.  The objective of the Eichleay formula is to obtain a daily rate for the home office overhead allocated to the specific contract and multiply the daily rate by the number of delay days to determine the contractor’s unabsorbed home office overhead caused by the government’s delay.

 

 

 

 

 

 

 

 

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.

 

LIEN RIGHTS FOR PROFESSIONAL (DESIGN) SERVICES

Posted on by

imagesDesign professionals  (e.g., architect, engineer, interior designer, surveyor, and mapper) have lien rights for professional services they perform under Florida’s Lien Law.

 

 

Florida Statute s. 713.03 governs liens for professional services and provides:

 

(1) Any person who performs services as architect, landscape architect, interior designer, engineer, or surveyor and mapper, subject to compliance with and the limitations imposed by this part, has a lien on the real property improved for any money that is owing to him or her for his or her services used in connection with improving the real property or for his or her services in supervising any portion of the work of improving the real property, rendered in accordance with his or her contract and with the direct contract.

 

(2) Any architect, landscape architect, interior designer, engineer, or surveyor and mapper who has a direct contract and who in the practice of his or her profession shall perform services, by himself or herself or others, in connection with a specific parcel of real property and subject to said compliances and limitations, shall have a lien upon such real property for the money owing to him or her for his or her professional services, regardless of whether such real property is actually improved.

 

 

This statutory language is important to the design professional.  Paragraph 1 says that a design professional shall have lien rights for their professional services rendered pursuant to their contract and the direct contract (or contract with the owner of the real property, typically the owner-architect contract in the design-bid-build scenario) in connection with improving the real property.  This would be the paragraph relied on by design professionals NOT in privity of contract with the owner.  On the other hand, Paragraph 2 would apply to design professionals that enter into a direct contract with the owner of the real property for professional services (such as the architect in the design-bid-build scenario).  Under this paragraph, the design professional has lien rights for their professional services regardless of whether the real property is even improved.  This means that the owner can decide not to use the professional services (the design) or abandon the project and the design professional in direct contract with the owner has lien rights even though the real property has not been improved.   Now, if a design professional enters into a contract with a developer or person that never had an interest in the real property, the design professional is not going to be able to use this statute to create lien rights because it never entered into a contract with the actual owner of the real property.  See Grossman v.  Pollack, 100 So.2d 660 (Fla. 3d DCA 1958) (finding that architect could not enforce lien for leasehold interest that never came into being because there was no privity between architect or anyone with interest in the real property).

 

Design professionals have flexibility preserving lien rights since they do not have to comply with all of the technical requirements that a general contractor, subcontractor, or supplier must comply with.  Design professionals do NOT need to serve a Notice to Owner (within 45 days of initial furnishing) unlike the supplier or subcontractor not in privity of contract with the owner.  And, the design professional in privity of contract with the owner does NOT need to serve a contractor’s final payment affidavit (at least 5 days before filing a lawsuit) unlike the contractor hired directly by the owner.   The ONLY thing the design professional needs to do to secure its lien rights is to record a lien within 90 days of its final furnishing of professional services (and serving a copy of the lien on the owner).

 

 

images-1The downside, however, is that a design professional’s lien maintains a priority standpoint from the date the lien is recorded.  So, anything that is recorded before the design professional’s lien will be superior to the lien.  This is different than a lien recorded by a general contractor, subcontractor, or supplier in that their lien relates back to an effective notice of commencement, which is important from a lien priority standpoint.

 

For example, let’s assume there is a new construction project.  The owner obtains financing and a mortgage securing the construction loan is recorded.  This mortgage should have superior priority to any other encumbrance on the property (if not, lenders would never lend money!).  After the mortgage is recorded, and before construction commences, a notice of commencement is recorded (which lasts for 1 year unless a different expiration date is specified; although, the notice of commencement can be amended).  Within the effective period of the notice of commencement, the structural engineer records a lien; the next day the architect records a lien.  Months later, and within the effective period of the notice of commencement, the framing subcontractor records a lien.  What is the priority of these liens? The framing subcontractor’s lien will have priority because it will relate back to the notice of commencement.  Then, the structural engineer’s lien will have priority over the architect’s lien because it was recorded the day before the architect’s lien.  Remember, design professional’s liens do not relate back to the notice of commencement and their priority is dictated as of the date/time they are recorded. Any other contractor or supplier that records a lien within the effective notice of commencement will have priority over the design professional’s lien since these liens will relate back to the earlier recorded notice of commencement.

 

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.