RECORDING THE NOTICE OF BOND TO TRANSFER THE CONSTRUCTION LIEN TO THE PAYMENT BOND

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

If a contractor furnishes a payment bond for a private project (per Florida Statute s. 713.23), a copy of that bond should be recorded with the Notice of Commencement recorded in the official records of the county where the project is located. A contractor furnishes a payment bond on a private project in order to exempt the owner’s real property from construction liens.

There are times, though, where a subcontractor or a supplier will still go ahead and record a lien against the owner’s real property even though there is a payment bond that was recorded with the Notice of Commencement. This is a frustrating scenario because the point of paying for the payment bond and furnishing the bond is to prevent this very scenario from occurring. No worries, however, because Florida’s Lien Law efficiently addresses this scenario by allowing the contractor or owner to record in the official records and serve on the lienor a verified Notice of Bond (attaching a copy of the payment bond) that will operate to transfer the lien to the payment bond. Fla. Stat. s. 713.23(2). A copy of the Notice of Bond form is provided below.

Moreover, this Notice of Bond procedure would apply even if the contractor furnished a payment bond, but for whatever reason, that payment bond was not recorded with the Notice of Commencement. When this happens, and it does happen, the subcontractor or supplier may honestly not know that the contractor actually furnished a payment bond and will move forward and record a lien. Again, no worries, because the contractor or owner should implement the same procedure by recording and serving the lienor with a Notice of Bond. Every lien recorded AFTER the execution and delivery of the payment bond will be transferred to the payment bond through the recording of the Notice of Bond (attaching a copy of the payment bond).

Now, if the contractor did NOT furnish a payment bond BEFORE the lien was recorded, the contractor could move to transfer the lien to a lien transfer bond pursuant to Florida Statute s. 713.24. This is different than a payment bond. The lien transfer bond is simply a mechanism where a contractor through a statutory procedure procures and records a lien transfer bond that is designed to transfer a specific lien to the security of the bond. (When a contractor procures a lien transfer bond, the bond must be for the principal amount of the lien, plus the greater of $1,000 or 25% of the principal amount to cover potential attorney’s fees and court costs, plus three years worth of interest on the principal amount at the prevailing statutory rate.)

NOTICE OF BOND

To (Name and Address of Lienor)
You are notified that the claim of lien filed by you on ___, ___, and recorded in Official Records Book ___ at page ___ of the public records of ___ County, Florida, is secured by a bond, a copy being attached.
Signed: (Name of person recording notice)

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 DRAFT AN AMBIGUOUS SCOPE OF WORK IN YOUR CONSTRUCTION CONTRACT

Posted on November 26, 2014November 26, 2014 by Edward Garber

Contractors should spend time carefully drafting and agreeing to a detailed scope of work. Otherwise, a dispute may arise relating to that scope of work. This dispute can take the form of a change order dispute where the contractor argues that the subcontractor’s change order request was base contract work and, thus, does not entitle the subcontractor to additional compensation. Or, the dispute can take the form of a defect claim where the subcontractor argues that the defect being asserted against it was never within its scope of work to begin with.

If there is a scope of work dispute, a court will look to the contract and any applicable change orders in order to see what the contract requires. If an ambiguity exists relating to the scope of work, the court will determine whether the ambiguity is a patent ambiguity or a latent ambiguity. A patent ambiguity clearly exists on the face of the contract based on defective, insensible, or obscure language used in the contract whereas a latent ambiguity is not apparent from the face of the contract, but becomes apparent when extrinsic / parol evidence is introduced that leads to the contract being interpreted in two reasonably plausible manners. See Barrington v. Gryphon Investments, Inc., 32 So.3d 668 (Fla. 2d DCA 2010). With a patent ambiguity, parol evidence (extrinsic evidence used to clarify the intent of the parties relating to a contractual provision) is NOT allowed to clear up the ambiguity; rather, it is up to the trier of fact (judge or jury) to interpret the patent ambiguity without extrinsic evidence explaining the intent of the parties. See, e.g., Barclays American Mortg. Corp. v. Bank of Central Florida, 629 So.2d 978 (Fla. 5^th DCA 1993) (it was up to trier of fact to interpret letter of credit containing 2 different expiration dates). On the other hand, with a latent ambiguity, parol evidence is allowed to be introduced relating to the parties’ intent to assist the trier of fact in clearing up the ambiguity.

The opinion in Macky Bluffs Development Corp. v. Advance Construction Services, Inc., 2008 WL 109390 (N.D.Fla. 2008) illustrates what can happen if there is an ambiguous scope of work. Here, a developer entered into a change order with a contractor to fix the collapsed wall of a retention pond. The change order required the contractor to haul off collapsed material from the bottom of the pond. To fix the wall, the contractor hauled collapsed material and stockpiled the material on lot #8 (owned by the developer). The contractor reused suitable material in reconstructing the wall in addition to material it excavated from lot #8. The unsuitable material the contractor did not use in reconstructing the wall was spread out and compacted on lot #8 versus being hauled offsite to a dumping site.

Years later, the developer discovered the unsuitable materials had been buried on lot #8 that required it to excavate and remove this material and refill with suitable material. The developer then sued the contractor for the costs it incurred in remediating this issue. The contractor moved for summary judgment arguing that lot #8 was never part of its scope of work and it reconstructed the wall of the retention pond pursuant to the change order. Unfortunately, the change order did not specify whether the contractor was required to haul off unsuitable material to an offsite dumping facility or it was required to leave that material on lot #8. In fact, it does not appear the change order even mentioned that the contractor was going to stockpile collapsed material on lot #8 and reuse suitable material in reconstructing the wall. The owner’s position was that while the contractor could use lot #8 as a temporary storage area, the contractor was always required to haul off unsuitable material to an offsite dumping facility. The contractor disagreed stating it was always going to leave unsuitable material on lot #8 that it could not reuse to reduce the costs associated with fixing the wall. Yet, the change order did not address this issue and was ambiguous as to what the contractor’s scope of work consisted of relative to reconstructing the wall with stockpiled suitable material and what it was required to do with unsuitable material it did not reuse.

The Northern District maintained that the scope of work in the change order contained a latent ambiguity because the change order did not identify where the contractor was required to haul off the collapsed material and both the contractor and owner’s interpretation of this scope of work was plausible and reasonable. The court’s opinion includes a good discussion about the difference between a patent ambiguity and a latent ambiguity:

“Under Florida law, the interpretation of a contract is a matter of law for the court’s determination so long as the terms of the contract are unambiguous. The existence of an ambiguity in a contract is also a matter of law. There are two types of ambiguities that can exist in a contract: patent and latent. A patent ambiguity is one that appears on the face of the contract. A latent ambiguity, on the other hand, exists where the language employed is clear and intelligible and suggests but a single meaning, but some extrinsic / parol evidence creates a necessity for interpretation or a choice among two or more possible meanings. If the ambiguity is patent, then parol evidence cannot be used to clarify the parties’ intent. If the court finds, however, that there is a latent ambiguity in the contract, then parol evidence must be heard in order to explain the meaning of the ambiguous term. After receiving parol evidence clarifying the latent ambiguity, if there is no genuine issue of material fact remaining, the court can resolve the ambiguity as a matter of law. Where, however, the terms of the written instrument are disputed and reasonably susceptible to more than one construction, an issue of fact is presented as to the parties’ intent which cannot properly be resolved by summary judgment.”

Macky Bluffs Development Corp., supra, at *2 (internal citations and quotations omitted).

Had the parties clearly clarified the scope of work relating to how collapsed material was going to be stockpiled on lot #8 and reused and whether unsuitable material was going to be (a) hauled offsite or (b) left on lot #8, there probably would be no scope of work dispute. But, because this issue was not truly defined, it presented an ambiguity that naturally resulted in a dispute when the developer needed to remove the unsuitable material on lot #8. The key is to spend the effort to clearly articulate the scope of work, whether it is base contract work or change order work, to best support your argument when a scope of work dispute subsequently arises.

BE CAUTIOUS WHEN FILING YOUR LAWSUIT IF YOU REALLY WANT TO ARBITRATE

Posted on November 25, 2014November 25, 2014 by Edward Garber

If you really want to arbitrate your construction dispute pursuant to your contract, DO NOT file a lawsuit without at least contemporaneously moving to stay the lawsuit and compel arbitration. Otherwise your right to arbitration will be waived. The determination as to whether a party waived their right to arbitrate is a determination for the court (not the arbitrator) as demonstrated in the non-construction case of Cassedy, Jr. v. Hofmann, 39 Fla. L. Weekly D2450a (1^st DCA 2014).

In this case, the plaintiffs filed a lawsuit against their stockbroker that they voluntarily dismissed without prejudice years later. The plaintiffs then initiated arbitration with the Financial Industry Regulatory Authority. The defendant filed a lawsuit to prevent the arbitration from going forward arguing that the plaintiffs waived their right to arbitration by initiating the lawsuit that they subsequently dismissed. The First District Court of Appeals held the trial court must conclude whether a party waived their right to arbitrate by acting inconsistently with the right to arbitrate a dispute. The First District did not decide whether the right to arbitration had been waived; however, considering the plaintiffs filed the very lawsuit that they subsequently dismissed, it would appear that this right was waived or should be deemed waived. If the plaintiffs really wanted to arbitrate, they should not have first filed a lawsuit without preserving their right to arbitrate through a contemporaneous motion to stay the lawsuit and compel arbitration.

SUING FEDERAL GOVERNMENT ON A CONTRACT CLAIM; EQUITABLE SUBROGATION CLAIM BY LIABILITY INSURER AGAINST GOVERNMENT NOT ALLOWED

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

Equitable subrogation is a doctrine that liability insurers rely on when paying a claim on behalf of an insured. Under this doctrine, the insurer equitably subrogates—steps in the shoes—to the rights of the insured and sues as an equitable subrogee of the insured in order to seek reimbursement for the claim it paid.

What if the liability insurer tried to pursue an equitable subrogation claim against the federal government? In other words, what if the insurer paid out insurance proceeds on behalf of its insured-prime contractor and then tried to recoup the insurance proceeds from the federal government as an equitable subrogee of the prime contractor? The United States Court of Federal Claims in Fidelity and Guaranty Insurance Underwriters v. U.S., 2014 WL 6491835 (Fed.Cl. 2014) explained that a liability insurer CANNOT sue the federal government as an equitable subrogee of the prime contractor in order to recoup insurance proceeds paid out on a claim.

In this case, the government hired a prime contractor to abate asbestos at a post office. The prime contractor was having difficulty obtaining CGL liability insurance to specifically cover asbestos removal for a reasonable premium and the government, through the contracting officer, agreed to execute an addendum to the prime contract that required the government to save harmless and indemnify the contractor from personal injury claims attributable to the asbestos removal work.

More than ten years later, a former government employee sued the prime contractor claiming he contracted cancer from his exposure to asbestos while it was being removed and abated at the project. The prime contractor demanded that the government defend and indemnify it for this claim; however, the government refused. The prime contractor then tendered the claim to its CGL liability insurer and its insurer settled the claim. After the settlement, the prime contractor once again demanded that the government reimburse it by honoring the indemnification language in the addendum; again, the government refused.

The prime contractor’s liability insurer then filed suit against the federal government as the equitable subrogee of the prime contractor in order to recoup the insurance proceeds it paid to the former government employee. The thrust of the claim was that the government breached the indemnification provision. The government moved to dismiss the lawsuit contending that the Court of Federal Claims does not have subject matter jurisdiction to entertain the lawsuit because the liability insurer is not in privity with the government and, therefore, cannot sue the government. The Court of Federal Claims agreed and dismissed the lawsuit. Why? Because a plaintiff suing the federal government on a contract claim must be in privity of contract with the federal government with limited exceptions to this rule:

“The Federal Circuit has recognized limited exceptions to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States. These limited exceptions include (1) actions against the United States by an intended third-party beneficiary; (2) pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s damages; and (3) actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor [after the surety financed completion of a defaulted subcontractor]. As the court of appeals has observed, the common thread that unites these exceptions is that the party standing outside of privity by contractual obligation stands in the shoes of a party within privity.“

Fidelity and Guaranty Insurance Underwriters, supra(internal quotations and citations omitted).

Since none of the limited exceptions applied to allow a liability insurer to sue the government as an equitable subrogee of its insured-prime contractor, the Court of Federal Claims lacked subject matter jurisdiction.

This ruling does not prevent the prime contractor from suing the government directly for breaching the indemnification provision; it simply prevents the liability insurer from suing as an equitable subrogee of the prime contractor. Even though the insurer paid the claim, perhaps it can enter into an agreement with the prime contractor whereby the prime contractor sues the government directly for breach of contract.

The case demonstrates the limited exceptions available to a claimant on a construction project that wants to pursue a claim directly against the government when the claimant is not the prime contractor hired by the government. While prime contractors can sue the government for breach of contract, subcontractors, in particular, that want to pursue a claim against the government can only do so as a pass-through claim, meaning they are suing in the name of the prime contractor and will require the cooperation of the prime contractor.

Also, as an aside, the indemnification provision from the government and the prime contractor required the government to save harmless and indemnify the prime contractor. I always like to include the word “defend” in an indemnification provision so it is crystal clear that the indemnitor’s indemnification obligations extend to its contractual obligation to defend the indemnitees for any claim.

“NO DAMAGE FOR DELAY” PROVISIONS AND THE EXCEPTIONS

Posted on November 21, 2014November 21, 2014 by Edward Garber

Contractors and subcontractors should be familiar with “no damage for delay” provisions. These are contractual provisions that limit the contractor’s remedies for a delay to an extension of time ONLY, and disallow the contractor from being entitled to extended general conditions (overhead) for an otherwise excusable, compensable delay.

There are numerous variations of the “no damage for delay” provision; however they usually contain language that provides as follows:

“The contractor’s sole and exclusive remedy for a delay, interference, or hindrance with its Work shall be an extension of time and contractor shall not be entitled to any damages for a delay, interference, or hindrance with its Work.”

or

“The contractor shall not be entitled to any compensation whatsoever for any delay, interference, hindrance, acceleration, or inefficiency with its Work and its sole and exclusive remedy for any delay, interference, acceleration, or inefficiency with its Work shall be an extension of time.”

In Florida, “no damage for delay” provisions are enforceable on private and public projects. However, there are EXCEPTIONS that would prevent the provision’s harsh application and entitle a contractor to its extended general conditions for an excusable, compensable delay. These exceptions are fraud, willful concealment of foreseeable circumstances, and active interference. See Triple R Paving, Inc. v. Broward County, 774 So.2d 50 (Fla. 4th DCA 2000). In other words, if the hiring party (owner) does not willfully or knowingly delay construction, then the application of the “no damage for delay” provision will preclude the hired party (contractor) from recovering its extended general conditions associated with the delay. See id. On the other hand, if the hiring party does willfully or knowingly delay construction, then the hired party has an argument around the “no damage for delay” provision.

Even with a “no damage for delay” provision in the contract, it is imperative for the hired party (contractor) to properly and timely request additional time and money in accordance with the contract. There are typically provisions that require the hired party (contractor) to notify the hiring party (owner) of delaying events or claims and to request time and money associated with the event or claim. If a contractor fails to timely preserve its rights under the contract to seek additional time or money, it may preclude itself from recovering extended general conditions for a delay that would otherwise serve as an exception to the “no damage for delay” provision. See Marriot Corp. v. Dasta Const. Co., 26 F.3d 1057 (11^th Cir. 1994) (contractor’s failure to request time pursuant to the contract prevented it from recovering delay damages associated with an owner’s active interference).

On federal construction projects, “no damage for delay” provisions are perhaps less common based on Federal Acquisition Regulations (F.A.R.) that would otherwise entitle the contractor to recover delay-related damages if it properly and timely preserves its rights. These “no damage for delay” provisions are more frequently found in subcontracts between the prime contractor and its subcontractors. There is authority that would hold an unambiguous “no damage for delay” enforceable on federal construction projects:

“Nevertheless, given their potentially harsh effect, no damages for delay provisions should be strictly construed, but generally will be enforced, absent delay (1) not contemplated by the parties under the provision, (2) lasting an unreasonable period and thereby amounted to an abandonment of the contract, (3) caused by fraud or bad faith, or (4) amounting to active interference or gross negligence.”

Appeal of-The Clark Construction Group, Inc., GAOCAB No. 2003-1, 2004 WL 5462234 (November 23, 2004); accord Grunley Construction Co. v. Architect of the Capitol, GAOCAB No. 2009-1, 2010 WL 2561431 (June 16, 2010).

In drafting a “no damage for delay” provision, I always like to include language that specifically states that the application of the “no damage for delay” provision is not conditioned on the hired party (contractor) being granted additional time to substantially complete or finally complete the project. I also like to include language that the hired party (contractor) understands this “no damage for delay” provision and has factored this provision into the contract amount. It is important that this provision clearly reflects the intent because the hiring party will want to rely on this provision in the event there is a delaying event and it is a provision that will be strictly construed.

Conversely, if you trying to avoid the harsh consequences of a “no damage for delay” provision, it is advisable to consult with counsel that understands the recognized exceptions to the provision and can assist you in negotiating and presenting your claim based on these recognized exceptions.

DOWNSIDE OF A BROAD ARBITRATION PROVISION

Posted on November 14, 2014November 14, 2014 by Edward Garber

In Sunsplash Events Inc. v. Robles, 39 Fla. L. Weekly D2368a (Fla. 4^th DCA 2014), the plaintiff entered into an employment agreement with the defendant. The employment agreement contained an arbitration provision that read, “[T]he Parties hereby agree and specifically stipulate that all differences, claims or matters of dispute relating to the performance of duties and/or benefits arising between the Parties to this Agreement contained herein shall be submitted to a mutually acceptable arbitrator….” Contemporaneously with the execution of the employment agreement, the parties entered into a bill of sale agreement regarding the plaintiff’s existing business whereby the plaintiff sold the inventory and goods of that business to the defendant. This separate bill of sale agreement did not contain an arbitration provision.

Plaintiff thereafter sued the defendant relating to the bill of sale agreement (that did not contain an arbitration provision) and the defendant moved to compel arbitration based on the arbitration provision in the employment agreement. The plaintiff’s claims were interrelated to the employment agreement.

The Fourth District Court of Appeal held that the arbitration provision in the employment agreement included plaintiff’s claims relating to the bill of sale agreement because the claims fell within the ambit of the employment agreement’s broad arbitration provision:

“[T]he plaintiff’s claims relating to the bill of sale agreement have a significant relationship to the claims relating to the employment agreement. According to the second amended complaint, the numerous misrepresentations alleged to have been made by the company president to induce the plaintiff into entering the bill of sale agreement are the same misrepresentations alleged to have been made to induce the plaintiff into entering the employment agreement. As a result, the claims relating to the bill of sale agreement are inextricably intertwined with the transaction from which the employment agreement emanated and the employment agreement itself.”

This case contains an important holding–a broad arbitration provision can compel parties to arbitrate a dispute under a separate agreement that does not contain an arbitration provision. Thus, this goes back to the fundamental premise that parties should not include an arbitration provision if they do not want to arbitrate. And, if an arbitration provision exists in one agreement and not a separate agreement (whether simultaneously executed or executed on a subsequent date), that separate agreement should clarify it is not subject to the arbitration provision in the earlier agreement.

HELPFUL PROVISIONS IN FLORIDA’S LOCAL GOVERNMENT PROMPT PAYMENT ACT

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

Florida’s Local Government Prompt Payment Act (Florida Statute s. 218.735) contains helpful provisions to contractors and subcontractors working on local government projects (or projects that are neither owned by a state agency nor private entity that would be governed under different prompt payment acts). These provisions pertain to the generation of the punchlist and the release of retainage.

A. Punchlist

The contract between the general contractor and local governmental entity needs to provide for the generation of a single punchlist. The contract needs to specify the process required to generate the punchlist including the responsibilities of both the local governmental entity and contractor. For projects with estimated construction costs less than $10 Million, the punchlist needs to be generated within 30 days after substantial completion. For projects with estimated construction costs of $10 Million or more, the punchlist needs to be generated within 30 days after substantial completion; although, this may be extended by contract to up to 60 days after substantial completion.

If the punchlist is not provided to the contractor by the required date (through no fault of the contractor), the contract time for completion needs to be extended by the number of days the punchlist is delayed. Moreover, the contractor can submit its payment application for the retainage balance and payment of any undisputed amount must be paid.

If a dispute exists as to any item on the punchlist, the local governmental entity may only withhold up to 150% of the cost to complete such items. Once the contractor completes the items on the list, it can submit its payment request for retainage.

Importantly…and I repeat, importantly…warranty items or items not identified on the (single) punchlist may not impact the local governmental entity’s final payment of retainage! Also, if the local governmental entity is utilizing an Owner Controlled Insurance Program (known as “OCIP”), the local governmental entity cannot withhold retainage or delay final payment pending a final audit to determine the insurance premium.

B. Retainage

The local governmental entity is entitled to withhold 10% retainage on progress payments until the project is 50% complete. After the project is 50% complete, the local governmental entity must reduce the retainage on future progress payments to 5%. The contractor may also submit a payment application to the local governmental entity for ½ of the retainage (5%) that the governmental entity was withholding until 50% completion (which must be paid unless there is a good faith dispute for withholding some or all of this retainage).

As it relates to subcontractors, the contractor can still withhold retainage greater than 5%; however, the “contractor shall notify the subcontractor, in writing, of its determination to withhold more than 5 percent of the progress payment and the reasons for making that determination, and the contractor may not request the reqlease of such retained funds from the local governmental entity.” Fla.Stat. s. 218.735(8)(c).

(This retainage reduction does not apply to municipalities with a population of 25,000 or fewer or counties having a population of 100,000 or fewer, meaning these local governmental entities can withhold 10% retainage until final completion.)

Florida’s Local Government Prompt Payment Act gives the general contractor the argument that only a single punchlist needs to be generated versus a never-ending punch list that the local governmental entity continues to add to so that there is no end in sight to the punchlist completion. It further allows the contractor to submit its payment application for its final contract balance of retainage if the punchlist is not timely generated through no fault of the contractor. Additionally, Florida’s Local Government Prompt Payment Act not only authorizes a reduction in retainage to 5% at 50% completion, but allows the contractor to bill for half of the withheld retainage that the local government was withholding through 50% completion.

INCLUDING IN YOUR ARBITRATION CLAUSE THAT ARBITRATION WILL BE CONDUCTED BY THE AMERICAN ARBITRATION ASSOCIATION

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

The American Arbitration Association (known as “AAA”) is a well-recognized organization that administers binding arbitration. AAA has its own set of developed arbitration rules and procedures that must be followed in a construction arbitration referred as the Construction Industry Arbitration Rules and Mediation Procedures. (This is no different than a dispute proceeding in federal or state court where a party must follow a governing rule of civil procedures.)

Parties that incorporate a binding arbitration provision often include language that the arbitration must be conducted by AAA and/or pursuant to AAA’s Construction Industry Arbitration Rules. Sometimes when a dispute occurs, a party wants to challenge the scope of the arbitration provision because they prefer that their dispute gets resolved through litigation instead of arbitration. But, as illustrated by the Eleventh Circuit decision in U.S. Nutraceuticals, LLC v. Cyanotech Corp., 2014 WL 5471913 (11^th Cir. 2014), this is not an easy accomplishment.

In this case, the buyer and seller entered into two contracts with the second contract succeeding the first contract. Both contracts contained a confidentiality provision; however, the second contract provided that a party can enforce the confidentiality provision in court. Both contracts also contained an arbitration provision for dispute resolution that required the arbitration to be conducted “under the auspices of the American Arbitration Association.” The second contract, though, excluded from arbitration disputes relating to a breach of the confidentiality provision. (Under the first contract, disputes relating to the breach of the confidentiality provision would be subject to arbitration.)

A dispute arose and the buyer sued the seller for claims associated with the breach of the confidentiality provision. Based on the allegations in the buyer’s lawsuit, it was unclear whether the first contract, the second contract, or both, were implicated by the dispute. The seller moved to compel the dispute to arbitration pursuant to the first contract that did not carve out an exception for breaches of the confidentiality provision. The district court denied the motion, but the Eleventh Circuit reversed ruling that the district court should have compelled arbitration. The reason was that the arbitration provisions incorporated the rules of the American Arbitration Association. Once the parties did this, they agreed that the arbitrator would decide whether a particular dispute was subject to the arbitration provision. Hence, questions as to the scope or arbitrability of a dispute would be determined by the arbitrator and not the court.

The arbitration clause in this case that required the arbitration to be conducted “under the auspices of the American Arbitration Association” is not language atypical to a construction contract. This language, however, was enough for the Eleventh Circuit to deem AAA’s applicable rules and procedures incorporated into the arbitration clause. In a construction dispute, Rule 9 of the Construction Industry Arbitration Rules (set forth below) authorizes the arbitrator to rule on the scope or arbitrability of a dispute, which is not ideal for a party that wants the court versus the arbitrator to have this power. It is important that parties that want to carve out exceptions to the arbitration clause to clearly convey these exceptions in the clause. Further, if parties want the court instead of the arbitrator to determine the scope or arbitrability of a particular claim, this should also be clearly conveyed in the clause. Otherwise, this determination will be made by the arbitrator.

R-9. Jurisdiction

(a) The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.

(b) The arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part. Such an arbitration clause shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitrator that the contract is null and void shall not for that reason alone render invalid the arbitration clause.

(c) A party must object to the jurisdiction of the arbitrator or to the arbitrability of a claim or counterclaim no later than the filing of the answering statement to the claim or counterclaim that gives rise to the objection. The arbitrator may rule on such objections as a preliminary matter or as part of the final award.

SUBMITTING A “CLAIM” UNDER THE CONTRACT DISPUTES ACT

Posted on November 6, 2014November 6, 2014 by Edward Garber

Unknown The case of Delaware Cornerstone Builders, Inc. v. U.S., 117 Fed.Cl. 539 (Fed.Cl. 2014) exemplifies what happens if a federal government contractor fails to properly submit a claim in accordance with the Contract Disputes Act (41 U.S.C. s. 7101 en seq.). As reflected below, the failure of the contractor to comply with the Contract Disputes Act will strip the United States Court of Federal Claims of jurisdiction to resolve the contractor’s claim with the federal government.

In this case, the contractor disputed the scope of the government’s punchlist. The contractor sent a letter to the contracting officer that included a good faith certification requesting payment in the amount of $143,390.39 pursuant to its resubmitted payment application #14. The contracting officer denied the payment request stating that the amount exceeded the value of punchlist work. Due to the delay in the contractor completing the punchlist items, the government advised that it would hire another contractor to complete the items and deduct the costs from the contractor’s contract balance. However, the government did not hire the replacement contractor. Years later the contract was still not closed out. The contractor was still trying to get paid its contract balance and was communicating with the government’s legal counsel. The government’s counsel advised the contractor to submit a formal claim (per the Contract Disputes Act), but the contractor failed to do so. Instead, the contractor filed a lawsuit in the Court of Federal Claims for $200,760.39. The government moved to dismiss the complaint based on the contractor’s failure to comply with the Contract Disputes Act prior to filing the lawsuit. The Court of Federal Claims agreed:

The CDA [Contract Disputes Act] permits a contractor to appeal the final decision of a contracting officer to this Court within 12 months of receiving the decision on a claim. A contractor may also seek review in this Court if the contracting officer fails to respond to a contractor’s claim within 60 days, as provided in the CDA. As such, the predicate for jurisdiction under the CDA is an appeal of either a contracting officer’s final decision on a claim or a deemed denial of a claim.

***

The CDA does not define the term “claim,” but the Federal Acquisition Regulation (“FAR”) [in F.A.R. 2.101] defines a claim as a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising from or relating to the contract. Thus, the elements of a claim are: (i) a written demand, (ii) seeking, as a matter of right, (iii) the payment of money in a sum certain. Additionally, all claims requesting relief greater than $100,000 must be certified by the contractor.

***

An action brought before the Court of Federal Claims under the CDA must be based on the same claim previously presented to and denied by the contracting officer.

Delaware Cornerstone Builders, supra, at 545-47 (internal quotations and citations omitted).

While the contractor arguably submitted a certified claim for the $143,390.39 per its resubmitted payment application #14, this amount was different than the $200,760.39 it was seeking in its Complaint. Thus, the amount it was seeking was not based on the same potential claim denied by the contracting officer which was a condition precedent to the contractor filing a lawsuit against the government in the Court of Federal Claims.

If a prime contractor wants to pursue a claim against the federal government, it needs to properly prepare and submit that claim pursuant to the Contract Disputes Act. Notably, this is also memorialized in the disputes clause in F.A.R. 52.233-1 that is likely incorporated into the prime contract.

RECOVERING COMPENSATION FOR UNREASONABLE DELAYS UNDER THE SUSPENSION OF WORK CLAUSE

Posted on November 2, 2014November 2, 2014 by Edward Garber

Federal government construction contracts for fixed-price contracts contain a suspension of work clause found in F.A.R. 52.242-14 (a copy of this clause can be found at the bottom of this posting). This clause allows the government, through the contracting officer, to order the suspension, interruption, or delay of the construction work. This clause further permits the contractor to obtain an equitable adjustment for the increased costs it incurs associated with the delay / suspension of its work for an unreasonable period of time. George Sollitt Const. Co. v. U.S., 64 Fed.Cl. 229, 236-37 (Fed.Cl. 2005). The unreasonableness of the delay / suspension depends on the actual circumstances of the project, but it is this finding of unreasonableness that triggers additional compensation to the contractor. See id. The test applied to determine whether the contractor is entitled to an equitable adjustment for additional compensation pursuant to the suspension of work clause is as follows:

1. The delay must be of an unreasonable length extending the contract’s performance;
2. The delay must be proximately caused by the government;
3. The delay resulted in injury or damage to the contractor; and
4. There is no concurrent delay caused by the contractor.

CEMS, Inc. v. U.S., 59 Fed.Cl. 168, 230 (Fed.Cl. 2003) quoting P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1375 (Fed.Cir. 2003).

As reflected above by the fourth factor, “even if the government has caused an unreasonable delay to the contract work, that delay will not be compensable if the contractor, or some other factor not chargeable to the government, has caused a delay concurrent with the government caused-delay.” George Sollitt, 64 Fed.Cl. at 237.

This suspension of work clause is designed to make the contractor whole for unreasonable delays, but additional profit would be excluded from any additional compensation owed to the contractor. See F.A.R. 52.242-14(b).

As mentioned in previous postings, contractors need to understand the clauses incorporated into their prime contract so they can appreciate how to best preserve their rights when they encounter a delaying event. Also, understanding the clauses will enable the contractor to best present their request for equitable adjustment or claim in a manner that supports their position for additional compensation.

F.A.R. 52.242-14

Suspension of Work (APR 1984)

(a) The Contracting Officer may order the Contractor, in writing, to suspend, delay, or interrupt all or any part of the work of this contract for the period of time that the Contracting Officer determines appropriate for the convenience of the Government.

(b) If the performance of all or any part of the work is, for an unreasonable period of time, suspended, delayed, or interrupted (1) by an act of the Contracting Officer in the administration of this contract, or (2) by the Contracting Officer’s failure to act within the time specified in this contract (or within a reasonable time if not specified), an adjustment shall be made for any increase in the cost of performance of this contract (excluding profit) necessarily caused by the unreasonable suspension, delay, or interruption, and the contract modified in writing accordingly. However, no adjustment shall be made under this clause for any suspension, delay, or interruption to the extent that performance would have been so suspended, delayed, or interrupted by any other cause, including the fault or negligence of the Contractor, or for which an equitable adjustment is provided for or excluded under any other term or condition of this contract.

(c) A claim under this clause shall not be allowed (1) for any costs incurred more than 20 days before the Contractor shall have notified the Contracting Officer in writing of the act or failure to act involved (but this requirement shall not apply as to a claim resulting from a suspension order), and (2) unless the claim, in an amount stated, is asserted in writing as soon as practicable after the termination of the suspension, delay, or interruption, but not later than the date of final payment under the contract.