THE VALUE OF A WELL-WRITTEN SUBCONTRACT TO FORECLOSE SUBCONTRACTOR’S INEFFICIENCY / LOST PRODUCTIVITY DAMAGES

Posted on May 31, 2015May 31, 2015 by Edward Garber

I have previously discussed the challenges a subcontractor has in proving a lost productivity / inefficiency claim. Besides being difficult to prove, subcontractors generally enter into subcontracts that include onerous provisions that foreclose a subcontractor’s right to pursue lost productivity / inefficiency claims. General contractors try to account for these types of delay-related claims by including provisions in their subcontracts that require subcontractors to fully bear this risk. An example of this ocurrence can be found in the opinion entered in Electrical Contractors, Inc. v. Fidelity & Deposit Co. of Maryland, 2015 WL 1444481 (D. Con. 2015) where the trial court precluded a subcontractor from recovering lost productivity / inefficiency costs based on the language in the subcontract that precluded such claims. Additionally, and importantly, the trial court found that that the subcontractor failed to timely notify the general contractor of its claims under the strict notice provisions of the subcontract.

In this case, the general contractor was hired by a state agency to construct a laboratory building and furnished the state a public payment bond. The prime contract contained a construction schedule (which is not an uncommon exhibit in a prime contract). The general contractor then entered into subcontracts with trade subcontractors including the electrical subcontractor. An exhibit to the electrical subcontract was a schedule that simply reproduced dates applicable to the electrical subcontractor’s scope of work that were included in the construction schedule attached to the prime contract.

No different than any baseline construction schedule on any construction project, it was not written in stone. This meant there were updates to the schedule that were furnished to the state agency and the state agency unsurprisingly challenged or opposed numerous schedule updates. The general contractor did not keep its electrical subcontractor apprised of the back-and-forth between it and the state agency involving schedule updates (nor was the general contractor under any real obligation to do so).

And, as we all know, the schedule of the project is really driven in the field. So, as the construction progressed, the general contractor’s superintendents directed the electrical subcontractor to perform work in a piecemeal and unsystematic manner. This was due to work areas not being ready for the electrical scope due to delays on the project. The electrical subcontractor notified the general contractor that it was being impacted and forced to work unproductively. Thereafter, the electrical subcontractor sued the general contractor and the general contractor’s payment bond sureties for damages that included lost productivity / inefficiency damages.

However, the subcontract that the electrical subcontractor signed posed problems with its claims, particularly the following contractual provisions:

“Subcontractor agrees to … complete the work in such sequence and order and according to such schedules as Contractor shall establish from time to time … time being of the essence…. If Contractor determines that the Subcontractor is behind schedule or will not be able to maintain the schedule, Subcontractor … shall work overtime, shift work, or work in an altered sequence, if deemed necessary, in the judgment of the Contractor to maintain the progress of the work. Any such … altered sequence work required to maintain progress or to complete the work on a timely basis shall be at Subcontractor’s expense and shall not entitle Subcontractor to … additional compensation.”

***

“To the fullest extent permitted by applicable law, Contractor shall have the right at any time to delay or suspend the work or any part thereof without incurring liability therefore. An extension of time shall be the sole and exclusive remedy of Subcontractor for any delays or suspensions suffered by Subcontractor … and Subcontractor shall have no right to seek or recover from Contractor any damages or losses, whether direct or indirect, arising from or related to any delay or acceleration to overcome delay, and/or any impact or effect of such delays on the Work.”

***

“In the interest of the overall project, W–T [Contractor] reserves the right to alter the sequencing of activities in order to accommodate project conditions and/or Owner requirements. It is understood that the Subcontractor shall be obligated to complete its activities [timely] … regardless of the actual start date.”

***

“There is no guarantee of continuous work. Subcontractor shall work in all areas as they become available and as directed by Whiting–Turner [Contractor]. Subcontractor shall include the inefficiencies, supervision and manpower necessary to run separate and independent crews as necessary.”

Electrical Contractors, Inc., supra, at *6 and *7.

Additionally, the electrical subcontractor needed to timely notify the general contractor of its claims:

“Article 6(d) requires timely written notice as a precondition for making such claims: [N]otice in writing shall be given to the Contractor no later than seven (7) days following the occurrence on which such claim is based…. Any claim not presented within such time period shall be deemed waived by Subcontractor. The notice must describe the dispute, controversy or claim in detail so as to allow Contractor to review its merits … [and] provide detailed information to substantiate such claim including supporting documentation and calculations.”

Electrical Contractors, Inc., supra, at *8 (internal citations omitted).

While the 7-day claim notice requirement may seem unfair, the court explained that the electrical contractor was a sophisticated entity that knowingly assumed this notice obligation.

Of Significance:

These subcontract provisions recited above are not uncommon provisions. They are rather commonplace with sophisticated contractors–there is no real shock value when looking at these provisions, right?

If you are a general contractor that includes such provisions in your subcontracts, this case gives you reassurance as to those contractual provisions that are aimed to insulate you from a subcontractor’s delay-related damage and require the subcontractor to give you timely notification of a claim (so that you are not prejudiced by the late submission of a subcontractor claim). These are important provisions for a general contractor to include in a subcontract and the provisions referenced above are certainly well-written provisions to model. It is understood that a schedule is never going to be written in stone and there will be logic and sequence changes in the schedule, so protect yourself by including such provisions (including the no-damage-for-delay provision). As you can see, there is value in doing so.

On the other hand, if you are a subcontractor, if you accept these provisions, you need to either account for these risks in your subcontract price and/or bear the risk that these provisions may be appropriately enforced against you as shown in this case. Alternatively, and as the court alluded to, as a sophisticated party, you have the option of not signing the subcontract or trying to negotiate the best subcontract for you with an understanding as to those onerous provisions and risks that you choose to accept.

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.

BECOMING A PERSONAL GUARANTOR BY EXECUTING THE PERSONAL GUARANTEE

Posted on May 29, 2015May 29, 2015 by Edward Garber

Suppliers are not ill advised. When they have a contractor execute a credit application so the contractor can procure materials on credit, they generally include a personal guarantee in the credit application. This way they have both the company that ordered the materials and the personal guarantor jointly and severally liable in the event they are not paid for the materials. Suppliers want this personal guarantee as added security because they oftentimes supply materials on credit (to a job site) through an ongoing account so that their contractor customer can have the materials ordered to perform a scope of work.

Personal guarantors sometimes try to be clever with the way they sign the personal guarantee in order to avoid any personal liability through the personal guarantee. But, not so fast…“Florida law is clear that an individual who executes a guarantee as an officer of a corporation by inserting his corporate title after his name on a document cannot defeat the purpose of the guarantee when, by its terms, the document contains provisions for individual liability.” Great Lakes Products, Inc. v. Wojciechowski, 878 So.2d 418, 419 (Fla. 3d DCA 2004); see also Nelson v. Ameriquest Technologies, Inc., 739 So.2d 161, 164 (Fla. 3d DCA 1999) (“The fact that Nelson added the letters “V.P.” after his signature could not defeat the obvious and clear purpose of the guaranty agreement; that is, to impose individual liability upon him as the signor.”).

When signing a personal guarantee, make sure you understand its implications, particularly that of personal liability in the event the company does not pay or otherwise honor the terms of the agreement. You are agreeing to become jointly and severally liable with the company to pay for any potential outstanding debt.

A DESIGN PROFESSIONAL OR ARCHITECT’S COPYRIGHT INFRINGEMENT CLAIM…DON’T THINK SO…

Posted on May 24, 2015May 24, 2015 by Edward Garber

A design professional or architectural firm has an uphill battle proving a copyright infringement claim. Why? Because it is hard…very hard…for a design firm to show that another’s design is substantially similar to their original copyrighted design to warrant a finding of copyright infringement.

This uphill burden has been reaffirmed by the Northern District of Florida in Home Design Services, Inc. v. Turner Heritage Homes, Inc., 2015 WL 1482301 (N.D.Fla. 2015). In this case, a residential design was copyrighted. The design firm that owned the copyright for the residential design sued a homebuilder for copyright infringement alleging that the homebuilder built 165 custom homes based on the design firm’s copyrighted design. The jury returned a jury verdict in favor of the design firm for copyright infringement; however, the trial court entered judgment for the homebuilder finding that the design firm failed to prove a copyright infringement claim. That’s right—the jury returned a verdict finding copyright infringement and the trial court entered a judgment for the homebuilder notwithstanding the verdict.

A leading issue in this case was whether the design firm’s copyrighted design was an original design and whether there were differences between the copyrighted design and the homebuilder’s allegedly infringing design. The reason being is that in order to prove a copyright infringement claim of an architectural design:

“For copyright infringement, a plaintiff must prove: (1) ownership of a valid copyright, and (2) copying of protectable elements. In order to establish ownership of a valid copyright, the plaintiff must prove, among other things, that the work is original. Original, as the term is used in copyright, means only that the work was independently created by the author (as opposed to copied from other works), and that it possesses at least some minimal degree of creativity. To establish copying, the plaintiff must show as a factual matter that the defendant copied the protected work, and, as a mixed question of law and fact, that the protected expression itself was copied. In the absence of direct proof of copying, a plaintiff may prove copying by demonstrating that the defendants had access to the copyrighted work and that the works are substantially similar. To show access, the plaintiff need not prove actual viewing and knowledge but simply a reasonable opportunity to view the work. The test for substantial similarity for architectural works is whether a reasonable jury could find the competing designs substantially similar at the level of protected expression. [S]pacial depictions of rooms, doors, windows, walls, etc. are not protected. [O]nly the original, and thus protected arrangement and coordination of spaces, elements and other staple building components should be compared. Moreover, given the subtle distinction between protected and unprotected expression, the Eleventh Circuit has recognized that judges, rather than juries, are usually better equipped to resolve questions of infringement. The Eleventh Circuit has further instructed that copyright protection in a compilation is thin, and that modest dissimilarities are more significant than they may be in other types of art works.”

Home Design Services, supra, at *6.

Focusing on whether the design firm’s copyrighted design was substantially similar to the homebuilder’s home design, the trial court found dissimilarities between the designs including, but not limited to, the porches were different, fireplaces were in different locations, elevations were different, hallways had different dimensions and openings, toilets were positioned differently, the nooks had different windows, master bathrooms contained differences, etc. (you get the point…there were differences). Although the design differences were slight when comparing architectural designs, the fact remained that there were dissimilarities to preclude a copyright infringement claim. No matter how modest the dissimilarities truly were, that fact that there were dissimilarities precluded a finding for copyright infringement.

USING THE YARDSTICK TEST TO PROVE LOST PROFIT DAMAGES

Posted on May 22, 2015May 22, 2015 by Edward Garber

It’s all about proving your damages! One category of consequential damages that parties sometimes seek is lost profit damages. Lost profits, though, are one of the most difficult damages to prove. If a party is interested in pursuing lost profit damages (such as when the opposing party materially breaches their contract) it is important to understand the burden and expert testimony needed to support these damages with a reasonable degree of certainty.

In a prior article, I discussed a tenant supporting a lost profit claim against its landlord due to the landlord’s breach of the lease. Recently, in Victoriana Buildings, LLC v. Ft. Lauderdale Surgical Center, LLC, 40 Fla.L.Weekly D1169b (Fla. 4^th DCA 2015), the Fourth District found that a tenant did not properly support its lost profit damages even though the landlord breached the lease. The Court affirmed that the tenant’s lost profits claim was speculative and, therefore, not recoverable. In reaching this determination, the Court explained:

Lost profits are typically proven by one of two methods: (1) the before and after theory; or (2) the yardstick test. The yardstick test is generally used when a business has not been established long enough to compile an earnings record that would sufficiently demonstrate lost profits and compares the profits of businesses that are closely comparable to the plaintiff’s. Here, the tenant’s expert consultant, in analyzing the viability of the tenant’s proposed facility, did not evaluate any comparable facility’s profitability as a “yardstick,” and the tenant’s expert CPA acknowledged that his report, which was based on the consultant’s report and forecast, was only as good or as bad as [the consultant’s] forecast. Thus, the tenant’s proof was insufficient.

Victoriana Buildings, supra (internal quotation and citation omitted).

Without a true proven history of profitability, the tenant should have used the yardstick test supported by sufficient expert testimony. Under this yardstick test, the expert would analyze closely comparable businesses to render an opinion as to the lost profits caused by the defendant’s breach. Because the tenant’s expert failed to properly perform this yardstick analysis, the tenant was denied lost profit damages since these damages became purely conjectural.

If you have incurred damages, it is important to consult with counsel to ensure the damages you have incurred can be sufficiently proven. Whether those damages are lost profit damages or another category of damages, it is crucial to sufficiently prove these damages in accordance with applicable law. Otherwise, you can wind up in the position of not properly presenting your damages at trial. In the case of a business that does not have a sufficient track record to prove lost profitability, a yardstick needs to be established to prove lost profits with a reasonable degree of certainty.

WALKING THAT MEASURED MILE TO PROVE AND CALCULATE LOST PRODUCTIVITY / INEFFICIENCY

Posted on May 16, 2015May 16, 2015 by Edward Garber

What is a lost productivity / inefficiency claim? These are claims where a contractor claims it incurred increased labor (and, perhaps, equipment usage) because an event (referred to as an impact) caused it to work inefficiently. There needs to be a causal link between the cause of the impact and the increased labor costs. See Appeals of—Fox Construction, Inc., ASBCA No. 55265, 08-1 BCPA 33810 (March 5, 2008). Numerous factors can contribute to a contractor working inefficiently. Oftentimes these claims are asserted by subcontractors associated with a delay to their scope of work or due to the manner in which the subcontractor’s work was sequenced. The bottom line is that some impact (not attributable to the contractor asserting the claim) caused the contractor to work inefficiently and incur unplanned, increased labor cost (and/or equipment usage).

Lost productivity / inefficiency claims are very challenging claims to prove and calculate. They require expert testimony to analyze cost reports, labor hours, and project documentation such as daily reports, etc. to determine the performance or production rate for a given scope of work. But, remember, lost productivity / inefficiency claims also require a causal link between the impact and the increased costs meaning an expert needs to analyze project documentation to determine the impact and the causal link to the contractor’s increased costs. Probably the most well received method to prove lost productivity / inefficiency is the measured mile methodology.

Measured Mile

The measured mile compares a period of productive work (the good period) with an unproductive period of the same work (bad period). “The measured mile approach provides a comparison of a production period that is impacted by a disruption with a production period that is not impacted.” Appeal of Bay West, Inc., ASBCA No. 54166, 07-1 BCA 33569 (April 25, 2007). The period of productive work forms the contractor’s benchmark period of productivity. Typically, this benchmark productivity is based on the number of man-hours during the productive period divided by the performance or production rate in that period to determine a productivity ratio. This productivity ratio is compared to the productivity ratio during the impacted period in order to determine an unproductivity ratio that is multiplied by the unproductive performance or production rate to determine the number of unproductive man-hours. Without determining a benchmark, the measured mile cannot be performed because there is nothing to compare the unproductive period of work to.

For instance, let’s take a rough hypothetical:

Good Period — A contractor during a productive period installs 2500 feet (or select another unit of production or performance) of “x” (you select the scope). It takes the contractor 4000 labor hours to install 2500 feet of “x.” The number of labor hours (4000) divided by the production (2500 feet of “x”) gives a productivity ratio of 1.6.

Bad Period — The same contractor gets impacted performing the same scope of “x.” During this impacted period, the contractor installs 1500 feet of “x” with 4600 labor hours. The number of labor hours (4600) divided by the production (1500 feet of “x”) gives a productivity ratio of 3.07.

Calculating Lost Productivity — Subtracting the productivity ratio during the bad impacted period (3.07) with the productivity ratio during the good unimpacted period (1.6) gives an unproductivity ratio of 1.47. This unproductivity ratio now allows you to determine the number of unproductive man-hours by multiplying the unproductivity ratio (1.47) by the unproductive performance (1500 feet of “x”) to give you 2205 unproductive man-hours. The number of unproductive man-hours would then be multiplied by a supported labor rate plus burden to give you your unproductivity costs.

If you are experiencing lost productivity / inefficiency, it is good practice to consult with a lawyer and expert in order to best prove and calculate your lost productivity / inefficiency. Although this article focuses on the measured mile methodology, there are other methodologies that can be utilized based on the facts and circumstances of the project. Just remember, these types of claims generally require expert testimony to prove.

IS THE 10 YEAR STATUTE OF REPOSE FOR CONSTRUCTION DEFECTS REALLY A 10 YEAR STATUTE OF REPOSE?

Posted on May 9, 2015May 9, 2015 by Edward Garber

It is time for a very favorable case for an owner that experiences latent defects. In construction defect cases, there is a ten-year statute of repose to sue for latent defects. Specifically, under Florida Statute s. 95.11(3)(c), the “action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest. Stated differently, the latent defect lawsuit must be commenced no later than 10 years from the latest of one of the specified conditions or else the lawsuit is forever barred.

The question is when does the ten-year repose period really begin to run; what condition specifically triggers the running of the period. The Fifth District Court of Appeal in Cypress Fairway Condominium v. Bergeron Construction Co. Inc., 40 Fla. L. Weekly D1097b (Fla. 5^th DCA 2015) concluded that the statute of repose in a construction defect case began to run on the completion of the contract which was the date the owner made final payment under the contract. Naturally, the completion of the contract would be the latest condition and completion does not occur until the owner fulfills its obligation by making final payment.

What does this mean? This means that the repose period does NOT commence when construction is actually completed or when the certificate of occupancy is issued. Rather, it commences when the owner tenders final payment to its contractor (after it accepts the construction and punchlist work).

The ramifications of this type of opinion are unknown and potentially scary. What if the owner withholds payment and does not make final payment for months if not years after the contractor completed construction and the owner has received a certificate of occupancy. Maybe there is a dispute as to punchlist or warranty items that results in the owner not making final payment. Does the owner get the benefit of withholding money or delaying making final payment? Perhaps.

There have been recent cases that have been fairly generous to owners with respect to the statute of repose in construction defect cases. Thus, if you are an owner and discover latent defects, consult with counsel because all may not be lost regarding a potential defect lawsuit. And, if you are a contractor, do not automatically dismiss a construction defect lawsuit as being outside of the statute of repose and be sure to consult with counsel to best protect your interests.

RELEASES ON FEDERAL PROJECTS — MAYBE THE RELEASE IS NOT A FINAL RELEASE

Posted on May 6, 2015May 6, 2015 by Edward Garber

Executing partial releases and a final release in consideration of payment are routine on construction projects. Counsel will correctly tell you not to sign a release if you don’t intend to release all of your claims through the date of the release. Counsel will also tell you to be sure to exempt those claims from a release that you do not intend on releasing. The reason for this is that if you sign a release and then seek damages or costs pre-dating the release, the party you gave the release too will waive it in front of your face and say “tough luck; you released these claims and costs!”

However, the opinion in H.J. Lyness Construction, Inc. v. U.S., 120 Fed.cl. 1 (Fed.Cl. 2015) gives those contractors (or subcontractors), particularly federal government contractors, that sign a release and do not exempt certain claims or costs from the release some hope that not all is lost. In this case, the federal government terminated a contractor for convenience. After the termination for convenience, the contractor submitted a release and was paid in consideration for that release. The contractor did not exempt or carve out any claims or costs from that release even though the release allowed the contractor to do so. In other words, the release did not carve out any termination for convenience settlement costs that the contractor would be entitled to. Notwithstanding, the government and contractor continued to discuss termination for convenience settlement costs and when an agreement could not be reached, the contractor filed suit.

The government moved for summary judgment that the contractor released the government for termination for convenience settlement costs because the contractor executed the unambiguous release after the termination for convenience. The contractor countered that the release did not apply to termination for convenience settlement costs and, to show this, the government continued to entertain discussions regarding these costs after it received the release the government is arguing under. Furthermore, the contractor argued that it timely and properly submitted its settlement costs in accordance with F.A.R. 52.249-2(e) that provides:

(e) After termination, the Contractor shall submit a final termination settlement proposal to the Contracting Officer in the form and with the certification prescribed by the Contracting Officer. The Contractor shall submit the proposal promptly, but no later than 1 year from the effective date of termination, unless extended in writing by the Contracting Officer upon written request of the Contractor within this 1–year period. However, if the Contracting Officer determines that the facts justify it, a termination settlement proposal may be received and acted on after 1 year or any extension. If the Contractor fails to submit the proposal within the time allowed, the Contracting Officer may determine, on the basis of information available, the amount, if any, due the Contractor because of the termination and shall pay the amount determined.

Based on these facts and circumstances, the contractor took the position that the government never intended the release the contractor furnished post-termination for convenience to operate as a final release and release of its termination for convenience costs. The Court of Federal Claims sided with the contractor:

The Court finds that through the affidavit provided by Mr. Lyness [contractor’s representative], the parties’ actions and course of conduct in this case creates a genuine issue of material fact regarding whether the release constituted a full and final release of claims given in exchange for a final payment, or was simply a routine payment application form that was used with respect to all applications for partial payments requested by HJL [contractor].

H.J. Lyness Construction, supra.

Now, why is this case helpful? Because it goes directly to the argument on federal projects that even if a contractor executed an unambiguous release and does not exempt or carve out any claims, there may be an argument that the conduct of the parties reflects that the parties did not intend the release to operate as a final release of all claims. In H.J. Lyness the argument was that the release was not intended to bar termination for convenience settlement costs even though the release was executed months after the termination for convenience.

Regardless of the holding in H.J. Lyness, it is important for contractors to read what they sign and be cognizant of those claims and costs they do not want to release. This includes executing a release without properly exempting termination for convenience settlement costs if the contractor does not intend its release to be a final release of all claims.

AN AMENDED LIEN DOES NOT DELAY THE 60 DAY WINDOW TO FORECLOSE A LIEN WHEN A NOTICE OF CONTEST OF LIEN IS RECORDED

Posted on May 1, 2015May 1, 2015 by Edward Garber

I previously discussed the value of an owner recording a Notice of Contest of Lien under Florida Statute s. 713.22 to shorten a lienor’s statute of limitations to foreclose a construction lien to 60 days from the date the lien is contested. For more information on recording a Notice of Contest of Lien please look at this posting and this posting.

What happens if after a Notice of Contest of Lien is recorded the lienor amends its construction lien? For instance, say the following sequence occurs:

1: Lien

2: Notice of Contest of Lien

3: Amended Lien

Does an owner need to record another Notice of Contest of Lien for the Amended Lien? If an owner does, then a lienor could extend its 60 day window to foreclose its lien by simply recording an amended lien.

This exact scenario was addressed long ago by the Florida Supreme Court in Jack Stilson & Co. v. Caloosa Bayview Corp., 278 So.2d 282 (Fla. 1973) which held that the foreclosure of an amended lien MUST still be brought within the 60 days from the initial Notice of Contest of Lien. In other words, the recording of an amended lien does NOT toll (or stop) the running of the 60 day window to foreclose the lien when a Notice of Contest of Lien is recorded.

Therefore, if you are an owner, there is certainly a benefit to recording a Notice of Contest of Lien. Conversely, if you are a contractor, do not think you can delay or escape the 60 day window to foreclose your construction lien if you received a Notice of Contest of Lien by simply amending your lien.