Monthly Archives: July 2015

LABOR INEFFICIENCIES – DIFFICULT TO PROVE, ESPECIALLY WHEN THE CONTRACT SHIFTS THIS RISK TO YOU

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imagesThe case of Electrical Contractors, Inc. v. Pike Co., Inc., 2015 WL  3453348 (D.Conn. 2015) demonstrates a court barring a subcontractor’s claim for labor inefficiencies based on the provisions of the subcontract.  Not only does this case demonstrate the challenges a subcontractor has in recovering labor inefficiencies based on the risks agreed to in a subcontract, but also the difficult hurdle a subcontractor has in actually proving its labor inefficiencies. 

 

In this case, the general contractor was hired to renovate a public school.  The general contractor hired an electrical subcontractor.  The subcontract contained provisions favorable to the general contractor, as set forth in more detail at the bottom of this article.  The general contractor prepared a CPM schedule to manage the progress of the construction, which was to be completed in phases.  During phase 3, the electrical subcontractor fell behind schedule.  A July 21, 2010 meeting was conducted and the general contractor advised the subcontractor to increase its manpower because the project needed to finish on time and it would not be giving the subcontractor any extension of time to perform. After the subcontractor completed its work in phase 3, it submitted a claim for its increased labor costs (e.g., labor inefficiencies) associated with performing phase 3.

 

The subcontractor sued the general contractor for breach of contract to recover its increased labor costs.  The court held in favor of the general contractor based on favorable subcontractual provisions to the general contractor and rather onerous provisions to the subcontractor.  Stated differently, the court held the subcontractor’s feet to the fire to the risks and provisions in the subcontract that the subcontractor accepted.

 

Subcontractor’s Notification to General Contractor of Claims

 

Section 5.4 of the subcontract (see below) required the subcontractor to notify the general contractor of claims within 3 days.  The subcontractor failed to comply with this claim notification procedure.  As a result, the court held that the subcontractor’s claims were barred by its failure to strictly comply with this claim notification requirement.

 

Subcontractor’s Execution of Lien Waivers in Consideration of Payment

 

The subcontractor did not submit a claim for additional labor costs associated with its phase 3 work until October 2010.  The problem, however, was that the subcontractor executed an unconditional lien waiver in September 2010 that did not reserve any rights associated with this claim.  The court held the subcontractor waived labor costs based on its execution of the unconditional lien waiver it executed.

 

Subcontractor Could Not Prove the General Contractor Breached the Subcontract

 

The subcontractor argued that the general contractor breached the subcontract by forcing the subcontractor to work inefficiently and not providing the subcontractor any extension of time to perform.

 

Section 3.4 of the subcontract (see below) contained a no-damage-for-delay provision.  The court held that any of the subcontractor’s costs associated with a delay were foreclosed by this provision.

 

Furthermore, although not mentioned but demonstrated by the facts, section 3.1 of the subcontract (see below) authorized the general contractor to modify the construction schedule to delay or accelerate work at its discretion without compensation to the subcontractor.

 

Subcontractor Could Not Prove Damages for Increased Labor Costs

 

“A subcontractor claiming compensation from a general contractor for cost overruns must establish the extent to which its costs were increased by the contractor’s improper acts because its recovery will be limited to damages actually sustained.  Generally, proof of damages should be established with reasonable certainty and not speculatively and problematically.” Electrical Contractors, Inc., supra, at *25 (internal quotations and citations omitted).

 

The court held that the subcontractor failed to prove causation of its damages–that the general contractor’s actions (whether stemming from delay or mismanagement) caused the increased labor hours that the subcontractor sought.   Among other inadequacies, the court found the subcontractor sought labor costs for a period of time in which it offered no evidence; the subcontractor made no adjustments for inefficiencies it caused; there was no consideration for labor hours the subcontractor underestimated at bid time for other phases of work; there was no consideration for labor hours the subcontractor overestimated at bid time for other phases of work; the subcontractor could not support the high hourly labor rate it based its damages on; and the baseline for which the subcontractor measured its labor overruns for phase 3 was not reliable.   The subcontractor used a total cost claim to establish its phase 3 labor cost overrun which is a disfavored method to calculate inefficiencies based on its inherent unreliability.

 

Takeaways:

 

  • Understand the risks you agree to in a contract and factor those risks into the contract price.
  • Make sure you timely submit claims in accordance with the contract.
  • Carve out exceptions to lien waivers and releases and ensure you consistently incorporate these exceptions into all lien waivers and releases you execute in consideration of payment.
  • Inefficiency damages from a subcontractor are very difficult to prove.  If you are claiming these damages, make sure you prove these damages based on a methodology that is more reliable than the total cost method (such as the measured mile or, at a minimum, the modified total cost method).  Also, make sure you have the appropriate back-up documentation to support an inefficiency claim, such as a reliable take-off of the bid amount demonstrating the labor hours and that the increased labor costs were directly caused by something the general contractor did or did not do.

 

 Provisions in the Subcontract

 

3.1 Time and Schedule Time is of the essence as to the prosecution of the Subcontractor’s Work. If requested, the Subcontractor shall provide the Contractor with scheduling information and Subcontractor’s proposed schedule for the Subcontract Work. The Contractor may prepare the Schedule of Work for the Project and Contractor shall have the right to modify the construction schedule, to suspend, delay or accelerate, in whole or in part, the commencement or execution of Subcontractor’s Work, or vary the sequence thereof, without compensation to the Subcontractor. In the event such a delay or suspension extends the overall time of performance, the time for the Subcontractor to complete its work shall be extended. The Subcontractor shall commence the Subcontractor’s Work promptly upon notice to proceed. The Subcontractor shall prosecute the Subcontractor’s Work in a prompt and diligent manner as directed by the Contractor and in accordance with the Schedule of Work without hindering the Work of the Contractor or any other subcontractor. The Subcontractor shall proceed with the Subcontractor’s Work, making all necessary deliveries, so as to make timely progress and complete the same in accordance with the Project’s Schedule of Work and as directed by the Contractor. Whenever, in the Contractor’s opinion, the Subcontractor’s Work falls behind, the Subcontractor shall increase its labor force and/or provide overtime, Saturday, Sunday and/or holiday work, and shall have each of its subcontractors do likewise, all at no additional cost to or compensation from the Contractor.

 

3.4 Delays Should the Subcontractor be delayed by the act or omission of the Contractor or by any other contractor or subcontractor on the Project, or by any cause beyond the Subcontractor’s control and not due to any fault, act or omission on its part, then the time for completion of the work shall be extended for a period equivalent to the time lost by reason of any of the aforesaid causes, as determined by the Contractor, and Subcontractor agrees to make no claim for damages for delay in the performance of this Subcontract occasioned by any act or omission to act of the Contractor or any of its representatives.

 

5.1 Change Orders and Directives The Contractor and Subcontractor agree that the Contractor may add to or deduct from the amount of Subcontract Work covered by this Subcontract Agreement, and any changes so made to the Subcontract Work, or any other parts of this Subcontract Agreement, shall be by a written Change Order. A Change Order is a written instrument prepared by the Contractor and signed by the Subcontractor stating their agreement upon the change in the Subcontract Work and the value of such change. In addition, the Subcontractor agrees to proceed with the Subcontract Work, as changed, when so directed in writing by a Construction Change Directive issued by the Contractor so as not to delay the progress of the Subcontract Work and pending any determination of the value. If the Contractor requests a proposal of cost for a change, the Subcontractor shall promptly comply with such request. Contractor shall not make changes in Subcontract Work, whether additions, deletions or other revisions in any manner except by written Change Order or Construction Change Directive. All changes in the Subcontract Work made by Change Order or Construction Change Directive shall be deemed a part of the Subcontract Work and shall be performed and furnished in strict accordance with all terms and conditions of this Subcontract Agreement and the Subcontract Documents, including the current Schedule of Work.

 

5.4 Claims If the Subcontractor believes that any order, directive or condition, other than as provided for in Paragraph 5.7 [“Unknown Conditions”], entitles him to extra compensation or an extension of time, he shall give the Contractor written notice of his claim not later than three (3) days after the occurrence of the event giving rise to the claim and shall, as soon as practicable, furnish sufficient facts in support of his position as may be necessary for a decision. Any claim by the Subcontractor for extra compensation or an extension of time not so made shall be waived, and the Subcontractor shall not be entitled to any extra compensation or extension of time as a result thereof. The Contractor shall not be obligated or liable to the Subcontractor for, and the Subcontractor hereby expressly waives any claims against the Contractor on account of, any damages, costs or expenses of any nature which the Subcontractor or its subcontractors may incur as a result of any delays, interferences, suspensions, changes in sequence or the like, arising from or out of any act or omission of, or attributable to, the Contractor, it being understood and agreed that the Subcontractor’s sole and exclusive remedy in such event shall be an extension of time, but only in accordance with the provisions of this Subcontract Agreement.

 

 

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.

 

 

CONTRACTUAL LIABILITY EXCLUSION IN CGL POLICIES AND “INSURED CONTRACT” EXCEPTION

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Picture1Commercial General Liability (CGL) policies contain a CONTRACTUAL LIABILITY EXCLUSION (see adjacent picture). The contractual liability exclusion operates to BAR personal injury and property damage claims “which the insured is obligated to pay by reason of the assumption of liability in a contract or agreement.”  Think indemnification claims which are assumption of liability claims and common in construction. 

 

But, and this is an important but, there are two exceptions to this exclusion.

 

First, the contractual liability exclusion does not apply to liability for damages “that the insured would have in the absence of the contract or agreement.”   Think tort claims.

 

Second, the contractual liability exclusion does not apply to liability for damages “assumed in a contract or agreement that is an ‘insured contract’.”  The key to this exception is the definition of an “insured contract.” 

 

Applicable to construction, a key definition of an “insured contract” is “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization.”  This portion of the “insured contract” definition should ideally bring contractual indemnification claims back into play so that contractual indemnification claims are not barred by the contractual liability exclusion.

 

Be careful, though.  There are endorsements to CGL policies that have modified the definition of “insured contract” to either remove the aforementioned definition all together, meaning contractual indemnification claims would be excluded.  This is a bad endorsement to the definition of “insured contract” if you are involved in construction.

 

Or, this key definition of “insured contract” has been narrowed to include the following underlined language “that part of any contract…pertaining to your business…under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization, provided the bodily injury or property damage is caused, in whole or in part, by you or those acting on your behalf.”  This means that if you contractually agree to indemnify another for that person’s negligence, this would not meet the definition of “insured contract” since you are agreeing to indemnify another for negligence not caused in whole or in part by you. 

 

For example, the opinion in Mid-Continent Casualty Co. v. Royal Crane, LLC, 2015 WL 3609062 (Fla. 4th DCA 2015), discusses this narrowed definition of “insured contract” with the underlined language above.  In this case, a subcontractor leased a crane and crane operator from a rental company.  The rental agreement between the subcontractor and rental company contained the following contractual indemnification language:

 

“Lessee [subcontractor] agrees to indemnify, defend and hold harmless Lessor [rental company], its employees, operators and agents from any and all claims for damage to property, damage to the work or bodily injury (including death) resulting from the use, operation, or possession of the crane and operator whether or not it be claimed or found that such damage or injury resulted in whole or in part from Lessor’s negligence, from a defective condition of the crane or operator or from any act, omission or default of Lessor.”

 

 

In other words, the subcontractor was agreeing to indemnify the rental company for the rental company’s negligence.  This is known as a broad form indemnification provision.

 

During construction, a worker was hurt when a truss fell from the crane.  The worker sued the rental company and the crane operator for negligence.  The rental company and operator third-partied in the subcontractor based on the contractual indemnification provision in the rental agreement. However, the subcontractor’s CGL insurer denied coverage (and, thus, a defense in the lawsuit) based on the contractual liability exclusion.

 

As a consequence of the CGL insurer’s immediate denial of coverage, the subcontractor entered into a Coblentz settlement agreement with the rental company that allowed the rental company to sue the subcontractor’s CGL’s insurer for its wrongful refusal to deny the subcontractor a defense and for coverage under the subcontractor’s policy.  

 

Coblentz Settlement Agreement

 

In a nutshell, a Coblentz settlement agreement is an agreement between an insured and a third-party claimant where the insurer denied coverage and, thus, the duty to defend its insured in an underlying lawsuit.  The insured agrees to give the claimant a consent judgment to resolve the lawsuit and an assignment of its rights under its CGL policy to the claimant in exchange for the claimant not enforcing the consent judgment against the insured.  This allows the claimant to now sue the insured’s CGL insurer directly to enforce the consent judgment.  In doing so, the claimant must still prove: (a) the insurer wrongly refused to defend its insured, (b) there is coverage under the policy, and (3) the negotiated consent judgment was made in good faith and is reasonable. But, the consent judgment prevents the insurer from trying to argue the liability of the insured since that could have been argued in the underlying lawsuit that the insurer refused to defend its insured in.  See Royal Crane, supra, at *4-5. (For more information on Coblentz settlement agreements, check out this presentation that discusses this in detail.)

 

“Insured Contract”

 

But, the heart of the case really pertained to the contractual liability exclusion and the definition of an “insured contract” as narrowed by endorsement. With respect to the definition of “insured contract” in the policy (see above language), the Fourth District Court of Appeals importantly held:

 

“[A]n indemnity agreement can be an ‘insured contract’ under the policy where the injury is caused by the indemnitee’s negligence, so long as the named insured ‘caused’ some part of the injuries or damages or is otherwise vicariously liable.”

Royal Crane, supra, at *7. 

 

 

In other words, taking the above fact pattern, the indemnity agreement could constitute an “insured contract” to be excepted from the contractual liability exclusion if the worker’s injury was caused by the rental company’s (indemnitee) negligence, so long as the subcontractor (named insured in the CGL policy) caused some part of the injuries or was otherwise vicariously liable to the rental company for the injuries.

 

 Unfortunately for the rental company, even under this favorable definition of an “insured contract”, the rental company’s third-party complaint against the subcontractor still did not trigger a duty of subcontractor’s CGL insurer to defend and cover the subcontractor:

 

“Hunter Crane’s [indemnitee-rental company] third party complaint did not assert a legal theory under which Cloutier [insured-subcontractor] can be said to have ‘caused’ the injury in whole or in part.  No allegation described how Cloutier contributed to causing the accident.  No allegation attempted to invoke the borrowed servant doctrine, which dictates that ‘one who borrows and exercises control over the servant or worker of another in effect assumes all liability for the activities of the borrowed servant or worker.’ Nor did the third party complaint cast Cloutier as the employer of an independent contractor who actively participated in or interfered with the job to the extent that it directly influenced the manner in which the work was performed.”

Royal Crane, supra, at *7 (internal quotations omitted).

 

 

For this reason, the Fourth District sided with the CGL insurer finding that the contractual liability exclusion barred coverage to the subcontractor such that the CGL insurer had no duty to defend or cover the subcontractor in the underlying litigation.  This also meant that the rental company’s Coblentz settlement agreement provided it no value because it already agreed to give up rights to collect against the subcontractor and it could no longer collect against the subcontractor’s CGL insurer.  What this case does exemplify, however, is the importance of pleading allegations to maximize insurance coverage as well as a more relaxed definition of an “insured contract”  to hopefully prevent the application of the contractual liability exclusion.

 

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.

 

CONSTRUCTION SCHEDULING IS AN IMPORTANT TOOL

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imagesConstruction scheduling is an important tool for planning, managing, and forecasting the performance of work on construction projects.   Generally CPM (critical path method) schedules, or schedules depicting the project’s critical path, are prepared beginning with the baseline schedule (the initial as-planned schedule) followed by schedule updates (perhaps monthly updates) as the work progresses.  Schedules identify milestone dates (such as the substantial completion date) as well as the dates and durations of construction activities / tasks.

 

Check out this chart for understanding key terms and meanings when it comes to CPM (critical path method) scheduling. 

 

Besides scheduling being a tool used for project management, schedules are helpful in assessing and measuring delays to the critical path, the acceleration of activities, and inefficiencies. 

 

Finally, check out this article for more information on the importance of understanding construction scheduling for strong project management.

 

 

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.

 

WHAT IS A FRAUDULENT LIEN?

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What is a fraudulent lien? 

 

Just because a construction lien is recorded does not mean the lien is a fraudulent lien.  In fact, getting a lien declared a fraudulent lien is not an easy feat.

 

A fraudulent lien is defined in Florida’s Lien Law.  Florida Statute s. 713.31(2)(a) states:

 

“Any lien asserted under this part in which the lienor has willfully exaggerated the amount for which such lien is claimed or in which the lienor has willfully included a claim for work not performed upon or materials not furnished for the property upon which he or she seeks to impress such lien or in which the lienor has compiled his or her claim with such willful and gross negligence as to amount to a willful exaggeration shall be deemed a fraudulent lien.”

 

But, “a minor mistake or error in a claim of lien, or a good faith dispute as to the amount due does not constitute a willful exaggeration that operates to defeat an otherwise valid lien.” Fla. Stat. s. 713.31(2)(b).

 

So, a lien that (a) willfully exaggerates the amount, (b) willfully includes work not performed or materials not furnished, or is (c) compiled with willful and gross negligence, constitutes a fraudulent lien.   But, a minor mistake in a lien does not constitute willful exaggeration to constitute a fraudulent lien. And, a good faith dispute as to what a lienor claims it is owed does not constitute willful exaggeration to constitute a fraudulent lien.

 

What is the recourse if a fraudulent lien is recorded?

 

Florida Statute s. 713.31(2)(b) explains:

 

“It is a complete defense to any action to enforce a lien under this part, or against any lien in any action in which the validity of the lien is an issue, that the lien is a fraudulent lien; and the court so finding is empowered to and shall declare the lien unenforceable, and the lienor thereupon forfeits his or her right to any lien on the property upon which he or she sought to impress such fraudulent lien.”

 

So, if a fraudulent lien is declared, the lienor loses its lien—the lien becomes unenforceable. 

 

Plus, with respect to an action for damages, s. 713.31(2)(c) states:

 

“An owner against whose interest in real property a fraudulent lien is filed, or any contractor, subcontractor, or sub-subcontractor who suffers damages as a result of the filing of the fraudulent lien, shall have a right of action for damages occasioned thereby. The action may be instituted independently of any other action, or in connection with a summons to show cause under s. 713.21, or as a counterclaim or cross-claim to any action to enforce or to determine the validity of the lien. The prevailing party in an action under this paragraph may recover reasonable attorney’s fees and costs. If the lienor who files a fraudulent lien is not the prevailing party, the lienor shall be liable to the owner or the defrauded party who prevails in an action under this subsection in damages, which shall include court costs, clerk’s fees, a reasonable attorney’s fee and costs for services in securing the discharge of the lien, the amount of any premium for a bond given to obtain the discharge of the lien, interest on any money deposited for the purpose of discharging the lien, and punitive damages in an amount not exceeding the difference between the amount claimed by the lienor to be due or to become due and the amount actually due or to become due.”

 

So, in addition to the fraudulent lien being declared unenforceable, the lienor can be liable for damages including, without limitation, attorneys’ fees, court costs, and, potentially, punitive damages in an amount not exceeding the difference between the amount claimed by the lienor to be due and the amount actually due.

 

What does this mean?

 

It is important for lienors  to consult with counsel prior to preparing and recording a lien since a routine defense to a lien is that the lien is an unenforceable fraudulent lien.

 

Here are important tidbits regarding fraudulent liens:

 

 

  • Including amounts in the lien NOT authorized by contract can render the lien fraudulent. See Skidmore, Owings, and Merrill v. Volpe Const. Co., Inc., 511 So.2d 642, 644 (Fla. 3d DCA 1987) (“The inclusion of items not authorized by change orders or by contract renders the lien fraudulent and unenforceable.”); accord In re Hayes, 305 B.R. 361, 366-67 (M.D.Fla. 2003).   For instance, think disputed change order requests.  Sometimes, it is better to pursue these amounts in a breach of contract action so as not to risk the lien being declared fraudulent.  But see In re American Fabricators, 917 B.R. 987, 992 (M.D.Fla. 1996): “The test for determining whether extras [changes] are lienable under Florida’s mechanics’ lien law is whether work was performed (i) in good faith; (ii) within a reasonable time; (iii) pursuant to the terms of the contract; and (iv) is necessary to finish the job.”

 

  • Consulting with counsel including full and complete disclosure of pertinent facts regarding the lien will help establish that there is a good faith dispute as to the amount in the lien and, therefore, there is no willful exaggeration to support a fraudulent lien.   As one appellate court explained “[A] lienor can rely on consultation with counsel prior to filing the claim of lien as evidence of good faith only in the event of a full and complete disclosure of the pertinent facts to the attorney from whom the advice is sought before the lienor acts on the advice. Consultation with an attorney is not entitled to any legal weight if the contractor did not disclose all pertinent facts to the attorney.”  Check out this article for more information on the value of consulting with counsel.

 

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.

 

 

 

CHARTS AND GRAPHICS SUMMARIZING PAYMENT BOND AND CONSTRUCTION LIEN RIGHTS

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imagesAs they say, a picture is worth a 1,000 words.  How about charts and graphics?

 

Check out this chart that summarizes preserving and enforcing construction lien and payment bond rights in Florida.

 

Check out this chart that summarizes Miller Act payment bond rights in comparison to Florida private and public payment bond rights.

 

Check out this graphic that depicts Miller Act payment bond claimants.

 

And, finally, check out this graphic that depicts those entities entitled to construction liens and payment bond rights under Florida law.

 

 

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.