Monthly Archives: February 2016

QUICK NOTE: DON’T NEGLECT CONDITIONS PRECEDENT TO PAYMENT IN YOUR CONTRACT

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imagesThere is a good chance your contract contains conditions precedent to payment.  Such conditions precedent to payment include waivers and releases of lien (and, perhaps, claims) and contractually required warranties.  Make sure to comply with conditions precedent to payment!

 

In a case where a subcontractor sued a payment bond surety, the court held the subcontractor’s lawsuit was premature because the subcontractor did not comply with a condition precedent to payment, that being the submission of a release in satisfactory form.  Until such condition precedent was satisfied, payment was not due and owing the subcontractor.  

 

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.

 

FEDERAL GOVERNMENT TERMINATING FOR DEFAULT “SEPARABLE” CONTRACT

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UnknownIf a contractor is terminated for default on a federal project (really, any project), the objective for the contractor is to convert that termination for default into a termination for convenience so that the contractor can get paid for work performed and associated profit on that work through the date of the termination. For more information on termination for defaults and convenience, check out this article and this article.

 

The Armed Service Board of Contract Appeals (ASBCA) decision, Nelson, Inc., ASBCA No. 57201, 2015 WL 959241 (ASBCA 2015), provides an example of the government terminating a prime contractor for default where the prime contractor argued the termination was improper.  The prime contract called for the construction of stone dikes at four sites along the Mississippi River.  Each site had separate pricing, separate notices to proceed, and separate performance periods and durations for the construction of the stone dikes. After the prime contractor had started to perform at two of the four sites, the government terminated the prime contractor for default based on the prime contractor’s failure to timely perform in accordance with the schedules for those sites. 

 

The prime contract included the F.A.R. 52.249.10 clause (set forth in full at the bottom of this posting) relating to termination for defaults.   Applicable here, F.A.R. 52.249-10(a) and (c) provide:

 

(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

***

(c) If, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been issued for the convenience of the Government.

 

This case focused on the language “separable part” in F.A.R. 52.249-10(a) to determine whether the government properly terminated the prime contractor from ALL four of the sites along the Mississippi River when the termination focused on the prime contractor’s delay at only two of those sites. 

 
“The government has the burden of proving that the termination for default was justified.”  Nelson, Inc., supra, citing Libson Contractors, Inc. v. U.S., 828 F.2d 759, 764 (Fed. Cir. 1987).   When a contract is separable, or divisible, “and a contractor is delinquent only as to a separable part of the contract work, it is improper for the contracting officer to terminate for default the entire contract.”  Nelson, Inc., supra, citing Overhead Electric Co., ASBCA No. 25656, 1985 WL 16703 (1985). 

 

The ASBCA found that the four sites were separable because each site had separate performance periods, notices to proceed, and pricing.  The commencement of the prime contractor’s work at one of the sites was not dependent on or related to its completion of work at another site. (To support the divisibility of the work, the ASCBA stated: “Work at each of the locations did not involve sequential or incremental and interdependent progression of construction, e.g., of one building or levee at one contiguous site.” Nelson, Inc., supra.)   Therefore, the ASBCA found that terminating the prime contractor for default from all four of the sites was improper since the prime contractor’s work was separable (and the government based the termination on delay of two of the four separable sites).

 

Importantly, even when a prime contractor challenges a termination for default claiming it should be converted to a termination for convenience, the prime contractor needs to comply with the Contract Disputes Act.  In other words, the prime contractor needs to submit its termination for convenience costs / claim. For more information on this important issue, check out this article. 

 

 

F.A.R. 52.249-10 Default (Fixed-Price Construction)

(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if—

(1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and

(2) The Contractor, within 10 days from the beginning of any delay (unless extended by the Contracting Officer), notifies the Contracting Officer in writing of the causes of delay. The Contracting Officer shall ascertain the facts and the extent of delay. If, in the judgment of the Contracting Officer, the findings of fact warrant such action, the time for completing the work shall be extended. The findings of the Contracting Officer shall be final and conclusive on the parties, but subject to appeal under the Disputes clause.

(c) If, after termination of the Contractor’s right to proceed, it is determined that the Contractor was not in default, or that the delay was excusable, the rights and obligations of the parties will be the same as if the termination had been issued for the convenience of the Government.

(d) The rights and remedies of the Government in this clause are in addition to any other rights and remedies provided by law or under this contract.

 

 

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

 

 

SUBCONTRACTORS MAY (LIKELY) BE REQUIRED TO STAY THEIR MILLER ACT PAYMENT BOND CLAIMS PENDING THE OUTCOME OF THE CONTRACT DISPUTES ACT RESOLUTION PROCESS

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UnknownIf you are a subcontractor on federal construction projects, the opinion by the District Court of Alaska in U.S. f/u/b/o Brice Environmental Services Corp. v. Bhate Environmental Associates, Inc., 2016 WL 544406 (D.Alaska 2016),  provides an interesting or not-so-interesting outlook on subcontractors that participate (perhaps by choice) in the request for equitable adjustment (REA) and Contract Disputes Act dispute resolution process.  (See this article for more on this outlook that creates a conflict between a subcontractor’s Miller Act payment bond rights and a prime contractor’s participation in the Contract Disputes Act dispute resolution process.) 

 

In this matter, a soil remediation subcontractor submitted an REA to the prime contractor for approximately $3 Million associated with the prime contractor’s standby and additional work directives.  The subcontractor claimed that most of the REA was unrelated to issues caused by the owner, but rather, caused by the prime contractor.  The subcontractor and prime contractor agreed to a mutual termination of the subcontractor and the subcontractor reduced its REA to approximately $1.1 Million (to include only incurred costs versus anticipated costs).  The prime contractor then submitted a change order request to the federal government.  The subcontractor shortly thereafter sued the prime contractor and its Miller Act payment bond surety.

 

The prime contractor and its Miller Act payment bond surety moved to stay the lawsuit pending the completion a Contract Disputes Act resolution and, if required, completion of arbitration thereafter.  The subcontractor did not oppose staying its Miller Act payment bond claim pending arbitration with the prime contractor, but opposed staying the case pending the resolution of the prime contractor’s Contract Disputes Act claim. However, the subcontractor acknowledged that claims attributable to the federal government are passed through to the government and that the subcontractor shall not maintain any proceeding against the prime contractor with respect to government-related (owner) claims until resolution of Contract Dispute Act claims.  Moreover, the subcontract provided for the completion of the Contract Disputes Act resolution process between the prime contractor and federal government before the subcontractor could maintain any proceeding against the prime contractor in connection with any omission, default, or act by the federal government.   

 

 

Here, the subcontractor could not establish that the federal government’s acts did not contribute to its claims against the prime contractor; and, the prime contractor submitted a change order to the federal government that included the subcontractor’s costs supporting its position that the federal government’s acts were connected to the subcontractor’s claim.  Nonetheless, the subcontractor argued it would be unfair if it had to bear the brunt of waiting for the resolution of any Contract Disputes Act claim between the prime contractor and federal government before the subcontractor could pursue its claim against the prime contractor.  The Court dismissed this argument and stayed the action pending the outcome of the Contract Disputes Act resolution process between the prime contractor and federal government expounding:

 

The economic strain of awaiting resolution of the CDA procedures between Defendant Bhate [prime contractor] and AFCEC [federal government] is, while burdensome, still a reasonably foreseeable event under the Subcontract. Furthermore, denying the Motion to Stay and allowing this matter to proceed would bifurcate the matter, creating parallel proceedings involving many of the same facts and witnesses. Additionally, it could potentially force Defendants [prime contractor and surety] to take inconsistent positions in the simultaneous proceedings, supporting Plaintiff’s claims against AFCEC while defending against them in the arbitration between the parties. An order staying this matter is supported not only by the contract, but also the promotion of judicial economy and efficiency.

Bhate Environmental Associates, supra, at *4. 

 

This is undoubtedly a harsh ruling for a subcontractor that is now forced to wait a potentially long time while the prime contractor participates in the Contract Disputes Act resolution process. While harsh, the subcontractor agreed to bear this risk in its subcontract.  And, from the Court’s rationale, even if the subcontractor did not bear this risk, the Court still found that staying the subcontractor’s claims promoted judicial economy since it prevented the prime contractor from dealing with simultaneous disputes (one with the subcontractor and another with the federal government) and taking inconsistent positions.  

 

From the prime contractor’s perspective, this language that requires the subcontractor to bear this risk and stay any dispute pending the outcome of the Contract Disputes Act resolution process is extremely important language (based on the precise reasoning by the Court quoted above). 

 

From the subcontractor’s perspective, this reinforces the notion that it is imperative for parties to appreciate the risks they are agreeing to in their contracts, particularly as it relates to the resolution of disputes.  Also, this reinforces the risk that a subcontractor performing federal construction work may have to bear irrespective of the subcontract.  

 

Although the subcontractor is now in a wait-and-see mode while the Contract Disputes Act process runs its course, the subcontractor was smart by perfecting its Miller Act payment bond rights by timely filing suit.  Even though the prime contractor’s Contract Disputes Act resolution process may take some time, the prime contractor and its payment bond surety will ultimately have to deal with this dispute if the outcome of its Contract Disputes Act claim does not fully resolve the subcontractor’s claim to the subcontractor’s satisfaction.

 

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.

 

 

MAKE SURE YOU HAVE THE SUBCONTRACTOR EXCEPTION TO THE “YOUR WORK” EXCLUSION

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imagesI previously discussed the importance of the subcontractor exception to the “your work” exclusion in CGL policies (exclusion l) for contractors and subcontractors that subcontract out scopes of work.  Without this exception, the CGL policy provides minimal (and I mean minimal) coverage for property damage associated with construction defects.  If you are involved in construction, you categorically need to make sure there is a subcontractor exception to the “your work” exclusion in your CGL policy.  The subcontractor exception to the “your work” exclusion is the language bolded below that negates the application of the exclusion:

 

 

 

This insurance does not apply to:

 

l. Damage to Your Work

 

 

“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard”.

 

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

 

The Middle District in Auto-Owners Ins. Co. v. Elite Homes, Inc., 2016 WL 409577 (M.D.Fla. 2016) recently issued an opinion involving the application of the “your work” exclusion in a homebuilder’s CGL policy that did not have the subcontractor exception (the language bolded above).  Ouch!!!!  Without this exception, the policy excluded from coverage “property damage to your work arising out of it or any part of it and included in the products-completed operations hazard.”  Elite Homes, supra, at *2.  But again,there was no subcontractor exception that negated the application of this provision to work performed by a subcontractor.

 

What is the impact of not having the subcontractor exception to the “your work” exclusion?  This case explains.  The owners sued the homebuilder for water intrusion and damage from window defects.  The complaint alleged that the leaky window(s) caused damage to drywall, insulation, interior finishes, wood frame, and sheathing.    The homebuilder’s CGL insurer denied the homebuilder a defense and coverage based on the “your work” exclusion—the owner alleged damage to the homebuilder’s work (the structure of the home) but nothing else.  The Middle District concurred that the water damage alleged in the owner’s complaint arose out of the homebuilder’s work and was damage to the homebuilder’s work (the home).  Hence, the “your work” exclusion barred coverage for the owner’s construction defect lawsuit against the homebuilder.

 

This opinion is painful because it illustrates the non-value the CGL policy provided to the homebuilder for property damage associated with defective windows.  This outcome was the result of a CGL policy that eliminated the subcontractor exception to the “your work” exclusion.  If the policy had this subcontractor exception, then there would have been coverage for the water damage caused by the defective windows and the homebuilder’s CGL insurer would have been obligated to defend the homebuilder in the owner’s lawsuit.  The homebuilder would have been able to say that it hired a glazer (subcontractor) that performed the window installation and the glazer’s defective window installation caused damage to other subcontractors’ work.  

 

Make sure to review your CGL policy.  If you do not have the subcontractor exception to the “your work” exclusion, the outcome in this case could likely be the outcome in your case dealing with property damage caused by defective construction.  Consult with your insurance broker because this subcontractor exception to the “your work” exclusion is a must in construction!  

 

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.

 

 

 

QUICK NOTE: HAVE YOU SEEN THE “SEPARATION OF INSUREDS” PROVISION IN YOUR CGL POLICY?

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imagesHave you ever looked at your CGL policy and seen the “Separation of Insureds” provision? You must have seen it but perhaps it does not ring a bell.  If you are an additional insured under another’s policy or have additional insured under your policy, this is an important provision.  Check out this article to understand the application of the “Separation of Insureds” provision in your CGL policy. 

 

 

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.

 

QUALIFYING AGENTS AND UNLICENSED CONTRACTING – MORE QUESTIONS THAN ANSWERS

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imagesFlorida’s licensing requirements for contractors is a complicated statutory framework.  This complication was exemplified in the First District Court of Appeal’s decision in Taylor Morrison Services, Inc. v. Ecos, 163 So.3d 1286 (Fla. 1st DCA 2015), a case I believe leads to more questions than actual answers relating to the status of a contractor’s qualifying agent. 

 

 

Homeowners entered into a contract with a homebuilder on February 13, 2004 for the construction of a home.  The homebuilder submitted a building permit application (for purposes of obtaining a building permit).  A qualifying agent of the homebuilder that previously resigned from the company prior to the date of the contract executed the application.  This individual testified she had no involvement with the project, did not authorize the homebuilder to pull a permit for this project, did not supervise this project, and doubted the authenticity of her signature on the application. Notwithstanding, the homebuilder had another designated qualifying agent testify he was employed with the homebuilder during various capacities during the relevant contract period.   However, he also did not appear to supervise the project.

 

 

After closing, the homeowners sued the homebuilder for negligence by an unlicensed contractor (per Florida Statute s. 768.0425) due to construction defects.  The issue turned on whether the homebuilder was licensed at the time of contract. The trial court ruled the homebuilder was not licensed based on the fact that the person that pulled the building permit was no longer affiliated with the contractor at the time of contract and did not supervise the construction.

 

 

On appeal, the First District focused on the following applicable language in Florida’s contracting licensing law  (embodied in Florida Statutes Chapter 489):

 

Florida Statute s. 489.128

 

(1) [C]ontracts entered into…by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor

 

(1)(a)  A business organization (e.g, company) is unlicensed if the business organization does not have a primary or secondary qualifying agent in accordance with this part concerning the scope of the work to be performed under the contract.

 

(1)(c) A contractor shall be considered unlicensed only if the contractor was unlicensed on the effective date of the original contract for the work, if stated therein, or, if not stated, the date the last party to the contract executed it, if stated therein. If the contract does not establish such a date, the contractor shall be considered unlicensed only if the contractor was unlicensed on the first date upon which the contractor provided labor, services, or materials under the contract

 

Florida Statute s. 489.105

 

(4) “Primary qualifying agent” means a person who possesses the requisite skill, knowledge, and experience, and has the responsibility, to supervise, direct, manage, and control the contracting activities of the business organization with which he or she is connected; who has the responsibility to supervise, direct, manage, and control construction activities on a job for which he or she has obtained the building permit; and whose technical and personal qualifications have been determined by investigation and examination as provided in this part, as attested by the department.

 

(5) “Secondary qualifying agent” means a person who possesses the requisite skill, knowledge, and experience, and has the responsibility to supervise, direct, manage, and control construction activities on a job for which he or she has obtained a permit, and whose technical and personal qualifications have been determined by investigation and examination as provided in this part, as attested by the department.

 

 

Based on this language, the homeowners argued that a business organization does not have a primary or secondary qualifying agent unless a licensed contractor (qualifying agent) obtained the building permit for a project and supervised that project.  The First District disagreed and reversed the trial court explaining:

 

The requirement that a business organization have a qualifying agent “concerning the scope of the work to be performed under the contract” refers to the qualifying agent’s type of licensure, not to the agent’s actual performance with respect to a particular job or permit or even to an agent’s assignment to a particular contract. Section 489.128(1)(a)’s requirement that the business organization have a qualifying agent “concerning the scope of the work to be performed under the contract” means the business organization must have at its disposal a person who is recognized as a qualifying agent and licensed as an individual to perform the type of work addressed in the contract.

***

In consideration of the date requirement, the statutory definitions of “qualifying agent,” and the modifier “concerning the scope of the work to be performed under the contract,” we conclude that the licensure question under section 489.128(1) turns on whether the business organization is associated with a person licensed for the type of work to be performed under the contract as of the effective date of the contract, irrespective of whether that person ultimately obtains the permit and supervises the construction under the contract.

***

[A] person can be a qualifying agent in a general sense, even though the person has not obtained the permit for a particular job. In other words, chapter 489 recognizes “qualifying agent” as a position with respect to a business organization and not only as a position in relation to a specific project.

***

Although Appellant may have violated the law by building the home with a contractor other than the one whose name appears on the permit, by using Steiner’s license [person that resigned prior to contract] when she was not affiliated with the project, and by conducting the project with inadequate supervision, these transgressions did not retroactively render Appellant unlicensed within the meaning of section 489.128. Appellant’s apparent violations of the law occurred after the effective date of the contract. Thus, they are irrelevant to the narrow issue of whether Appellant was licensed on that date….

Taylor Morrison, supra, 1290-1292.

 

 

More Questions than Answers

  

What does the First District’s decision actually mean? How far does this decision extend?

 

-Does it mean that a non-licensed contractor that has another licensed contractor pull a permit becomes a licensed contractor simply by having the contractor that pulled the permit testify that he/she served as the qualifying agent? 

 

 

-Does it mean that a licensed contactor can simply loan his/her license by pulling permits and testifying he/she served as the qualifying agent despite having no involvement or, perhaps, knowledge of the project?

 

 

-Does it mean that a contracting company that loses its qualifier can have any licensed contractor testify that he/she was serving as the qualifier of the company?

 

 

-Does it mean that an unlicensed contracting company can have a permit pulled by a sister company, parent company, or related company as long as the person that pulled the permit testifies that he/she served as the qualifier of the company?

 

 

-Does it mean that it is acceptable for a contractor to construct a project by another person/ licensed contractor that was not identified on the permit?

 

 

Here, the homebuilder had another employee testify that he served as a qualifying agent of the homebuilder even though he did not pull the permit or supervise the construction.  Apparently, though, he was listed as a qualifier of the company on the effective date of the contract.  Thus, even though the qualifier did not sign the permit application, the homebuilder still had a qualifier, and was thus licensed, as of the effective date of the contract.  This makes sense; it is just uncertain how far this rationale extends relating to qualifying agents when determining whether a contractor was licensed or unlicensed (see unanswered questions above).

 

Importantly, and irrespective of whether the homebuilder was licensed, the court noted that whether the qualifier carried his responsibility faithfully was a separate question not before the court.  Thus, the court left open the door for potential claims and transgressions relating to this issue in other analogous matters. 

 

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.

 

UNDERSTAND PROJECT DELIVERY METHODS SO THAT YOU SELECT A METHOD THAT BEST MEETS YOUR NEEDS

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There are numerous project delivery methods or a method to deliver an owner the design and construction of a project.  Selecting a project delivery method requires the owner to consider many factors including the 1) project size, complexity, and scope, 2) insurance, 3) emerging technology such as building information modeling, 4) lean construction, 5) sustainability, 6) risk allocation, 7) control, 8) internal resources, 9) budget, 10) schedule, 11) contractor input during preconstruction, 12) risk allocation, 13) dispute resolution, and 14) collaboration amongst ownership, the design team, and the construction team. After carefully considering all of these factors, the objective is for an owner to select the project delivery method that will best bring it value including allocating responsibility of the design and construction to those best equipped to manage and handle that responsibility.  Learn more about the following project delivery methods by analyzing  considerations and perspectives of each method in the attached primer:

 

1. Design-bid-build

2. Multi-prime

3. Design-build

4. CM-agency

5. CM-at risk

6. Integrated project delivery

7. Public private partnership

[gview file=”https://floridaconstru.wpengine.com/wp-content/uploads/2016/02/Project-delivery-handout.pdf”]

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.