GENERAL CONTRACTOR’S ABILITY TO SUPPLEMENT SUBCONTRACTOR PER SUBCONTRACT

shutterstock_142349770As a subcontractor, you need to appreciate that the subcontract you (more than likely) sign is going to have you bear risk associated with furnishing manpower to maintain the prime contractor’s schedule and progress.   A subcontractor can factor some of this risk into the lump sum amount it agrees to in the subcontract.  But, from the general/prime contractor’s perspective, it is very important that this risk is borne by the subcontractor because there is no such thing as a schedule written in stone.  The baseline schedule, whether attached to the subcontract or not, will change.  Activities will be re-sequenced.  Activities will be added.  Activities will overlap.  Activity start dates and finish dates will change.  It is the nature of construction.  As a subcontractor, you know all of this because it is the same no matter the project. Schedules are never written in stone — they change on a regular basis.

 

The subcontract will include a number of provisions that address the schedule, the prime contractor’s discretion to adjust the schedule and supplement the work, and the subcontractor’s requirement to maintain progress.  These are provisions that shift risk to the subcontractor including:

 

  • The subcontractor will furnish all manpower to complete its scope of work;
  • Time is of the essence with respect to the subcontractor’s performance of its work;
  • The prime contractor has the right to decide the time and order of various portions of the subcontractor’s work;
  • The subcontractor must prosecute its work in a prompt and diligent manner and at such times as the prime contractor directs;
  • The subcontractor must keep itself thoroughly informed as to the overall progress of the project;
  • The subcontractor must not delay, hinder, or interfere with the progress of the project;
  • The subcontractor must notify the prime contractor within “X” days after the occurrence of the circumstances giving rise to a change (or delay) or else waive such claim for additional time or compensation;
  • If the subcontractor fails to furnish sufficient manpower or prosecute the work with promptness and diligence, which is not corrected after “X” days after receiving notice, the prime contractor can declare the subcontractor in default, supplement the subcontractor, terminate the subcontract in whole or in part, and/or complete the subcontract work at the expense of the subcontractor;
  • The prime contractor can withhold payments if the subcontractor is unable to comply with subcontractual obligations, perform its work, or is delaying or is in reasonable danger of delaying the work; and
  • The subcontractor is required to indemnify the prime contractor for damages resulting from its breaches of the subcontract (which may be an indemnification provision separate from an indemnification for personal injury or property damage claims).

 

These types of provisions are crafted a number of different ways, are perhaps more onerously drafted, but the intent is the same relating to the subcontractor assuming risk and ensuring the prime contractor has recourse against the subcontractor associated with that risk.   (An example of such risk-shifting provisions in a subcontract can be found here.)  Again, these are important provisions for prime contractors to include in subcontracts.  They are also important provisions for subcontractors to factor in the risk associated with the subcontract amount.

 

In a recent bench trial, MWH Constructors, Inc. v. Brown and Brown Electric, Inc., 2018 WL 2087687 (S.D.Fla. 2018), a prime contractor sued its electrical subcontractor for breach of subcontract and contractual indemnification associated with the subcontractor’s inability to maintain progress during the construction of a water treatment project.  The subcontractor counter-sued for its contract balance.  The subcontract at-issue contained all of the provisions discussed above.

 

During the subcontractor’s scope of work, its president and qualifier died.  Thereafter, it began to fall behind schedule and was not furnishing sufficient manpower. There were numerous discussions between the prime contractor and subcontractor regarding the subcontractor’s inability to timely complete its work.  It was discussed that the subcontractor needed additional manpower and needed to work on Saturdays to recover lost time.   The subcontractor, however, was unable to abide by its commitments.  Further meetings were held and notifications were sent to the subcontractor. The public owner notified the prime contractor the job was delayed, the electrical subcontractor was behind schedule, and was threatening to assess liquidated damages.  Finally, after the subcontractor was unable to improve its progress, the prime contractor declared the subcontractor in default and supplemented its work with another electrical subcontractor and back-charged the subcontractor for such costs.

 

Due to the supplementation, the prime contractor paid the supplemental electrical subcontractor in excess of the defaulted subcontractor’s contract balance.  The prime contractor also had to pay the defaulted subcontractor’s lower tiered subcontractors and suppliers because the defaulted subcontractor did not pay them (likely because it did not have the cash flow due to the prime contractor withholding contract balance). 

 

The trial court entered judgment in favor of the prime contractor against the subcontractor finding that the prime contractor was justified supplementing the subcontractor in accordance with the numerous contractual provisions.  The prime contractor put on evidence at trial supporting the justification in conjunction with its rights under the prime contract. 

 

Of importance, the trial court was not going to rewrite the subcontract or the risks the subcontractor assumed in the subcontract:

 

Contracts are voluntary undertakings, and contracting parties are free to bargain for-and specify-the terms and conditions of their agreement.  That freedom is a constitutionally protected right.

***

Thus, [i]t is not the function of the courts to rewrite a contract or interfere with the freedom of contract or substitute their judgment for that of the parties thereto in order to relieve one of the parties from the apparent hardship of an improvident bargain.

***

Rather, the court’s task is to apply the parties’ contract as-written, not rewrite it under the guise of judicial construction.

 

MWH Constructors, Inc., 2018 WL at *6 (internal citations and quotations omitted).

 

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.

 

EXCULPATORY PROVISIONS IN BUSINESS CONTRACTS

shutterstock_734837968-644x316An exculpatory provision in a contract is a provision that relieves one party from liability for damages.  It shifts the risk of an issue entirely to the other party.   Such a provision is generally drafted by the party preparing the contract that is looking to eliminate or disclaim liability associated with a particular risk, oftentimes a risk within their control.  These provisions are also known as limitation of liability provisions because they do exactly that — limit liability as to a risk.   For this reason, they can be useful provisions based on the context of certain risks, and are provisions that are included in business contracts (such as construction contracts).

 

While such clauses are disfavored, they are enforceable if they are drafted clearly, unambiguously, and unequivocally.  If they are unclear, ambiguous, or equivocal, they will construed against enforcement.  See Obsessions In Time, Inc. v. Jewelry Exchange Venture, LLP, 43 Fla.L.Weekly D1033a (Fla. 3d DCA 2018) (finding exculpatory clause in lease ambiguous and, therefore, unenforceable as to lessor looking to benefit from the exculpatory clause).   

 

Exculpatory clauses are enforceable only where and to the extent that the intention to be relieved from liability is made clear and unequivocal. The wording must be so clear and understandable that an ordinary and knowledgeable person will know what he is contracting away. A phrase in a contract is ambiguous when it is of uncertain meaning, and thus may be fairly understood in more ways than one.

Peterson v. Flare Fittings, Inc., 177 So.3d 651, 654 (Fla. 5th DCA 2015) quoting Tatman v. Space Coast Kennel Club, Inc., 27 So.3d 108, 110 (Fla. 5th DCA 2009). 

 

 

Because such clauses are disfavored and will be narrowly construed against the party who benefits from the clause, there are certainly public policy considerations that may come into play. See, e.g., Loewe v. Seagate Homes, Inc., 987 So.2d 758 (Fla. 5th DCA 2008) (exculpatory provision in agreement for purchase and construction of new home unenforceable to the extent it relieved homebuilder for an intentional tort and homebuilder could not contract around complying with building code). 

 

When negotiating a contract with an exculpatory provision in a contract, make sure you appreciate the risk associated with the clause.  The risk could be significant and outside of your control.  Make sure the provision is drafted in a clear, unequivocal. and unambiguous manner.  If you are dealing with such a provision after-the-fact, consult with counsel to best analyze arguments pertaining to the enforceability of that provision.

 

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

ACCOUNT FOR THE IMPOSITION OF MATERIAL TARIFFS IN YOUR CONSTRUCTION CONTRACT

shutterstock_138974732After Hurricane Irma, I wrote an article that contractors should revisit the force majeure provisions in their construction contracts.  Not later.  But Now. The force majeure provision is an important provision in a construction contract to account for certain uncertainties that you have NO control over. 

 

Recently, another reason has given rise to contractors needing to revisit their force majeure provisions, as well as any provisions dealing with material escalations. Not later.  But now.  The imposition of raw steel and aluminum tariffs (tax on imported goods) and the back-and-forth regarding a potential trade war leads to the kind of uncertainty that should be assessed as a risk.  A risk in both time and cost from material escalations.

 

Contractors want to revisit their force majeure provisions, as well as any material escalation language, for these two reasons. 

 

First, you want to ensure any delay, to the extent there is any, associated with the tariffs or potential trade war provides for a time extension.    Any impact a contractor has with the delivery or fabrication of raw steel due to the imposition of tariffs should result in an extension of time.

 

 

Second, and probably the bigger concern, is associated with price.  Higher raw steel and aluminum costs could mean you based your price on inaccurate supplier and/or subcontractor pricing (pricing that did not factor in tariffs), particularly if the raw steel has not been pre-ordered or pre-delivered. Escalating material pricing is a concern.

 

 

Moving forward, I suggest including language in the force majeure provision that accounts for the imposition of tariffs and the concern of a trade war just to be safe.  Clarity in a contract is always better.  But, adding this language will account for time, but not the escalation of steel and aluminum pricing due to the tariffs.

 

If you are entering a lump sum contract, consider factoring this issue into your pricing.  Or, alternatively, identify an allowance associated with these materials so that you are not penalized based on actual pricing that accounts for the tariff   Another thing you can do is include a contingency in your lump sum contract with language that allows you to use the contingency for this purpose.  The difference between the allowance and contingency is there is still contractor-risk with the contingency if the costs exceed the contingency agreed upon in the contract.  Finally, you can include a carefully crafted material escalations provision that does not require you to bear the risk of certain material escalations.  

 

If you are entering into a Guaranteed Maximum Price (GMP) contract, you want to factor this escalating material pricing into the GMP cap.  Most GMP contracts have (and, if not, they should have) a line item for contingency.  The contingency amount should be increased (or there should be a separate contingency) to account for this issue with language that allows the contractor to use the contingency for escalating material pricing.  Alternatively, you can identify that due to the uncertainty associated with steel or aluminum pricing (or perhaps any other pricing) the GMP includes certain allowance items which will increase the contract through change order if the cost of the item exceeds the allowance. Finally, you can include a carefully crafted material escalations provision so that you are not bearing the risk of this uncertainty, i.e., material escalations entitle you to a change order. 

 

The politics behind the tariffs are irrelevant.  What is relevant, however, is the uncertainty behind the impact and pricing associated with the imposition of tariffs and the risk assessment that needs to be factored in to deal with this uncertainty.   This uncertainty affects the costs and potential time associated with obtaining raw materials to fabricate and incorporate into an owner’s construction project.

 

If this issue is currently impacting an on-going project, be proactive and consult an attorney that can review the language in your existing contract(s) and help, as need be, craft a change order request or claim based upon what has already been agreed to.

 

 

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.

 

CONTRACTORS: REVISIT YOUR FORCE MAJEURE PROVISIONS TO ACCOUNT FOR HURRICANES

 

shutterstock_43059370We now know and can appreciate the threat of hurricanes.  Not that we did not appreciate the reality of hurricanes–of course we did–but Hurricane Harvey and Hurricane Irma created the type of actual devastation we fear because they hit close to home.  The fear came to life, creating panic, anxiety, and uncertainty.  It is hard to plan for a force majeure event such as a hurricane because of the capriciousness of Mother Nature.   But, we need to do so from this point forward.  No exception!  And, I mean no exception!!

 

A force majeure event is an uncontrollable event that cannot be anticipated with any degree of definitiveness.   The force majeure event will excusably delay or hinder performance obligations under a contract.  One type of force majeure event is a hurricane—an uncontrollable and unforeseen act of Mother Nature.   

 

Standard construction contracts will contain some type of force majeure language.  The language will entitle the contractor to an extension of time to perform since the force majeure event will have excusably delayed the contractor’s performance.  I am not going to rehash that standard language because this language needs to be modified and tailored to address the major risk of a hurricane.  Not only is time impacted, but money is impacted too.  We need to consider the total impact of a hurricane versus considering the impact in isolation or in a vacuum. 

 

Take a look at your present construction contracts.  Revisit the force majeure language.  Does this language adequately address the time and monetary impacts associated with a hurricane?  If it does, great!  If it does not, or can be written much better, now is the time to make this language a MUST-INCLUDED provision in your construction contracts because this risk is real.  It is not illusory and it will be a real risk during hurricane season.   If you do not know or are unsure as to the language, please engage a construction attorney to review your contracts or propose standard language for you catered to your business needs.  Even if you feel comfortable with the language, I would still encourage you to have a construction attorney review the language and provide constructive feedback on the language.  At this point, there is no excuse to neglect this risk or minimize the potential of a devastating time and cost impact.  Regardless of the type of construction work you perform, this risk needs to be addressed. Any owner should appreciate this risk because it is a reasonable risk that needs to be accounted for with certainty in your construction contract. Is this a risk you completely want to assume from a cost standpoint?

 

I have drafted numerous force majeure provisions tailored to the risks of a project and business objectives of a client.  I have drafted specific provisions or negotiated provisions dealing with the risk of a hurricane.   Based on this experience, here are my suggestions when considering the risk of a hurricane and the potential time and monetary impacts associated with the risk:

 

1)   Make sure there is builder’s risk insurance covering property damage during construction.  Builder’s risk insurance policies are specialized property insurance policies for construction projects.  Make sure the policy does not exclude hurricanes.  In other words, you do not want hurricanes to be an excluded peril, particularly if there is the chance your work will take place during the hurricane season and/or you are performing work where storm surge or flooding caused by a hurricane can be an issue.   If there is a sub-limit for hurricane-caused damage, know what that sub-limit is.   You want to know a) what property and materials will be covered for hurricane-caused damage, b) whether costs to protect the property and materials from the hurricane are covered, c) whether the policy covers repair costs, and 3) whether the policy covers delay-type damage caused by the hurricane.   Get a copy of the builder’s risk policy in advance.  This way you know whether or not you need to supplement the policy accordingly or, alternatively, you want specific perils covered before that policy is bound.  In fact, you will likely want to supplement this with a construction equipment / inland marine insurance policy.  Work with an insurance broker that has experience with construction projects to ensure you have the right insurance in place for the project and your business.

2)   Make sure your contract specifically identifies a named storm such as a hurricane as a force majeure event.  Make sure your contract specifically identifies a hurricane as a force majeure event.  Be specific.  A hurricane should be an event that entitles you to additional time to perform since time will be spent protecting the work and tying down equipment and materials, time will be spent dealing with the actual hurricane, and time will be spent assessing the damage, remediating the damage, and ramping back up. 

3)   Make sure your contact entitles you to delay-related compensation associated with a hurricane such as a force majeure event.  A time extension for a hurricane is a given.  But, what about compensation for the impact?  Your project schedule is not going to include the risk of a hurricane, as there is no reasonable way to include that time in a project schedule.  Hence, the time extension.   As we know though, time is money.  You want to include a provision that entitles you to compensation for the time impact.  The provision should entitle you to utilize contingency money for any delay or, perhaps more appropriately, entitle you to a change order for the time-related costs.  (I have even drafted provisions that include a specific force majeure contingency to address associated costs for a force majeure event.)  You can even stipulate to a daily rate for such time-impact costs (which I have also done) caused by a hurricane or force majeure event.  A hurricane will not only prevent you from performing, but it will shift your performance to essential activities (that will not be included in your schedule).  It is reasonable for impact-related costs to be recoverable for such a force majeure issue.  It is unreasonable for the risk to be entirely shifted to the contractor because Mother Nature is certainly a risk that a contractor cannot control.

4)   Make sure your contract entitles you to recover costs associated with preserving and protecting work in-place, materials, and equipment.  As mentioned, a hurricane will divert your performance to progressing the work to preserving and protecting work in-place, materials, and equipment.  All of this needs to be protected from prolonged, heavy wind activity, torrential rain, and potential surge and flooding.  There are costs associated with this and you want to make sure this is performed to minimize the likelihood of any loss.  You also want to make sure you have time to perform this work.  Be safe, rather than sorry, and do not wait to the last minute to see what direction the hurricane ultimately pursues.   Hurricanes, as we know, are unpredictable and take unpredictable paths.  We need to make sure we have time to not only preserve and protect the work, materials, and equipment, but that our employees and subcontractors (and their families) safely make the right decisions to protect their homes and families.  Similar to the above, make sure your contract specifies how you get paid for this type of work – whether through contingency funds or, perhaps more appropriately, a change order.  Notifying the owner in writing in advance of the protective measures being performed is always a good idea.  If the owner elects not to implement such measures because it does not want to bear the cost, then the owner is evidently bearing risk.

5)   Know your contractual notification requirements.  Your contract probably includes notification provisions to address time impacts and costs associated with protecting the work.  Make sure these provisions are reasonable in light of a hurricane or force majeure event.  Your priorities when dealing with a hurricane, in particular, will be shifted.  For this reason, you want to make sure the notification provisions are not unreasonably onerous and are more than reasonable to account for the issues you will be dealing with.  Think these issues through.  Remember, not only will you be dealing with the issues associated with the construction project, but there will be internal issues dealing with the safety of your employees, their families, and any subcontractors you hire.

 

 

Do not panic if your contract currently does not, in your opinion, sufficiently address all of these items.  You can address this moving forward.  You should address this moving forward.  Again, no excuses.  And, again, do not be reluctant to hire a construction attorney that can best protect your rights moving forward to account for this risk that we know is REAL.

 

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.