INDUSTRY FORM CONTRACTS SERVE AS A TEMPLATE FOR YOUR CONSTRUCTION CONTRACT

Recently, I put on a presentation on construction contracts–considerations when using an industry form contract as the template for your construction contract.  There are good industry form contracts that contemplate many different project delivery methods and objectives.  These industry form contracts are promulgated by widely respectable organizations including the AIA, ConsensusDocs, EJCDC, and DBIA.  Based on your needs, these associations also promulgate industry form exhibits to use with your contract (e.g, payment application, schedule of values, payment bond, performance bond, dispute review board, electronic communications protocol, BIM, certificate of substantial completion, change order, construction change directive, green building, RFI, and many more!).    

 

Below is a chart I put together of a comparison of some of the common risk allocation provisions in the standard general conditions between an owner and contractor in the AIA, ConsensusDocs, and EJCDC as a frame of reference.  All of these standard form agreements serve as valuable templates, but they still require modifications based on the objectives of the parties and the preferred project delivery method.

 

Download (PDF, 196KB)

 

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.

IS AN INITIAL DECISION MAKER, PROJECT NEUTRAL, OR DISPUTE RESOLUTION BOARD RIGHT FOR YOU?

UnknownRecently, I participated in a roundtable hosted by JAMS with experienced South Florida construction lawyers and retired circuit court judges to discuss the pros and cons of utilizing an initial decision maker (“IDM” and also referred to as a project neutral) or a dispute resolution board (“DRB”) to resolve disputes on construction projects.  The IDM and DRB are designed to resolve disputes, specifically claims (whether for time, money, or both), during construction to keep the project progressing forward without being bogged down by the inevitable claim.  There are numerous avenues to resolve disputes without resorting to filing a lawsuit or a demand for arbitration.   The thought is that dispute resolution will be facilitated by techniques designed to assist the parties with the resolution of claims during construction.  While direct discussions between the parties, meetings with the executives for business decision purposes, mediations, etc., are certainly helpful, sometimes these avenues are simply not enough to truly resolve a complex claim on a construction project that occurs during construction. 

 

This is where the IDM and DRB come into play.  Perspectives on the value of having an IDM or DRB and their defined roles are based on experiences.  But, what is important is that these experiences can help you determine whether an IDM or DRB is right for your project to resolve claims during construction and, if so, how you want to contractually frame the role of the IDM nor DRB.  As you know, the larger and more complex the project the greater likelihood that there will be disputes that occur during the course of construction.  Knowing this, how do you want these disputes to be resolved during construction, and who do you want to resolve these disputes, so that (a) the project continues to move forward notwithstanding such dispute, (b) the parties believe the agreed-upon resolution technique will truly assist them to resolve the inevitable claim without having to file a lawsuit or demand for arbitration down the road, and (c) the person (or persons) resolving the dispute is deemed as credible and objective.

 

For example, the American Institute of Architects (AIA) incorporates the concept of an IDM to its General Conditions (see A201-2007) as the person that renders initial decisions on claims.  If no person is selected as the IDM, the fallback is to have the architect serve in this role.  The IDM is tasked with reviewing the claim and can approve the claim, reject the claim, request additional data,  request a response to the claim, suggest a compromise, or advise the parties he/she is unable to render a decision on the claim.   The General Conditions further provides:

 

15.2.6.1 Either party may, within 30 days from the date of an initial decision, demand in writing that the other party file for mediation within 60 days of the initial decision.  If such a demand is made and the party receiving the demand fails to file for mediation within the time required, then both parties waive their rights to mediate or pursue binding dispute resolution proceedings with respect to the initial decision.  

See AIA-A201, s. 15.2.6.1.

 

The Consensus Documents (ConsensusDocs) incorporates the concept of a project neutral (similar to IDM) or DRB in its General Conditions if direct discussions between the parties reach an impasse. The General Conditions provide:

 

12.3.1 The Project Neutral/Dispute Review Board shall be mutually selected and appointed by the Parties and shall execute a retainer agreement with the Parties establishing the scope of the Project Neutral/Dispute Review Board’s responsibilities. The costs and expenses of the Project Neutral/Dispute Review Board shall be shared equally by the Parties. The Project Neutral/Dispute Review Board shall be available to either Party, upon request, throughout the course of the Project, and shall make regular visits to the Project so as to maintain an up-to-date understanding of the Project progress and issues and to enable the Project Neutral/Dispute Review Board to address matters in dispute between the Parties promptly and knowledgeably. The Project Neutral/Dispute Review Board shall issue nonbinding findings within five (5) business Days of referral of the matter to the Project Neutral, unless good cause is shown.

12.3.2 If the matter remains unresolved following the issuance of the nonbinding finding by the mitigation procedure or if the Project Neutral/Dispute Review Board fails to issue nonbinding findings within five (5) business Days of the referral, the Parties shall submit the matter to the binding dispute resolution procedure designated in Paragraph 12.5.  

See ConsensusDocs 200-2007, s. 12.3.1, 12.3.2.

 

If you like the concept of the IDM (project neutral) or DRB, then you need to consider whether you really want the architect or engineer of record to serve in any role, especially if you are the contractor.  As the contractor, your claims may derive from the contract documents and you probably want a more objective party to resolve such claims.  So the question becomes who do you trust to serve in this role?  A practicing construction attorney?  A mediator or arbitrator from a company like JAMS or the American Arbitration Association that has experience with alternate dispute resolution? An industry expert or experts that have no vested interest in the project other than to render initial decisions on claims?  Do you want a combination of all to serve on a DRB? Does this person(s) participate in project meetings? This is an important consideration. 

 

Next, what is the process you want the IDM or DRB to undertake to resolve claims?  This process is important from a timing standpoint and proof standpoint. Do you want the IDM or DRB to simply resolve claims on paper; in other words, render a decision by virtue of the claim submitted and any response provided?  Do you want the IDM or DRB to hear testimony from fact witnesses and, perhaps, experts?  Do you want the IDM or DRB to hear legal argument from counsel?  Do you want the IDM or DRB to have the authority to simultaneously examine experts to get at the heart of the truly disputed technical issues?  And, when do you want the IDM or DRB to step in and render an initial decision?  In other words, do you want direct discussions between the parties, mediation, a meeting with project folks, or a meeting with the business executives to take place first?  After the initial decision? Or never?

 

Then, what is the avenue you want to undertake if you want to contest (or appeal for lack of a better term) the IDM or DRB’s initial decision as to a claim occurring during construction? This is very important because let’s assume a party does not like the initial decision.  You want a mechanism to continue to discuss the claim and, perhaps, appeal the claim if discussions reach an impasse without that initial claim becoming binding.  The next step would naturally be binding dispute resolution, whether arbitration or litigation, to finally resolve the merits of the claim.   With this eventuality in mind, do you want the trier of fact (arbitrator, judge, or judge) to know that an IDM or DRB rendered an initial decision on this very issue and that decision was “x”?  This is an important consideration because human nature suggests that if the IDM or DRB is an objective party(ies) / industry professional(s), the fact that they rendered the initial decision of “x” will probably carry credibility with the trier of fact.  And, that credibility may be greater based on how the IDM or DRB rendered the decision.  Think about it.  If the decision was based on evidence or the consideration of testimony and experts, which may be analogous to the evidence and expert opinions presented at trial or arbitration, then it makes sense that the trier of fact is going to defer (perhaps unknowingly) to what the objective party / industry professional(s) decided regarding the claim.  Conversely, if the evidence and expert opinions are different than those presented to the IDM or DRB, does this alteration impact the credibility of the witnesses or the claim? Although, knowing this may make it less likely to actually pursue binding arbitration or litigation as to the claim considering the merits of the dispute had been decided by a knowledgeable / objective party(ies).

 

Finally, how is the IDM or DRB going to be funded – how are the costs of the IDM or DRB going to be budgeted and allocated?  This is another important consideration because this could be a costly endeavor. But, the costs may be worth it if the IDM or DRB is considered objective by the parties and the parties are truly engaged in the during construction dispute resolution techniques designed to avoid litigation or arbitration which could become more costly.  Also, the costs may certainly be worth it–the larger or more complex the project–when you know going into it that there will be claims and it is in the project’s best interest to promptly resolve the claims.

 

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.

 

 

CONVERTING THE DREADFUL TERMINATION FOR DEFAULT INTO A TERMINATION FOR CONVENIENCE

images-1Contractors, whether prime contractors or subcontractors, terminated for default (also known as termination for cause) want to convert that termination for default into a termination for convenience.   The termination for default ultimately means the contractor materially breached the contract and would be liable for any cost overrun associated with completing their contractual scope of work.  On the other hand, if the termination for default is converted into a termination for convenience, the contractor would be entitled to get paid for the work performed through the termination along with reasonable profit on the work performed and, depending on the contract, reasonable anticipatory profit on the work NOT performed.  A huge difference and the fundamental reason contractors terminated for default should aim to convert that termination for default into a termination for convenience!

 

Under the Federal Acquisition Regulations, contractors terminated for convenience may recover reasonable profit on work performed, but NOT profit for work not performed.  (See F.A.R. s. 52.249-2 and 49.202)

 

But, under the standard AIA A201 General Conditions, if an owner terminates a general contractor for convenience, “the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.”  (See AIA A201, para. 14.4.3)

 

Yet, under the ConsensusDocs 200, “If the Owner terminates this Agreement for Convenience, the Constructor shall be paid: (a) for the Work performed to date including Overhead and profit; and (b) for all demobilization costs and costs incurred as a result of the termination but not including Overhead or profit on Work not performed.” (See Consensus Docs, 200, para. 11.4.2)

 

As reflected above, a contractual provision will dictate the costs recoverable when there is a termination for convenience.  The AIA A201 General Conditions is favorable to a contractor by providing for reasonable overhead and profit on the work not executed.  Whether reasonable  profit on work not performed is recoverable, the objective should always be converting that termination for default into one for convenience so that at least the contractor can recover for work performed and profit on the work performed along with other associated termination costs that the contract may provide.

 

When a party is terminated for default, the key issues that will arise will typically be: (a) whether the termination for default was proper, i.e., whether the terminating party procedurally complied with the termination for default provision in the contract, (b) whether the cause or default was material and rose to the level of constituting a default termination, and (c) converting the termination for default into a termination for convenience and the recoverable costs pursuant to the termination for convenience provision in the contract.  Again, a termination for default will likely mean that the terminated party owes the terminating party money associated with the overrun for completing their scope of work.  A termination for convenience, on the other hand, will likely mean that the terminated party is owed money for work it performed irrespective of any overrun experienced by the terminating party.

 

 

imagesA recent ruling in U.S.A. f/u/b/o Ragghianti Foundations III, LLC v. Peter R. Brown Construction, Inc., 2014 WL 4791999 (M.D.Fla. 2014), illustrates a dispute between a prime contractor and a subcontractor on a federal project after the prime contractor default terminated the subcontractor.   The prime contractor hired a subcontractor to construct the foundation, slab on grade, and site concrete.  As the subcontractor was pouring the slab on grade concrete, it was determined that there were deficiencies in the concrete.  The prime contractor sent the subcontractor notice under the subcontract regarding the deficiencies and that the subcontractor needed to provide an action plan prior to future concrete placement. Although the subcontractor responded with a plan including when it was going to demolish the defective portion of the slab, it failed to live up to its own recovery schedule.  Accordingly, the prime contractor terminated the subcontractor for default and incurred costs well in excess of the subcontractor’s original subcontract amount to complete the subcontractor’s scope of work.  The subcontractor filed suit against the prime contractor and its Miller Act surety and the prime contractor counter-claimed against the subcontractor.

 

 

There were numerous interesting issues raised in this case.  This article will only touch upon a couple of the legal issues. The first issue was whether the prime contractor properly terminated the subcontractor for default pursuant to the subcontract; if not, the termination should be deemed a termination for convenience.  The Court found that the termination was procedurally proper, but declined to determine whether the termination was wrongful, perhaps because the Court determined that once the termination for default was properly implemented pursuant to the subcontract there was no reason to delve into any further analysis.  In other words, once the prime contractor procedurally, properly terminated the subcontractor for default pursuant to the subcontract, it appeared irrelevant whether the cause forming the basis of the default was material.   This implication is certainly beneficial for the prime contractor and it is uncertain why the Court did not entertain the argument as to whether the procedurally proper termination was wrongful.   This determination would seem important because if the termination was wrongful, the terminating contractor would be responsible for its own cost overrun in addition to the costs incurred by the terminated subcontractor.  Although, in this case, by the Court finding that the termination for default was procedurally proper, the Court seemed to recognize that there was cause supporting the implementation of the termination for default; otherwise, the termination for default would not have been procedurally proper.

 

The next issue discussed in this case pertained to recoverable delay-type damages under the Miller Act.  The Court expressed:

 

A Miller Act plaintiff is entitled to recover under the bond the out-of-pocket labor and expenses attributable to delays. 

***

[A] damage claim against a surety that does not flow directly and immediately from actual performance [of its agreement] is barred by the Miller Act….A subcontractor cannot recover on a Miller Act payment bond for the cost of labor and materials provided after the termination of work under a government construction project, and cannot recover profits on out-of-pocket expenditures attributable to delay.

Ragghianti Foundations, supra, at *18, 19 (internal quotations and citations omitted).

 

What does this mean?  This means that a subcontractor is not entitled to recover against a Miller Act surety:  (a) anticipated lost profits on work not performed, (b) delay-related costs that do not flow directly and immediately from actual performance under the subcontract, (c) profit on delay-related costs, and (d) costs incurred after the termination of the work.  These are all categories of damages that are applicable to a terminated subcontractor that it will NOT be able to recover against a Miller Act surety.  This is important because if a subcontractor is looking to capitalize on its damages for converting a termination for default into one of convenience, it may want to sue the terminating contractor so that it is not leaving any damages on the table by only suing the Miller Act surety.

 

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 CONTRACTS AND YOUR “ORDER OF PRECEDENCE” CLAUSE

UnknownDuring the negotiation of construction contracts there is often consideration as to the priority of the Contract Documents.  In other words, in the event of a conflict with the Contract Documents, what is the priority that you want to govern the conflict?  To address this, parties may include an order of precedence clause that clarifies how conflicts with the Contract Documents are to be interpreted by prioritizing the Contract Documents.

 

The AIA Document A201 (General Conditions) deems the Contract Documents as complementary (see § 1.2.1 -“The Contract Documents are complementary, and what is required by one shall be as binding as if required by all….”) without including an order of priority to determine which Contract Document truly governs a conflict.  The AIA does not really favor establishing an order of precedence;  but, if supplementary conditions are added to modify the A201 General Conditions, the AIA does suggest model language:

 

§ 1.2.1.1 In the event of conflicts or discrepancies among the Contract Documents, interpretations will be based on the following priorities:

1. Modifications.

2. The Agreement.

3. Addenda, with those of later date having precedence over those of earlier date.

4. The Supplementary Conditions.

5. The General Conditions of the Contract for Construction.

6. Division 1 of the Specifications.

7. Drawings and Divisions 2–49 of the Specifications.

8. Other documents specifically enumerated in the Agreement as part of the Contract Documents.

 

 

The EJCDC C-700 (General Conditions) contains virtually identical language as the AIA A201 deeming the Contract Documents as complementary: (see § 3.01.A- “The Contract Documents are complementary; what is required by one is as binding if required by all.”)

 

The ConsensusDocs 200 (Agreement and General Conditions) takes a much more proactive approach regarding conflicts by containing the following clauses:

 

14.2.2 In case of conflicts between the drawings and specifications, the specifications shall govern….

 

 14.2.5 ORDER OF PRECEDENCE In case of any inconsistency, conflict, or ambiguity among the Contract Documents, the documents shall govern in the following order: (a) Change Orders and written amendments to this Agreement; (b) this Agreement; (c) subject to subsection 14.2.2 the drawings (large scale governing over small scale), specifications and addenda issued prior to the execution of this Agreement or signed by both Parties; (d) information furnished by the Owner pursuant to subsection 3.13.4 or designated as a Contract Document in section 14.1; (e) other documents listed in this Agreement. Among categories of documents having the same order of precedence, the term or provision that includes the latest date shall control. Information identified in one Contract Document and not identified in another shall not be considered a conflict or inconsistency.

 

 

Even Federal Acquisition Regulation 52.236-21 incorporated into government prime construction contracts contains language that, “In the case of difference between drawings and specifications, the specifications shall govern.”

 

There are certainly pluses and minuses to creating an order of precedence provision.  A minus is that implementing a provision takes away from the complementary nature of the Contract Documents.  Thus, whatever hierarchy you determine and include is a hierarchy you need to understand because you will be living by it. There is also the concern that the provision is incorporated to perhaps serve as a substitute for properly executed, coordinated, and detailed plans and specifications or is incorporated to reduce the contractor’s risk to check the Contract Documents to address any inconsistencies on the front end.   On the other hand, as a plus, these clauses provide necessary guidance in the event there is a claim due to a conflict with the Contract Documents. Most of the time, I tend to favor an order of precedence provision to prioritize direct conflicts in the Contract Documents.  Depending on whether you are the owner, the contractor, or even a subcontractor, forethought should be given to the order of precedence of the Contract Documents since there is a good chance this order will be relied on once construction commences.

 

 

imagesTo illustrate the application of an order of precedence provision, in Hensel Phelps Const. Co. v. U.S., 886 F.2d 1296 (Fed.Cir. 1989), a prime contractor sought an equitable adjustment of its contract. The contractor relied on an order of precedence provision that required the specifications to govern over any conflict between the drawings and specifications (see routinely incorporated F.A.R. 52.236-21).  In this case, the specifications called for a minimum of 18” of fill under concrete floor slabs; however, the drawings called for 36” inches of fill.  The contractor priced the job with the 18” of fill.  During construction, the contracting officer directed the contractor to install 36” of fill which triggered the equitable adjustment.   The government, however, argued that the contractor knew of this discrepancy all along.  The Federal Circuit Court nevertheless held that the contractor should be entitled to an equitable adjustment since the specifications had priority over this direct conflict:

 

Reliance was properly placed on the order of precedence clause to resolve a discrepancy between the specifications and the drawings and this resolution was reflected in the bid. When the government insisted on 36 inches of fill, rather than the 18 inches called for in the specifications, the contractor was required to perform more work than the contract required and more than its bid price contemplated. Consequently, on the record here neither Hensel Phelps [prime contractor] nor Watts [subcontractor] can be said to have profited or otherwise benefited by reliance on the order of precedence clause.” 

Hensel Phelps, 886 F.2d at 1299.

 

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.

HAS A MATERIAL BREACH OF CONTRACT OCCURRED? CONSULT COUNSEL TO BEST DETERMINE RIGHTS!

UnknownWhen a dispute arises, whether it is a payment dispute or otherwise, parties sometimes point the finger to the other party to argue that the other party breached the contract. What exactly does this mean? For a breach of contract to occur, the breach (or nonperformance) must be a MATERIAL BREACH.  See Abbot Labs, Inc. v. Gen. Elec. Capital, 765 So.2d 737, 740 (Fla. 5th DCA 2000).  A material breach is one that goes to the essence of the contract versus a minor aspect of the contractSee Covelli Family, L.P. v. ABG5, L.L.C., 977 So.2d 749, 752 (Fla. 4th DCA 2008).  The Covelli Family Court explained:

 

“To constitute a vital or material breach, a party’s nonperformance must go to the essence of the contract.  A party’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach.”  

Id. (internal quotations and citations omitted).

 

Stated similarly:

 

“To constitute a vital or material breach a defendant’s nonperformance must be such as to go to the essence of the contract; it must be the type of breach that would discharge the injured party from further contractual duty on his part. Corbin, supra, s 1104. A defendant’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach. Corbin states, at s 1104, pp. 562-565:

 

‘. . . The injured party, however, can not maintain an action for restitution of what he has given the defendant unless the defendant’s non-performance is so material that it is held to go the ‘essence’; it must be such a breach as would discharge the injured party from any further contractual duty on his own part. Such a vital breach by the defendant operates, with respect to the right of restitution, in the same way that a repudiation of the contractual obligation would operate. A minor breach by one party does not discharge the contractual duty of the other party; and the latter being still bound to perform as agreed can not be entitled to the restitution of payments already made by him or to the value of other part performances rendered.‘”

Beefy Trail, Inc. v. Beefy King Intern, Inc., 267 So.2d 853, 857 (Fla. 1972) citing and quoting Corbin on Contracts, Vol. 5.

 

In numerous circumstances, nonpayment can constitute a material breach.  See Scott v. Rolling Hills Place Inc., 688 So.2d 937 (Fla. 5th DCA 1996) (finding that developer first breached contract by not paying engineer that discharged engineer of performance obligations).   However, it is important for parties to consider that nonpayment does not automatically in of itself constitute a material breach.  For instance, did the contract have a pay-if-paid clause?  Did the party claiming nonpayment satisfy contractual conditions precedent to payment?  Was the nonpaying party withholding money due to a performance issue such as defective or incomplete work?  Was the payment late by a few days or was it never paid? Is the payment amount a relatively insignificant amount? Does the payment amount concern disputed amounts such as change orders or disputed defective or incomplete work? These are all questions that need to be a considered before a party takes an extreme position that it will no longer perform under the contract due to the nonpayment.  A party should consult their written contract and counsel before taking any extreme position that the other party materially breached the contract to best determine the strategy and lay the foundation for the position.

 

imagesThe case of Marshall Const., Ltd. v. Coastal Sheet Metal & Roofing, Inc., 569 So.2d 845 (Fla. 1st DCA 1990), illustrates the ramifications of a party without a written contract taking an extreme position due to nonpayment.   In this case, a general contractor entered into a contract to repair and replace roofs on three buildings at a Florida State Hospital.  The general contractor then entered into an oral contract with a roofing subcontractor.  During construction, a water leak arose with the new roof installed on one of the buildings. Both the general contractor and subcontractor appeared to agree that the new roof was defective and needed to be replaced.  However, the subcontractor could not finance the repair / replacement work without getting paid for the work it had performed.  The subcontractor was not paid for the work performed and determined that it would not perform any more work until it was paid.  As a result, the general contractor terminated the subcontractor and hired a new roofing subcontractor to finish the balance of the roofing work and replace the defective roof.  The subcontractor then sued the contractor for breaching their oral contract. The trial court ruled in favor of the subcontractor; the First District Court of Appeal reversed maintaining that the subcontractor actually committed the material breach:

 

“It is undisputed that Coastal [roofer] failed to install the roofing system on the east wing as required under the contract. When Coastal refused to repair the roof without further payment, it committed a material breach. Marshall  [general contractor] was entitled to treat the breach as a discharge of its duty to pay Coastal until such time as Coastal repaired the defective roof and fulfilled its contractual duties. In light of the fact that the terms of the [general contractor’s] contract [with the owner] required substantial completion by July 25, 1988, and that Coastal refused to return to work until it was paid, Marshall was completely justified in determining that a material breach had occurred and ordering Coastal off the job.

 

 

We find no substantial, competent evidence to support a finding that Marshall [general contractor] breached the contract. The undisputed evidence demonstrates that Coastal [roofer] committed a material breach of the contract. This breach excused Marshall’s obligation to pay Coastal until the roof was repaired. We therefore reverse and remand for a new trial on damages and liability.” 

Marshall Const., 569 So.2d at 848 (internal citations omitted).

 

 

Now, this case demonstrates why oral contracts are disfavored because rights and obligations are amorphous.  Nothing is clearly defined and there is no written agreement to consult.  If there was a written contract, most likely there would be a pay-if-paid provision in which the general contractor’s payment to the subcontractor was conditioned on its receipt of payment from the owner.  It is uncertain whether the owner paid the general contractor for the defective work; if the owner did not, then the general contractor’s payment obligation would not have been triggered.  But, let’s assume the owner did pay the general contractor.  Well, the subcontract most likely contained a clause pertaining to defective work that would authorize the subcontractor to fix the work at its own costs and also entitle the general contractor to withhold sums as the result of incomplete or defective work.  For instance, the standard form agreement between a contractor and subcontractor published by the ConsensusDocs (Document 750) contains the following provisions:

 

3.22.2.1 If the Architect/Engineer or Contractor rejects the Subcontract Work or the Subcontract Work is not in conformance with the Subcontract Documents, the Subcontractor shall promptly correct the Subcontract Work whether it had been fabricated, installed or completed. The Subcontractor shall be responsible for the costs of correcting such Subcontract Work, any additional testing, inspections, and compensation for services and expenses of the Architect/Engineer and Contractor made necessary by the defective Subcontract Work.

 

 

10.1.1 NOTICE TO CURE If the Subcontractor refuses or fails to supply enough properly qualified workers, proper materials, or maintain the Progress Schedule, or fails to make prompt payment to its workers, subcontractors or suppliers, or disregards laws, ordinances, rules, regulations or orders of any public authority having jurisdiction, or otherwise is guilty of a material breach of a provision of this Agreement, the Subcontractor shall be deemed in default of this Agreement. If the Subcontractor fails within three (3) business Days after written notification to commence and continue satisfactory correction of the default with diligence and promptness, then the Contractor without prejudice to any other rights or remedies, shall have the right to any or all of the following remedies:

10.1.1.1 supply workers, materials, equipment and facilities as the Contractor deems necessary for the completion of the Subcontract Work or any part which the Subcontractor has failed to complete or perform after written notification, and charge the cost, including reasonable overhead, profit, attorneys’ fees, costs and expenses to the Subcontractor;

10.1.1.2 contract with one or more additional contractors to perform such part of the Subcontract Work as the Contractor determines will provide the most expeditious completion of the Work, and charge the cost to the Subcontractor as provided under Clause 10.1.1.1; or

10.1.1.3 withhold any payments due or to become due the Subcontractor pending corrective action in amounts sufficient to cover losses and compel performance to the extent required by and to the satisfaction of the Contractor.

 

These provisions would  hurt a subcontractor’s argument that it should get paid for work performed, including defective work performed, so that it could finance the repairs.

 

Again, before extreme positions are taken, a party should absolutely consult their written contract to determine  rights, obligations, and risks they agreed to.  Having a lawyer involved on the front end during the contract negotiation can help a party negotiate and/or appreciate the risks they are agreeing to. Even if a lawyer was not involved on the front end, having the lawyer involved when difficult issues arise during the course of construction will allow a party to preserve rights / arguments and take positions or avoid positions based on a determined strategy. As the expression goes, “An ounce of prevention is worth a pound of cure!”

 

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.