WAIVER OF CONSEQUENTIAL DAMAGES AND LOSS OF USE DAMAGES (IN CONSTRUCTION / DESIGN DEFECT DISPUTE)

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

In construction / design defect cases, a plaintiff (party proving defect) may assert a category of damages referred to as loss of use damages. Importantly, if your contract includes a waiver of consequential damages, these types of damages will not be recoverable. This is a significant issue to consider when entering into a construction contract, especially when you are the owner of the project, because if you do not want to waive a party you hire of consequential damages (such as loss of use damages), then you do not want to include a waiver of consequential damages in your contract or, at a minimum, you want to carve out exceptions to the waiver of consequential damages. Stated differently, this is an issue and risk you want to consider on the front end because even though construction / design defects are not anticipated, they do occur.

In a construction / design defect scenario, an owner’s consequential damages would generally be those damages unrelated to repairing the defect. For instance, loss of use of the property or lost rental income to an owner during the implementation of the repairs would be a consequential damage that would be waived by a waiver of consequential damages provision in an owner’s contract.

An example of a waiver of consequential damages provision found in the AIA A201 (general conditions of the construction contract between an owner and contractor) is as follows:

The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes

.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and

.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

(See AIA A201-2007, s. 15.1.6)

Now, if loss of use damages are not contractually waived, the recent decision in Gonzalez v. Barrenechea, 40 Fla. L. Weekly D258a (Fla. 3d DCA 2015), illustrates how an owner can recover these types of damages when there is a construction / design defect. In this case, an owner sued its architect for design errors with the HVAC system in a newly constructed home. The owner was forced to engage a new design professional to address the deficiencies. It took the owner 20 months to repair the deficiencies during which the owner claimed he could not live (or use) his new house. Although the owner did not live in the house, there was evidence that the owner had some use of the house. For instance, the owner’s son slept in the house on an intermittent basis, the owner docked his boat at the dock behind the house, furniture was stored in the house, and the owner had cars parked in the garage.

Notwithstanding some use of the house, the owner put on testimony of an expert real estate appraiser that testified that the owner incurred lost rental value of approximately $15,500 per month during the 20-month repair period. The architect argued that this rate was flawed because the expert failed to factor in the use the owner had of the house during the 20-month period. The trial court agreed and denied the owner the loss of use damages.

The Third District Court reversed the trial court finding that the owner was entitled to loss of use damages:

Under Florida law, a homeowner that loses the use of a structure because of delay in its completion is entitled to damages for that lost use. Florida courts have held that “[d]amages for delay in construction are measured by the rental value of the building under construction during the period of delay.”

Gonzalez, supra, quoting Fisher Island Holdings, LLC v. Cohen, 983 So.2d 1203, 1204 (Fla. 3d DCA 2008).

Furthermore, because the architect failed to put on any evidence as to what the rental value of the house should have been during the 20-month period factoring in the owner’s use of the house during this period, there was nothing to refute the owner’s rental rate.

This case touches upon important take-aways:

Consider the risk of a waiver of consequential damages provision on the front end, especially if you are an owner. Likewise, if you are a contractor or design professional, you want to consider the risk of not having such a waiver of consequential damages.
Loss of use damages are recoverable in a construction / design defect case absent a contractual waiver of consequential damages.
An owner can introduce evidence of loss of use damages through an expert real estate appraiser that can testify as to the rental rate of the property during the repair period.
A contractor or design professional defending a loss of use damages claim should engage its own expert to counter an owner’s expert. In this case, if the design professional had an expert real estate appraiser, it would have put on evidence of a rental rate much lower than the $15,500 per month factoring in the owner’s limited use of the house during this time period.

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.

VALIDITY OF NON-COMPETE AGREEMENTS

Posted on December 5, 2014December 5, 2014 by Edward Garber

The validity of a non-compete agreement (also referred to as a restrictive covenant since it imposes a restriction on trade or commerce) will be governed by Florida Statute s. 542.335. (A copy of this statute is set forth below). Written and signed non-compete agreements or clauses are presumptively valid if they are reasonable in time (the non-compete time period), area (geographic limitation), and line of business; these clauses cannot be overbroad.

Even if the non-compete agreement is in writing and signed by the employee, it still needs to be supported by a proven legitimate business interest justifying its enforcement (e.g., learning of trade secrets or confidential business information, relationships with customers or clients, customer or client goodwill associated with the business). Stated differently, the employer seeking to enforce the non-compete agreement against a former employee still needs to establish that the enforcement of the non-compete is reasonably necessary to protect its legitimate business interests.

To enforce non-compete agreements, a party (typically, the former employer) moves for injunctive relief.

The case of Ankarli Boutique, Inc. v. Ortiz, 2014 WL 6674727 (4^th DCA 2014) held that a two-year non-compete agreement, to the extent valid, applied from the time the former employee left the company. The case also maintained that the non-compete period could not be “nullified because the non-compete period was devoured by the time it took to appeal an erroneous ruling on the interpretation of the [non-compete] clause.” Ankarli Boutique, supra, at *1. In other words, if there is a delay in entering a ruling (i.e., an injunction) enforcing the non-compete clause, or the non-compete time period is consumed during the pendency of an appeal, the employer or party enforcing the clause is still entitled to reap the benefit of a valid non-compete clause. Thus, any delay tactic by litigating the issue or appealing the issue should not nullify an otherwise valid non-compete clause.

Florida Statute s. 542.335

(1) Notwithstanding s. 542.18 and subsection (2), enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, so long as such contracts are reasonable in time, area, and line of business, is not prohibited. In any action concerning enforcement of a restrictive covenant:

(a) A court shall not enforce a restrictive covenant unless it is set forth in a writing signed by the person against whom enforcement is sought.

(b) The person seeking enforcement of a restrictive covenant shall plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant. The term “legitimate business interest” includes, but is not limited to:

1. Trade secrets, as defined in s. 688.002(4).

2. Valuable confidential business or professional information that otherwise does not qualify as trade secrets.

3. Substantial relationships with specific prospective or existing customers, patients, or clients.

4. Customer, patient, or client goodwill associated with:

a. An ongoing business or professional practice, by way of trade name, trademark, service mark, or “trade dress”;

b. A specific geographic location; or

c. A specific marketing or trade area.

5. Extraordinary or specialized training.

Any restrictive covenant not supported by a legitimate business interest is unlawful and is void and unenforceable.

(c) A person seeking enforcement of a restrictive covenant also shall plead and prove that the contractually specified restraint is reasonably necessary to protect the legitimate business interest or interests justifying the restriction. If a person seeking enforcement of the restrictive covenant establishes prima facie that the restraint is reasonably necessary, the person opposing enforcement has the burden of establishing that the contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the established legitimate business interest or interests. If a contractually specified restraint is overbroad, overlong, or otherwise not reasonably necessary to protect the legitimate business interest or interests, a court shall modify the restraint and grant only the relief reasonably necessary to protect such interest or interests.

(d) In determining the reasonableness in time of a postterm restrictive covenant not predicated upon the protection of trade secrets, a court shall apply the following rebuttable presumptions:

1. In the case of a restrictive covenant sought to be enforced against a former employee, agent, or independent contractor, and not associated with the sale of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 6 months or less in duration and shall presume unreasonable in time any restraint more than 2 years in duration.

2. In the case of a restrictive covenant sought to be enforced against a former distributor, dealer, franchisee, or licensee of a trademark or service mark and not associated with the sale of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 1 year or less in duration and shall presume unreasonable in time any restraint more than 3 years in duration.

3. In the case of a restrictive covenant sought to be enforced against the seller of all or a part of:

a. The assets of a business or professional practice, or

b. The shares of a corporation, or

c. A partnership interest, or

d. A limited liability company membership, or

e. An equity interest, of any other type, in a business or professional practice,

a court shall presume reasonable in time any restraint 3 years or less in duration and shall presume unreasonable in time any restraint more than 7 years in duration.

(e) In determining the reasonableness in time of a postterm restrictive covenant predicated upon the protection of trade secrets, a court shall presume reasonable in time any restraint of 5 years or less and shall presume unreasonable in time any restraint of more than 10 years. All such presumptions shall be rebuttable presumptions.

(f) The court shall not refuse enforcement of a restrictive covenant on the ground that the person seeking enforcement is a third-party beneficiary of such contract or is an assignee or successor to a party to such contract, provided:

1. In the case of a third-party beneficiary, the restrictive covenant expressly identified the person as a third-party beneficiary of the contract and expressly stated that the restrictive covenant was intended for the benefit of such person.

2. In the case of an assignee or successor, the restrictive covenant expressly authorized enforcement by a party’s assignee or successor.

(g) In determining the enforceability of a restrictive covenant, a court:

1. Shall not consider any individualized economic or other hardship that might be caused to the person against whom enforcement is sought.

2. May consider as a defense the fact that the person seeking enforcement no longer continues in business in the area or line of business that is the subject of the action to enforce the restrictive covenant only if such discontinuance of business is not the result of a violation of the restriction.

3. Shall consider all other pertinent legal and equitable defenses.

4. Shall consider the effect of enforcement upon the public health, safety, and welfare.

(h) A court shall construe a restrictive covenant in favor of providing reasonable protection to all legitimate business interests established by the person seeking enforcement. A court shall not employ any rule of contract construction that requires the court to construe a restrictive covenant narrowly, against the restraint, or against the drafter of the contract.

(i) No court may refuse enforcement of an otherwise enforceable restrictive covenant on the ground that the contract violates public policy unless such public policy is articulated specifically by the court and the court finds that the specified public policy requirements substantially outweigh the need to protect the legitimate business interest or interests established by the person seeking enforcement of the restraint.

(j) A court shall enforce a restrictive covenant by any appropriate and effective remedy, including, but not limited to, temporary and permanent injunctions. The violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of a restrictive covenant. No temporary injunction shall be entered unless the person seeking enforcement of a restrictive covenant gives a proper bond, and the court shall not enforce any contractual provision waiving the requirement of an injunction bond or limiting the amount of such bond.

(k) In the absence of a contractual provision authorizing an award of attorney’s fees and costs to the prevailing party, a court may award attorney’s fees and costs to the prevailing party in any action seeking enforcement of, or challenging the enforceability of, a restrictive covenant. A court shall not enforce any contractual provision limiting the court’s authority under this section.

(2) Nothing in this section shall be construed or interpreted to legalize or make enforceable any restraint of trade or commerce otherwise illegal or unenforceable under the laws of the United States or of this state.

(3) This act shall apply prospectively, and it shall not apply in actions determining the enforceability of restrictive covenants entered into before July 1, 1996.

A LETTER OF INTENT CAN FORM THE BASIS OF AN ENFORCEABLE CONTRACT

Posted on December 2, 2014December 2, 2014 by Edward Garber

Just because there is not an executed subcontract, does not mean there is not an enforceable written contract between a contractor and subcontractor. While it is good practice for there to be an executed contract in place, this does not always occur. But, this lack of occurrence does not necessarily mean a performing subcontractor can escape contractual obligations merely because it never signed the subcontract. Indeed, many times a subcontractor starts performing based on a letter of intent that it received from the contractor. The letter of intent may indicate that a formal subcontract will be furnished to the subcontractor such as when the contractor is awarded the project or after the subcontractor starts performing under the letter of intent. If the subcontractor starts performing based on the letter of intent that it received, this letter of intent can certainly form the basis of an enforceable contract!

The decision in Sealevel Construction, Inc. v. Westcoast Corp., 2014 WL 3587264 (E.D.La. 2014) exemplifies how a letter of intent can form the basis of a written contract. Here, a subcontractor on a federal project solicited bids from sub-subcontractors to perform aspects of its work based on the plans and specifications for the project. The specifications, among other things, contained a liquidated damages section. A sub-subcontractor submitted a bid to install concrete piles. The subcontractor accepted the bid and issued the sub-subcontractor a letter of intent. The letter of intent was signed by both the subcontractor and sub-subcontractor and referenced the specifications. The letter of intent further stated that a formal subcontract would be entered between the parties; however, a subcontract was never executed.

The sub-subcontractor started to perform its scope of piling work based on the letter of intent. Thereafter, the subcontractor notified the sub-subcontractor of delays with the sub-subcontractor’s scope of work. The sub-subcontractor was unable to cure the delays and the subcontractor hired another entity to supplement its sub-subcontractor’s work. Nevertheless, as a result of delays to the sub-subcontractor’s scope of work, the government assessed liquidated damages against the prime contractor. The prime contractor, in turn, withheld the amount of the liquidated damages from the subcontractor in addition to the prime contractor’s own extended general conditions. The subcontractor then withheld this money from its sub-subcontractor in addition to its own extended general conditions.

The Eastern District of Louisiana found that the letter of intent served as an enforceable contract between the subcontractor and sub-subcontractor and the sub-subcontractor breached the letter of intent through its delayed performance. As a result, the subcontractor was entitled to withhold / back-charge the sub-subcontractor for (i) the costs spent on the supplemental entity to mitigate the sub-subcontractor’s delay and (ii) the portion of liquidated damages attributable to the sub-subcontractor’s delay. The court did not, however, allow the subcontractor to back-charge the sub-subcontractor for other delay-related costs (such as the prime contractor’s and the subcontractor’s extended general conditions) since the sub-subcontractor never contractually agreed to these types of damages unlike the liquidated damages section that was included in the specifications referenced in the letter of intent.

Take-aways:

If a letter of intent is issued, the letter of intent should identify the subcontract amount, the applicable scope of work, and reference the plans and specifications. The more detail in the letter of intent the better so that if the subcontractor starts performing based on the letter of intent there is a strong argument that the detailed letter of intent served as the contract between the parties (such as if the subcontractor refuses to sign the subcontract, the parties are unable to agree on the formal written subcontract, or if the subcontract is never issued).

It is good practice to have both the contractor and subcontractor sign the letter of intent.

An unexecuted contract does not mean there is not a written contract between the parties. Parties need to consider this before taking an extreme position that a contract does not exist or that they are not bound by certain requirements.

It is good practice for a party subcontracting work to be able to flow-down damages such as liquidated damages and their own extended general conditions. In this case, the subcontractor would have been able to flow-down the prime contractor’s and its extended general conditions attributable to the sub-subcontractor’s delay had this been identified in the letter of intent or clarified by an executed written subcontract.

DON’T DRAFT AN AMBIGUOUS SCOPE OF WORK IN YOUR CONSTRUCTION CONTRACT

Posted on November 26, 2014November 26, 2014 by Edward Garber

Contractors should spend time carefully drafting and agreeing to a detailed scope of work. Otherwise, a dispute may arise relating to that scope of work. This dispute can take the form of a change order dispute where the contractor argues that the subcontractor’s change order request was base contract work and, thus, does not entitle the subcontractor to additional compensation. Or, the dispute can take the form of a defect claim where the subcontractor argues that the defect being asserted against it was never within its scope of work to begin with.

If there is a scope of work dispute, a court will look to the contract and any applicable change orders in order to see what the contract requires. If an ambiguity exists relating to the scope of work, the court will determine whether the ambiguity is a patent ambiguity or a latent ambiguity. A patent ambiguity clearly exists on the face of the contract based on defective, insensible, or obscure language used in the contract whereas a latent ambiguity is not apparent from the face of the contract, but becomes apparent when extrinsic / parol evidence is introduced that leads to the contract being interpreted in two reasonably plausible manners. See Barrington v. Gryphon Investments, Inc., 32 So.3d 668 (Fla. 2d DCA 2010). With a patent ambiguity, parol evidence (extrinsic evidence used to clarify the intent of the parties relating to a contractual provision) is NOT allowed to clear up the ambiguity; rather, it is up to the trier of fact (judge or jury) to interpret the patent ambiguity without extrinsic evidence explaining the intent of the parties. See, e.g., Barclays American Mortg. Corp. v. Bank of Central Florida, 629 So.2d 978 (Fla. 5^th DCA 1993) (it was up to trier of fact to interpret letter of credit containing 2 different expiration dates). On the other hand, with a latent ambiguity, parol evidence is allowed to be introduced relating to the parties’ intent to assist the trier of fact in clearing up the ambiguity.

The opinion in Macky Bluffs Development Corp. v. Advance Construction Services, Inc., 2008 WL 109390 (N.D.Fla. 2008) illustrates what can happen if there is an ambiguous scope of work. Here, a developer entered into a change order with a contractor to fix the collapsed wall of a retention pond. The change order required the contractor to haul off collapsed material from the bottom of the pond. To fix the wall, the contractor hauled collapsed material and stockpiled the material on lot #8 (owned by the developer). The contractor reused suitable material in reconstructing the wall in addition to material it excavated from lot #8. The unsuitable material the contractor did not use in reconstructing the wall was spread out and compacted on lot #8 versus being hauled offsite to a dumping site.

Years later, the developer discovered the unsuitable materials had been buried on lot #8 that required it to excavate and remove this material and refill with suitable material. The developer then sued the contractor for the costs it incurred in remediating this issue. The contractor moved for summary judgment arguing that lot #8 was never part of its scope of work and it reconstructed the wall of the retention pond pursuant to the change order. Unfortunately, the change order did not specify whether the contractor was required to haul off unsuitable material to an offsite dumping facility or it was required to leave that material on lot #8. In fact, it does not appear the change order even mentioned that the contractor was going to stockpile collapsed material on lot #8 and reuse suitable material in reconstructing the wall. The owner’s position was that while the contractor could use lot #8 as a temporary storage area, the contractor was always required to haul off unsuitable material to an offsite dumping facility. The contractor disagreed stating it was always going to leave unsuitable material on lot #8 that it could not reuse to reduce the costs associated with fixing the wall. Yet, the change order did not address this issue and was ambiguous as to what the contractor’s scope of work consisted of relative to reconstructing the wall with stockpiled suitable material and what it was required to do with unsuitable material it did not reuse.

The Northern District maintained that the scope of work in the change order contained a latent ambiguity because the change order did not identify where the contractor was required to haul off the collapsed material and both the contractor and owner’s interpretation of this scope of work was plausible and reasonable. The court’s opinion includes a good discussion about the difference between a patent ambiguity and a latent ambiguity:

“Under Florida law, the interpretation of a contract is a matter of law for the court’s determination so long as the terms of the contract are unambiguous. The existence of an ambiguity in a contract is also a matter of law. There are two types of ambiguities that can exist in a contract: patent and latent. A patent ambiguity is one that appears on the face of the contract. A latent ambiguity, on the other hand, exists where the language employed is clear and intelligible and suggests but a single meaning, but some extrinsic / parol evidence creates a necessity for interpretation or a choice among two or more possible meanings. If the ambiguity is patent, then parol evidence cannot be used to clarify the parties’ intent. If the court finds, however, that there is a latent ambiguity in the contract, then parol evidence must be heard in order to explain the meaning of the ambiguous term. After receiving parol evidence clarifying the latent ambiguity, if there is no genuine issue of material fact remaining, the court can resolve the ambiguity as a matter of law. Where, however, the terms of the written instrument are disputed and reasonably susceptible to more than one construction, an issue of fact is presented as to the parties’ intent which cannot properly be resolved by summary judgment.”

Macky Bluffs Development Corp., supra, at *2 (internal citations and quotations omitted).

Had the parties clearly clarified the scope of work relating to how collapsed material was going to be stockpiled on lot #8 and reused and whether unsuitable material was going to be (a) hauled offsite or (b) left on lot #8, there probably would be no scope of work dispute. But, because this issue was not truly defined, it presented an ambiguity that naturally resulted in a dispute when the developer needed to remove the unsuitable material on lot #8. The key is to spend the effort to clearly articulate the scope of work, whether it is base contract work or change order work, to best support your argument when a scope of work dispute subsequently arises.

“NO DAMAGE FOR DELAY” PROVISIONS AND THE EXCEPTIONS

Posted on November 21, 2014November 21, 2014 by Edward Garber

Contractors and subcontractors should be familiar with “no damage for delay” provisions. These are contractual provisions that limit the contractor’s remedies for a delay to an extension of time ONLY, and disallow the contractor from being entitled to extended general conditions (overhead) for an otherwise excusable, compensable delay.

There are numerous variations of the “no damage for delay” provision; however they usually contain language that provides as follows:

“The contractor’s sole and exclusive remedy for a delay, interference, or hindrance with its Work shall be an extension of time and contractor shall not be entitled to any damages for a delay, interference, or hindrance with its Work.”

or

“The contractor shall not be entitled to any compensation whatsoever for any delay, interference, hindrance, acceleration, or inefficiency with its Work and its sole and exclusive remedy for any delay, interference, acceleration, or inefficiency with its Work shall be an extension of time.”

In Florida, “no damage for delay” provisions are enforceable on private and public projects. However, there are EXCEPTIONS that would prevent the provision’s harsh application and entitle a contractor to its extended general conditions for an excusable, compensable delay. These exceptions are fraud, willful concealment of foreseeable circumstances, and active interference. See Triple R Paving, Inc. v. Broward County, 774 So.2d 50 (Fla. 4th DCA 2000). In other words, if the hiring party (owner) does not willfully or knowingly delay construction, then the application of the “no damage for delay” provision will preclude the hired party (contractor) from recovering its extended general conditions associated with the delay. See id. On the other hand, if the hiring party does willfully or knowingly delay construction, then the hired party has an argument around the “no damage for delay” provision.

Even with a “no damage for delay” provision in the contract, it is imperative for the hired party (contractor) to properly and timely request additional time and money in accordance with the contract. There are typically provisions that require the hired party (contractor) to notify the hiring party (owner) of delaying events or claims and to request time and money associated with the event or claim. If a contractor fails to timely preserve its rights under the contract to seek additional time or money, it may preclude itself from recovering extended general conditions for a delay that would otherwise serve as an exception to the “no damage for delay” provision. See Marriot Corp. v. Dasta Const. Co., 26 F.3d 1057 (11^th Cir. 1994) (contractor’s failure to request time pursuant to the contract prevented it from recovering delay damages associated with an owner’s active interference).

On federal construction projects, “no damage for delay” provisions are perhaps less common based on Federal Acquisition Regulations (F.A.R.) that would otherwise entitle the contractor to recover delay-related damages if it properly and timely preserves its rights. These “no damage for delay” provisions are more frequently found in subcontracts between the prime contractor and its subcontractors. There is authority that would hold an unambiguous “no damage for delay” enforceable on federal construction projects:

“Nevertheless, given their potentially harsh effect, no damages for delay provisions should be strictly construed, but generally will be enforced, absent delay (1) not contemplated by the parties under the provision, (2) lasting an unreasonable period and thereby amounted to an abandonment of the contract, (3) caused by fraud or bad faith, or (4) amounting to active interference or gross negligence.”

Appeal of-The Clark Construction Group, Inc., GAOCAB No. 2003-1, 2004 WL 5462234 (November 23, 2004); accord Grunley Construction Co. v. Architect of the Capitol, GAOCAB No. 2009-1, 2010 WL 2561431 (June 16, 2010).

In drafting a “no damage for delay” provision, I always like to include language that specifically states that the application of the “no damage for delay” provision is not conditioned on the hired party (contractor) being granted additional time to substantially complete or finally complete the project. I also like to include language that the hired party (contractor) understands this “no damage for delay” provision and has factored this provision into the contract amount. It is important that this provision clearly reflects the intent because the hiring party will want to rely on this provision in the event there is a delaying event and it is a provision that will be strictly construed.

Conversely, if you trying to avoid the harsh consequences of a “no damage for delay” provision, it is advisable to consult with counsel that understands the recognized exceptions to the provision and can assist you in negotiating and presenting your claim based on these recognized exceptions.

DELAY, DELAY AND MORE DELAY! EXCUSABLE OR NON-EXCUSABLE?

Posted on October 19, 2014October 19, 2014 by Edward Garber

The word “delay” is an all too familiar word utilized during construction because it is not remotely uncommon for a construction project to experience delays. While contractors never want a delay to actually happen because time is money, delays unfortunately do happen as construction schedules are not written in stone.

There are two types of delay: (1) non-excusable delay (or inexcusable delay) and (2) excusable delay.

Non-excusable delay is the type of delay that contractors never want to hear. This is the delay solely caused by them and may trigger the owner’s assessment of liquidated damages. Not only this, but this type of delay will not entitle the contractor to additional time or compensation. Why? Because again, the delay was caused by the contractor, hence the reason why it is the type of delay a contractor never wants to hear!

Excusable delay is not the fault of the contractor and is the type delay that will entitle the contractor to additional time, additional compensation, or both. Excusable delay is further broken down into (a) compensable, excusable delay (entitling the contractor to additional compensation and time) and (b) non-compensable, excusable delay (entitling the contractor to additional time, but not additional compensation).

Excusable, compensable delay is a delay solely caused by the owner or its consultants and is not caused by the contractor. This is the good type of delay in the sense that it should entitle the contractor to additional time to substantially complete the project and, based upon the contract, additional compensation in the form of extended general conditions. This type of delay could be the result of owner-directed changes, differing site conditions, design revisions, suspension of performance, i.e., actions that are outside of the contractor’s control but within the owner and its agents’ control.

Excusable, non-compensable delay, on the other hand, is typically your force majeure delay including unusually severe weather conditions, fire, or labor strikes—these are the types of delay that are beyond any parties’ control in the construction process, which is why the contractor would be entitled to additional time, but not additional money.

The contractor claiming excusable delay has the burden of proving the delay. See R.P. Wallace, Inc. v. U.S., 63 Fed.Cl. 402, 409 (Fed.Cir. 2004) (“The contractor must prove that the excusable event proximately caused a delay to the overall completion of the contract, i.e., that the delay affected activities on the critical path.”). For this reason, it is important that the contractor well-document the cause of the delay including how the delay impacted its critical path, and provide timely notice under the contract regarding the event causing the delay.

Now, construction contracts contain may contain a “no damage for delay” clause that is designed to prevent the contractor from being entitled to extended general conditions for excusable, compensable delay. Basically, if there is an excusable delay, the contractor’s sole and exclusive remedy is an extension of time and not extended general conditions. The “no damage for delay” provision is enforceable in many jurisdictions. While there are certain recognized exceptions to the application of an enforceable “no damage for delay” provision (e.g., fraud, active interference), a contractor agreeing to such a provision certainly cannot operate on the premise that it will argue around it in the event of an excusable, compensable delay. Rather, the contractor needs to operate on the premise that it is assuming a certain risk that a delay could be caused by the owner or the owner’s agents and the contractor’s sole remedy for the delay is more time to substantially complete the project.

The objective for any contractor is to understand what the legal implications and consequences are for delays on a construction project, whether an excusable delay or non-excusable delay. Some tidbits for contractors to absolutely consider on the front-end and prior to the execution of the contract include:

Does the contract define excusable delay that would entitle the contractor to additional time and/or money? For instance, in government contracting, the prime contract may incorporate Federal Acquisition Regulation 52.249.10 and 52.249.14 regarding excusable delay, as set forth below.
Is there a “no-damage-for-delay” provision in the contract?
What are the notice provisions to ensure the contractor is timely providing notice for the cause of the delaying event? Notice should always be given even if the full impact of the delay is unknown. Many contracts contain onerous language that if notice is not given with “x” number of days after the delaying event, the contractor waives any and all claims for delay. Watch out for this!
Does the contractor have appropriate language in its subcontracts that will enable it to flow-down damages associated with non-excusable delay (the owner’s assessment of liquidated damages and the contractor’s own extended general conditions)?
Does the contractor have an experienced scheduling consultant or scheduler that can capture the delaying event to show the event impacted the critical path?

52.249-10 Default (Fixed–Price Construction) (APR 1984)

(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.

See also F.A.R. 52.249-14 (regarding bolded language).

CONVERTING THE DREADFUL TERMINATION FOR DEFAULT INTO A TERMINATION FOR CONVENIENCE

Posted on October 5, 2014October 5, 2014 by Edward Garber

Contractors, 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.

A 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.

CONSTRUCTION CONTRACTS AND YOUR “ORDER OF PRECEDENCE” CLAUSE

Posted on September 28, 2014September 28, 2014 by Edward Garber

During 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.

To 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.

COMPELLING REASONS NOT TO ENFORCE SUBCONTRACT VENUE PROVISIONS IN MULTI-PARTY CONSTRUCTION DEFECT CASES

Posted on September 13, 2014September 13, 2014 by Edward Garber

Subcontracts oftentimes contain venue provisions as to the exclusive venue for lawsuits. These venue provisions or forum selection clauses are consistent with the general contractor’s preferred venue; the venue, however, may be in a location unrelated to the project site. Sometimes the general contractor is sued by an owner (or association) for construction defects in a venue different than the venue included in the subcontracts. The general contractor, as it should, will third-party into the lawsuit those subcontractors that are implicated by the owner’s complaint for breach of contract, indemnification, etc.

Certain subcontractors will move to transfer venue based on the venue provision in their subcontract. Despite the venue provision, transferring venue is really in no one’s best interest since it is more efficient and economical to have multi-party construction defect cases tried and adjudicated in the same action versus many separate actions. The recent case of Love’s Window & Door Installation, Inc. v. Acousti Engineering, Etc., 39 Fla. L. Weekly D1963a (Fla. 5^th DCA 2014) supports this position. In this multi-party construction defect case, a sub-subcontractor that was sued by the subcontractor that hired it moved to transfer venue. The trial court denied the motion and the sub-subcontractor appealed. The Fifth District Court of Appeal agreed with the trial court that there were compelling reasons not to enforce the venue provision (e.g., to prevent multiple lawsuits, minimize judicial labor, avoid inconsistent results, and reduce expenses).

Yes, venue provisions are important and routinely enforceable. But, there are times where it is in the interests of justice and the parties NOT to enforce a venue provision, such as a multi-party construction defect case.

Notwithstanding, I always like to include a joinder provision in a construction contract that allows the hiring party (e.g., general contractor) to sue the hired party (e.g., subcontractor) in any forum and venue that the hiring party is sued. For example, in a subcontract, I would want a provision that allows the general contractor to sue (or third-party / join) the subcontractor in any venue and forum the general contractor is sued by any third-party, association, or owner. Such a provision ensures that even if the hired party (subcontractor) wants to rely on the venue provision, there is a joinder provision in the subcontract that negates the application of the venue provision in this context.

HMM–WAIVER OF SUBROGATION–SHOULD IT STAY OR SHOULD IT GO?!?

Posted on September 5, 2014September 5, 2014 by Edward Garber

Parties involved in construction are familiar with the phrase “waiver of subrogation” because there is commonly, and virtually always, a waiver of subrogation provision in the construction contract. For instance, the AIA Document A201 (General Conditions) contains a waiver of subrogation provision for damages or loss covered by builder’s risk property insurance. A waiver of subrogation provision prevents an insurance company from paying a claim and then stepping in the shoes of the insured (through subrogation) to sue a waived third party responsible for the claim. To ensure the waiver of subrogation provision does not conflict with any other rights in the contract, the A201’s waiver of subrogation provision provides: “A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.”

For example, let’s assume a fire during construction caused substantial damage to an owner’s property. The owner submitted a builder’s risk claim and it was determined that the damage caused by the fire (peril) was covered. Let’s assume the fire was attributed to the negligence of the contractor and its electrical subcontractor. With waiver of subrogation language, the carrier cannot pay the claim to the owner and then subrogate to the interests of the owner to pursue claims directly against the contractor and/or electrical subcontractor to recoup the proceeds it paid to the owner. This waiver would apply even though the owner’s contract with its contractor required the contractor to indemnify the owner for damage caused by the contractor or the contractor’s subcontractor’s negligence. Without the waiver of subrogation language, the carrier would not be deprived of this subrogation right.

In addition to the waiver of subrogation relating to builder’s risk property insurance, parties are requesting waivers of subrogation endorsements for CGL policies and other liability policies. With CGL policies, the waiver of subrogation endorsement is referred to as the “Waiver of Transfer of Rights of Recovery Against Others to Us” endorsement. Sometimes parties want a blanket waiver or at least they want to know they are specifically identified in the endorsement to ensure the CGL carrier waives a subrogation claim against it if the carrier pays out insurance proceeds. This endorsement is important because without it a party could be breaching its insurance policy and voiding applicable coverage by contractually agreeing to waive subrogation that is in conflict with the policy’s subrogation language. If a carrier is willing to issue this endorsement (and there are times it may not), it will usually come at a cost through a higher premium, etc., since the waiver of subrogation impacts an insurer’s risk assessment.

I like contractual waiver of subrogation language relating to builder’s risk property insurance claims. As long as the insurance broker and carrier are aware of the contractual waiver so that there is not any issue that the waiver impacts policy language / coverage (and, the broker and carrier should inquire since it’s become boilerplate language in construction contracts), the waiver of subrogation allows a covered claim to be paid without an otherwise waived party worried about whether the carrier is going to try to later recoup losses against it.

From an owner or contractor’s perspective, I also usually like the idea of the party being hired to provide the waiver of subrogation endorsement / waiver of transfer of rights endorsement in its CGL policy irrespective of the requirement to identify the hiring (or paying) party as an additional insured. The primary reason is that in the event there is any issue whatsoever with the additional insured status under the hired party’s policy such that it does not apply to the hiring party (e.g., additional insured status of a general contractor under its hired subcontractor’s policy), with the waiver of subrogation, if the hired party’s policy pays it has at least waived its right to recoup that money against the hiring party through subrogation.

I know there are some parties that do not like waiver of subrogation language, especially with CGL policies, due to underwriting issues that it poses and/or potential increased premium costs associated with the endorsement. Sure, this is true. But, a waiver of subrogation does enable a dispute to be streamlined by allocating risk to a party that is in a position to control the risk and has insurance to cover that risk and by reducing continued litigation associated with a claim.