Category Archives: Government Contracting

CONFLICT BETWEEN A SUBCONTRACTOR’S MILLER ACT PAYMENT BOND CLAIM AND A PRIME CONTRACTOR’S CONTRACT DISPUTES ACT CLAIM

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The recent opinion in U.S. f/u/b/o Marenalley Construction, LLC v. Zurich American Insurance Co., 2015 WL 1137053 (E.D.Pa. 2015) is a great example as to what could happen when a prime contractor submits a Contract Disputes Act claim to the federal government that includes subcontractor amounts and then a subcontractor simultaneously pursues the same amounts from the prime contractor’s Miller Act payment bond surety. The question becomes should the subcontractor’s lawsuit against the Miller Act payment surety be dismissed or stayed pending the outcome of the resolution of the prime contractor’s Contract Disputes Act claim.  The ruling in this case held that the subcontractor’s Miller Act claim could proceed, and would not be dismissed or stayed, pending the outcome of the prime contractor’s Contract Disputes Act claim.  This was a great ruling for the subcontractor and obviously puts the prime contractor in an uncomfortable position, to say the least, since it becomes hard to dispute a subcontractor’s claim when the merits of that claim have been packaged (or passed through) to the federal government in a certified Contract Disputes Act claim.

In this case, both the prime contractor and subcontractor agreed that the United States Department of Veterans Affairs (VA) caused additional work that increased the cost of the work.  As a result, the prime contractor submitted a Contract Disputes Act claim to the VA that included claims and amounts from subcontractors.  While the prime contractor’s claim was pending with the VA, a subcontractor sued the prime contractor’s Miller Act payment bond surety. This was a subcontractor that also had its claims and amounts packaged (or passed through) to the VA in the prime contractor’s Contract Disputes Act claim.

The prime contractor argued that the subcontractor’s Miller Act payment bond claim should be dismissed or stayed pending the resolution of the Contract Disputes Act claim.  In particular, the prime contractor argued that because the subcontract incorporated a dispute resolution clause (that incorporated the requirements of the Contract Disputes Act), the subcontractor was required to exhaust this administrative process before proceeding with a Miller Act payment bond claim.

Dismissal of  Miller Act Payment Bond Claim?

The ruling to deny the prime contractor and surety’s motion to dismiss the Miller Act payment bond claim was an easy decision.  To begin with, a Miller Act payment bond claim needs to be instituted within a year from the subcontractor’s last furnishing so if the court dismissed the claim it would potentially be depriving the subcontractor of its rights under the law without any certainty as to if the subcontractor re-filed the lawsuit it would be within the statute of limitations or the statute of limitations would otherwise be tolled.  And, pursuant to the Miller Act, a subcontractor cannot contractually agree to waive its Miller Act rights before the subcontractor performed any work.  A waiver of Miller Act payment bond rights is only enforceable if the waiver is: 1) in writing, 2) signed by the party waiving its payment bond rights, and 3) “executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.”  See 40 U.S.C. s. 3133.

Stay of Miller Act Payment Bond Claim?

The real determination was whether the subcontractor’s Miller Act payment bond lawsuit should be stayed until the completion of the prime contractor’s dispute resolution with the VA. The court held No!:

 

“The Miller Act entitles Marenalley [subcontractor] to bring suit ninety days after the completion of its work…not when and if Nason [prime contractor] recovers from the VA. Conditioning Marenalley’s right to recover from the [Miller Act] Payment Bond on the completion of Nason’s CDA [Contract Disputes Act] process would be inconsistent with the terms of the Miller Act.

***

Nason and Zurich [surety] protest that they will be prejudiced in the absence of a stay due to the costs of dual litigation and the risk of inconsistent decisions.  The Court is not overly troubled by these arguments.  Ordinarily the fact that a prime contractor has a claim for the same amount pending under the disputes clause of the [incorporated] prime contract, does not affect Miller Act cases.

***

The CDA process will determine the VA’s liability to Nason.  The VA, however, has no jurisdiction over the amount that Nason must pay Marenalley and no interest in how that amount is determined. Thus, a stay would subject Marenalley to a substantial, indefinite delay as Nason’s claim passes through the administrative process and court review, only to be left at the end of that process to begin again here to litigate its rights against Nason.”

 

Marenalley, supra, at *6 (internal citations and quotations omitted).

How Does a Prime Contractor Account for this Risk?

So, based on this ruling, how does a prime contractor account for this business risk? And, this is a business risk because there may be value to a subcontractor to pursue the Miller Act payment bond claim rather than wait an indefinite period of time for the Contract Disputes Act process to resolve itself and then hope that the prime contractor pays the subcontractor the portion of the subcontractor’s claim that was passed through to the federal government.

 

Well, there is authority that would entitle the prime contractor to a stay of a subcontractor’s Miller Act payment bond lawsuit.  But, this authority is predicated on language in the subcontract that any action filed by the subcontractor will be stayed pending the exhaustion of administrative remedies.

 

For example, in U.S. f/u/b/o Trans Coastal Roofing Co. v. David Boland, Inc., 922 F.Supp. 597, 598 (S.D.Fla. 1996), the subcontract contained the following language:

 

“[s]ubcontractor shall first pursue and fully exhaust [the procedures set forth in the standard disputes clause of the primary contract] before commencing any other action against Contractor for any claims it may have arising out of its performance of the Work herein.”

***

“[Contractor shall] prosecute all claims submitted by Subcontractor under the contractual remedial procedure of the Prime Contract on behalf of and to the extent required by the Subcontractor.”

***

 “[Subcontractor] agree[d] to stay an action or claim against [the prime contractor’s Miller Act bond] pending the complete and final resolution of the Prime Contract’s contractual remedial procedure.”

 

Because the subcontractor failed to exhaust its administrative remedies, the court dismissed the subcontractor’s Miller Act payment bond claim.  Importantly, this case was decided before there were amendments to the Miller Act that now prevents a subcontractor from waiving a Miller Act payment bond claim prior to performing work.  Thus, if this case were decided today, the court likely would have stayed the Miller Act payment bond claim instead of dismissing it unless, of course, it was clear that the statute of limitations for pursuing a Miller Act payment bond claim would be tolled pending the exhaustion of the administrative remedies.

 

Similarly, in U.S. v. Dick/Morganti, 2007 WL 3231717 (N.D.Cal. 2007), the prime contractor and surety moved to stay a subcontractor’s payment bond claim based on the following subcontract language:

 

“If the Owner [GSA] and the Contractor [Dick/Morganti], pursuant to the General Contract or by agreement, submit any dispute, controversy, or claim between them to arbitration or some other dispute resolution procedure specified in the General Contract and such a matter involves or relates to a dispute, controversy, or claim between the Contractor and the Subcontractor, Subcontractor agrees …to stay any action filed by the Subcontractor until the dispute resolution and appeals process between the Contractor and the Owner is exhausted.”

 

The prime contractor argued it “intended” to submit a claim to the federal government [GSA] that will include the subcontractor’s amounts and, as such, the provision should operate to stay the subcontractor’s Miller Act payment bond claim.  The court agreed provided that the prime contractor did actually submit the claim.

 

Thus, a prime contractor should absolutely incorporate language in a subcontract consistent with the language in these decisions that reflects that any action filed by the subcontractor, including an action against the prime contractor’s Miller Act payment bond surety, will be stayed pending the complete resolution of any dispute resolution between the prime contractor and federal government that involves or includes the claims and amounts sought by the subcontractor. 

 

And a subcontractor, even if this language is included in the subcontract, should still move forward and timely file any Miller Act payment bond lawsuit.

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.

 

GOVERNMENT CONTRACTS AND TERMINATION FOR DEFAULTS: SURETY TAKEOVER AGREEMENTS, TENDER AGREEMENTS, ETC.

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On federal government construction projects, the prime contractor provides the government with a performance bond (pursuant to the Miller Act) guarantying the prime contractor’s performance under the prime contract.   Under normal course and in accordance with the Federal Acquisition Regulations (“FAR”), the performance bond is triggered when the government terminates the prime contractor for default and then looks to the performance bond surety to remedy the default by completing the defaulting prime contractor’s contractual obligations.  (See FAR 49.402-3 regarding the government’s procedure to terminate the prime contractor for default and put the contractor and surety on notice.) 

 

Subpart 49.4 of FAR deals with termination for defaults.  Prime contractors as well as sureties should familiarze themselves with this subpart especially if they received notification from the contracting officer of the possibility of a terminatin for default or the notices seem to indicate that the terminatiion for default is imminent.

 

Let’s presume the contracting officer moves forward and terminates the prime contractor for default or the termination is imminent.  Now what?   Clearly, the contracting officer will be looking to the prime contractor’s performance bond surety to remedy the default.    Below are considertaions that will be explored and are the reasons why prime contractors and sureties in this situation should absolutely ensure they are consulting with counsel.

 

A. Takeover Agreements

 

One common option under FAR  49.404 that can be implemented is a surety-takeover agreement with the government (see below).  This is when the surety takes over the contractual obligations of the prime contract.  Typically, the surety will enter into a takeover agreement with the government that outlines the obligations of the takeover and will enter into a separate contract with the completion contractor the surety engages to complete its defaulting prime contractor’s scope of work.  While FAR ideally prefers a tripartite takeover agreement with the government, surety, and defaulted prime contractor, this generally does not happen with a prime contractor that challenges the termination for default and looks to convert the termination into one for convenience. 

 

49.404  Surety-takeover agreements.

(a) The procedures in this section apply primarily, but not solely, to fixed-price construction contracts terminated for default.

(b) Since the surety is liable for damages resulting from the contractor’s default, the surety has certain rights and interests in the completion of the contract work and application of any undisbursed funds. Therefore, the contracting officer must consider carefully the surety’s proposals for completing the contract. The contracting officer must take action on the basis of the Government’s interest, including the possible effect upon the Government’s rights against the surety.

(c) The contracting officer should permit surety offers to complete the contract, unless the contracting officer believes that the persons or firms proposed by the surety to complete the work are not competent and qualified or the proposal is not in the best interest of the Government.

(d) There may be conflicting demands for the defaulting contractor’s assets, including unpaid prior earnings (retained percentages and unpaid progress estimates). Therefore, the surety may include a “takeover” agreement in its proposal, fixing the surety’s rights to payment from those funds. The contracting officer may (but not before the effective date of termination) enter into a written agreement with the surety. The contracting officer should consider using a tripartite agreement among the Government, the surety, and the defaulting contractor to resolve the defaulting contractor’s residual rights, including assertions to unpaid prior earnings.

(e) Any takeover agreement must require the surety to complete the contract and the Government to pay the surety’s costs and expenses up to the balance of the contract price unpaid at the time of default, subject to the following conditions:

(1) Any unpaid earnings of the defaulting contractor, including retained percentages and progress estimates for work accomplished before termination, must be subject to debts due the Government by the contractor, except to the extent that the unpaid earnings may be used to pay the completing surety its actual costs and expenses incurred in the completion of the work, but not including its payments and obligations under the payment bond given in connection with the contract.

(2) The surety is bound by contract terms governing liquidated damages for delays in completion of the work, unless the delays are excusable under the contract.

(3) If the contract proceeds have been assigned to a financing institution, the surety must not be paid from unpaid earnings, unless the assignee provides written consent.

(4) The contracting officer must not pay the surety more than the amount it expended completing the work and discharging its liabilities under the defaulting contractor’s payment bond. Payments to the surety to reimburse it for discharging its liabilities under the payment bond of the defaulting contractor must be only on authority of—

(i) Mutual agreement among the Government, the defaulting contractor, and the surety;

(ii) Determination of the Comptroller General as to payee and amount; or

(iii) Order of a court of competent jurisdiction.

 

B.  Tender Agreements

 

Another option the surety can implement is by tendering a completion contractor to the government for the government to complete the work.  Oftentimes the surety will obtain pricing to complete the defaulting prime contractor’s scope of work.  The surety will then tender a completion contractor to the government so that the government can hire this contractor directly.  The surety will also tender the difference between the balance of the defaulted prime contractor’s contract amount and the completion contractor’s contract amount to complete the work.  (For example, if the balance of the defaulted prime contract is Twenty Million but it will cost a completion contractor Twenty Five Million to complete the defaulted prime contractor’s scope of work, the surety will tender the additional Five Million.)  A tender agreement is generally entered into between the surety and the government and outlines the parameters of the tender including monetary responsibilities of the surety. 

 

C.  Government Completion (if surety does not takeover or tender)

 

FAR 49.405 gives the government authority to engage a completion contractor if the surety does not arrange for the completion of the defaulted prime contractor’s scope of work (see below).  If the government moves forward with this option, it will certainly look to the surety for all costs it incurs associated with the prime contractor’s default and any delay associated with bringing a completion contractor on board.

 

49.405  Completion by another contractor.

If the surety does not arrange for completion of the contract, the contracting officer normally will arrange for completion of the work by awarding a new contract based on the same plans and specifications. The new contract may be the result of sealed bidding or any other appropriate contracting method or procedure. The contracting officer shall exercise reasonable diligence to obtain the lowest price available for completion.

  

D. Procedures Government Can Utilize Instead of Termination for Default

 

FAR 49.402-4 identifies certain procedures that the government can utilize instead of terminating the prime contractor for default, although these procedures are generally implemented after the prime contractor and surety are on notice of an impending termination for default (see below).   The government is probably not going to move forward with these procedures unless its rights are reserved against the prime contractor and performance bond for any resultant damages (see FAR 49.406 below) associated with defaults asserted by the government against the prime contractor (e.g., liquidated damages for delays,  correction of deficient work, etc.).  If these procedures are considered and utilized, there is a good chance the procedure was suggested by the prime contractor and surety as a protocol to best mitigate potential damages asserted by the government.   (By way of example, one option a surety can present is to agree to fund the prime contractor through completion in order to keep the project moving forward with the contractor most familiar with the scope of work.)

 

49.402-4  Procedure in lieu of termination for default.

The following courses of action, among others, are available to the contracting officer in lieu of termination for default when in the Government’s interest:

(a) Permit the contractor, the surety, or the guarantor, to continue performance of the contract under a revised delivery schedule.

(b) Permit the contractor to continue performance of the contract by means of a subcontract or other business arrangement with an acceptable third party, provided the rights of the Government are adequately preserved.

(c) If the requirement for the supplies and services in the contract no longer exists, and the contractor is not liable to the Government for damages as provided in 49.402-7, execute a no-cost termination settlement agreement using the formats in 49.603-6 and 49.603-7 as a guide.

 

49.406  Liquidation of liability.

(1) The contract provides that the contractor and the surety are liable to the Government for resultant damages. The contracting officer shall use all retained percentages of progress payments previously made to the contractor and any progress payments due for work completed before the termination to liquidate the contractor’s and the surety’s liability to the Government. If the retained and unpaid amounts are insufficient, the contracting officer shall take steps to recover the additional sum from the contractor and the surety.

 

E. Preservation of Surety’s Rights

 

When a surety takesover the completion of the work, tenders a completion contractor, or even funds the original prime contractor through completion, the surety will do so while preserving its rights.  In other words,  a surety will want to best preserve rights to pursue potential claims against the government while contemporaneously mitigating its exposure under the performance bond through the takeover, tender, or funding of the completion work.  See, e.g., Transamerica, Ins. v. U.S.,  31 Fed.Cl. 532 (1994) (finding surety can pursue equitable subrogation claim against government for funds held by government when surety tendered and paid completion contractor); see also In re Appeal of Fireman’s Fund Ins. Co., ASBCA No. 50657, 2000 WL 246620 (2000) (“When a terminated contractor assigns such [pre-takeover / tender] claims to the surety to which assignment the contracting officer consents, or incorporates such an assignment in novation or takeover [or tender] agreement executed by the contracting officer, the surety has standing to prosecute such claims before the Board.”); In re Hackney Group, ASBCA No. 51453, 2000 WL 655950 (2000) (surety’s argument that it has standing to assert defaulted prime contractor’s pre-takeover claims against government based on surety’s indemnity agreement with  prime contractor failed since government was not a party to indemnity agreement and never consented to prime contractor’s assignment of pre-takeover claims to 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.

 

 

SUING FEDERAL GOVERNMENT ON A CONTRACT CLAIM; EQUITABLE SUBROGATION CLAIM BY LIABILITY INSURER AGAINST GOVERNMENT NOT ALLOWED

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Equitable subrogation is a doctrine that liability insurers rely on when paying a claim on behalf of an insured.  Under this doctrine, the insurer equitably subrogates—steps in the shoes—to the rights of the insured and sues as an equitable subrogee of the insured in order to seek reimbursement for the claim it paid.

 

What if the liability insurer tried to pursue an equitable subrogation claim against the federal government?  In other words, what if the insurer paid out insurance proceeds on behalf of its insured-prime contractor and then tried to recoup the insurance proceeds from the federal government as an equitable subrogee of the prime contractor?  The United States Court of Federal Claims in Fidelity and Guaranty Insurance Underwriters v. U.S., 2014 WL 6491835 (Fed.Cl. 2014) explained that a liability insurer CANNOT sue the federal government as an equitable subrogee of the prime contractor in order to recoup insurance proceeds paid out on a claim.

 

In this case, the government hired a prime contractor to abate asbestos at a post office.  The prime contractor was having difficulty obtaining CGL liability insurance to specifically cover asbestos removal for a reasonable premium and the government, through the contracting officer, agreed to execute an addendum to the prime contract that required the government to save harmless and indemnify the contractor from personal injury claims attributable to the asbestos removal work.

 

More than ten years later, a former government employee sued the prime contractor claiming he contracted cancer from his exposure to asbestos while it was being removed and abated at the project.  The prime contractor demanded that the government defend and indemnify it for this claim; however, the government refused.  The prime contractor then tendered the claim to its CGL liability insurer and its insurer settled the claim.  After the settlement, the prime contractor once again demanded that the government reimburse it by honoring the indemnification language in the addendum; again, the government refused.

 

The prime contractor’s liability insurer then filed suit against the federal government as the equitable subrogee of the prime contractor in order to recoup the insurance proceeds it paid to the former government employee.  The thrust of the claim was that the government breached the indemnification provision.  The government moved to dismiss the lawsuit contending that the Court of Federal Claims does not have subject matter jurisdiction to entertain the lawsuit because the liability insurer is not in privity with the government and, therefore, cannot sue the government.  The Court of Federal Claims agreed and dismissed the lawsuit.  Why? Because a plaintiff suing the federal government on a contract claim must be in privity of contract with the federal government with limited exceptions to this rule:

 

“The Federal Circuit has recognized limited exceptions to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States. These limited exceptions include (1) actions against the United States by an intended third-party beneficiary; (2) pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s damages; and (3) actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor [after the surety financed completion of a defaulted subcontractor]. As the court of appeals has observed, the common thread that unites these exceptions is that the party standing outside of privity by contractual obligation stands in the shoes of a party within privity.“

Fidelity and Guaranty Insurance Underwriters, supra(internal quotations and citations omitted).

 

Since none of the limited exceptions applied to allow a liability insurer to sue the government as an equitable subrogee of its insured-prime contractor, the Court of Federal Claims lacked subject matter jurisdiction.

 

This ruling does not prevent the prime contractor from suing the government directly for breaching the indemnification provision; it simply prevents the liability insurer from suing as an equitable subrogee of the prime contractor. Even though the insurer paid the claim, perhaps it can enter into an agreement with the prime contractor whereby the prime contractor sues the government directly for breach of contract.

 

 

The case demonstrates the limited exceptions available to a claimant on a construction project that wants to pursue a claim directly against the government when the claimant is not the prime contractor hired by the government.  While prime contractors can sue the government for breach of contract, subcontractors, in particular, that want to pursue a claim against the government can only do so as a pass-through claim, meaning they are suing in the name of the prime contractor and will require the cooperation of the prime contractor.

 

Also, as an aside, the indemnification provision from the government and the prime contractor required the government to save harmless and indemnify the prime contractor.  I always like to include the word “defend” in an indemnification provision so it is crystal clear that the indemnitor’s indemnification obligations extend to its contractual obligation to defend the indemnitees for any claim.

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.

“NO DAMAGE FOR DELAY” PROVISIONS AND THE EXCEPTIONS

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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 (11th 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.

 

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.

SUBMITTING A “CLAIM” UNDER THE CONTRACT DISPUTES ACT

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The case of Delaware Cornerstone Builders, Inc. v. U.S., 117 Fed.Cl. 539 (Fed.Cl. 2014) exemplifies what happens if a federal government contractor fails to properly submit a claim in accordance with the Contract Disputes Act (41 U.S.C. s. 7101 en seq.).  As reflected below, the failure of the contractor to comply with the Contract Disputes Act will strip the United States Court of Federal Claims of jurisdiction to resolve the contractor’s claim with the federal government.

 

In this case, the contractor disputed the scope of the government’s punchlist.  The contractor sent a letter to the contracting officer that included a good faith certification requesting payment in the amount of $143,390.39 pursuant to its resubmitted payment application #14.  The contracting officer denied the payment request stating that the amount exceeded the value of punchlist work. Due to the delay in the contractor completing the punchlist items, the government advised that it would hire another contractor to complete the items and deduct the costs from the contractor’s contract balance.  However, the government did not hire the replacement contractor.  Years later the contract was still not closed out. The contractor was still trying to get paid its contract balance and was communicating with the government’s legal counsel.   The government’s counsel advised the contractor to submit a formal claim (per the Contract Disputes Act), but the contractor failed to do so.  Instead, the contractor filed a lawsuit in the Court of Federal Claims for $200,760.39.  The government moved to dismiss the complaint based on the contractor’s failure to comply with the Contract Disputes Act prior to filing the lawsuit.  The Court of Federal Claims agreed:

 

The CDA [Contract Disputes Act] permits a contractor to appeal the final decision of a contracting officer to this Court within 12 months of receiving the decision on a claim. A contractor may also seek review in this Court if the contracting officer fails to respond to a contractor’s claim within 60 days, as provided in the CDA. As such, the predicate for jurisdiction under the CDA is an appeal of either a contracting officer’s final decision on a claim or a deemed denial of a claim.

***

The CDA does not define the term “claim,” but the Federal Acquisition Regulation (“FAR”) [in F.A.R. 2.101] defines a claim as a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising from or relating to the contract. Thus, the elements of a claim are: (i) a written demand, (ii) seeking, as a matter of right, (iii) the payment of money in a sum certain. Additionally, all claims requesting relief greater than $100,000 must be certified by the contractor.

***

An action brought before the Court of Federal Claims under the CDA must be based on the same claim previously presented to and denied by the contracting officer.

Delaware Cornerstone Builders, supra, at 545-47 (internal quotations and citations omitted).

 

While the contractor arguably submitted a certified claim for the $143,390.39 per its resubmitted payment application #14, this amount was different than the $200,760.39 it was seeking in its Complaint.  Thus, the amount it was seeking was not based on the same potential claim denied by the contracting officer which was a condition precedent to the contractor filing a lawsuit against the government in the Court of Federal Claims.

 

If a prime contractor wants to pursue a claim against the federal government, it needs to properly prepare and submit that claim pursuant to the Contract Disputes Act.  Notably, this is also memorialized in the disputes clause in F.A.R. 52.233-1 that is likely incorporated into the prime contract.

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

RECOVERING COMPENSATION FOR UNREASONABLE DELAYS UNDER THE SUSPENSION OF WORK CLAUSE

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Federal government construction contracts for fixed-price contracts contain a suspension of work clause found in F.A.R. 52.242-14 (a copy of this clause can be found at the bottom of this posting).   This clause allows the government, through the contracting officer, to order the suspension, interruption, or delay of the construction work.  This clause further permits the contractor to obtain an equitable adjustment for the increased costs it incurs associated with the delay / suspension of its work for an unreasonable period of time. George Sollitt Const. Co. v. U.S., 64 Fed.Cl. 229, 236-37 (Fed.Cl. 2005).  The unreasonableness of the delay / suspension depends on the actual circumstances of the project, but it is this finding of unreasonableness that triggers additional compensation to the contractor.  See id.   The test applied to determine whether the contractor is entitled to an equitable adjustment for additional compensation pursuant to the suspension of work clause is as follows:

 

1.  The delay must be of an unreasonable length extending the contract’s performance;
2.  The delay must be proximately caused by the government;
3.  The delay resulted in injury or damage to the contractor; and
4.  There is no concurrent delay caused by the contractor.

 

CEMS, Inc. v. U.S., 59 Fed.Cl. 168, 230 (Fed.Cl. 2003) quoting P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1375 (Fed.Cir. 2003).

 

As reflected above by the fourth factor, “even if the government has caused an unreasonable delay to the contract work, that delay will not be compensable if the contractor, or some other factor not chargeable to the government, has caused a delay concurrent with the government caused-delay.”  George Sollitt, 64 Fed.Cl. at 237.

 

This suspension of work clause is designed to make the contractor whole for unreasonable delays, but additional profit would be excluded from any additional compensation owed to the contractor.  See F.A.R. 52.242-14(b).

 

As mentioned in previous postings, contractors need to understand the clauses incorporated into their prime contract so they can appreciate how to best preserve their rights when they encounter a delaying event.  Also, understanding the clauses will enable the contractor to best present their request for equitable adjustment or claim in a manner that supports their position for additional compensation.

 

F.A.R. 52.242-14

Suspension of Work (APR 1984)

(a) The Contracting Officer may order the Contractor, in writing, to suspend, delay, or interrupt all or any part of the work of this contract for the period of time that the Contracting Officer determines appropriate for the convenience of the Government.

(b) If the performance of all or any part of the work is, for an unreasonable period of time, suspended, delayed, or interrupted (1) by an act of the Contracting Officer in the administration of this contract, or (2) by the Contracting Officer’s failure to act within the time specified in this contract (or within a reasonable time if not specified), an adjustment shall be made for any increase in the cost of performance of this contract (excluding profit) necessarily caused by the unreasonable suspension, delay, or interruption, and the contract modified in writing accordingly. However, no adjustment shall be made under this clause for any suspension, delay, or interruption to the extent that performance would have been so suspended, delayed, or interrupted by any other cause, including the fault or negligence of the Contractor, or for which an equitable adjustment is provided for or excluded under any other term or condition of this contract.

(c) A claim under this clause shall not be allowed (1) for any costs incurred more than 20 days before the Contractor shall have notified the Contracting Officer in writing of the act or failure to act involved (but this requirement shall not apply as to a claim resulting from a suspension order), and (2) unless the claim, in an amount stated, is asserted in writing as soon as practicable after the termination of the suspension, delay, or interruption, but not later than the date of final payment under the contract.

 

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

FEDERAL GOVERNMENT CONTRACTING AND RECOVERY OF ATTORNEY’S FEES UNDER THE EQUAL ACCESS TO JUSTICE ACT (“EAJA”)

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The ability to recover attorney’s fees against the federal government is a consideration before initiating a dispute against the government, whether in federal court or in an administrative proceeding.

 

The Equal Access to Justice Act (referred to as the “EAJA”) authorizes a court to award reasonable attorney’s fees and costs to a prevailing, eligible contractor in an action brought by or against the United States.  28 U.S.C. s. 2412(d)(1)(a).  The purpose of the EAJA has been explained as follows:

 

“The purpose of the EAJA is to eliminate legal expenses as a barrier to challenges of unreasonable government action. Accordingly, the EAJA authorizes this court to award attorney fees and expenses incurred by contractors who prevail in litigation against the government provided the contractors do not exceed certain size and net worth limitations. The government may escape liability for legal expenses if its actions were substantially justified or if special circumstances make the award unjust.  The burden is on the government to present a substantial justification for its actions.”

Community Heating & Plumbing Co., Inc. v. Garrett, 2 F.3d 1143, 1145 (Fed.Cir. 1993) (internal citations and quotations omitted)

 

First, the contractor needs to be eligible to recover fees under the EAJA.  Not every contractor is eligible.  Such eligible contractors are defined by the EAJA as:

 

“(i) an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed, or (ii) any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $7,000,000 at the time the civil action was filed, and which had not more than 500 employees at the time the civil action was filed….”

28 U.S.C. 2412 (d)(2)(B)

 

Second, the contractor needs to be the prevailing party.  A prevailing contractor under the EAJA is a contractor that recovers a judgment on the merits in its favor.  Ulysses, Inc. v. U.S., 117 Fed.Cl. 772, 777 (Fed.Cl. 2014).   The government however, can avoid the award of fees against it if it proves it was substantially justified in advancing its position.  Substantial justification is a subjective standard determined on a case-by-case basis:

 

“In determining whether to award attorney’s fees under EAJA, the Court looks to whether the Government’s position prior to and throughout litigation had a reasonable basis in both law and fact. While the appropriateness of the Government’s position might vary on individual matters, the Court considers the totality of circumstances to determine whether that position was substantially justified. In the words of the United States Supreme Court, ‘While the parties’ postures on individual matters may be more or less justified, the EAJA … favors treating a case as an inclusive whole, rather than as atomized line-items.’”

Ulysses, 117 Fed.Cl. at 778 (internal quotations and citations omitted). 

 

Stated more simplistically, the government must prove that it advanced a position “justified to a degree that could satisfy a reasonable person.”  BCPeabody Construction Services, Inc. v. U.S., 117 Fed.Cl. 408, 413 (Fed.Cl. 2014) (internal quotation and citation omitted).

 

And third, even if the contractor is eligible to recover attorney’s fees under the EAJA and prevails against the government, this does NOT mean that it will recover 100% of the fees it incurred in the action.  The EAJA provides a statutory cap of $125/hour for attorney’s fees time unless the “court determines that an increase in the cost of living or a special factor, such as the limited availability of qualified attorneys or the proceedings involved, justifies a higher fee.” 28 U.S.C. s. 2412(d)(2)(A).  Unfortunately, exceeding this hourly cap has nothing to do with the novelty of the issues, the competence of the attorney, or the results obtained.  BCPeadbody Construction Services, 117 Fed.Cl. at 415. This means that contractors should not bank on exceeding the statutory cap in recovering attorney’s fees against the government.

 

Importantly, there is also a relevant EAJA for administrative proceedings initiated prior to or instead of  any civil action in court.   5 U.S.C. s. 504.  This administrative EAJA largely mirrors the EAJA discussed above for civil actions, but applies to administrative proceedings. See Melkonyan v. Sullivan, 501 U.S. 89 (1991).

 

Before proceeding with a dispute against the federal government in federal court or an administrative proceeding, consider whether you have a basis under the EAJA to recover attorney’s fees.

 

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.

REQUESTS FOR EQUITABLE ADJUSTMENT AND CONSTRUCTIVE CHANGES IN FEDERAL CONSTRUCTION PROJECTS

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Federal government construction contracts contain a changes clause.  The changes clause in fixed-price federal construction contracts is contained in F.A.R. 52.243-4 (set forth at the bottom of this posting).  This changes clause allows the government, through the contracting officer, to direct changes to the construction contract.  It also allows the prime contractor to request an equitable adjustment to its contract price associated with either a directed / formal change or a constructive change.

 

Formal / directed changes issued to the prime contractor by the government are easy to comprehend.  These typically are less likely to lead to a dispute because the government acknowledges increased costs are owed to the prime contractor through its issuance of a formal change order / directive.

 

A constructive change, on the other hand, oftentimes is what leads to a dispute if the government does not agree that it caused the contractor to incur increased costs to perform the contract. The United States Court of Federal Claims in CEMS, Inc. v. U.S., 59 Fed.Cl. 168 (Fed.Cl. 2003) contains a good discussion as to what constitutes a constructive change:

 

“A constructive change generally arises where the Government, without more, expressly or impliedly orders the contractor to perform work that is not specified in the contract documents.  The constructive change doctrine provides recovery for contractors as the rationale for constructive changes involves the objective of persuading a contractor to continue to work pending resolution of any dispute involving the work at issue.

*** 

There are two basic components to the constructive change doctrine-the change component and the order/fault component.  The change component describes work outside of the scope of the contract, while the order/fault component describes the reason that the contractor performed the work.

***

A constructive change issue arises for work if the Government either expressly or impliedly ordered the work outside the scope of the contract, or if the Government otherwise caused the contractor to incur additional work….In any event, the Government must have directed the contractor to perform the additional work.  The work must not have been volunteered.”

CEMS, supra, at 203 (internal quotations and citations omitted).

 

It is the constructive change that typically leads to what is referred to as a request for equitable adjustment or REA.  An equitable adjustment compensates a prime contractor for the increased costs it incurs in performing the contract, whether due to additional work or delays caused by the government.  Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221, 1243-44 (10th Cir. 1999).   “Some equitable adjustments are for work added by formal change orders….Other equitable adjustments result from ‘constructive changes,’ which occur when the government does something to increase the contractor’s costs without issuing a formal change order.” Id at 1244.

 

 

For a prime contractor to receive an equitable adjustment under the changes clause, it bears the burden of proving liability, causation, and injury.  P.R. Burke Corp. v. U.S., 58 Fed.Cl. 549, 556 (Fed.Cl. 2003).   The prime contractor must “prove that the government somehow delayed, accelerated, augmented, or complicated the work, and thereby caused the contractor to incur specific additional costs.”  Morrison Knudsen Corp., 175 F.3d at 1244.  Stated differently, “[b]efore an equitable adjustment will be granted, plaintiffs [prime contractor] are required to demonstrate that: (1) increased costs arose from conditions materially different from what the contract documents indicated and that such conditions were reasonably unforeseeable based on all information available to the contractor; and (2) the changes in the requirements caused the increased costs.”  Sipco Services & Marine, Inc. v. U.S., 41 Fed.Cl. 196, 224 (Fed.Cl. 1998).

 

As a prime contractor, if you experience a constructive change (increased costs to perform your work), notify the government and request an equitable adjustment to the contract.  If you volunteer to do additional work than you may be impacting your ability to request an equitable adjustment for a constructive change.  It is all about knowing and understanding your rights under the contract so that, among other things, you can preserve your right to seek additional compensation / an equitable adjustment to your contract price.

 

 

 

52.243-4 Changes (JUN 2007)

(a) The Contracting Officer may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes-

(1) In the specifications (including drawings and designs);

(2) In the method or manner of performance of the work;

(3) In the Government-furnished property or services; or

(4) Directing acceleration in the performance of the work.

(b) Any other written or oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; provided, that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order.

(c) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.

(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

(e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) above.

(f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.

 

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

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

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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).

 

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

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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.

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.