YOUR CONSTRUCTION CONTRACT

Posted on March 23, 2024March 23, 2024 by David Adelstein

Your construction contract is an important topic. What’s even more important is YOUR process for reviewing and negotiating construction contracts.

Are you simply acting as a riverboat gambler willing to assume undue risk because you don’t value the investment in understanding what you are signing? If so, it becomes hard to complain about what you agreed to and signed when you chose NOT to invest in the process. Investing in the process means you are working with a construction attorney, you have an insurance broker that understands your industry, you have resources in place to ensure risk is negotiated and allocated, and you understand what risk you are assuming to make sure you are properly protecting and perfecting your rights, and transferring risk downstream.

When it comes to construction contracts, there are really three approaches:

1. Riverboat Gambler. This is the “I’ll sign whatever you give me because I don’t want to lose the contract / revenue.” Under this approach, you are not worried about undue risk because you don’t value the investment in the next two approaches. Your thought process is that you’ll care about the risk when an issue pops up, i.e., the riverboat gambler. This is not an approach I’d recommend because it is contrary to the adage, “an ounce of prevention is worth a pound of cure.” This is simply a reactive approach to issues and risks. The other two approaches are more proactive and better suited to understand and manage risk.

2. Budgeted Approach. Under this approach, you budget a certain amount of money to work with a construction attorney. The attorney works within this budget to provide you bullet points, red-line suggestions, or comments for consideration (e.g., adding PDF comments) within your budget and you factor this input into your business decision and negotiation. Based on this, you can consider whether to expand the budget or take the lead in the edits and negotiation. This approach is good for parties that have experience in understanding and allocating risk and negotiating deal points, and value the budget they are allocating.

3. Invested Approach. This is the most proactive because you are investing in resources to make sure you understand risk, allocate risk, negotiate risk, have the right resources and insurance for risk, educate your team on risk, and are willing to digest and consider deal points. This means working with a construction attorney on contracts as-needed based on your level of sophistication and experience and ensuring you have the right insurance broker that understands your industry and risks. This means an attorney would be engaged in red-lining contracts, negotiating contracts, and working with you and your insurance broker to make sure you understand assumed risk. An attorney prefers this approach because it is a value-added service.

Please reach out to me if you are interested in discussing the second or third approaches. Again, these are more proactive approaches for those that value and appreciate the risk and don’t want to be purely reactive. Since everything starts and ends with your contract, the riverboat gambler approach should be a non-starter to you. There is too much risk in construction to be a riverboat gambler.

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.

A LACK OF SOPHISTICATION WITH THE CONSTRUCTION CONTRACT CAN PLAY OUT IN AN UGLY DISPUTE

Posted on October 16, 2022October 16, 2022 by Edward Garber

There are times where a lack of sophistication can come back to haunt you. This is not referring to a lack of sophistication of the parties. The parties, themselves, could be quite sophisticated. This is referring to a lack of sophistication with the construction contract forming the basis of the relationship. While parties don’t always want to buy into the contract drafting and negotiation process, it is oftentimes the first document reviewed. Because contract terms and conditions are important. They govern the relationship, the risk, scope, amount, and certain outcomes with disputes. However, a lack of sophistication can play out when that contract that should govern the relationship, the risk, the scope, the amount, and certain outcomes doesn’t actually do that, or if it does, it does it poorly. An example of how bad a dispute can play out when it comes to the lack of sophistication on the front end is Avant Design Group, Inc. v. Aquastar Holdings, LLC, 2022 WL 6852227 (Fla. 3d DCA 2022), where a cost-plus contract was treated as a lump sum contract.

Here, an owner planned to perform an extensive interior build-out to a residential unit. The owner had an out-of-country architect; because the architect was not licensed in Florida, the owner hired a local architect/designer to oversee construction and obtain goods and services for the residential interior build-out. The contract was nothing but a proposal of items and costs. The proposal stated the owner “would pay the cost of goods and services of the vendors, plus pay a ‘20% Interior Design & Administrative Fee’” to the local designer. Avant Design Group, 2022 WL at *1. The proposal further stated, “This preliminary budget of the Client’s construction costs include [sic] anticipated costs for construction materials, labor and sales tax. Any other cost, including but not limited to freight, cartage, shipping, receiving, storage and delivery are not included in the preliminary budget and will be invoiced separately.” Id., n.2.

The owner and its local designer executed 92 proposals for purposes of the interior residential build-out. Think about this: 92 proposals. Collectively, all of these so-called proposals formed the basis of the contractual arrangement between the owner and local designer. Terms and conditions, however, appeared to be skimpy at best. The bigger issue, mentioned below, is the application of the 20% fee, as the language would suggest it is a cost-plus contract where the fee of 20% was on top of actual costs.

A dispute arose. The owner thought it was being over-charged so it terminated the local designer. The local designer thought it was underpaid so it recorded a lien. Then, the inevitable lawsuit. At trial, the owner had a forensic expert that testified that the owner was overcharged by over $500,000. This was based on the owner’s position that the contract was actually a cost-plus contract. The local designer claimed it was lump sum. The type of contract—whether it was cost-plus OR lump sum—formed the basis of the dispute, and it mattered a lot. A cost-plus arrangement meant that the local designer would be entitled to a cost of the goods and services plus its 20% fee markup. A lump sum meant that actual costs did not matter–in other words, all of the proposals were simply mini-lump sum arrangements that could factor in the 20% fee markup.

“Generally, absent a finding of ambiguity, parol evidence is not admissible to assist the factfinder regarding the parties’ intent.” Avant Design Group, supra, n.10. Stated differently, expert testimony and the testimony of the parties is irrelevant when the contract is unambiguous. While here, the trial court did not render any findings that the contract was ambiguous, “both parties, without objection, elicited expert testimony regarding the nature of the parties’ contract.” Avant Design Group, supra, n.10. Both parties viewed the type of contract to be a factual issue and the trial court ruled that the contract was a cost-plus agreement. “As ample evidence supports the trial court’s finding that the parties entered into a cost-plus contract that limited [owner’s] payment obligation to the 20% Fee, we affirm the trial court’s principal conclusion regarding the contract’s payment terms.” Avant Design Group, supra, *4.

The determination of whether the contract was cost-plus or lump sum was really the dispute and determined the outcome. It was the dispute. This determination meant that the local designer was overpaid by over $500,000, its lien was fraudulent, and its lien should be discharged. Had the determination been that the contract was lump sum, the entire outcome of the case should have been different. Keep this in mind. If your intent is lump sum, make that intent clear. Conversely, if it is cost-plus, it is a completely different contract relationship and contract administration because you cannot add your markup to what you are already marking up as that is double dipping. Notably, the case of Avant Design Group has a number of interesting issues to be discussed. Those will be probably be discussed separately in shorter postings. The key, though, is that the dispute centered on a cost-plus contract being treated as lump sum, when that was clearly not the case.

DIFFERENCE BETWEEN A NOVATION AND A MODIFICATION TO A CONTRACT

Posted on April 24, 2022April 24, 2022 by Edward Garber

In contract law, there are two doctrines that have similarities but are indeed different. These doctrines are known as novation and modification. There are times you may want to make arguments relative to these doctrines because they are important for your theory of the dispute. Thus, you want to make sure you understand them so you can properly plead and prove the required elements to substantiate the basis of the theories. Understanding the elements will help you understand the evidence you will need to best prove your factual theories.

A novation is essentially substituting a new contract for an old contract.

“‘A novation is a mutual agreement between the parties for the discharge of a valid existing obligation by the substitution of a new valid obligation.’” Thompson v. Jared Kane Co., Inc., 872 So.2d 356, 361 (Fla. 2d DCA 2004) (citation omitted). To prove a novation, a party must prove four elements: “(1) the existence of a previously valid contract; (2) the agreement of the parties to cancel the first contract; (3) the agreement of the parties that the second contract replace the first; and (4) the validity of the second contract.” Id. at 61. Whether the parties consented to the substitute contract can be implied from the factual circumstances. Id.

Parties are more familiar with a modification because it is not uncommon that parties may agree to modify contractual terms. The contract remains in effect but certain terms or obligations are modified. For example, a change order to a contract is a modification.

A modification, unlike a novation, “merely replaces some of the terms of a valid and existing agreement while keeping those not abrogated by the modification in effect.” Bornstein v. Marcus, 275 So.3d 636, 639 (Fla. 3d DCA 2019).

When determining the scope of a modification to a contract, the following principles control: (1) “individual terms of a contract are not to be considered in isolation, but as a whole and in relation to one another”; (2) “the proper resolution of any inconsistency … is best determined by the manner in which the parties actually perform under it”; and (3) “an amendment to an agreement is designed to serve some useful function, and its existence is strong evidence, therefore, that the contract was changed from what the parties believed and intended was provided before.”

Marcus, supra, at 640 (citations omitted).

Remember, there is a difference between a modification and a novation. Understanding this distinction may come into play in a dispute you have relative to a contract you entered into.