DISPUTE RESOLUTION PROVISION IN SUBCONTRACT THAT SAYS OWNER, ARCHITECT OR ENGINEER’S DECISION IS FINAL

In subcontracts, it is not uncommon to see a provision that says something to the effect:

Should any dispute arise between the parties respecting the true construction or interpretation of the Plans, Specifications and/or the Contract Requirements, the decision of the Owner or the Owner’s designated representative as set forth in the General Contract shall be final.

This is a provision in a subcontract dealing with dispute resolution, typically when there is a dispute as to whether the subcontractor is performing extra-contractual or base contract work regarding an “interpretation of the Plans, Specifications, and/or the Contract Requirements.” It is not uncommon for there to be a dispute as to whether certain work is within the subcontractor’s scope of work or outside the subcontractor’s scope of work and subject to a change order.

This language, however, is not a get out of jail free card for a contractor just because the owner or the architect render a decision adverse to the subcontractor.

For instance, in F.H. Paschen, S.N. Nielsen & Associates, LLC v. B&B Site Development, Inc., 2021 WL 359487 (Fla. 4thDCA 2021), the subcontract contained the same provision discussed above.  During construction, a dispute arose as to whether a 561 square yard asphalt area was required to be demolished by the subcontractor and replaced with concrete.  The subcontractor claimed this area was not within its base scope of work that only required it to demolish concrete areas and replace such areas with new concrete. The subcontractor was directed to perform this disputed work and submitted its costs to the contractor.  The contractor submitted the subcontractor’s costs to the architect and the architect decided that the 561 square yard asphalt area was included in the contractor’s scope of work.  The contractor used the architect’s decision to argue the subcontractor was not entitled to the additional costs because the asphalt area was included in the subcontractor’s scope of work.

Unfortunately for the contractor, the court disagreed based on the express terms of the subcontract.    The subcontract did not use the term asphalt or require the subcontractor to demolish asphalt areas.  It did require the subcontractor to demolish concrete or pavement areas.  The court found that:

[T]he only reasonable interpretation of the subcontract is that the scope of work did not include the removal and replacement of asphalt [area] of the parking lot. ‘Asphalt’ and ‘concrete’ are not synonymous terms.  Nothing in the subcontract stated that the Sub was required to remove any asphalt from the parking lot.  The subcontract did not say that the Sub was required to remove pavement from the ‘entire’ parking lot.  Nor did the subcontract describe the specific square footage of pavement that the Sub was to remove.

B&B Site Development, supra, at *3.

Well, what about the validity of the decision of the architect that found the demolition and replacement of this asphalt area to be within the contractor’s scope of work?

While there are certainly times such a provision is governing, “construction contracts cannot leave the arbitrary or fraudulent decision of an architect or engineer or the like to operate as a conclusive settlement of matters in controversy.” B&B Site Development, supra, at *4 (quotation and citation omitted).  Stated differently, “[t]he law does not allow a third party’s arbitrary decision concerning the scope of a contract’s specifications ‘to operate as a conclusive settlement of matters in controversy.’” Id. (citation omitted).

Here, the court found that the subcontract was clear as to the subcontractor’s scope and allowing the architect’s decision to be conclusive would “unfairly allow the revision of the explicit scope of a subcontract after work has commenced, to the detriment of the subcontractor.”  B&B Site Development, supra, at *4.

It was clear that the 561 square yard asphalt area was included in the contractor’s scope of work.  However, it was also clear that this scope of work was not clearly included in the subcontractor’s scope of work.  As a result, it would be arbitrary for the architect to find this scope of work was included in the subcontract (when the architect never reviewed the subcontract) just because the contractor was always responsible for this work.   Clearly defined scopes of work are important.  This case illustrates why because had the subcontract included language that suggested the asphalt area was within the subcontractor’s scope of work, the ruling would have been different because the architect’s decision as to what was included in the contractor’s scope of work would have presumably been passed to the subcontractor.

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.

 

WORKING WITH CONSTRUCTION COUNSEL ON YOUR CONSTRUCTION CONTRACT IS VALUE-ADDED

It is always good practice to have construction counsel assist you with your construction contract.  This may mean drafting your contract.  This may mean negotiating your contract.  This may mean advising you as to provisions in your contract that shift risk to you.  This may mean providing red-lined suggestions to the contract.   Or, this may mean all of the above, or a combination.   The point is having construction counsel work with you will allow you to appreciate risk you are assuming and risk you are allocating to the other party.    It will also allow you to consider provisions or language to provisions you should consider.  I cannot emphasize the importance of working with construction counsel when it comes to your construction contracts.  This is a value-added service.

One consideration is the forum selection provision.  This is the provision in the construction contract that may dictate the exclusive venue for disputes.  The forum selection provision is not a provision that should be cast aside because if there is a dispute it will be one of the first provisions your attorney will want to review.   Dismissing this provision could result in you being required to litigate your dispute or portions thereof in a non-preferred destination, as seen in this non-construction case, that may be more costly or disadvantageous to you for a variety of reasons.  A forum selection provision and the provisions in your contract dealing with dispute resolution are important provisions as these provisions advise you how to navigate disputes that may occur during the performance of the construction 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.

 

NOW IS THE TIME TO REVISIT CONTRACT LANGUAGE IN LIGHT OF COVID-19 TO ADDRESS FUTURE CONTRACTS


Now is the time!  Today!  If you are currently in the process of negotiating or executing contracts, now is the time to ensure the contract protects your interest in light of this new world we enter into.   The impacts associated with COVID-19 may have been realized by some parties, but not others.  Regardless, the full extent of the COVID-19 impacts has likely been realized by no one — we are dealing with an unknown, prospective impact.

Will projects get suspended?  Will they stop and start back up due to disinfecting?  Will they slow down due to health concerns and preventative measures?  Will there be unanticipated material lead times?  Will current material lead times or material orders  be delayed?  Will material prices increase?  Will there be a labor shortage and/or inefficiencies with the labor force?  Will labor costs increase in order to address the preventative measures and anticipated inefficiencies?

These are some questions you may be asking, plus more.   You are asking these questions because of the unknown factor associated with COVID-19 and any future health crisis.  This is the reason now is the time — the time to ensure your contract best captures the risk of the unknown.

Here are considerations:

1.  Force majeure wording. –   This needs to be beefed up and tweaked to address COVID-19 and, potentially, other pandemics / health crisis.   You need to have an understanding who is bearing the cost risk for a project being shut down (by the government or otherwise), suspended, or slowed-down due to this issue.    Leaving it alone is a mistake.  All contracts until this pandemic hit left it alone meaning no contract truly addressed the global pandemic we are all facing.

2.  Additional safety and preventative health measures. – This needs to be factored in as the additional measures will add a cost to the project.  The measures may also add a cost in that they will add certain inefficiencies into the project that need to be factored into the schedule and general conditions.

3.  Material price escalations.- Could the cost of materials increase due to supply chain issues?  It is certainly a possibility and should be considered.  Further, it is likely that to avoid this issue, a party wants to accelerate the ordering of materials at today’s price, and there may be additional storage costs associated with doing this.   Conversely, what if the price of materials skyrocket post-contract?  This issue could break a party’s performance, profitability, and financial wherewithal to perform.  A party may want to address protection from any uncertainty with material price escalations.

4.  Material lead times and material delays.- If there are delays tied to COVID-19, how this being allocated?  There could be a realistic delay in material deliveries that impacts the project’s schedule.  The delay is not the ordering party’s fault but the result of impacts associated with the pandemic.  Based on this concern, this may result in the discussion of material accelerations and the additional storage costs associated with doing this (also discussed above).

5.  No-damage-for-delay.-  A no-damage-for-delay provision is common.  However, a party may want to deliberately carve-out from this issue delays associated with or tied to COVID-19 or any pandemic / health crisis.  The carve-out language should be broad and include language “arising out of or relating to” COVID-19 or any pandemic / health crisis based on the uncertainty as to how impacts may be realized.

6.  Contingencies.- Certain contracts, such as GMP contracts, contain a contingency.  Parties may want to add a contingency in the contract for COVID-19 and pandemics / health crisis.  A certain sum is built into the contract sum to address the unknown costs that could be incurred.

7.  Dispute resolution.- Knowing that the onslaught of COVID-19 cases will start affecting the judicial system, parties may want to revisit their dispute resolution provisions to see how disputes can be more efficiently resolved.  Parties may consider turning towards more specific arbitration provisions that modify standard contractual language.  Since arbitration is a creature of contract, parties can essentially start negotiating the rules of arbitration within the parameters of the contract.  Parties may demand pre-suit mediation provisions, executive settlement meetings, or partnering agreements as vehicles to efficiently resolve disputes and avoid delays or inefficiencies with the judicial system.

These are some talking points.  There will be others based on the scope.  I remain available to assist any party that wants to revisit their standard form contracts or needs help in drafting or negotiating contracts.   A party should not rely on their same-ole contract forms.  Also, a party should not rely on the same-ole negotiation as COVID-19 brought new issues to the table and highlighted the significance of other issues and contractual provisions.

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.

 

GENERAL TIPS WHEN IT COMES TO CONSTRUCTION CONTRACT DRAFTING AND NEGOTIATION

When it comes to construction contracts, there are many good industry form templates that can be used.   All are templates and all are designed to be modified to conform to the jurisdiction’s law and, of course, the parameters of the project.  There are industry form templates from the American Institute of Architects, ConsensusDocs, Engineers Joint Contract Documents Committee, and Design-Build Institute of America.  All include good provisions.  Regardless of the industry form template utilized, or whether your own template is utilized, contract drafting and negotiation is all about assessing risk and allocating risk to the party best equipped to manage that risk.  Oftentimes, management of the risk is considered in conjunction with insurance coverage to cover that associated risk.  Construction contract drafting and negotiation should not be taken lightly because “you want to know what you are getting into” so that you can best manage and address issues that arise, and you know issues always arise in construction.

Here are some general tips when it comes to construction contract drafting and negotiation:

  • Work with a construction attorney. Yes, I had to go there, because too frequently parties want to draft the contract without legal assistance, or negotiate without legal assistance, and this is not always fruitful.  Working with a construction attorney can at least help you assess the risk and ensure that a contract is sufficiently drafted or negotiated based on your understanding and appreciation of risk. I am routinely involved in some capacity when it comes to construction contract drafting and negotiation.

 

  • Obtain documents that are incorporated or flowed-down into the contract. Most contracts will either incorporate other documents or, in the case of a subcontract, contain flow-down provisions that flow-down obligations from the prime contract into the subcontract.  To best understand and appreciate the risk you are accepting, including risk associated with your scope of work, obtain these documents incorporated or flowed-down into the contract.   Not doing so is a mistake when these documents will impose obligations or requirements on you.

 

  • Review the insurance coverage language and consult with your insurance broker to make sure you have the required insurance. Insurance coverage is key.  Many times, contracts require heightened insurance coverage requirements that, realistically, are not available to a certain contractor.  Consider the insurance coverage requirements and consult with your insurance broker (and your construction attorney, if possible) regarding the insurance coverage, additional premium associated with the coverage, whether the coverage is available to you, and whether there is additional insurance coverage you should consider based on your scope of work.

 

  • Have an appreciation of the following driving provisions that will be important no matter the project:
    • Indemnification
    • Insurance coverage
    • Dispute resolution including forum selection, prevailing party attorney’s fees, joinder, and abatement or staying of certain disputes or claims
    • Termination for default and for convenience
    • Default and notification of default and any cure period
    • Suspension of work
    • Payment timing and requirements including any pay-if-paid language and conditions precedent to payment
    • Claims procedures including timing requirements when to submit claims and the waiver of claims
    • Change orders and directives
    • Scope of work to make sure you understand the scope of work in the contract as it will likely include work and risk not included in your proposal
    • No-damage-for-delay and all schedule-based language (since time is money)

The construction contract serves as the backbone governing your relationship with the project.  Do not neglect the importance of the construction contract or deprioritize its importance.

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.