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.

 

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

images9DHJ23URContractors should spend time carefully drafting and agreeing to a detailed scope of work.  Otherwise, a dispute may arise relating to that scope of work.  This dispute can take the form of a change order dispute where the contractor argues that the subcontractor’s change order request was base contract work and, thus, does not entitle the subcontractor to additional compensation. Or, the dispute can take the form of a defect claim where the subcontractor argues that the defect being asserted against it was never within its scope of work to begin with.

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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.