Category Archives: Contract Drafting

CONSTRUCTION CONTRACTS AND APPLICATION OF PAROL EVIDENCE RULE TO CLARIFY LATENT AMBIGUITY

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The parol evidence rule is a need-to-know rule of law when it comes to cases that involve the rights, liabilities, and remedies of parties under a written agreement.  As explained in this article, the parol evidence rule is designed to exclude the admissibility of extrinsic / parol evidence (agreements and discussions) made before or at the time a contract is executed that are used to modify or alter the actual written agreement.  This is because what the parties agreed to should be embodied in the written agreement and there should be no need for parol evidence to guide the court in its interpretation of contractual provisions.  Now, as explained in this article, there are exceptions to this rule.  One such exception is when there is a latent ambiguity in the contract which is an ambiguity that is not clear from the face of the contract, but concerns language reasonably interpreted in more than one way, particularly when the contract fails to specify rights of parties in certain situations.

 

An example of the application of the ambiguity exception to the parol evidence rule in a construction contract can be found in the decision in Science Applications Intern. Corp. v. Environmental Risk Solutions, LLC, 132 A.D.3d 1161 (N.Y. 2015).   While this case did not concern Florida law, the application is still germane. 

 

In this case, a subcontractor sued a contractor and the owner of gas station sites concerning remediation of a spill / contamination it performed at the sites.  The subcontractor had an existing relationship with the contractor where they previously entered into a Professional Services Master Agreement governing general rights and obligations.  The subcontractor and contractor then entered into three Project Specific Scopes of Work that formed three separate subcontracts relating to the sites and contained the same remediation work for each site for a lump sum.   Noteworthy here, the Scopes of Work lump sum were fixed regardless of the actual cleanup costs required for each site to achieve the designated remediation standard.  At some point, the contractor terminated the subcontractor for convenience pursuant to the Professional Services Master Agreement.  The subcontractor submitted its final invoicing for remediation work but was not paid leading to this action.

 

On appeal, the court noted various ambiguities with the Professional Services Master Agreement and Scopes of Work relative to the subcontractor’s scope of work relating to the cleanup of the spill / contamination:

 

Here, we agree with Supreme Court that most of the disputed terms regarding SAIC’s [subcontractor] remediation obligations under the PSSWs [Scopes of Work] are ‘a compromised hodgepodge of conflicting proposals’ susceptible to several reasonable interpretations. As an example, Lehigh’s [owner] argument that section 5(a)(1) of the PSSWs [Scopes of Work] unambiguously required SAIC to, among other things, meet a stringent, contractually defined ‘Cleanup Standard’ is belied by section 5(a)(3) of the PSSWs, which—also unambiguously—permits SAIC to remediate the sites by, among other things, achieving regulatory closure of the spill numbers from DEC [Department of Environmental Conservation], as indicated by receipt of ‘no further action’ (hereinafter NFA) letters from DEC.

As an additional example, SAIC [subcontractor] argues that Lehigh’s [owner] consent to seek spill number closures pursuant to section 5(a)(3) of the PSSWs [Scopes of Work] could be obtained passively via the review and comment procedure set forth in section 5(p) of the PSSWs. Nowhere in the PSSWs, however, does it indicate that SAIC could rely on this subsection to obtain Lehigh’s consent—passively or otherwise—to proceed with regulatory closure pursuant to section 5(a)(3). Likewise, the PSSWs fail to provide any alternative mechanism or procedure for Lehigh to review and comment on SAIC’s submissions to DEC. This failure on the part of Lehigh and SAIC to articulate an adequately defined procedure for how SAIC was to obtain Lehigh’s consent to proceed with an alternate cleanup standard left the ultimate formation of such a procedure susceptible to the varied and subjective constructions of the parties, thus creating additional [latent] ambiguity.

 

Further ambiguity arose with regard to section 5(g) of the PSSWs [Scopes of Work], an inherently contradictory provision governing when SAIC’s remediation work at a given site could be considered complete. In its first clause, section 5(g) references SAIC’s [subcontractor] obligations pursuant to section 5(a)(1) of the PSSWs, stating that ‘SAIC’s remediation and monitoring obligations under this PSSW shall cease upon attainment of the Cleanup Standard and receipt of NFA Status from DEC for each site as defined in section 5(a)’ . However, the very next clause contradicts the prior one, stating that, ‘upon receipt of NFA Status confirmation from DEC, SAIC’s remediation and monitoring obligations shall cease, except for re-openers to the extent found to be due to SAIC’s negligence.’  In light of these ambiguities, we find that Supreme Court [of New York] appropriately considered parol evidence to determine both the intent of the parties and whether SAIC breached the PSSWs.

 

Science Applications Intern, supra, at 756-757.

 

 

The last sentence quoted above—that the trial court appropriately considered parol evidence to determine the parties’ intent and whether the subcontractor breached the Scopes of Work—is telling.  This was based on the court’s  finding that the scope of work was susceptible to more than one reasonable interpretation by, in part, omitting adequately defined procedures applicable to the remediation work.  The point of a written contract is to prevent parol evidence from being considered to determine the parties’ intent.  This is why it is important for the contract and the scope of work, in particular, to be clear and unambiguous!

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.

 

IMPLIED COVENANT OF GOOD FAITH & FAIR DEALING ATTACHES TO EVERY CONTRACT

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There is an implied covenant of good faith and fair dealing in every contract.  Meruelo v. Mark Andrews of Palm Beach, Ltd., 12 So.3d 247, 251 (Fla. 4th DCA 2009).  “Its purpose is to protect the reasonable expectations of the contract parties.”  Snow v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 896 So.2d 787, 791 (Fla. 2d DCA 2005). 

 

A breach of this implied covenant of good faith and fair dealing is not really an independent cause of action. This is because the implied covenant of good faith and fair dealing attaches to the performance of a contractual provision.  Snow, 896 So.2d at 791.   Thus, if a contractual provision has not been breached, there has not been a breach of the implied covenant of good faith and fair dealing.  Id.  The implied covenant of good faith and fair dealing cannot override the express terms the parties agreed to in a contract.  Id.

 

For example, in Avatar Development Corp. v. De Pani Const., Inc., 834 So.2d 873 (Fla. 4th DCA 2002), a developer terminated a stucco subcontractor.  The subcontractor sued the developer.  The trial court held that the developer violated the implied covenant of good faith and fair dealing by terminating the subcontractor.  The Fourth District reversed because the implied covenant is not a tool to override the agreement of the parties:

 

The trial judge found that Avatar[developer]  violated the implied covenant of good faith and fair dealing in terminating the contract pursuant to Article 67. However, the covenant of good faith cannot be used to create a breach of contract on Avatar’s part, where there was no breach of any express term of the contract. As this Court explained in Indian Harbor Citrus, Inc. v. Poppell, 658 So.2d 605 (Fla. 4th DCA 1995), an implied covenant of good faith cannot be used to vary the unambiguous terms of a written contract and when parties negotiate “a fully specified, unambiguous contract, this court is not at liberty to change their bargain.” Id. at 607. The “duty of good faith must relate to the performance of an express term of the contract and is not an abstract and independent term of a contract which may be asserted as a source of breach when all other terms have been performed pursuant to the contract requirements.” Hosp. Corp. of Am. v. Fla. Med. Ctr., Inc., 710 So.2d 573, 574 (Fla. 4th DCA 1998). The language of Article 67 was plain and unambiguous: Avatar could terminate the contract at any time for any reason. It was a valid contract with an enforceable termination clause. 

Avatar, 834 So.2d at 875.

 

Typically, the implied covenant of good faith and fair dealing comes into play “when a question is not resolved by the terms of the contract or when one party has the power to make a discretionary decision without defined standards.”   Speedway SuperAmerica, LLC v. Tropic Enterprises, Inc., 966 So.2d 1, 3 (Fla. 2d DCA 2007) quoting Publix Super Markets, Inc. v. Wilder Corp. of Del., 876 So.2d 652, 654 (Fla. 2d DCA 2004).  

 

For example, in Speedway SuperAmerica, a landlord refused to give its tenant consent to assign a commercial lease. The lease provided that the tenant could not assign the lease without the prior written consent of the landlord and that any assignment without the landlord’s consent would be void allowing the landlord, at its discretion, to terminate the lease.  Here, the tenant assigned the lease even after the landlord refused to provide its written consent to the assignment.  The trial court ruled that the landlord had the unfettered right to refuse to provide its written consent and the tenant’s assignment constituted a material breach of the lease entitling the landlord to retake possession of the leased space.  The Second District reversed because the discretion the landlord had in providing its written consent (without any defined standards as to when the landlord would or would not provide such consent) was subject to the implied covenant of good faith and fair dealing to protect the contracting parties reasonable commercial expectations.

  

The bottom line is that a claim that a party violated the implied covenant of good faith and fair dealing will fail without proving that the party actually violated an express contractual provision.  This claim, however, is not a vehicle to rewrite contractual performance obligations and will not be used to supersede what the parties agreed to.  It can be used when the contract gives a party a discretionary obligation (such as to act reasonably, or gives the party the power to do something at its option) that has no defined standards.  In such circumstance, a party can argue the other party breached the contract by breaching the implied covenant of good faith and fair dealing by not exercising or exercising such discretionary obligation in good faith, thereby impacting the reasonable expectations of the contracting parties.

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.

 

REFERRAL SOURCES CAN CONSTITUTE LEGITIMATE BUSINESS INTEREST TO SUPPORT NON-COMPETE AGREEMENT

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I previously discussed the validity of non-compete agreements as well as tips for drafting such agreements.

Recently, in Infinity Home Care, L.L.C. v. Amedisys Holding, LLC, 40 Fla.L.Weekly D1929a (Fla. 4th DCA 2015), the Fourth District Court of Appeal discussed the requirement of a “legitimate business interest” pursuant to Florida Statute s. 542.335, which governs the enforcement of non-compete agreements. Specifically, the court was looking at whether referral sources constitute a legitimate business interest.  The reason being is that there needs to be a legitimate business interest to enforce a restrictive covenant such as a non-compete agreement.  The statute gives examples of legitimate business interests (e.g., trade secrets, confidential business information that does not qualify as trade secrets, substantial relationships with specific prospective or existing customers, patients or clients, etc.) but is NOT limited to the criteria or examples set forth in the statute.  See Fla.Stat. 542.335(1)(b) (“the term ‘legitimate business interest’ includes, but is not limited to:…”).

 

As it pertains to what constitutes a legitimate business interest, the Fourth District held:

 

Section 542.335, however, clearly states that the legitimate business interests listed in the statute are not exclusive. This allows the court to examine the particular business plans, strategies, and relationships of a company in determining whether they qualify as a business interest worthy of protection.

***

In sum, we hold that referral sources are a protectable legitimate business interest under section 542.335, Florida Statutes.

Infinity Home Care, supra.

 

If you are drafting or enforcing a non-compete agreement, it is important to consult with counsel.  This way your legitimate business interests can appropriately be protected as you move to enforce the non-compete agreement—the restrictive covenant—by moving for injunctive relief.  This case, however, supports the argument that the legitimate business is broader than the criteria and examples in the statute and based on the business’s “plans, strategies, and relationships.” 

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 UNDERSTANDING OF CONSTRUCTION PROJECT DELIVERY METHODS

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Ever hear the expression, “there are many ways to skin a cat?”  Of course you have!  Well, this expression can apply to construction as there are many ways to build a project to accomplish the same objective–to deliver a completed project.  

 

The various ways projects are delivered are oftentimes referred to as construction project delivery methods.  Such delivery methods can be the traditional method of design-bid-build to the much more sophisticated and collaborative delivery mthod of integrated project delivery (“IPD”) to the method aimed at delivering needed public projects (such as infrastructure) known as the public private partnership (“P3”). 

 

Below is a basic presentation illustrating the following construction project delivery methods:

1)   design-bid-build

2)   design-bid

3)   construction manager at-risk

4)   integrated project delivery (“IPD”) and

5)   public private partnership (“P3”).

Check out the presentation to get a general understanding of the highlights of each of these project delivery methods.

[gview file=”https://floridaconstru.wpengine.com/wp-content/uploads/2015/08/project-delivery-methods.pdf”]

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.

 

EXAMPLES OF (RISK SHIFTING & ACCEPTING) PROVISIONS IN A SUBCONTRACT

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In reading articles posted in this blog, I hope it is impressed upon you to understand the risks you are accepting in your contract and what to do if you encounter a risk, as well as those risks you are flowing down or allocating to your subcontractors.   Construction is inherently risky so you want to know what to do when you encounter certain situations or occurrences, and in certain circumstances, you want to factor the costs associated with certain accepted risks in your contract amount. 

 

When it comes to subcontracts, there are provisions that contractors want to include in their subcontracts that subcontractors need to note:

  1. The schedule – the contractor will want to include provisions that any baseline schedule is not written in stone and that it has the discretion to resequence the progress of the work.  This is an understood event since the contractor is responsible for managing the work so subcontractors should account for this contingency.
  2. No damage for delay – the contractor will want to include a no-damage-for-delay provision that provides it is not responsible for any delay-related damages and that the subcontractor’s only recourse for a delay will be an extension of time.  The provision may also state that the contractor’s liability for any delay will be limited by the amount it receives by the owner associated with the delay.
  3. Change orders – There will be a change order issue at some point.  The subcontractor needs to understand the change order procedure so proper notice is given regarding the change order work before proceeding with that work.  And, if the subcontractor is directed to proceed with work (through a change order directive) or there is a dispute as to the amount or time associated with the change, the subcontractor needs to understand that it needs to track and itemize its costs associated with the change.
  4. Claims – If a subcontractor is delayed / impacted or there is an event triggering change order work, as mentioned above, the subcontractor needs to submit timely notice of the event or occurrence.  Otherwise, there may be an argument that this event or occurrence is waived.  The contractor will argue that the notice provision is important so that it can ensure it timely submits notice to the owner pursuant to the prime contract and a subcontractor’s failure to comply with the notice provision prejudiced the contractor.

Provided below is an example of contractual provisions that fit within the above four categories.  These provisions may be analogous to provisions in the subcontract you are working under or, if you are a general contractor, may be provisions you want to consider including in your subcontract.  Remember, the objective is to know those risks you are accepting, those risks to flow down or allocate to the subcontractor, and, importantly, what to do if you encounter a risk!!

Also, please share any examples of contractual provisions that you have come across that fit within these categories. The more examples the merrier when it comes to understanding the types of risks that are frequently dealt with and allocated between a contractor and subcontractor.

[gview file=”https://floridaconstru.wpengine.com/wp-content/uploads/2015/08/Copy-of-subk-contract-considerations.pdf”] 

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.

 

 

CHALLENGES OF AN ORAL CONTRACT OR THE “HANDSHAKE DEAL”

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An oral contract is a contract that is not reduced to writing.  In certain circumstances, and every disputed circumstance involving an oral contract, it becomes a “he said, she said” as to whether a contract was created and what the terms of the contract entailed.  This is why it is always good practice to memorialize contractual terms in writing instead of accepting the “handshake deal” as the manner in which to do business.

 

Also, with oral contracts, the party being sued may argue that the statute of frauds bars the enforcement of the oral contract.  The statute of frauds is a legal doctrine that states that an oral contract is unenforceable if it is not performed (or cannot be performed) within one year of the contract’s making.  See Fla. Stat. s. 725.01.    The statute of frauds does not apply if the oral contract is capable of being performed or accomplished within one year of the contract’s making.  However, if there is a lawsuit concerning an oral contract, there is a strong chance that the defendant (or party the contract is being enforced against) will assert the statute of frauds as an affirmative defense.

 

The case of Loper v. Weather Shield Manufacturing, Inc., 40 Fla. L. Weekly D1492a (1st DCA 2015) illustrates an oral contract scenario.

 

In this case, a house was constructed facing the ocean in 2001-2002.  The house was constructed with large double-paned windows that came with a 10-year warranty.  The owner noticed water intrusion started to occur between the panes of glass and windows began to develop a fogging affect.  The contractor tried to correct the issue to no avail.  In 2005, a representative from the window manufacturer inspected the windows and some of the windows were replaced.  However, the water intrusion and window-fogging issues continued.  In 2010, a meeting was conducted with the owner, window manufacturer, window installer, and contractor. During the meeting, the owner separately spoke with the representative from the window manufacturer.   The representative explained that if the owner had a lawyer he was not going to be able to help the owner to which the owner replied he did not have a lawyer but plans to seek legal action if the problem does not get resolved.  The owner stated that he wanted the defective windows replaced and wanted a new 10-year warranty (the original warranty was set to expire at the end of 2011).  The representative responded that he would relay the request to his bosses;  he subsequently contacted the owner to confirm there was a deal.  The owner asked for the terms to be put in writing and the representative said his company’s legal department would prepare the agreement.

 

The owner never heard back from the representative.  After calling many, many times, he discovered that the representative had been laid off.  The owner then spoke with another representative that told the owner that he approved the deal and he would check on the status of the settlement agreement with his company’s legal department and get back to the owner.  Of course, this did not occur.  The owner followed-up with this representative and never received a call back.

 

By August 2011, and with the original warranty set to expire, the owner was still following-up with the manufacturer to reach a longstanding resolution to his window issues. Finally, approximately a month before the owner’s original 10-year warranty was set to expire, the owner received an e-mail from the manufacturer saying it will not extend the 10-year warranty and, thus, was reneging on the terms of the oral agreement between the parties. 

 

The owner filed a lawsuit against the manufacturer claiming that the manufacturer breached an oral contract where windows would be replaced and a new 10-year warranty furnished.

 

After a jury trial, the jury returned a verdict in favor of the owner finding that there was an oral contract.  However, the judge directed judgment in favor of the window manufacturer finding (1) there was insufficient consideration for the oral agreement between the owner and manufacturer and (2) even if there was consideration, the statute of frauds barred the enforcement of the oral contract because the contract required a new warranty that extended beyond one-year.

 

On appeal, the First District Court of Appeal reversed directing entry of judgment in favor of the owner on the breach of oral contract claim consistent with the jury’s verdict. 

 

Regarding the trial court’s finding of insufficient consideration, the Court held that the owner’s forbearance from pursing legal rights, specifically in the context of an expiring 10-year warranty and a manufacturer’s overt run-around, was sufficient consideration.  (“Viewed in a light favorable to Dr. Loper [owner], the parties had a deal that could be readily and promptly effectuated, but which languished — not due to Dr. Loper’s actions — but because of dawdling by Weather Shield [manufacturer]. The jury specifically answered ‘yes’ to the question of whether Dr. Loper ‘reasonably rel[ied] in good faith on Weather Shield Manufacturing, Inc., to reduce this oral agreement to writing,’ and could have readily concluded that the time period of Dr. Loper’s forbearance was expected to be brief, but ultimately was prolonged due to Weather Shield’s dithering….” Loper, supra.) 

 

Regarding the trial court’s finding that the statute of frauds barred the enforcement of the oral contract, the Court held that the statue of frauds makes an oral contract unenforceable if it cannot be performed within one year of the contract’s making.   But, if the oral contract is capable of performance within one year, it is enforceable.  Here, the trial court focused on the fact that the contract could not be performed within one year because it contemplated a ten-year warranty (extending beyond one year).  But, the issuance of the warranty could have been accomplished within one year and the issuance of the warranty, and not the length of the warranty, is what the trial court should have focused on. (“The record evidence supports the conclusion that Dr. Loper [owner] and Weather Shield [manufacturer] both intended that their oral agreement be effectuated promptly; no evidence supports that they intended that the issuance of the warranty was intended or required to occur beyond a year’s time. Because issuance of replacement policy could have, indeed should have, occurred in less than a year, the statute of frauds issue is inapplicable.”  Loper, supra.)

 

Take-Aways

  • Although the owner prevailed on his breach of oral contract claim, it is always good to reduce the terms of an agreement (any agreement) to writing. The owner prevailed because he was probably a good witness that told a persuasive story to the jury that the jury found to be credible.  It is the owner’s story of events the Court focused on since the owner received a jury verdict in his favor (and was the party appealing).   Hence, having a credible, persuasive witness always helps!
  • Here, the owner’s counsel was creative.  The owner’s counsel knew the owner could not sue the contractor or even the window installer because the statute of limitations expired.  But, there was a colorable claim that could be asserted against the window manufacturer based on the outcome of a meeting that took place involving the owner and manufacturer.  While this oral contract claim is certainly a difficult and probably expensive claim to prove, the owner prevailed on this claim (although, it is uncertain as to what expense meaning did the owner recover more than he incurred in legal fees and/or did he create an argument to recover attorney’s fees by serving a proposal for settlement).
  • It is uncertain why it took the owner so long to retain counsel to deal with a persistent water intrusion and window-fogging problem.  The owner should have retained counsel earlier to best preserve his rights.  Although the owner was able to show that his wiliness not to retain counsel supported the consideration for the oral contract, forbearance from pursuing legal rights should not come across as unreasonably indefinite or illusory.  Here, the Court found that the forbearance was intended to be brief but was simply extended based on the run-around given by the manufacturer up until the point that the manufacturer knew the original warranty was expiring.

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.

 

RESIDENTIAL CONSTRUCTION – SHOULD BOTH HUSBAND & WIFE SIGN THE CONTRACT?

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It is always good practice for residential contractors to get both husband and wife to sign the residential construction contract.   But, even if only one spouse signs the contract, Florida’s Lien Law doesn’t really punish the contractor when its comes to construction liens.

 

Florida Statute s. 713.12 provides:

 

When the contract for improving real property is made with a husband or wife who is not separated and living apart from his or her spouse and the property is owned by the other or by both, the spouse who contracts shall be deemed to be the agent of the other to the extent of subjecting the right, title, or interest of the other in said property to liens under this part unless such other shall, within 10 days after learning of such contract, give the contractor and record in the clerk’s office, notice of his or her objection thereto.

 

In other words, one spouse is deemed the agent of the other spouse when it comes to subjecting the other to construction liens.  This makes sense because generally when one spouse signs a contract for construction at his/her property, the other spouse has knowledge and is on board of the construction project.   But, assuming the other spouse wasn’t aware, Florida’s Lien Law allows that spouse to provide the contractor an objection to the contract and record that objection in the public records in order for any construction lien not to impact that spouse’s interest in the property.

 

However, the statute only applies to real property and doesn’t apply to personal liability relating to the non-signing spouse.  See Mullne v. Sea-Tech Const. Inc., 84 So.3d 1247, 1249 (Fla. 4th DCA 2012); Meadows Southern Const. Co. v. Pezzaniti, 108 So.2d 499, 502 (Fla. 2d DCA 1959).  This is why it is good practice for the contractor to get both spouses so sign the contract because while the contractor may be able to lien the non-signing spouse’s interest, that will be about it because it will not be able to impose personal liability against the non-signing spouse.

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.

 

THE VALUE OF A WELL-WRITTEN SUBCONTRACT TO FORECLOSE SUBCONTRACTOR’S INEFFICIENCY / LOST PRODUCTIVITY DAMAGES

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I have previously discussed the challenges a subcontractor has in proving a lost productivity / inefficiency claim.  Besides being difficult to prove, subcontractors generally enter into subcontracts that include onerous provisions that foreclose a subcontractor’s right to pursue lost productivity / inefficiency claims.   General contractors try to account for these types of delay-related claims by including provisions in their subcontracts that require subcontractors to fully bear this risk.  An example of this ocurrence can be found in the opinion entered in Electrical Contractors, Inc. v.  Fidelity & Deposit Co. of Maryland, 2015 WL 1444481 (D. Con. 2015) where the trial court precluded a subcontractor from recovering lost productivity / inefficiency costs based on the language in the subcontract that precluded such claims. Additionally, and importantly, the trial court found that that the subcontractor failed to timely notify the general contractor of its claims under the strict notice provisions of the subcontract.

 

In this case, the general contractor was hired by a state agency to construct a laboratory building and furnished the state a public payment bond.  The prime contract contained a construction schedule (which is not an uncommon exhibit in a prime contract).  The general contractor then entered into subcontracts with trade subcontractors including the electrical subcontractor.  An exhibit to the electrical subcontract was a schedule that simply reproduced dates applicable to the electrical subcontractor’s scope of work that were included in the construction schedule attached to the prime contract.

 

No different than any baseline construction schedule on any construction project, it was not written in stone. This meant there were updates to the schedule that were furnished to the state agency and the state agency unsurprisingly challenged or opposed numerous schedule updates. The general contractor did not keep its electrical subcontractor apprised of the back-and-forth between it and the state agency involving schedule updates (nor was the general contractor under any real obligation to do so).

And, as we all know, the schedule of the project is really driven in the field.  So, as the construction progressed, the general contractor’s superintendents directed the electrical subcontractor to perform work in a piecemeal and unsystematic manner. This was due to work areas not being ready for the electrical scope due to delays on the project.  The electrical subcontractor notified the general contractor that it was being impacted and forced to work unproductively. Thereafter, the electrical subcontractor sued the general contractor and the general contractor’s payment bond sureties for damages that included lost productivity / inefficiency damages. 

However, the subcontract that the electrical subcontractor signed posed problems with its claims, particularly the following contractual provisions:

 

“Subcontractor agrees to … complete the work in such sequence and order and according to such schedules as Contractor shall establish from time to time … time being of the essence…. If Contractor determines that the Subcontractor is behind schedule or will not be able to maintain the schedule, Subcontractor … shall work overtime, shift work, or work in an altered sequence, if deemed necessary, in the judgment of the Contractor to maintain the progress of the work. Any such … altered sequence work required to maintain progress or to complete the work on a timely basis shall be at Subcontractor’s expense and shall not entitle Subcontractor to … additional compensation.”

***

“To the fullest extent permitted by applicable law, Contractor shall have the right at any time to delay or suspend the work or any part thereof without incurring liability therefore. An extension of time shall be the sole and exclusive remedy of Subcontractor for any delays or suspensions suffered by Subcontractor … and Subcontractor shall have no right to seek or recover from Contractor any damages or losses, whether direct or indirect, arising from or related to any delay or acceleration to overcome delay, and/or any impact or effect of such delays on the Work.”

***

“In the interest of the overall project, W–T [Contractor] reserves the right to alter the sequencing of activities in order to accommodate project conditions and/or Owner requirements. It is understood that the Subcontractor shall be obligated to complete its activities [timely] … regardless of the actual start date.”

***

“There is no guarantee of continuous work. Subcontractor shall work in all areas as they become available and as directed by Whiting–Turner [Contractor]. Subcontractor shall include the inefficiencies, supervision and manpower necessary to run separate and independent crews as necessary.”

Electrical Contractors, Inc., supra, at *6 and *7.

 

Additionally, the electrical subcontractor needed to timely notify the general contractor of its claims:

“Article 6(d) requires timely written notice as a precondition for making such claims: [N]otice in writing shall be given to the Contractor no later than seven (7) days following the occurrence on which such claim is based…. Any claim not presented within such time period shall be deemed waived by Subcontractor. The notice must describe the dispute, controversy or claim in detail so as to allow Contractor to review its merits … [and] provide detailed information to substantiate such claim including supporting documentation and calculations.”

Electrical Contractors, Inc., supra, at *8 (internal citations omitted).

 

While the 7-day claim notice requirement may seem unfair, the court explained that the electrical contractor was a sophisticated entity that knowingly assumed this notice obligation.

Of Significance: 

These subcontract provisions recited above are not uncommon provisions.  They are rather commonplace with sophisticated contractors–there is no real shock value when looking at these provisions, right?

 

If you are a general contractor that includes such provisions in your subcontracts, this case gives you reassurance as to those contractual provisions that are aimed to insulate you from a subcontractor’s delay-related damage and require the subcontractor to give you timely notification of a claim (so that you are not prejudiced by the late submission of a subcontractor claim).  These are important provisions for a general contractor to include in a subcontract and the provisions referenced above are certainly well-written provisions to model.  It is understood that a schedule is never going to be written in stone and there will be logic and sequence changes in the schedule, so protect yourself by including such provisions (including the no-damage-for-delay provision). As you can see, there is value in doing so.

 

On the other hand, if you are a subcontractor, if you accept these provisions, you need to either account for these risks in your subcontract price and/or bear the risk that these provisions may be appropriately enforced against you as shown in this case.  Alternatively, and as the court alluded to, as a sophisticated party, you have the option of not signing the subcontract or trying to negotiate the best subcontract for you with an understanding as to those onerous provisions and risks that you choose to accept.

 

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.

 

BECOMING A PERSONAL GUARANTOR BY EXECUTING THE PERSONAL GUARANTEE

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Suppliers are not ill advised.  When they have a contractor execute a credit application so the contractor can procure materials on credit, they generally include a personal guarantee in the credit application.  This way they have both the company that ordered the materials and the personal guarantor jointly and severally liable in the event they are not paid for the materials.  Suppliers want this personal guarantee as added security because they oftentimes supply materials on credit (to a job site) through an ongoing account so that their contractor customer can have the materials ordered to perform a scope of work.

 

Personal guarantors sometimes try to be clever with the way they sign the personal guarantee in order to avoid any personal liability through the personal guarantee.  But, not so fast…“Florida law is clear that an individual who executes a guarantee as an officer of a corporation by inserting his corporate title after his name on a document cannot defeat the purpose of the guarantee when, by its terms, the document contains provisions for individual liability.” Great Lakes Products, Inc. v. Wojciechowski, 878 So.2d 418, 419 (Fla. 3d DCA 2004); see also Nelson v. Ameriquest Technologies, Inc., 739 So.2d 161, 164 (Fla. 3d DCA 1999) (“The fact that Nelson added the letters “V.P.” after his signature could not defeat the obvious and clear purpose of the guaranty agreement; that is, to impose individual liability upon him as the signor.”).

 

When signing a personal guarantee, make sure you understand its implications, particularly that of personal liability in the event the company does not pay or otherwise honor the terms of the agreement. You are agreeing to become jointly and severally liable with the company to pay for any potential outstanding debt. 

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.

 

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.