DON’T INCLUDE AN ARBITRATION PROVISION IN YOUR CONTRACT IF YOU DON’T WANT TO ARBITRATE!

Posted on August 8, 2014November 8, 2024 by Edward Garber

Arbitration as the method of dispute resolution is based on your contract. If you don’t want to arbitrate, do not (I repeat, do not) include an arbitration provision. If you ultimately have no choice and need to agree to a contract that includes an arbitration provision, understand that this provision will be enforced unless the parties agree to waive it.

The recent case of Bari Builders, Inc. v. Hovstone Properties Florida, LLC, et al., 39 Fla. L. Weekly D1648a (Fla. 4^th DCA 2014), exemplifies what happens if you include an arbitration provision. In this case, a condominium association sued the developer for construction defects. The developer (that may have also served as the general contractor / home builder) third-partied in its subcontractors. However, there was a binding arbitration provision in the subcontract. Subcontractors, therefore, moved to compel arbitration of the developer’s claims against them. The developer, naturally, did not want to arbitrate its third-party claims against subcontractors when it was being sued by the condominium association. It makes more sense to wrap up the disputes in one matter. The developer tried to argue around arbitration by arguing that the arbitration provision in its contract was ambiguous because another place in the contract said, “In all actions the parties waive the right to jury and agree to determination of all facts by the court.” The Fourth District Court of Appeal disagreed with the developer’s ambiguity argument and reconciled this language:

“[T]he jury waiver language in the subcontract does not render the arbitration provision ambiguous, as the two provisions can be reconciled in favor of arbitration. Read together, the provisions provide that the parties agree to submit any ‘controversy or claim’ to arbitration and, thereafter, any award may be reduced to judgment in court without the right to a jury trial. Additionally, in the event that the parties choose to waive their right to arbitration, the clause provides that any ‘action’ in court will be in the form of a bench trial.”

Bari Builders, supra.

As shown in this case, courts will favor arbitration when there is an arbitration provision in the contract. If parties prefer arbitration, and specifically if arbitration is preferred by a general contractor, the contract should include language that in the event the general contractor is sued by the developer or association (or any third-party), the general contractor, at its sole discretion, can waive arbitration and the parties are bound to the forum governing the dispute against the general contractor. In other words, the general contractor has the authority to join in the subcontractor to any dispute it is involved in irrespective of the arbitration provision.

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.

LIQUIDATED DAMAGES PROVISIONS IN SUBCONTRACTS (PARTICULARLY SUBCONTRACTS FOR PUBLIC PROJECTS)

Posted on May 18, 2014November 8, 2024 by Edward Garber

The assessment of liquidated damages should be a consideration to contractors on all projects, specifically public (federal and state) projects where the prime contract routinely contains a liquidated damages provision for delays to the completion of the project. Many times, the subcontract will contain a provision that will allow the prime contractor to pass-through liquidated damages assessed by the government (owner) to the responsible subcontractor. Well, what if the government did not assess liquidated damages? Can the prime contractor still assess liquidated damages against a responsible subcontractor in accordance with the subcontract? The opinion in U.S. f/u/b/o James B. Donahey, Inc. v. Dick Corp., 2010 WL 4666747 (N.D.Fla. 2010), would allow a prime contractor to assess liquidated damages against a subcontractor even if the government did not assess liquidated damages against the prime contractor.

In this case, a prime contractor entered into a contract to design and build four buildings at the Pensacola Navy Station and provided a Miller Act payment bond. The prime contractor hired a subcontractor to perform the plumbing and mechanical work. Due to delays the general contractor believed were caused by the subcontractor, it withheld substantial payment from the subcontractor. The prime contractor contended that the subcontractor caused 63 days of delay to the occupancy of the Visitors Quarters building and 32 days of delay to the Aviation Rescue Swimmers School building. The subcontract provided that in the event of delays, liquidated damages would be assessed in the amount of $5,400 per day for delay to the Aviation Rescue Swimmers School and $24,898 per day for delay to the Visitors Quarters.

The subcontractor filed a Miller Act lawsuit against the prime contractor and its surety (amongst other causes of actions). The prime contractor filed a counterclaim based on the liquidated damages that it assessed against the subcontractor, an amount in excess of what it was withholding. The subcontractor moved for summary judgment arguing that the liquidated damages provision was unenforceable (and the prime contractor could not assess liquidated damages) because the provision was a pass-through provision; thus, because the government did not assess liquidated damages against the prime contractor, the prime contractor could not assess liquidated damages against the subcontractor. The subcontractor further argued that the liquidated damages provision is unenforceable because it is being treated as a penalty because the subcontractor is not being provided the benefit of extensions of time granted by the government to the prime contractor that would negate delays. The prime contractor countered that nothing in the subcontract stated that liquidated damages could only operate as a pass-through claim, that being that the government had to assess liquidated damages before the prime contractor could assess liquidated damages against the subcontractor. The prime contractor further countered that the extensions of time granted by the government were irrelevant since they did not pertain to the subcontractor’s scope of work or affect the subcontractor’s milestone completion dates.

The Northern District of Florida agreed with the prime contractor and denied the subcontractor’s motion for summary judgment because it found the liquidated damages provision enforceable. The Northern District explained as it pertained to the subcontractor’s Miller Act payment bond claim:

“In considering a Miller Act claim, the trier of fact must thus look to the subcontract to determine the amount due. ‘[I]f the subcontract provides for a condition precedent to payment, or a part thereof, which is not fulfilled, the subcontractor cannot recover labor and material expenditures against the surety on the payment bond.’ In other words, if there has been a default by the subcontractor, the general contractor may assert recoupment or setoff as a defense. Because there is a genuine issue of material fact regarding the timeliness of Donaghey’s [subcontractor] performance and, therefore, Donaghey’s entitlement to the amounts withheld by Dick [prime contractor], summary judgment is inappropriate as to Donaghey’s Miller Act claim.”

Dick Corporation, 2010 WL at *3 quoting U.S. f/u/b/o Harrington v. Trione, 97 F.Supp. 522, 527 (D.C.Colo. 1951).

Stated differently, the Miller Act payment bond surety was entitled to rely on the prime contractor’s assessment of liquidated damages as a set-off / recoupment defense to the subcontractor’s Miller Act claim. Also, if there were other conditions precedent that the subcontractor failed to comply with, the Miller Act surety would be entitled to many of these defenses as well.

The Northern District further maintained that a liquidated damages provision under Florida law will be enforceable if the provision does not operate as a penalty, meaning damages upon a breach must not be readily ascertainable at the time of the contract and must not be grossly disproportionate to any damages reasonably expected to follow from the breach. Dick Corporation, 2010 WL at *4 quoting Mineo v. Lakeside Village of Davie, LLC, 983 So.2d 20, 21 (Fla. 4^th DCA 2008). The Court held that the liquidated damages provision did not operate as a penalty and it was not intended to operate only as a pass-through mechanism. See, e.g., U.S. f/u/b/o Sunbeam Equip. Corp. v. Commercial Constr. Corp., 741 F.2d 326, 328 (11^th Cir. 1984) (“The fact that the Navy did not assess liquidated damages as such against Commercial [prime contractor], would not foreclose recovery of delay damages, if Commercial could demonstrate that damages arising out of the subcontract with Sunbeam [subcontractor] were not otherwise compensated.”)

There are three important take-aways from this opinion:

Liquidated damages provisions in subcontracts can operate as more than a pass-through provision for liquidated damages assessed by the government (owner). These provisions can operate as a mechanism to assess liquidated damages against the subcontractor even if the government / owner has not assessed liquidated damages against the prime contractor. Prime contractors and subcontractors need to keep this in mind when drafting and negotiating liquidated damages provisions. If the intent is for the provision to only operate as a pass-through provision, this intent should be clearly stated in the subcontract. If the intent is for it to operate more than as a pass-through provision, then this risk needs to be considered by the subcontractor.

Liquidated damages are typically going to be deemed enforceable if they are not intended to operate as a penalty.

A Miller Act payment bond surety will be entitled to rely on set-off / recoupment affirmative defenses contained within the subcontract including, without limitation, the prime contractor’s assessment of liquidated damages or other delay damages against the subcontractor pursuant to the subcontract.

HAS A MATERIAL BREACH OF CONTRACT OCCURRED? CONSULT COUNSEL TO BEST DETERMINE RIGHTS!

Posted on May 17, 2014November 8, 2024 by Edward Garber

When a dispute arises, whether it is a payment dispute or otherwise, parties sometimes point the finger to the other party to argue that the other party breached the contract. What exactly does this mean? For a breach of contract to occur, the breach (or nonperformance) must be a MATERIAL BREACH. See Abbot Labs, Inc. v. Gen. Elec. Capital, 765 So.2d 737, 740 (Fla. 5^th DCA 2000). A material breach is one that goes to the essence of the contract versus a minor aspect of the contract. See Covelli Family, L.P. v. ABG5, L.L.C., 977 So.2d 749, 752 (Fla. 4^th DCA 2008). The Covelli Family Court explained:

“To constitute a vital or material breach, a party’s nonperformance must go to the essence of the contract. A party’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach.”

Id. (internal quotations and citations omitted).

Stated similarly:

“To constitute a vital or material breach a defendant’s nonperformance must be such as to go to the essence of the contract; it must be the type of breach that would discharge the injured party from further contractual duty on his part. Corbin, supra, s 1104. A defendant’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach. Corbin states, at s 1104, pp. 562-565:

‘. . . The injured party, however, can not maintain an action for restitution of what he has given the defendant unless the defendant’s non-performance is so material that it is held to go the ‘essence’; it must be such a breach as would discharge the injured party from any further contractual duty on his own part. Such a vital breach by the defendant operates, with respect to the right of restitution, in the same way that a repudiation of the contractual obligation would operate. A minor breach by one party does not discharge the contractual duty of the other party; and the latter being still bound to perform as agreed can not be entitled to the restitution of payments already made by him or to the value of other part performances rendered.‘”

Beefy Trail, Inc. v. Beefy King Intern, Inc., 267 So.2d 853, 857 (Fla. 1972) citing and quoting Corbin on Contracts, Vol. 5.

In numerous circumstances, nonpayment can constitute a material breach. See Scott v. Rolling Hills Place Inc., 688 So.2d 937 (Fla. 5^th DCA 1996) (finding that developer first breached contract by not paying engineer that discharged engineer of performance obligations). However, it is important for parties to consider that nonpayment does not automatically in of itself constitute a material breach. For instance, did the contract have a pay-if-paid clause? Did the party claiming nonpayment satisfy contractual conditions precedent to payment? Was the nonpaying party withholding money due to a performance issue such as defective or incomplete work? Was the payment late by a few days or was it never paid? Is the payment amount a relatively insignificant amount? Does the payment amount concern disputed amounts such as change orders or disputed defective or incomplete work? These are all questions that need to be a considered before a party takes an extreme position that it will no longer perform under the contract due to the nonpayment. A party should consult their written contract and counsel before taking any extreme position that the other party materially breached the contract to best determine the strategy and lay the foundation for the position.

The case of Marshall Const., Ltd. v. Coastal Sheet Metal & Roofing, Inc., 569 So.2d 845 (Fla. 1^st DCA 1990), illustrates the ramifications of a party without a written contract taking an extreme position due to nonpayment. In this case, a general contractor entered into a contract to repair and replace roofs on three buildings at a Florida State Hospital. The general contractor then entered into an oral contract with a roofing subcontractor. During construction, a water leak arose with the new roof installed on one of the buildings. Both the general contractor and subcontractor appeared to agree that the new roof was defective and needed to be replaced. However, the subcontractor could not finance the repair / replacement work without getting paid for the work it had performed. The subcontractor was not paid for the work performed and determined that it would not perform any more work until it was paid. As a result, the general contractor terminated the subcontractor and hired a new roofing subcontractor to finish the balance of the roofing work and replace the defective roof. The subcontractor then sued the contractor for breaching their oral contract. The trial court ruled in favor of the subcontractor; the First District Court of Appeal reversed maintaining that the subcontractor actually committed the material breach:

“It is undisputed that Coastal [roofer] failed to install the roofing system on the east wing as required under the contract. When Coastal refused to repair the roof without further payment, it committed a material breach. Marshall [general contractor] was entitled to treat the breach as a discharge of its duty to pay Coastal until such time as Coastal repaired the defective roof and fulfilled its contractual duties. In light of the fact that the terms of the [general contractor’s] contract [with the owner] required substantial completion by July 25, 1988, and that Coastal refused to return to work until it was paid, Marshall was completely justified in determining that a material breach had occurred and ordering Coastal off the job.

We find no substantial, competent evidence to support a finding that Marshall [general contractor] breached the contract. The undisputed evidence demonstrates that Coastal [roofer] committed a material breach of the contract. This breach excused Marshall’s obligation to pay Coastal until the roof was repaired. We therefore reverse and remand for a new trial on damages and liability.”

Marshall Const., 569 So.2d at 848 (internal citations omitted).

Now, this case demonstrates why oral contracts are disfavored because rights and obligations are amorphous. Nothing is clearly defined and there is no written agreement to consult. If there was a written contract, most likely there would be a pay-if-paid provision in which the general contractor’s payment to the subcontractor was conditioned on its receipt of payment from the owner. It is uncertain whether the owner paid the general contractor for the defective work; if the owner did not, then the general contractor’s payment obligation would not have been triggered. But, let’s assume the owner did pay the general contractor. Well, the subcontract most likely contained a clause pertaining to defective work that would authorize the subcontractor to fix the work at its own costs and also entitle the general contractor to withhold sums as the result of incomplete or defective work. For instance, the standard form agreement between a contractor and subcontractor published by the ConsensusDocs (Document 750) contains the following provisions:

3.22.2.1 If the Architect/Engineer or Contractor rejects the Subcontract Work or the Subcontract Work is not in conformance with the Subcontract Documents, the Subcontractor shall promptly correct the Subcontract Work whether it had been fabricated, installed or completed. The Subcontractor shall be responsible for the costs of correcting such Subcontract Work, any additional testing, inspections, and compensation for services and expenses of the Architect/Engineer and Contractor made necessary by the defective Subcontract Work.

10.1.1 NOTICE TO CURE If the Subcontractor refuses or fails to supply enough properly qualified workers, proper materials, or maintain the Progress Schedule, or fails to make prompt payment to its workers, subcontractors or suppliers, or disregards laws, ordinances, rules, regulations or orders of any public authority having jurisdiction, or otherwise is guilty of a material breach of a provision of this Agreement, the Subcontractor shall be deemed in default of this Agreement. If the Subcontractor fails within three (3) business Days after written notification to commence and continue satisfactory correction of the default with diligence and promptness, then the Contractor without prejudice to any other rights or remedies, shall have the right to any or all of the following remedies:

10.1.1.1 supply workers, materials, equipment and facilities as the Contractor deems necessary for the completion of the Subcontract Work or any part which the Subcontractor has failed to complete or perform after written notification, and charge the cost, including reasonable overhead, profit, attorneys’ fees, costs and expenses to the Subcontractor;

10.1.1.2 contract with one or more additional contractors to perform such part of the Subcontract Work as the Contractor determines will provide the most expeditious completion of the Work, and charge the cost to the Subcontractor as provided under Clause 10.1.1.1; or

10.1.1.3 withhold any payments due or to become due the Subcontractor pending corrective action in amounts sufficient to cover losses and compel performance to the extent required by and to the satisfaction of the Contractor.

These provisions would hurt a subcontractor’s argument that it should get paid for work performed, including defective work performed, so that it could finance the repairs.

Again, before extreme positions are taken, a party should absolutely consult their written contract to determine rights, obligations, and risks they agreed to. Having a lawyer involved on the front end during the contract negotiation can help a party negotiate and/or appreciate the risks they are agreeing to. Even if a lawyer was not involved on the front end, having the lawyer involved when difficult issues arise during the course of construction will allow a party to preserve rights / arguments and take positions or avoid positions based on a determined strategy. As the expression goes, “An ounce of prevention is worth a pound of cure!”

VENUE FOR MILLER ACT PAYMENT BOND DISPUTE

Posted on April 29, 2014November 8, 2024 by Edward Garber

The venue (or locale of the forum) in which to initiate or transfer a Miller Act (40 USC s. 3131-3134) payment bond dispute is an important consideration. The Miller Act provides that the venue must be “in the United States District Court for any district in which the contract was to be performed and executed, regardless of the amount in controversy.” 40 USC s. 3133(3)(B). However, this venue requirement will not prevent a party from initiating the Miller Act payment bond lawsuit or transferring the lawsuit to a venue governed by a mandatory forum selection provision (one in which provides an exclusive venue for disputes) in the subcontract. See, e.g., U.S. f/u/b/o Pittsburgh Tank & Tower, Inc. v. G&C Enterprises, Inc., 62 F.3d 35 (1^st Cir. 1995) (finding that Miller Act payment bond lawsuit was subject to venue provision in subcontract).

For instance, in U.S. f/u/b/o MDI Services, LLC v. Federal Insurance Company, 2014 WL 1576975 (N.D.Ala. 2014), a subcontractor on a federal project initiated a Miller Act payment bond lawsuit against the surety and the prime contractor in the Northern District of Alabama because that is where the project was located. The surety and prime contractor moved to transfer the venue of the lawsuit to the Middle District of Florida pursuant to a venue provision in the subcontract. The district court explained that “a valid forum-selection clause can trump the Miller Act’s venue provision.” MDI Services, supra, at *2 citing In re Fireman’s Fund Ins. Cos., 588 F.2d 93, 95 (5^th Cir. 1979) (finding that Miller Act venue clause is subject to variation pursuant to the parties’ forum selection clause). The district court, therefore, granted the motion to transfer venue.

If you are a prime contractor, it is a safe idea to include language in the forum selection provision that reflects that it governs any claim against the contractor’s payment bond surety. This way, if the dispute is asserted only against the payment bond surety, the surety (routinely being defended by the prime contractor) can transfer the venue to the mandatory venue per the forum selection provision in the subcontract. On the other hand, if you are a subcontractor and the venue is silent as it relates to claims regarding the payment bond surety, perhaps you only want to assert the payment bond claim against the surety (and not the prime contractor) to, at a minimum, create the argument that the surety should not be able to transfer the venue based on a forum selection provision that should not govern the surety.

AN OWNER’S “INTENDED THIRD PARTY BENEFICIARY” STATUS UNDER A SUBCONTRACT

Posted on March 29, 2014November 8, 2024 by Edward Garber

Sometimes, during a dispute, there are arguments as to whether an owner is an INTENDED third party beneficiary of the subcontract by and between the general contractor and the subcontractor. There are instances where an owner desires to be an intended third party beneficiary of a subcontract so that it could pursue a breach of contract claim directly against the subcontractor. (These instances can relate to concerns over the solvency of the general contractor and/or the insurance coverage limits of the general contractor.)

“A party is an intended [third party] beneficiary only if the parties to the contract clearly express, or the contract itself expresses, and intent to benefit the third party or a class of persons to which that party claims to belong.” Dingle v. Dellinger, 2014 WL 470679, *1 (Fla. 5th DCA 2014). In other words, an intended third party beneficiary is not a signatory or party to the contract. Rather, it is expressly clear from the contract that the contract’s intent is to directly benefit that third party. Dingle, 2014 WL at *1 (finding to assert a breach of an intended third party beneficiary contract, the third party must show an intent that the contract was to directly and primarily benefit the third party). Because the intent of the contract is to directly benefit the third party, the third party is entitled to enforce the contract and, thus, sue for a breach of that contract.

However, if a third party is not an intended third party beneficiary of the contract, it will be deemed an incidental beneficiary that maintains no rights whatsoever to enforce the contract. McKinney-Green, Inc. v. Davis, 606 So.2d 393, 396 (Fla. 1st DCA 1992).

Now, a property owner is typically not regarded as an intended third party beneficiary of a subcontract between a general contractor and subcontractor. See J.W. Hodges Drywall, Inc. v. Mizner Falls, LLP, 865 So.2d 681 (Fla. 4th DCA 2004) (owner could not enforce arbitration provision in subcontract between general contractor and drywall subcontractor); accord Lillibridge Health Care Services, Inc. v. Hunton Brady Architects, P.A., 2010 WL 3788859 (M.D. Fla. 2010) (owner not intended third party beneficiary of mechanical engineer’s subconsultant agreement with architect); City of Tampa v. Thornton-Tomasetti, P.C., 646 So.2d 279 (Fla. 2d DCA 1994) (public owner not intended third party beneficiary of subconsultant’s agreement between subconsultant and architect); Vogel Bros. Bldg. Co. v. Scarborough Constructors, Inc., 513 So.2d 260 (Fla. 2d DCA 1987) (public owner not intended third party beneficiary of subcontract). Indeed, the Fifth District of Florida maintained: “As one court put it, ‘[a]lthough the work performed by subcontractors ultimately accrues to the property owner, the owner is ordinarily regarded as only an incidental beneficiary of the subcontract.” Publix Super Markets, Inc. v. Cheesbro Roofing, Inc., 502 So.2d 484, 488 (Fla. 5th DCA 1987) (superseded on other grounds) quoting National Cash Register Co. v. Unarco Indus., Inc., 490 F.2d 285, 286 (7th Cir. 1974). In addition, a subcontractor is not going to be deemed an intended third party beneficiary between the prime contract between the owner and the general contractor that would entitle it to assert a breach of contract claim against the owner. Esposito v. True Color Enterprises Const., Inc., 45 So.3d 554 (Fla. 4th DCA 2010).

If an owner wants to be an INTENDED third party beneficiary of the subcontracts, it should require the general contractor to include certain buzz language in the subcontracts that expressly sets forth this intent. Such buzz words would be something to the effect:

“It is understood and agreed that this subcontract is to primarily and directly benefit the Owner; therefore, the Owner is deemed an intended third party beneficiary of the subcontract and can enforce the subcontract as an intended third party beneficiary.”

This language clearly indicates the required intent for the intended third party beneficiary status that will enable the owner to enforce the subcontract. Without such language that clearly articulates this intent, an intended third party beneficiary status should not be extended to all situations where an owner decides to sue a subcontractor for breach of subcontract when the subcontractor was not hired by the owner. Although the owner will make the argument that the subcontractor’s work is to benefit the owner under the subcontract, the subcontractor could make a similar argument that the owner’s payment obligations to the general contractor under the prime contract is to benefit the subcontractors since the owner knew that the general contractor was not self-performing the work. If however the owner is an intended third party beneficiary of the subcontract and enforces the subcontract, it should be deemed bound by all of the terms, conditions, and burdens of the subcontract. See Woods v. Christensen Shipyards, Ltd., 2005 WL 5654643 (S.D.Fla. 2005); accord Consolidated Bathurst, Ltd. v. Rederiaktiebolaget Gustaf Erikson, 645 F.Supp. 884, 886 (S.D.Fla. 1986).

TIPS FOR DRAFTING RESTRICTIVE COVENANT (SUCH AS NON-COMPETE / ANTI-COMPETITION) LANGUAGE IN EMPLOYMENT AGREEMENT

Posted on March 16, 2014November 8, 2024 by Edward Garber

Parties sometimes seek counsel to enforce a restrictive covenant in an agreement or a provision in an agreement that prohibits the other party from doing something or limiting the use of something. Such provisions are sometimes found in employment agreements to prevent an employee from learning how the employer conducts business, obtaining valuable information such as client contacts and client and pricing lists, and then starting a competing business. The recent decision of Richland Towers, Inc. v. Richland Towers, LLC, 39 Fla. L. Weekly D535b (Fla. 2d DCA 2014), is a new opinion that emphasizes the importance of including the following language in any agreement that contains a restrictive covenant such as an agreement that contains a non-compete / anti-competition provision:

“Covenants Independent. Each restrictive covenant…set forth in this Agreement shall be construed as a covenant independent of any other covenant or provisions of this Agreement or any other agreement which the Corporation and Employee [parties to the agreement] may have, fully performed and not executory, and the existence of any claim or cause of action by the Employee against the Corporation, whether predicated upon another covenant or provision of the Agreement or otherwise, shall not constitute a defense to the enforcement by the Corporation of any other covenant.” Richland Towers, supra.

By identifying that each covenant in the agreement is INDEPENDENT instead of dependent on one another, it should prevent the party opposing the restrictive covenant from arguing that the party enforcing the covenant committed a prior material breach of contract and, thus, can no longer enforce the restrictive covenant. This is a common argument from parties opposing the enforcement of a restrictive covenant such as non-compete language.

The above language was in the employment agreement in the dispute. The former employer moved for a temporary injunction to enforce non-compete / anti-competition language in the employment agreement. The trial court denied the injunction finding that because the employer did not pay certain bonuses, the employer committed a prior breach of contract and, thus, the restrictive covenant (non-compete provision) was not enforceable. The Second District, however, reversed the trial court court’s denial of the temporary injunction based on the above quoted language in the agreement. Since one covenant was independent of the other, whether the bonuses were paid would not render the non-compete language unenforceable. So, if drafting a restrictive covenant, having language that clarifies the intent that the covenants in the agreement are independent is important. On the other hand, if agreeing to non-compete language, consider the significance of the provision and the fact that the provision may be deemed independent of any other provision in the agreement.

Restrictive covenants are enforced through requesting a temporary injunction. To prevail on a temporary injunction, the moving party must establish: “the threat of irreparable harm to the movant for which there would be no adequate legal remedy, the movant’s substantial likelihood of success on the merits, and a determination that granting the injunction would serve the public interest.” Richland Tower, supra, citing Atomic Tattoos, LLC v. Morgan, 45 So.3d 63, 64-65 (Fla. 2d DCA 2010). Furthermore, if a temporary injunction is ordered, the court should require the moving party to post an injunction bond to cover damages in the event the injunction is determined to have been wrongly ordered. Richland Tower, supra (reversing trial court’s denial of the injunction and holding that if the injunction is ordered, the trial court must require the moving party to provide an injunction bond.)

For more on the requirements for temporary injunctions, specifically in the bit protest arena, please see: https://floridaconstru.wpengine.com/the-difficulty-in-prevailing-in-a-bid-protest/

MAKE SURE INDEMNIFICATION PROVISIONS CLEARLY REFLECT THE REQUIRED SCOPE OF THE INDEMNIFICATION

Posted on February 20, 2014November 8, 2024 by Edward Garber

Indemnification provisions are a vital component of construction contracts. Every construction contract (whether a prime contract, subcontract, professional services contract, etc.) should absolutely require that the party receiving compensation for performing a service to indemnify the party paying for that service (referred to as the indemnitee). No exception! Moreover, it is crucial that indemnification provisions are carefully drafted to not only comply with Florida law, but to eliminate any uncertainty regarding the scope of the indemnification. In other words, make sure the indemnification provision unequivocally reflects the scope of the indemnification that is sought and that the scope complies with Florida law.

In Florida, indemnification provisions for construction contracts are governed by Florida Statute s. 725.06, which is recited below. Also, please see https://floridaconstru.wpengine.com/buttoning-up-contractual-indemnification-language/ and https://floridaconstru.wpengine.com/the-scope-of-a-release-in-a-settlement-and-contractual-indemnification/ for more information on the application of this statute to ensure the indemnification provision, whether for a private or public project, complies with Florida law.

The recent Third District Court of Appeal decision in Royal Palm Hotel Property, LLC v. Deutsche Lufthansa Aktiengesellschaft, Inc., 2014 WL 444150 (Fla. 3d DCA 2014), albeit a non-construction dispute, exemplifies the significance of making sure the indemnification provision accurately reflects the scope of indemnification that the party receiving the indemnification (the indemnitee) truly wants or requires.

In this case, the indemnification provision read: “The Hotel agrees to indemnify and hold Lufthansa harmless from all liabilities, including damage to property or injury or death of persons, including Lufthansa property and Lufthansa personnel that may result from the negligence or wilful (sic) misconduct of the Hotel.”

The indemnification provision was between a hotel and an airline which had its employees stay at the hotel. In this personal injury action, the hotel was sued for negligence when a window fell out of a frame and injured a guest. Also, the airline was sued under the theory that it was vicariously liable for the negligence of its employee staying at the hotel. The issue was whether the hotel was required to indemnify the airline for the negligence of the airline and its employees staying at the hotel. However, a look at the indemnification clause above does not articulate that the hotel will be responsible for indemnifying and holding the airline harmless for the negligence of the airline or the airline’s employees. Rather, it says the hotel will indemnify the airline for its negligence or willful misconduct. This is a huge difference as the indemnification written is much narrower than the indemnification that the airline perhaps wanted.

Again, the airline was never sued for the hotel’s negligence. It was sued for the negligence of its employee staying at the hotel under a vicarious liability (respondeat superior) theory. While the airline prevailed in the underlying personal injury action, it wanted to recoup its defense costs against the hotel. The Third District construing the indemnification provision held that the provision was never kicked into effect because the hotel was not required to indemnify the airline for the negligence of the airline or its employee and the basis of the underlying claims against the airline related to the negligence of the airline’s employee.

The reason this case is worth discussing is because if an indemnitee wants an indemnification provision to cover its own negligence, the provision needs to clearly reflect this intent. Now, for construction contracts, an indemnitee should never negotiate an indemnification that covers it for its negligence without making sure the provision undoubtedly complies with Florida Statute s. 725.06. Otherwise, the indemnitee risks an unenforceable indemnification provision! In a nutshell, s. 725.06 provides that if an indemnification provision is going to indemnify an indemnitee for its negligence, the contract must contain a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and its part of the project specifications or bid documents, if any.”

Section 725.06

(1) Any portion of any agreement or contract for or in connection with, or any guarantee of or in connection with, any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith, between an owner of real property and an architect, engineer, general contractor, subcontractor, sub-subcontractor, or materialman or any combination thereof wherein any party referred to herein promises to indemnify or hold harmless the other party to the agreement, contract, or guarantee for liability for damages to persons or property caused in whole or in part by any act, omission, or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any. Notwithstanding the foregoing, the monetary limitation on the extent of the indemnification provided to the owner of real property by any party in privity of contract with such owner shall not be less than $1 million per occurrence, unless otherwise agreed by the parties. Indemnification provisions in any such agreements, contracts, or guarantees may not require that the indemnitor indemnify the indemnitee for damages to persons or property caused in whole or in part by any act, omission, or default of a party other than:

(a) The indemnitor;

(b) Any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees; or

(c) The indemnitee or its officers, directors, agents, or employees. However, such indemnification shall not include claims of, or damages resulting from, gross negligence, or willful, wanton or intentional misconduct of the indemnitee or its officers, directors, agents or employees, or for statutory violation or punitive damages except and to the extent the statutory violation or punitive damages are caused by or result from the acts or omissions of the indemnitor or any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees.

(2) A construction contract for a public agency or in connection with a public agency’s project may require a party to that contract to indemnify and hold harmless the other party to the contract, their officers and employees, from liabilities, damages, losses and costs, including, but not limited to, reasonable attorney’s fees, to the extent caused by the negligence, recklessness, or intentional wrongful misconduct of the indemnifying party and persons employed or utilized by the indemnifying party in the performance of the construction contract.

(3) Except as specifically provided in subsection (2), a construction contract for a public agency or in connection with a public agency’s project may not require one party to indemnify, defend, or hold harmless the other party, its employees, officers, directors, or agents from any liability, damage, loss, claim, action, or proceeding, and any such contract provision is void as against public policy of this state.

(4) This section does not affect any contracts, agreements, or guarantees entered into before the effective date of this section or any renewals thereof.

WHAT IS SUBSTANTIAL COMPLETION?

Posted on November 8, 2013November 8, 2024 by Edward Garber

The term “substantial completion” is in most construction contracts. And, it should be. This date marks the date the owner expects to be able to use its project for its intended purpose and, if it cannot, the contractor will (likely) be assessed liquidated damages for the delay to the substantial completion date. The owner’s contractual ability to assess liquidated damages serves to motivate the contractor to substantially complete the project by the agreed date and to reimburse the owner for delay-related damages that cannot be ascertained with a reasonable degree of certainty at the time of the contract.

A. How is Substantial Completion Defined

Under the general conditions of the AIA (American Institute of Architects A201 Document 2007), substantial completion is the “stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.” (AIA Document A201 s. 9.8.1) Under the AIA, the architect is required to conduct inspections to determine the date of substantial completion and certifies this date.

The general conditions of the EJCDC (Engineers Joint Contract Documents Committee C-700 Document 2007) defines substantial completion similarly as:

“The time and date at which the Work has progressed to the point where, in the opinion of Engineer, the Work is sufficiently complete, in accordance with the Contract Documents, so that the Work can be occupied and/or utilized for the purposes for which it is intended….Substantial Completion cannot occur before the Project is issued a Certificate of Occupancy (or Completion, if applicable) by the governing building department that allows Owner to utilize the entire Project for the purposes for which it is intended.” (EJCDC Document C-700 s. 1.01.46)
Whether it is an AIA, EJCDC, or other industry form document, substantial completion is routinely defined as that point in time when the owner can utilize its project for the purposes for which it is intended.

A leading case in Florida discussing substantial completion is J.M. Beeson Co. v. Sartori, 553 So.2d 180 (Fla. 4th DCA 1989). This case involved an owner assessing liquidated damages against its contractor. The contractor was hired to construct a shopping center that required substantial completion within 300 days of commencement. The contract provided that substantial completion occurred when “construction is sufficiently complete in accordance with the Contract Documents, so the owner can occupy or utilize the work or designation portion thereof for the use for which it is intended.” J.M Beeson, 553 So.2d at 181. Although two anchor tenants in the shopping center received Certificates of Occupancy within the 300 days, another tenant did not. The owner took the position that substantial completion had not been achieved, irrespective of the Certificates of Occupancy, because items such as landscaping were not completed. The Fourth District dismissed the owner’s position finding:

“[W]hen the owner can put tenants in possession for fixturing and can begin to collect rents, the owner begins to utilize the work for its intended purpose. When the owner was able to occupy and fixture the constructed space, the construction was substantially completed.” J.M. Beeson, 553 at 182-83 (internal citations omitted).

The Fourth District indicated that the substantial completion date occurred no later than the date the shopping center was able to obtain certificates of occupancy for the tenants. Notably, if the contractor in J.M. Beeson was simply required to build shell retail space where the tenants were responsible for their own tenant improvements, the substantial completion would likely occur when an applicable certificate of completion was issued for the shell space pursuant to the shell permit that would entitle the tenants to begin their individual improvements. See, e.g., Hausman v. Bayrock Investment Co., 530 So.2d 938 (Fla. 5th DCA 1988) (finding that test for substantial completion for property tax purposes is the date property is put to use for which it is intended; in this case, since contactor was building shell retail space, substantial completion occurred when shells were completed).

If an owner is in a position to use its project for its intended purpose (whether for personal use, public use, whatever the project entails), this really should mark the substantial completion date. This is more of an objective date determined by the governing building department through the issuance of a certificate relating to the permit.

B. Contract Drafting / Understanding Tips

I prefer the substantial completion definition in the general conditions of the EJCDC (above) because it references that this point in time should not be earlier than the issuance of a Certificate of Occupancy (or applicable Certificate of Completion). Even though most contracts give certain discretion to the design professional to determine and certify the date, the fact remains that the Certificate of Occupancy is realistically the date that determines when an Owner can use its project for its intended purpose since it permits occupancy. I often like to tie the substantial completion date in the contract to the Certificate of Occupancy date or Temporary Certificate of Occupancy date (since the TCO date may be the date that allows occupancy under certain conditions) since this more accurately reflects the date the Owner can use its project for its purpose (or, if it is a project for shell space, the Certificate of Completion date that authorizes the tenant to construct finishes / improvements). Also, this removes some of the discretion from the design professional and shifts their focus to generating the punchlist and working towards final completion.

From an owner’s perspective, if it agrees to a mutual waiver of consequential damages in the contract, it must absolutely include a liquidated damages provision tied to the substantial completion date. If it does not want to include a liquidated damages provision, then the owner needs to ensure there is not a mutual waiver of consequential damages provision and, if there is a delay to the substantial completion date, be in a position to prove its actual delay-related damages.

From a contractor’s perspective, it wants to agree to a substantial completion date where arguably there is float built into its schedule to ensure it has enough time to substantially complete the project. Also, it will want to ensure through flow-down provisions in its subcontracts that it has the ability to flow down assessed liquidated damages to responsible subcontractors that impact its critical path.

From a subcontractors’ perspective, it needs to understand the contractor’s schedule and how the work is sequenced and ideally have input particularly relating to durations for its activities based on the sequencing of the work. Otherwise, the subcontractor could be putting itself in a position where it will be notified of delays since it is unable to meet its required durations.

THE INCLUSION OF LIMITATION OF LIABILITY PROVISIONS FOR DESIGN PROFESSIONALS

Posted on October 8, 2013November 8, 2024 by Edward Garber

Design professionals need to remember the benefit of newly enacted legislation effective July 2013 that authorizes a limitation of liability provision for design professionals in their individual capacity. Florida Statute s. 558.0035 authorizes a design professional to limit their personal liability if: (a) the professional’s company entered into the contract for professional services; (b) the contract does not name the professional as a party to the contract; (c) the contract provides in uppercase and at least 5 font points larger than the rest of the contract that an employee or agent of the professional’s company cannot be held individually liable in negligence, and (d) the professional’s company maintains professional liability insurance. See Fla. Stat. s. 558.0035 set forth below. Complying with this statute can limit a professional’s liability in an individual capacity for economic damages, although based on the language of the statute, it would not extend to personal injury or property damage not subject to the professional services contract.

When negotiating a contract for a design professional, it is good to include a limitation of liability provision to protect professionals working with the design professional company/ entity entering into the contract. I would include a provision identifying that it is specifically understood that employees or agents of the contracting party are not parties to the professional services contract. The reason being is many times professional services contracts will call out the specific professional(s) that is to act as the company’s representative or the professionals that will be performing the professional services. Additionally, I would include in uppercase and 5 font sizes larger than the balance of the text in the contract a provision to the effect: “PURSUANT TO FLORIDA STATUTE S. 558.0035, AN INDIVIDUAL EMPLOYEE OR AGENT OF_______ [CONTRACTING PARTY] MAY NOT BE HELD INDIVIDUALLY LIABLE IN NEGLIGENCE FOR ANY CLAIMS, DAMAGES, OR DISPUTES ARISING OUT OF AND SUBJECT TO THE CONTRACT.”

Although the statute provides that the limitation of liability provision does not apply to damages to personal injuries or property not subject to the contract, it does not define the circumstances in which this would apply. For instance, if a structure is deficiently engineered and a portion falls down or collapses and damages persons or property other than the structure itself, it would seem that the limitation of liability provision would not extend to these types of damages since the other property and personal injuries were not subject to the professional services contract. On the other hand, there could be the argument that these damages are subject to the professional services contract because they arose out of errors and omissions in the performance of professional service contractual obligations.

When negotiating a contract for an owner, the key is to ensure that the design professional has sufficient professional liability insurance based on the requirements of the project (i.e., sufficient insurance limits and potentially tail / extended reporting period coverage). An owner willing to agree to the limitation of liability provision could put a disclaimer that reflects that should the contracting party not continue its professional liability insurance for “x” years after the project’s completion with a date retroactive to the contract date or purchase tail coverage for the same period of time, the limitation of liability provision shall be deemed null and void.

Florida Statute s. 558.0035

(1) A design professional employed by a business entity or an agent of the business entity is not individually liable for damages resulting from negligence occurring within the course and scope of a professional services contract if:
(a) The contract is made between the business entity and a claimant or with another entity for the provision of professional services to the claimant;
(b) The contract does not name as a party to the contract the individual employee or agent who will perform the professional services;
(c) The contract includes a prominent statement, in uppercase font that is at least 5 point sizes larger than the rest of the text, that, pursuant to this section, an individual employee or agent may not be held individually liable for negligence;
(d) The business entity maintains any professional liability insurance required under the contract; and
(e) Any damages are solely economic in nature and the damages do not extend to personal injuries or property not subject to the contract.
(2) As used in this section, the term “business entity” means any corporation, limited liability company, partnership, limited partnership, proprietorship, firm, enterprise, franchise, association, self-employed individual, or trust, whether fictitiously named or not, doing business in this state.

LIEN TRANSFER BONDS AND VENUE

Posted on August 12, 2013November 8, 2024 by Edward Garber

The Fourth District Court of Appeals in Attaway Electric, Inc. v. Kelsey Construction, Inc., 38 Fla. L. Weekly D1693a (Fla. 4th DCA 2013) recently ruled that an action on a lien transfer bond (posted pursuant to Fla. Stat. s. 713.24 in the county where the project is located and lien recorded) needs to be initiated in the county where the bond is recorded. This means that even if there is a contract between the parties that requires a different venue outside of where the lien transfer bond is posted, that venue provision will not be enforced so that an action as to the lien transfer bond and an action under the contract can both be brought in the same county, i.e., where the lien transfer bond is posted.
In Attaway Electric, a subcontractor recorded liens for alleged nonpayment on Broward County projects with the same general contractor. The liens were transferred to lien transfer bonds by the general contractor. The subcontractor moved to foreclose the liens in Broward County and also sued the general contractor for breach of contract. The general contractor then moved to transfer venue to Orange County pursuant to a forum selection provision in the subcontract. The trial court granted the motion and transferred venue. The Fourth District, however, reversed finding that an action on a lien transfer bond must be brought in the county where it is recorded and “contract claims involving the same matters should be brought in the same place to avoid inconsistent rulings.” Attaway Electric.

This recent decision is important because contractors that want to obtain the benefit of a forum selection provision in a subcontract probably need to have a payment bond and ensure in the subcontract that the forum selection provision covers claims as to the payment bond surety. If there is no payment bond, specifically for a private project, a subcontractor can lien the private project for monies owed. If the general contractor (or even perhaps the owner) then transfers the lien to a lien transfer bond, the subcontractor will be able to foreclose the lien as to the lien transfer bond in the county where the bond is recorded as well as pursue a breach of contract claim against the contractor in the same county, even if the subcontract contains a forum selection provision with a different venue.