PAY ATTENTION TO THE RELEASE YOU EXECUTE!

Posted on March 26, 2014November 8, 2024 by Edward Garber

Pay attention to the release you execute! This includes the release that is executed in consideration of insurance proceeds where the release will likely include a full release of all claims and the parties forbear from pursuing legal claims against one another. Such claims would include the insured / party receiving insurance proceeds releasing its right to assert claims for additional proceeds arising from same incident and the insurer releasing its right to assert a claim that the insured breached the insurance policy and/or that there is no coverage under the policy. This is besides the fact that the monetary payment should constitute sufficient consideration for a full release of any and all rights / claims relating to the incident.

In Crystal Colony Condominium Ass’n, Inc.v. Aspen Specialty Ins. Co., 2014 WL 1116881 (S.D.Fla. 2014), an insurer issued a property insurance policy to an association. In October 2005, the insured-association experienced severe damage due to Hurricane Wilma. Due to the damage, the insurer agreed to pay $1,071,359.52 to its insured-association in consideration of a full release from the insured. The insured-association agreed and a release was executed that read:

“In consideration of the sum of [$1,071,349.52], to me/us [Plaintiff] paid, the receipt whereof is hereby acknowledged, l/we, [Plaintiff] (being of lawful age) do hereby release and forever discharge [Defendant, its] heirs, administrators, executors, successors and assigns, from any and all action, causes of action, claims and demands whatsoever for, upon, or reason of any damage, loss or injury and all consequential damage, which heretofore have been or which hereafter may be sustained by me/us [Plaintiff] in consequence of windstorm damage during Hurricane Wilma, 10/24/05.”

It is being further agreed and understood that the payment of said amount is not to be construed as an admission of liability, but is a compromise of a disputed claim and that this release is executed in full settlement and satisfaction of rights of the undersigned under Policy No. BP000106 arising out of said hurricane damage above referred to.”

Crystal Colony, supra, at *2.

Approximately six year later, the insured-association advised the insurer that it disagreed with the quantum of insurance proceeds it received and filed a declaratory action. The insurer moved for summary judgment based on the full release it received for the incident (the hurricane). The insured-association argued that the release was not enforceable because it lacked consideration since the money it received was only a partial payment and did not cover future damages the association incurred. The insurer argued that the release included language where there was a mutual forbearance from pursuing legal action against the other party and this constituted more than sufficient consideration.

The Southern District agreed with the insurer (entering summary judgment against the association-insured) and held: “Florida law provides that a promise, no matter how slight, can constitute sufficient consideration so long as a party agrees to do something that they are not bound to do. Forbearing the pursuit of a legal remedy constitutes such a promise.” Crystal Colony, supra, at *3 (internal citations and quotations omitted).

Unambiguous releases will typically be deemed enforceable since it will clarify the intent of the parties. Whether it is a release given in consideration of insurance proceeds or a release given in consideration of a progress or final payment, if the party giving the release wants to ensure certain rights are carved-out or preserved, they need to do so. If the other party is unwilling to accept such carved-out language, the party giving the release, at a minimum, needs to preserve its rights by sending contemporaneous documentation that they are signing the release because the other party will not accept a release with carve-outs for the following specific issues. And, as seen from this case, if a mutual release is given where both parties forbear from pursuing claims against the other, this consideration will be more than enough consideration to support the release and courts will not delve into the type of claims that the parties are potentially releasing each other from. Thus, pay attention to the release you execute so that it does not come back to haunt you later!

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.

SUPPLIER / SUB-SUBCONTRACTOR NOTICE REQUIREMENTS UNDER THE MILLER ACT

Posted on March 23, 2014November 8, 2024 by Edward Garber

Sub-subcontractors and suppliers to subcontractors working on federal projects NEED to know what they need to do to preserve Miller Act payment bond rights. Prime contractors need to know too so that they know what defenses to raise against the unwary sub-subcontractor/supplier that asserts a claim against their Miller Act payment bond. The Miller Act requires:

“A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the [prime] contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. The notice shall be served–
(A) by any means that provides written, third-party verification of delivery to the contractor at any place the contractor maintains an office or conducts business or at the contractor’s residence; or
(B) in any manner in which the United States marshal of the district in which the public improvement is situated by law may serve summons.
40 U.S.C. s. 3133 (b)(2)

In U.S. f/u/b/o Columbus Fire & Safety Equipment Co., Inc. v. Anderson Electric Co., Inc., 2014 WL 931262 (M.D. GA 2014), a supplier to a subcontractor was not paid on a federal project. The supplier notified the Miller Act surety and prime contractor of the non-payment. However, the supplier appeared to only notify the surety of the specific amount it claimed it was due which the surety communicated to the prime contractor. When the supplier remained unpaid, it instituted a Miller Act lawsuit. The surety and prime contractor moved for summary judgment arguing that the supplier failed to provide proper notice to the prime contractor pursuant to the Miller Act. Specifically, the surety and prime contractor argued that the supplier failed to notify the prime contractor of the amount the supplier claimed to be due as required by the Miller Act.

Under the Miller Act, “If a subcontractor fails to pay a supplier of materials on such a project, that supplier can sue on the bond by giving written notice to the general contractor within ninety days of last supplying the material for which the claim is made.” Anderson Electric, supra, at *2 citing 40 USC s. 31333(b)(2).

The question in this case was whether the prime contractor was on sufficient notice of the supplier’s claim since it was not provided with direct notice from the supplier of the amount the supplier claimed it was owed. The Middle District of Georgia noted that courts typically allow flexibility concerning the method notice is given. However, the notice must be sufficiently specific to place the prime contractor on notice of the claim that the supplier is asserting. “The purpose of the notice requirement of the Miller Act is to alert a general contractor that payment will be expected directly from him, rather than from the subcontractor with whom the materialman [supplier] dealt directly.” Anderson Electric, supra, at *3 quoting United States ex rel. Jinks Lumber Co. v. Fed. Ins. Co., 452 F.2d 485, 487 (5th Cir.1971). Regarding the notice requirement, the Middle District of Georgia stated:

“That notice does not, however, have to be entirely in one writing for it to comply with the Miller Act. Written notice may be considered in conjunction with other writings or even oral statements to determine whether the general contractor was adequately informed, expressly or impliedly, that the supplier is looking to the general contractor for payment so that it plainly appears that the nature and state of the indebtedness was brought home to the general contractor.” Anderson Electric, supra, at *3 (internal quotations omitted and citation omitted).

Here, there was no evidence that the supplier notified the prime contractor of the amount it claimed it was owed. However, there was evidence that the supplier notified the surety of the amount it claimed it was due and the surety notified the prime contractor of this amount within the 90-day deadline. For this reason, the Middle District of Georgia denied the summary judgment and found that “communication between the…claimant, the contractor’s surety, and the general contractor can be considered by the jury in its determination of whether the general contractor received sufficient notice, that the supplier is looking to the general contractor for payment of some specific amount of a specific subcontractor’s indebtedness.” Anderson Electric, supra, at *4.

This opinion illustrates the importance of a supplier or sub-subcontractor giving the prime contractor on a federal project proper notice of its claim for non-payment within 90 days of their final furnishing date. Not doing so can be fatal to their Miller Act claim. A prime contractor that is aware of this will raise this as a defense and move for summary judgment on this point. In this case, it appeared that the surety assisted the supplier by notifying the prime contractor of the supplier’s claimed amount within the supplier’s 90 day deadline. Also, due to the flexibility of the notice requirements, the supplier/sub-subcontractor may have arguments to survive a summary judgment, especially if it notified the surety and the surety notified its principal-prime contractor within 90 days of the supplier/sub-subcontractor’s final furnishing date. But, it should not even get to this point as the notice requirements of the Miller Act should absolutely be met to ensure Miller Act payment bond rights are timely preserved.

DESIGN PROFESSIONAL’S STANDARD OF CARE AND THE FIRST COST DEFENSE

Posted on March 21, 2014November 8, 2024 by Edward Garber

Design professionals entering into contracts need to absolutely understand the standard of care they are agreeing to in the contract. The reason being is that a design professional can agree to a heightened standard of care making them contractually liable for breaches based on an ultra-technical standard of care that cannot realistically be met.

Typically, the standard of care of a design professional is: “[P]rofessionals rendering professional services are to perform such services in accordance with the standard of care used by similar professionals in the community under similar circumstances.” Trikon Sunrise Assocs., LLC v. Brice Bldg. Co., 41 So.3d 315, 318 (Fla. 4th DCA 2010). Yet, “if the professional contracts to perform duties beyond those required by ordinary standards of care, the quality of that performance must comport with the contractual terms.” CH2M Hill Se., Inc. v. Pinellas County, 698 So.2d 1238, 1240 (Fla. 2d DCA 1997).

The School Board of Broward County, Florida v. Pierce Goodwin Alexander & Linville, 39 Fla. L. Weekly D590a (Fla. 4th DCA 2014), is a new case that discusses the significance of the standard of care the architect agrees to in conjunction with another concept known as “the first cost” defense. Both the standard of care and the first cost defense are terms and concepts that design professionals need to be familiar with!

In this case, the architect was retained to design changes to existing buildings and design new buildings for a public school. The public owner retained the services of a separate peer reviewer to monitor and offer opinions on the design. The architect’s initial phase was to prepare preliminary designs for bidding purposes. The peer reviewer commented on the design including that a third floor balcony needed a staircase as an emergency fire exit in order to be code-compliant. The architect disagreed and suggested an alternate fire code solution. The architect thought that the public owner, which had final authority to determine the correct interpretation of the code, orally agreed with its alternate solution and the plans were submitted for bidding.

After construction commenced, the public owner determined that the architect’s alternate solution was not code-compliant and that the staircase suggested by the peer reviewer needed to be constructed. This resulted in a revision to the plans and a significant change order. As with any change order, this change resulted in the owner paying more for the construction. Other change orders due to design changes also increased construction costs. The public owner sued the architect to recoup these costs.

Two important issues were raised. The first issue was the appropriate standard of care of the architect–did the architect breach its standard of care by preparing a design that required changes to make it code-compliant. The second issue is the defense known as the first cost defense, meaning that the architect is not responsible for the costs of items left out of its original design since the owner should always be responsible for that cost based on the cost of that item if that item were included in the original design. If the cost of that item (i.e., steel or concrete) increased from the time of the original design, then the architect could be responsible only for the price increase (but not the cost of the item at the time of its original design). Or, if the omission of that item resulted in a delay, the architect could be responsible for the delay.

1) Standard of Care

The architect in this case wanted the typical standard of care jury instruction that would state that the architect is liable if it failed to perform services in accordance with the standard of care used by similar professionals under similar circumstances. The public owner, however, wanted a breach of contract jury instruction that would make the architect liable for breaching a contractual standard of care provision, in this case, for preparing a design that was not code-compliant. The public owner wanted this because this is what the architect agreed to. The contract provided:

“2.1.3 As to all services provided to this Agreement, the Project Consultant [the architect] shall furnish services by experienced personnel and under the supervision of experienced professionals licensed in Florida and shall exercise a degree of care and diligence in the performance of these services in accordance with the customary professional standards currently practiced by firms in Florida and in compliance with any and all applicable codes, laws, ordinances, etc. . . .

2.1.5 All professional design services and associated products or instruments of those services provided by the Project Consultant shall: .1 Be in accordance with all applicable codes, laws, and regulations of any governmental entity, including, but not limited to, [list of regulatory entities] with the Owner serving as the interpreter of the intent and meaning of . . . any other applicable code.”
The School Board of Broward County, supra.

Thus, the public owner wanted a jury instruction that would render the architect liable if its initial plans were not code compliant because the contract provided that the architect’s standard of care is to ensure its drawings comply with all codes, etc.

The Fourth District agreed with the owner and maintained:

“Where an express provision within a professional services contract provides for a heightened standard of care, however, the professional must perform in accordance with the terms of the contract….In other words, an architect can contractually commit to perform under a standard of care higher than the common law standard.
***
“We are satisfied that the parties unambiguously allocated to the architect the risk for costs and expenses attributable to design plans that were not code-compliant.”
The School Board of Broward County, supra.

*The lesson is that design professionals need to be careful and truly consider what they agree to as they can impose duties upon themselves that are more stringent than what the law otherwise imposes. This risk needs to be appreciated because more often than not architect / design professional do agree to perform a service (prepare a design) that is code-compliant.

2) First Cost Defense

Again, under the first cost defense, the architect is not responsible for the costs of items left out of its original design since the owner should always be responsible for that cost based on the cost of that item if that item were included in the original design. As the Fourth District explains:

“For example, if the school board would have paid a cost for construction in accordance with the code-compliant final design plans, an award of a COI [change order item] expense against the architect attributable to a change in the initial design plans for the same cost would put the school board in a better position than if the design services had been performed as agreed. Stated another way, if there had been no change between the initial plans drawn for bidding by contractors and the final construction plans, the school board would have been solely responsible for paying all construction expenses incurred for the renovation.” The School Board of Broward County, supra.

The Fourth District relied on and references a hypothetical stated by the Fifth District in Lochrane Engineering, Inc. v. Willingham Realgrowth Inv. Fund. Ltd., 552 So.2d 228 (Fla. 5th DCA 1989) to explain the first cost defense:

“[I]f an engineer negligently designed a 1000 square feet drain field, and it was subsequently determined that an adequate design required a 1200 square feet drain field, the owner, not the engineer, should pay for the additional 200 square feet of drain field because the necessity for the additional 200 square feet of drain field was caused by the owner’s need to dispose of the sewerage produced. However, the court then observed that this does not mean an engineer is never liable for damages that properly flow from his professional negligence. The court went on to say, if the cost of later installing the additional 200 feet of drain field costs more than it would have cost if installed as part of the original undertaking, the engineer would be liable for the difference as well as any other consequential damages. The School Board of Broward County, Florida, supra (internal quotations and citations omitted).

*The lesson is that even if an architect erred, the owner cannot obtain a windfall by virtue of that error and be placed in a better position because of that error.

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 ADDITIONAL INSURED COVERAGE IS FOR COMPLETED OPERATIONS

Posted on March 15, 2014November 8, 2024 by Edward Garber

Commercial general liability (“CGL”) insurance and additional insured coverage play an integral role in construction defect disputes. Specifically, general contractors want to ensure that they are an additional insured under their subcontractors CGL policies. (Subcontractors that engage other subcontractors to perform a portion of their scope likewise want to be an additional insured under their subcontractors’ CGL policies.) However, just being an additional insured is not enough. The key is that a general contractor should be an additional insured for ongoing operations and, importantly, completed operations since construction defects typically arise out of completed operations.

The recent Fifth Circuit decision in Carl E. Woodward, L.L.C. v. Acceptance Indemnity Insurance Co., 2014 WL 902575 (5th Cir. 2014), discusses additional insured coverage and the importance of additional insured coverage for completed operations. This case deals with the construction of a condominium in Mississippi. The general contractor hired a concrete subcontractor that performed work from January 2006 to October 2006 with the entire project being completed in August 2007. The general contractor was an additional insured under the concrete subcontractor’s CGL policy. Subsequent to completion, a construction defect dispute arose in arbitration that involved the concrete subcontractor’s scope of work. The concrete issues appeared to be that the subcontractor failed to properly slope concrete floors including balconies preventing water to drain and that it failed to install a step in the balcony slab at the balcony exterior walls and doors damaging exterior walls of condominium units.

The general contractor demanded that the concrete subcontractor’s CGL carrier indemnify and defend it in the dispute since it was an additional insured under the subcontractor’s policy (and the CGL carrier was responsible for indemnifying / defending it due to the negligence of the primary insured-concrete subcontractor). The concrete subcontractor’s CGL carrier refused to defend the general contractor because the additional insured endorsement stated that additional insured coverage was “only with respect to liability arising out of your [primary insured subcontractor’s] ongoing operations performed for that insured.” The endorsement also provided a specific exclusion to additional insured coverage–the additional insured coverage did NOT apply to property damage occurring after all work to be performed by or on behalf of the additional insured has been completed. Basically, there was NO additional insured coverage for completed operations.

The general contractor and its insurer filed suit against the concrete subcontractor’s CGL carrier. The argument was that the CGL carrier failed to indemnify and contribute to defense costs in connection with the arbitration. After trial, the district judge entered a judgment in favor of the contractor for approximately $1 Million. The Fifth Circuit reversed this judgment because the dispute arose out of completed operations for which there was no additional insured coverage owed to the general contractor.

A. What does the additional insured coverage “only with respect to liability arising out of your [primary insured subcontractor’s] ongoing operations performed for that insured” mean

The Fifth Circuit (relying on Mississippi law) held that under the additional insured language for ongoing operations, liability simply needs to arise out of ongoing operations–liability needs to be causally connected to the the subcontractor’s ongoing operations. But, what exactly does this mean? To determine what this specifically means, the Fifth Circuit examined the case of Noble v. Wellington Assoc., 2013 WL 6067991 (Miss.Ct.App. 2013), that involved post-completion foundation cracks in a house attributable to the site subcontractor’s compaction (before the house was even constructed). In Noble, the court maintained:

“Noble [additional insured] was only an additional insured for liability caused by Harris’s [site subcontractor] active [ongoing] work on the site and…did not cover property damage manifesting itself after Harris stopped working on the site…. [I]f Harris’s performance caused the damage for which Noble was liable, the cause was Harris’s completed work, not its ongoing operations. ” Carl E. Woodward, supra, at *6.

The Fifth Circuit further examined the Colorado case, Weitz Co., LLC v. Mid-Century Ins., Co., 181 P.3d 309 (Colo.App. 2007), whereby an owner observed water intrusion damage five months after the subcontractor completed its work. In Weitz, the court maintained:

“Because the contractor’s [additional insured] liability for the water intrusion damage arose out of the subcontractor’s completed operations–the work was completed five months before the intrusion–rather than its ongoing operations, there was no coverage under the additional-insured endorsement.” Carl E. Woodward, supra, at *7.

Additionally, the Fifth Circuit maintained that the additional insured endorsement (factoring in the specific exclusion that excluded property damage occurring after all work has been completed) only provided coverage for the concrete subcontractor’s ongoing (active) operations. In other words, it does not matter when the claim is actually filed as long as the liability does not arise out of completed operations.

Typically, and even as the Fifth Circuit noted, liability for construction defects arise out of completed operations. Even if liability arose out of the concrete subcontractor’s scope of work, the liability did not arise out of the subcontractor’s active / ongoing operations, but from the completed construction (when the owner received the completed building-substantial completion). Thus, once all work is completed, the liability and damage will arise from completed operations.

B. CGL is not a performance bond

CGL insurance is not a performance bond. I repeat, CGL insurance is not a performance bond. The reason for the repetition is because oftentimes arguments are made to essentially convert CGL insurance into a performance bond. The Fifth Circuit explained the difference between these two products that insure different risks:

“Allowing coverage under this [additional insured] endorsement because of an allegation that the additional insured failed to follow plans and specifications, effectively converts a CGL policy into a performance bond.
***
[A] performance bond is a form of insurance that guarantees the completion of the general contractor’s work on the project. This Circuit has previously noted the significance of the difference between these two forms of insurance [CGL and performance bond]: A CGL policy generally protects the insured when his work damages someone else’s property. The ‘your work’ exclusion [in the policy] prevent a CGL policy from morphing into a performance bond covering an insured’s own work.” Carl E. Woodward, supra, at *7 (internal quotations and citations omitted).

C. Take-aways

Take a look at the CGL policy and additional insured endorsement. There is a good chance the additional insured endorsement only provides additional insured status for ONGOING OPERATIONS and NOT COMPLETED OPERATIONS! This is absolutely not what a GC wants. It wants additional insured status for both ongoing and completed operations so that it can seek indemnification and defense for issues that arise post-completion.

Construction defect disputes often arise after substantial completion and after the owner receives the project. It is the owner that asserts the claim against the general contractor and the general contractor seeks indemnification and defense as an additional insured under subcontractors’ policies. If the subcontractor’s CGL policy does not provide for additional insured coverage for completed operations, courts and insurers will likely apply the same logic taken by the Fifth Circuit in this case. This is why obtaining a copy of the endorsement and requiring additional insured status for completed operations is important.

Even though contracts typically require the subcontractor to include additional insured coverage for completed operations, what the contract requires and what the policy states are oftentimes two different things. So, what is the recourse if a subcontractor’s policy does not comply with this provision? Well, you could include that the subcontractor failing to provide additional insured coverage for completed operations constitutes a material breach of contract. But, even if the contractor learns the right additional insured coverage is not being provided during construction, the chances of it terminating the subcontractor (and delaying the job) and finding a new subcontractor are probably slim to none. So what other recourse is there if this is learned during construction? Perhaps, if learned during construction, the provision can state that the general contractor is entitled to keep the subcontractor’s retainage as a form of liquidated damages based on damages that are not readily ascertainable. The subcontractor probably will not agree to such a provision. And, oftentimes, like this case, the additional insured coverage is not learned until after-the-fact when it is too late. Then what? Well, the contract already has an indemnification provision that would make the subcontractor responsible. The problem is that this provision is not additional insured coverage. Therefore, obtaining copies of subcontractors’ additional insured endorsements on the front end to determine whether there is coverage for completed operations is important.

CGL insurance is not a performance bond. They are two different insurance-type products with different purposes. Both can play a role in construction defect disputes. It is important to understand and appreciate their differences.

Finally, parties oftentimes try to navigate complicated CGL issues by themselves. This is a mistake. Parties should retain the services of counsel to assist them to ensure insurance claims are maximized and, if there is a performance bond in place, rights are preserved.

For more on additional insured coverage, please see: https://floridaconstru.wpengine.com/understanding-your-rights-as-an-additional-insured/

THE STATUTE OF LIMITATIONS ON A MILLER ACT PAYMENT BOND CLAIM AND THE DOCTRINE OF EQUITABLE TOLLING

Posted on March 9, 2014November 8, 2024 by Edward Garber

Complying with the one-year statute of limitations to assert a Miller Act (40 USC s. 3133) payment bond claim is an absolute must! Not complying will likely deprive the claimant of its payment bond rights. A claimant should never want this scenario as, in most instances, it is always better to file a lawsuit and preserve the rights to the payment bond. In a recent non-Florida federal case, U.S.A ex rel. Liberty Mechanical Services, Inc. v. North American Specialty Ins., 2014 WL 695106 (E.D.Pa. 2014), the Court discussed whether the doctrine known as equitable tolling could toll the statute of limitations to file a Miller Act payment bond action so that a late filed payment bond lawsuit was deemed timely filed.

In Liberty Mechanical Services, the Department of Veteran Affairs hired a contractor to preform renovation work. The prime contractor hired a mechanical and plumbing subcontractor. The subcontractor completed its work in January 2012 and was owed approximately $53,000. As a result of nonpayment, it obtained a copy of the prime contractor’s payment bond from the Department of Veteran Affairs in September 2012 (nine months from completing its work–there were allegations that it had difficulty obtaining a copy of the bond from the government). The subcontractor then sent a letter to the surety advising that it would not provide close out documents until it was paid in full and that its lawyer will be filing a claim against the bond. The surety responded that it would get the ball rolling regarding the claim while reserving all of its rights. Subsequently, the prime contractor reached out to the subcontractor and advised that it would pay and, therefore, an action against the bond would not be necessary. However, in February 2013, more than a year after the subcontractor completed its work, it still had not received payment from the prime contractor. Then, the surety told the subcontractor that it would not pay because the subcontractor’s claim was now time-barred by the one-year statute of limitations to sue on a Miller Act bond. Accordingly, in June 2013, approximately fifteen months from the subcontractor’s completion date, it filed a Miller Act lawsuit.

The Miller Act mandates:

“[E]very contractor on a federal government contract exceeding $100,000 to provide ‘[a] payment bond with a surety … for the protection of all persons supplying labor and material in carrying out the work provided for in the contract. Any supplier or sub-contractor who has not been paid in full within 90 days for labor performed or supplies furnished may bring a civil action on the payment bond for the amount unpaid at the time the civil action is brought and may prosecute the action to final execution and judgment for the amount due… The Act requires that suit must be brought no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.” Liberty Mechanical Services, supra, *3 (internal citations and quotations omitted).

Here, the Miller Act lawsuit was admittedly outside the one-year statute of limitations (more than one year from the subcontractor’s final furnishing date in January 2012); however, the subcontractor argued that the limitations period should be equitably tolled to allow it to move forward with the lawsuit and excuse its late filing.

The Third Circuit has explained that the doctrine of equitable tolling can apply to excuse a late filing after the expiration of the statute of limitations under the following circumstances:

“(1) where the defendant has actively misled the plaintiff respecting the plaintiff’s cause of action; (2) where the plaintiff in some extraordinary way has been prevented from asserting his or her rights; or (3) where the plaintiff has timely asserted his or her rights mistakenly in the wrong forum.” Liberty Mechanical Services, supra, at *8 quoting Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1387 (3d Cir. 1991).

The plaintiff, or late-filer, in applying the circumstances, must show it exercised reasonable diligence in investigating its claim and filing suit on its claim.

Notably, Florida district courts have applied equitable tolling under analogous circumstances:

“(1) the late filing plaintiff has been misled by defendant’s misconduct into allowing the statutory period to expire; (2) the plaintiff was unaware that his/her rights had been violated and therefore of the need to seek redress; or (3) the plaintiff actively pursued his/her judicial remedies but filed a defective pleading during the limitations period, timely filed in an improper forum and has exercised due diligence in all other respects in preserving his legal rights.” Booth v. Carnival Corp., 510 F.Supp.2d 985, 988 (S.D.Fla. 2007) citing Justice v. U.S., 6 F.3d 1474, 1479 (11th Cir. 1993).

The subcontractor in Liberty Mechanical Services alleged random facts to support its late filing. It first argued that it took roughly nine months from its final furnishing date to receive a copy of the payment bond from the Department of Veteran Affairs. Yet, this argument failed because the subcontractor still had three months left under the statute of limitations to timely pursue an action on the bond. The subcontractor argued that the prime contractor indicated it would pay so there was no need for the subcontractor to file a bond claim. Yet, this argument failed because nothing prevented the subcontractor from timely preserving its rights and filing a claim. In other words, the prime contractor indicating its intent to pay did not deprive the subcontractor of timely pursuing its rights. And, the subcontractor argued that the surety indicated that it would “get the ball rolling” once it was notified of the claim while reserving all rights. Yet, this argument failed because the surety never represented that it would pay, but, in essence, simply responded that it received and would investigate the claimant’s claim–a common response from a surety.

While equitable tolling could possibly work to support the basis for a late filed Miller Act payment bond claim, the plaintiff / claimant must plead and prove: 1) it used due diligence to timely file its claim and 2) the circumstances fit into one of the three limited categories identified above as to why the plaintiff could not have timely filed the lawsuit even exercising due diligence. However, the facts to support equitable tolling should be severe such that equity would require the tolling of the limitations so that a late filed Miller Act lawsuit is excused and deemed timely filed. Otherwise, claimants would simply conjure up excuses to support the late filing and completely water down the intent of the statute of limitations. The key for a claimant is to: 1) know the statute of limitations for a Miller Act payment bond claim, 2) know the final furnishing date, and 3) timely file the payment bond claim – no excuses!

PAY-WHEN-PAID AND THE PREVENTION OF PERFORMANCE DOCTRINE

Posted on February 23, 2014June 26, 2024 by Edward Garber

The pay-when-paid doctrine is a standard provision in subcontracts to shift the risk of the owner’s nonpayment to the subcontractor. The owner’s payment to the contractor is a condition precedent to the contractor’s payment to the subcontractor. However, if there is a payment bond in place, a surety in Florida cannot rely on this contractual defense to defeat a subcontractor’s claim. (Notably, in other jurisdictions, a surety can rely on this defense.) The pay-when-paid doctrine has been discussed numerous times in the following articles: https://floridaconstru.wpengine.com/pay-when-paid-provisions-and-payment-bonds/ and https://floridaconstru.wpengine.com/subcontractors-and-unjust-enrichment-claims/ and https://floridaconstru.wpengine.com/careful-drafting-of-pay-when-paid-provisions/.

Sometimes, there is not a payment bond in place and the subcontractor is forced to assert a direct claim against the contractor. Or, perhaps, the subcontractor may not have properly preserved its lien / bond rights and its best recourse is to assert a claim against the contractor. In this situation, the contractor will be able to rely on the pay-when-paid provision in its subcontract assuming it can prove that it was not paid for the subcontractor’s work that is the subject of the dispute. This defense, however, may not be absolute. There is a legal doctrine known as the “prevention of performance” doctrine.

Florida law provides:

“Under the doctrine of prevention of performance, one who prevents the happening of a condition precedent upon which his liability is made to depend, cannot avail himself of his own wrong and thereby be relieved of his responsibility to perform under the contract.” Florida Ins. Guar. Ass’n v. Somerset Homeowners Ass’n, Inc., 83 So.3d 850, 852, n.1 (Fla. 4th DCA 2011) (internal quotation omitted).

This doctrine really has not been analyzed in the context of a pay-when-paid defense under Florida case law. Yet, now and again, a case outside of Florida addresses interesting points that are worthy of discussion.

In Moore Brothers Co. v. Brown & Root, Inc., 207 F.3d 717 (4th Cir. 2000), the Fourth Circuit (interpreting Virginia law) analyzed the prevention of performance doctrine in the context of a contractor raising the pay-when-paid defense. In this case, the contractor entered into a contract to build a private toll road in Virginia. (The contractor was also an equity partner in the ownership group.) During the drafting of the prime contract, several design issues were referenced that would result in additional payment to the contractor. One of those issues was changing the thickness of the pavement subbase material. There was strong uncertainly over the initial pavement design and it was anticipated that the thickness of the pavement subbase material would change. The construction lenders wanted to contain construction costs and insisted on certainty in determining the costs. The lenders did not want to authorize a prime contract that did not provide this certainty and the draft prime contract with examples of additional costs the lenders may have to fund did not sit well with them. To appease the lenders, the owner and the contractor agreed to remove examples of design changes or issues that would result in increased construction costs. The owner and contractor further assured the lenders that they did not anticipate substantial changes in the work (such as a change in the pavement subbase thickness). Of course, what the contractor and owner assured the lenders was not really what they believed because they anticipated a design change regarding the thickness of the pavement subbase material. Thus, the owner and contractor entered into a side agreement that was not shared with the lenders concerning the design changes / issues that would result in increased costs to the contractor.

The contractor then hired subcontractors to perform scopes of work relative to the road construction. The subcontracts contained pay-when-paid provisions. The contractor did not advise the subcontractors that design changes such as a potential change in the thickness of the pavement subbase material were hidden from the lenders and that such a change would likely not be funded by the lenders. The contractor did not seem as concerned with this because it had pay-when-paid language shifting the risk of nonpayment to the subcontractors (although the contractor did have a payment bond in place). Naturally, there was a design change that changed the thickness of the pavement subbase material and this work was performed by the subcontractors. A payment dispute originated in arbitration involving the owner, contractor, and subcontractors regarding this additional work. The arbitrator ruled that the owner must pay the contractor for this additional work and the contractor, after receiving payment, must pay the subcontractors. The owner did not pay so the contractor never paid the subcontractors contending that the pay-when-paid language does not contractually require it to pay.

Since the arbitration award was never paid, the subcontractors filed suit in federal district court which was appealed to the Fourth Circuit. Among other issues discussed in the case, the Fourth Circuit analyzed whether the contractor was required to pay the subcontractors for the additional work associated with the pavement subbase thickness in light of the pay-when-paid provision. The Fourth Circuit found that the trial court correctly applied the prevention of performance doctrine to hold the contractor responsible for the payment of the additional work. The Fourth Circuit agreed that the contractor could not rely on the pay-when-paid language in the subcontract because it was responsible for the non-payment or non-occurrence of the condition precedent (i.e., owner’s payment). Specifically, the contractor knew that the additional work would most likely need to be performed which is why this design change was called out in the draft prime agreement. However, because of lender issues, it removed this language from the final prime contract and assured the lenders that additional work was not anticipated. It then contemporaneously entered into a side agreement with the owner that was not shared with the lenders regarding the same anticipated additional work (that it assured the lenders it was not anticipating). The Fourth Circuit held:

“The prevention [of performance] doctrine does not require proof that the condition would have occurred ‘but for’ the wrongful conduct of the promisor; instead it only requires that the conduct have ‘contributed materially’ to the non-occurrence of the condition.” Moore Brothers, 207 F.3d at 725.

It is easy to see how the facts in this case as presented by the Fourth Circuit warrant the application of the “prevent of performance” doctrine. It is uncertain from this case what the lenders would have done if construction costs were increased to specifically cover the highly anticipated design change to the pavement subbase thickness or why this change was not funded through any contingency funds / line item in the loan (perhaps there was none because the lenders insisted on certainty with the costs). It is also uncertain what the lenders would have done (or what they did) regarding the submission of these additional work costs since the parties could not dispute that the work was additional contractual work. And, it is uncertain why the contractor did not obtain bids for the additional work from the subcontractors before hiring them and try to negotiate perhaps a more palatable cost knowing this additional work was likely going to occur. Even though the contractor appeared to try to appease the lenders so this project could move forward, it knew funding for the additional work would be a huge concern and it was not up front with its subcontractors regarding this potential lack of funding. Had it been up front with the subcontractors, perhaps this risk could have been specifically accounted for in the subcontract through specific language or better pricing that could have been presented to the lenders.

Notwithstanding, in the event a contractor raises a pay-when-paid defense, a subcontractor may be able to rebut this defense by arguing the “prevention of performance” doctrine, that being that the contractor caused the very non-occurrence of the payment and, therefore, should not be entitled to rely on this defense. Although this argument seems like a tough hurdle for the subcontractor since not all facts will be as egregious as the facts in this case, the contractor should still take steps to eliminate this argument by showing that it took steps to obtain payment from the owner. Subcontractors, on the other hand, that may not have bond / lien rights or want to pursue substantial claims for additional work against the contractor, may want to rely on this argument in furtherance of trying to get around the expected pay-when-paid defense.

MILLER ACT – CONSIDERATIONS INVOLVING SUBCONTRACTOR WHEN GOVERNMENT ASSESSES LIQUIDATED DAMAGES

Posted on February 22, 2014November 8, 2024 by Edward Garber

Prime contractors and subcontractors that work on federal construction projects often find themselves in the garden variety payment dispute dealing with (1) entitlement and liability for additional work and (2) project delays, especially when the government assesses liquidated damages. These issues can put the prime contractor in the undesirable position because it may not have been paid for the additional work items and the government may be assessing liquidated damages against the prime contractor for the delays.

The case of U.S. ex rel. W.W. Gay Mechanical Contractor, Inc. v. Walbridge Aldinger Co., 2013 WL 5859456 (11th Cir. 2013), illustrates this garden variety construction payment dispute scenario between a subcontractor and prime contractor on a delayed federal project. This case involves a subcontractor asserting a Miller Act payment bond claim (pursuant to 40 U.S.C. s. 3133) against the prime contractor’s surety for unpaid retainage and additional work items, as well as a breach of contract claim against the prime contractor for the same amounts. The prime contractor argued that it was entitled to withhold payment from the subcontractor due to delays to the completion date of the project that the subcontractor was responsible for causing. In particular, the prime contractor was being assessed sizable liquidated damages from the government (Navy) and although it was appealing the liquidated damages exposure through the Contract Disputes Act, it wanted to offset monies that were owed to the subcontractor based on its potential liquidated damages exposure. The prime contractor relied on subcontract provisions that contained that “time is of the essence” as to the subcontractor’s performance; that it was entitled to withhold sums from the subcontractor for its breach of contract; and that the subcontractor may be liable for liquidated damages and other damages for causing delays in the progress of the project.

At the trial court level, the district court granted partial summary judgment in favor of the subcontractor finding that the subcontractor was entitled to payment for the retainage and additional work. Attorneys‘ fees were also granted to the subcontractor.

On appeal, the Eleventh Circuit first discussed the purpose of the Miller Act and what a party needs to do to assert a Miller Act claim:

“The MIller Act protects subcontractors on federal projects by requiring contractors to post a bond to ensure payment to their subcontractors. To establish a Miller claim, W.W. Gay [subcontractor] must show (1) that it supplied labor and materials for work in the particular contract at issue; (2) that it is unpaid; (3) that it had a good faith belief that the materials were for the specified work; and (4) that jurisdictional requisites are met.” Walbridge Aldinger, 2013 WL at *1 (internal citations omitted).

Irrespective of favorable contractual provisions, the Eleventh Circuit held that the prime contractor “has failed to produce more than a ‘scintilla of evidence’ that W.W. Gay’s alleged delays resulted in the liquidated damages assessed against it by the Navy.” Walbridge Aldinger, 2013 WL at *2. Although the prime contractor tried to rely on deposition testimony that correspondence was sent to the subcontractor regarding the delays, this was not proof that the subcontractor actually caused delays to the project. This is especially true because the prime contractor was also arguing that the Navy caused delays to the project, i.e., the likely reason it was appealing the liquidated damages assessment.

The Eleventh Circuit further analyzed the issue of whether the subcontractor was entitled to monies for additional work pertaining to re-routing an underground storm pipe. The Court found that the record reflected that when the subcontractor learned of the issue regarding the planned location of the storm pipe it notified the prime contractor and the prime contractor directed the subcontractor to install the pipe in the planned location. The prime contractor then waited six weeks before sending a request for information to the government and the government responded telling the prime contractor to re-route the pipe. The prime contractor then directed the subcontractor to re-route the pipe (through the constructive change directive provision or CCD provision in the subcontract). The subcontractor then notified the prime contractor that it expects to get paid for this work and the prime contractor indicated it would pay. The government, however, only paid for a fraction of the additional work item. For this reason, the prime contractor argued that even though it directed the extra work it was only responsible for paying the subcontractor the amount allowed by “applicable provisions” of the prime contract (agreement with the government). In support of this, the prime contractor relied on the following language in its subcontract:

“Contractor may, without invalidating the Subcontract or any bond given hereunder, order extra and/or additional work, deletions, or other modifications to the Work, such changes to be effective only upon written order of Contractor. Any adjustment to the Subcontract Price or the time for completion of the Work shall be made in accordance with the applicable provisions of the Agreement between Owner and Contractor and the lump sum or unit prices set forth in Exhibit E or, in the absence of such provisions on an agreed, equitable basis. Notwithstanding any inability to agree upon any adjustment or the basis for an adjustment, Subcontractor shall, if directed by Contractor, nevertheless proceed in accordance with the order, and the Subcontract shall be adjusted as reasonably determined by the Contractor with any dispute to be resolved after the completion of the Work. If requested by the Contractor, the Subcontractor shall perform extra work on a time and material basis, and the Subcontract price shall be adjusted based on time records and materials checked by the Contractor on a daily basis.”

Yet, the prime contractor never advised what “applicable provisions” of the prime contract supported its argument. Thus, the Eleventh Circuit maintained that the subcontractor should be entitled to be paid for its work on a time and materials basis based on time sheets per the very provision the prime contractor relied upon. Notably, the Eleventh Circuit minimized the significance of the contractual language by stating:

“Even assuming that the interpretation of the contract raises issues of material fact, Walbridge is still liable, as the district court found, under the duty of good faith and fair dealing implied in all contracts. Walbridge ordered W.W. Gay to install the storm pipe despite the problem that W.W. Gay had promptly called to Walbridge’s attention; Walbridge then waited six weeks to ask the Navy for advice; and after W.W. Gay had already finished installing the pipe, Walbridge ordered W.W. Gay to reroute the pipe. W.W. Gay understandably insisted that it receive full compensation for its work, and Walbridge accepted, or at least manipulatively encouraged, this expectation. Moreover, the only reason that the Navy did not pay for W.W. Gay’s work is because of Walbridge’s initial error in judgment. Thus, Walbridge cannot now invoke the Navy’s refusal to pay to avoid its obligations to W.W. Gay.” Walbridge Aldinger, 2013 WL at *5.

CONSIDERATIONS:

It’s hard to play both sides of the fence. In this case, the prime contractor wanted to play both sides by arguing on one hand that the Navy (government) caused delays it was assessing liquidated damages for and on the other side arguing that the subcontractor caused delays. It takes more than “conjecture” or argument to establish an actual delay. If a party argues delay, it needs to prove the delay (to the critical path that contributed to the overall delay to the project’s schedule) and not just that it “may” have caused delay or that it “could” have caused the delay based on the outcome of the dispute with the government over the assessment of liquidated damages. If the prime contractor wants to employ this tactic, it should include a provision that would allow it and its surety to withhold sums for any potential delay, although unsupportable, if the government assesses liquidated damages until the government’s assessment of liquidated has been resolved and that all claims between the parties regarding such sums shall be stayed pending the resolution. Naturally, such a clause needs to be ironed out with much more specificity and thoroughly considered because there are pros and cons to the provision including whether such a provision would be enforceable against a Miller Act surety (considering suits against the surety must be filed within a year from the subcontractor’s final furnishing). Otherwise, playing both sides can be challenging unless the prime contractor is taking the position with supportable schedule analysis that the subcontractor actually caused delays to the critical path.

The entitlement to additional work items is a common dispute between subcontractors and prime contractors. Thus, it is important to ensure that there are good notice provisions in the subcontract and that the subcontract clearly specifies what a subcontractor needs to do to be entitled to additional work. In this case, the subcontractor did send notice and was directed to proceed with the work and maintained time sheets verifying its additional work amounts. Too often subcontractors do not keep track of such amounts on a time and materials basis as specified in the subcontract and/or fail to submit timely notice.

The Eleventh Circuit’s discussion of the implied obligation of good faith and fair dealing is an interesting discussion. The reason being is that it creates an argument that a subcontractor could be entitled to additional work items even if it did not truly comply with contractual provisions, especially if the subcontractor was directed to perform the work pursuant to a construction change directive or another provision.

For more information on the a Miller Act payment bond, please see https://floridaconstru.wpengine.com/522/ and https://floridaconstru.wpengine.com/an-argument-to-recover-attorneys-fees-against-a-miller-act-payment-bond/

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.

WHEN A PUBLIC SOLICITATION GOES TERRIBLY WRONG

Posted on February 15, 2014November 8, 2024 by Edward Garber

The recent Northern District of Florida opinion of Community Maritime Park Associates, Inc. v. Maritime Park Partners, LLC, 2014 WL 415955 (N.D.Fla. 2014) is a case with complex facts that illustrates what can happen if a public contract is declared void as against public policy. It illustrates what can happen when a public solicitation goes terribly wrong! In this case, the outcome was disgorgement of all profits/benefits the public body paid to its master developer and design-builder.

A. Facts and the Consultants’ Competitive Negotiations Act

The public body filed suit against its master developer for fraud and rescission of a development contract (and design-build contract). The public body is a publicly funded non-profit corporation with a board appointed by the City of Pensacola tasked to manage city owned property for purposes of a project. It was looking for a master developer for its project to competitively award the development contract pursuant to Florida’s Consultants’ Competitive Negotiations Act (“CCNA”) set forth in Florida Statutes s. 287.055. (Notably, the CCNA governs a public body’s award of professional architectural and engineering services and design-build agreements.)

Without going into all of the specifics of the CCNA, it is a statute that requires two main steps for public bodyies to competitively award professional services: (1) competitive selection and (2) competitive negotiation.

Under the competitive selection step, the public body evaluates qualifications and performance data from bidders (typically, by sending out a Request for Qualifications) and typically requires presentations regarding the qualifications by no fewer than three firms. The public body then selects in order of preference no fewer than three firms that are qualified to perform the professional services it is seeking. As the CCNA states:

“In determining whether a firm is qualified, the agency shall consider such factors as the ability of professional personnel; whether a firm is a certified minority business enterprise; past performance; willingness to meet time and budget requirements; location; recent, current, and projected workloads of the firms; and the volume of work previously awarded to each firm by the agency, with the object of effecting an equitable distribution of contracts among qualified firms, provided such distribution does not violate the principle of selection of the most highly qualified firms. The agency may request, accept, and consider proposals for the compensation to be paid under the contract only during competitive negotiations….” Fla. Stat. s. 287.055(4).

Under the competitive negotiation step, the public body then starts competitive negotiations with its preferred–most qualified–professional. “Should the agency be unable to negotiate a satisfactory contract with the firm considered to be the most qualified at a price the agency determines to be fair, competitive, and reasonable, negotiations with that firm must be formally terminated. The agency shall then undertake negotiations with the second most qualified firm.” Fla. Stat. s. 287.055(5).

Here, the public body submitted Request for Qualifications to potential master developers. After receiving qualifications and narrowing the list to four finalists, it submitted a Request for Proposals to the finalists getting their proposal for their concept for the development of the project. Land Capital, the entity it deemed the most qualified, submitted a proposal and put on a public presentation. Land Capital presented that it partnered in a joint venture with other real estate entities known as “Brass/Magi” and that Land Capital and Brass/Magi formed a specific development company, the defendant, to execute the development agreement with the public body. Land Capital was deemed to be the top-ranked developer and was, thus, the first entity the public body could engage in competitive negotiations with. During these competitive negotiations, Land Capital collapsed financially. When the public body became aware of this, it approached Land Capital and Brass/Magi represented that Brass/Magi was financially sound and there was no threat to the project. The public body went forward with the development agreement since its understanding was the defendant was a joint venture between Land Capital and Brass/Magi.

Pursuant to the proposed development agreement, the master developer (defendant) had the option of serving as the design-build contractor for an additional fee but it would need to be qualified as a design-build contractor on the date the development agreement was executed, although the design-build contract would be separately awarded. The master developer entity could not get bonding capacity to serve as the design-build contractor and had to team up with a general contractor to form a new construction company to serve as the general contractor. The public body then awarded the design-build contract to the defendant knowing the design-build contractor would be a joint venture and would not specifically be the defendant.

Then, after the development agreement was entered, the public body learned that Land Capital (the entity it deemed the most qualified) had in fact financially collapsed, that defendant was not a part of a Brass/Magi joint venture, and the defendant was a project-specific entity with no assets–a shell. For these reasons, the public body rescinded the contracts and filed suit, specifically to recoup the monies paid to the defendant.

B. The Court’s Ruling

The Northern District agreed concluded that a participant in a public procurement cannot gain an unfair competitive advantage by injecting material misrepresentations. “Having been chosen to negotiate in this statutory public procurement process based on qualifications, Land Capital and MPDP [master developer entity contracted] through their officers…had a continuing duty to disclose material information or withdraw if material qualifications were no longer met.” Community Maritime Park Associations, supra, at *14. Instead of complying with the continuing duty, Land Capital’s representatives misled the public body in order to enter into the contract. The Court, therefore, disgorged the entire development fee paid to the master developer irrespective of services that were rendered and the profit on the design-build contract. The only monies that were not disgorged were monies paid directly to third party subcontractors or other project professionals. (Notably, the public body wanted these monies repaid back too.)

C. Rumblings and Considerations

Look, there is no doubt that the master-developer (defendant) the public body hired did not meet the required qualifications. There is also no doubt that misrepresentations were made, although it is uncertain whether the misrepresentations were made in bad faith with the intent to deceive the public body. This case exemplifies:

“Where a competitive public contract was awarded in violation of a statute but in ‘apparent good faith, in an honest effort to pursue the requirements of competitive bidding statutes, and it is not shown that the contract as actually entered into is to the public’s disadvantage in any way, nor that it has been entered into with unlawful or fraudulent intent,’ the decision of whether to restrain payment to the contracting party–or, presumably the converse, whether to require complete disgorgement [of] payments received on the void contract–will rest with the court’s discretion in light of the equities involved.” Community Maritime Park Associates, supra, at *13.

And, considering the court found that the master development agreement with a shell-defendant was clearly not in the public’s advantage, disgorgement was the remedy. But, in light of the facts , the public body appeared part of the very problem it complained about and instead of there being potential accountability (perhaps there will be) disgorgement was the remedy.

For instance, the public body thought Land Capital (not a joint venture or the entity it hired) was the most qualified under the CCNA to enter into the development agreement. Even though Land Capital represented that it joint ventured with another entity to form the defendant that the public body contracted, common sense would seem to dictate that the entity was a single-purpose entity created for purposes of the project. Or, the public body should have known that the defendant was really not what it was looking for pursuant to its solicitation requirements. There was nothing that would have prevented the public body from asking to see the joint venture agreement, partnership agreement, or any other agreement demonstrating that the proposed master developer defendant was more than a sole purpose entity. If defendant was a joint venture with separate firms, there should be an agreement memorializing this. The fact remains that the public body found Land Capital its most qualified master developer–not any other entity! Then, during competitive negotiations, the public body learned that Land Capital collapsed financially. Instead of this being a pretty big red flag since, again, Land Capital was its preferred entity, it proceeded with the negotiations because the supposed other joint venture partner to the defendant represented it was financially sound. Well, the other joint venture partner should really have not even been in the equation because Land Capital was the entity it deemed the most qualified. Nevertheless, not only did the public body forge ahead with the negotiations and contract, but then allowed the defendant to serve as the design-builder provided it had the proper license at the time the development agreement was executed. But, it knew that the defendant was not licensed at the time (there was a delay in the execution so the defendant could obtain a license) and did not have the bonding capacity to provide public payment and performance bonds. So, instead of both of these raising potentially more red flags (since lack of bonding capacity would indicate that the defendant did not have the financial wherewithal that complied with the public body’s qualifications and lack of licensure may have indicated that it not have certain design build qualifications), the public body allowed the defendant to joint venture with a contractor that could provide the bonding capacity and then separately awarded the contract to the joint-venture design-builder.

The point is that neither party in this situation appears to be entirely blameless. But, because the public body utilizes public funds to competitively award a contract, what it could have done or should have done (the what ifs, could ifs, or should ifs) to potentially avoid this scenario become moot due to the perception and reality that it was bamboozled into paying public funds to a master developer that was neither qualified nor financially solvent pursuant to the public solicitation. Certainly, the master developer entity (defendant) should not get a windfall or benefit from misrepresentations that undermine the competitive solicitation process and disgorgement of its benefit (its profit and monies paid to it) make sense. Yet, now the public body is most likely left to re-start the public procurement process to locate a new qualified master developer and new design builder.