WAIVER OF ARBITRATION BY NOT SUBMITTING CLAIM TO INITIAL DECISION MAKER…REALLY!

Posted on August 15, 2021August 15, 2021 by Edward Garber

Arbitration is a form of dispute resolution that is a creature of contract. If you want an arbitrator to resolve your disputes, you need to ensure there is an arbitration provision in your contract. There are pros and cons to arbitration. One con is you lose the right to appeal. A couple of pros, however, are that your arbitrator(s), which you generally have some control in the selection of, will be versed in the construction industry and it can be a more efficient forum to resolve disputes in the times of COVID. Once you have your scheduling conference with the appointed arbitrator(s), you will be able to agree upon a set final hearing (trial) time and have milestone dates that work backwards from the final hearing date. This is much more efficient than being placed on an unrealistic trial docket or having to deal with the gamesmanship of motions just to be able to get your case at-issue for trial.

However, the right to arbitrate your dispute can be waived. This was the issue in Leder v. Imburgia Construction Services, Inc., 2021 WL 3177338 (Fla. 3d DCA 2021), which I will be the first to tell you the ruling is quite baffling to me. In a nutshell, the contractor, by not complying with the submission of a claim to the Initial Decision Maker was found to have waived the dispute resolution provision in the AIA contract. Not sure this makes sense, but this was the ruling.

The contract, which was clearly an AIA contract, between the owner and contractor contained a dispute resolution provision. It contained an arbitration provision to resolve disputes. However, prior to arbitration, there were other dispute resolution steps parties had to follow. The parties were required to submit claims to the Initial Decision Maker. In this contract, the parties identified the “Miami Shores Village Building Department Official” as the Initial Decision Maker. The AIA defaults to the architect as the Initial Decision Maker, but sometimes parties will agree on a third-person to serve in this role. (I have never seen parties select a public body or official to serve in this role!). The Initial Decision Maker’s decision is a condition precedent to mediation, which is then a condition precedent to litigation. This is boilerplate AIA language in contracts with a contractor and owner.

The owner filed suit against the contractor after the contractor abandoned the project due to a dispute over a change order. The contractor moved to dismiss the suit based on the arbitration provision. The owner argued the contractor waived the right to arbitrate by not complying with the dispute resolution provision prior to abandoning the project, i.e., by not submitting the change order dispute to the Initial Decision Maker. The trial court found the owners’ argument without merit and dismissed the complaint based on the arbitration provision. The appellate court, on the other hand, found the owners’ waiver argument compelling and reversed the dismissal.

The Owners contend that the arbitration provision in the contract is unenforceable as it was waived. We agree.

Although a dispute arose between the parties, neither party initiated a claim with the Initial Decision Maker. Under the contract, a condition precedent to mediation is filing a claim with the Initial Decision Maker, and a condition precedent to arbitration is demanding mediation of the Initial Decision Maker’s decision. In this case, either party had the ability to initiate a claim with the Initial Decision Maker because the dispute relating to the fifth change order affected both parties and was related to the construction contract. However, neither party elected to do so.

***

In the instant case, the Contractor waived its right to arbitrate based on its pre-litigation action and the language in the parties’ contract. As stated above, prior to binding arbitration, there are other steps that the parties to the contract must take to preserve its contractual right to arbitrate—submitting a claim to the Initial Decision Maker, and thereafter, pursuing mediation. Neither party utilized this procedure to resolve their dispute relating to the…change order, including taking the first step—initiating a claim with the Initial Decision Maker. As such, we conclude that the parties waived their right to arbitrate under the terms of their contract. Therefore, we reverse the order granting the Contractor’s motion to dismiss the amended complaint and, on remand, the trial court is instructed to order the Contractor to file an answer to the Owners’ amended complaint.

Leder, supra, at *2-3.

The morale of this case is if there is a dispute resolution provision — comply with it — versus having to deal with this bonkers ruling where the court deemed a waiver of the arbitration provision and the entire dispute resolution process just because the claim had not been submitted to the Initial Decision Maker!

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.

INDUSTRY FORM CONTRACTS SERVE AS A TEMPLATE FOR YOUR CONSTRUCTION CONTRACT

Posted on October 14, 2016August 8, 2019 by Edward Garber

Recently, I put on a presentation on construction contracts–considerations when using an industry form contract as the template for your construction contract. There are good industry form contracts that contemplate many different project delivery methods and objectives. These industry form contracts are promulgated by widely respectable organizations including the AIA, ConsensusDocs, EJCDC, and DBIA. Based on your needs, these associations also promulgate industry form exhibits to use with your contract (e.g, payment application, schedule of values, payment bond, performance bond, dispute review board, electronic communications protocol, BIM, certificate of substantial completion, change order, construction change directive, green building, RFI, and many more!).

Below is a chart I put together of a comparison of some of the common risk allocation provisions in the standard general conditions between an owner and contractor in the AIA, ConsensusDocs, and EJCDC as a frame of reference. All of these standard form agreements serve as valuable templates, but they still require modifications based on the objectives of the parties and the preferred project delivery method.

[gview file=”https://floridaconstru.wpengine.com/wp-content/uploads/2016/10/AIA-Consensus-EJCDC-Comp..pdf”]

IS AN INITIAL DECISION MAKER, PROJECT NEUTRAL, OR DISPUTE RESOLUTION BOARD RIGHT FOR YOU?

Posted on July 3, 2016July 3, 2016 by Edward Garber

Recently, I participated in a roundtable hosted by JAMS with experienced South Florida construction lawyers and retired circuit court judges to discuss the pros and cons of utilizing an initial decision maker (“IDM” and also referred to as a project neutral) or a dispute resolution board (“DRB”) to resolve disputes on construction projects. The IDM and DRB are designed to resolve disputes, specifically claims (whether for time, money, or both), during construction to keep the project progressing forward without being bogged down by the inevitable claim. There are numerous avenues to resolve disputes without resorting to filing a lawsuit or a demand for arbitration. The thought is that dispute resolution will be facilitated by techniques designed to assist the parties with the resolution of claims during construction. While direct discussions between the parties, meetings with the executives for business decision purposes, mediations, etc., are certainly helpful, sometimes these avenues are simply not enough to truly resolve a complex claim on a construction project that occurs during construction.

This is where the IDM and DRB come into play. Perspectives on the value of having an IDM or DRB and their defined roles are based on experiences. But, what is important is that these experiences can help you determine whether an IDM or DRB is right for your project to resolve claims during construction and, if so, how you want to contractually frame the role of the IDM nor DRB. As you know, the larger and more complex the project the greater likelihood that there will be disputes that occur during the course of construction. Knowing this, how do you want these disputes to be resolved during construction, and who do you want to resolve these disputes, so that (a) the project continues to move forward notwithstanding such dispute, (b) the parties believe the agreed-upon resolution technique will truly assist them to resolve the inevitable claim without having to file a lawsuit or demand for arbitration down the road, and (c) the person (or persons) resolving the dispute is deemed as credible and objective.

For example, the American Institute of Architects (AIA) incorporates the concept of an IDM to its General Conditions (see A201-2007) as the person that renders initial decisions on claims. If no person is selected as the IDM, the fallback is to have the architect serve in this role. The IDM is tasked with reviewing the claim and can approve the claim, reject the claim, request additional data, request a response to the claim, suggest a compromise, or advise the parties he/she is unable to render a decision on the claim. The General Conditions further provides:

15.2.6.1 Either party may, within 30 days from the date of an initial decision, demand in writing that the other party file for mediation within 60 days of the initial decision. If such a demand is made and the party receiving the demand fails to file for mediation within the time required, then both parties waive their rights to mediate or pursue binding dispute resolution proceedings with respect to the initial decision.

See AIA-A201, s. 15.2.6.1.

The Consensus Documents (ConsensusDocs) incorporates the concept of a project neutral (similar to IDM) or DRB in its General Conditions if direct discussions between the parties reach an impasse. The General Conditions provide:

12.3.1 The Project Neutral/Dispute Review Board shall be mutually selected and appointed by the Parties and shall execute a retainer agreement with the Parties establishing the scope of the Project Neutral/Dispute Review Board’s responsibilities. The costs and expenses of the Project Neutral/Dispute Review Board shall be shared equally by the Parties. The Project Neutral/Dispute Review Board shall be available to either Party, upon request, throughout the course of the Project, and shall make regular visits to the Project so as to maintain an up-to-date understanding of the Project progress and issues and to enable the Project Neutral/Dispute Review Board to address matters in dispute between the Parties promptly and knowledgeably. The Project Neutral/Dispute Review Board shall issue nonbinding findings within five (5) business Days of referral of the matter to the Project Neutral, unless good cause is shown.

12.3.2 If the matter remains unresolved following the issuance of the nonbinding finding by the mitigation procedure or if the Project Neutral/Dispute Review Board fails to issue nonbinding findings within five (5) business Days of the referral, the Parties shall submit the matter to the binding dispute resolution procedure designated in Paragraph 12.5.

See ConsensusDocs 200-2007, s. 12.3.1, 12.3.2.

If you like the concept of the IDM (project neutral) or DRB, then you need to consider whether you really want the architect or engineer of record to serve in any role, especially if you are the contractor. As the contractor, your claims may derive from the contract documents and you probably want a more objective party to resolve such claims. So the question becomes who do you trust to serve in this role? A practicing construction attorney? A mediator or arbitrator from a company like JAMS or the American Arbitration Association that has experience with alternate dispute resolution? An industry expert or experts that have no vested interest in the project other than to render initial decisions on claims? Do you want a combination of all to serve on a DRB? Does this person(s) participate in project meetings? This is an important consideration.

Next, what is the process you want the IDM or DRB to undertake to resolve claims? This process is important from a timing standpoint and proof standpoint. Do you want the IDM or DRB to simply resolve claims on paper; in other words, render a decision by virtue of the claim submitted and any response provided? Do you want the IDM or DRB to hear testimony from fact witnesses and, perhaps, experts? Do you want the IDM or DRB to hear legal argument from counsel? Do you want the IDM or DRB to have the authority to simultaneously examine experts to get at the heart of the truly disputed technical issues? And, when do you want the IDM or DRB to step in and render an initial decision? In other words, do you want direct discussions between the parties, mediation, a meeting with project folks, or a meeting with the business executives to take place first? After the initial decision? Or never?

Then, what is the avenue you want to undertake if you want to contest (or appeal for lack of a better term) the IDM or DRB’s initial decision as to a claim occurring during construction? This is very important because let’s assume a party does not like the initial decision. You want a mechanism to continue to discuss the claim and, perhaps, appeal the claim if discussions reach an impasse without that initial claim becoming binding. The next step would naturally be binding dispute resolution, whether arbitration or litigation, to finally resolve the merits of the claim. With this eventuality in mind, do you want the trier of fact (arbitrator, judge, or judge) to know that an IDM or DRB rendered an initial decision on this very issue and that decision was “x”? This is an important consideration because human nature suggests that if the IDM or DRB is an objective party(ies) / industry professional(s), the fact that they rendered the initial decision of “x” will probably carry credibility with the trier of fact. And, that credibility may be greater based on how the IDM or DRB rendered the decision. Think about it. If the decision was based on evidence or the consideration of testimony and experts, which may be analogous to the evidence and expert opinions presented at trial or arbitration, then it makes sense that the trier of fact is going to defer (perhaps unknowingly) to what the objective party / industry professional(s) decided regarding the claim. Conversely, if the evidence and expert opinions are different than those presented to the IDM or DRB, does this alteration impact the credibility of the witnesses or the claim? Although, knowing this may make it less likely to actually pursue binding arbitration or litigation as to the claim considering the merits of the dispute had been decided by a knowledgeable / objective party(ies).

Finally, how is the IDM or DRB going to be funded – how are the costs of the IDM or DRB going to be budgeted and allocated? This is another important consideration because this could be a costly endeavor. But, the costs may be worth it if the IDM or DRB is considered objective by the parties and the parties are truly engaged in the during construction dispute resolution techniques designed to avoid litigation or arbitration which could become more costly. Also, the costs may certainly be worth it–the larger or more complex the project–when you know going into it that there will be claims and it is in the project’s best interest to promptly resolve the claims.

CONVERTING THE DREADFUL TERMINATION FOR DEFAULT INTO A TERMINATION FOR CONVENIENCE

Posted on October 5, 2014October 5, 2014 by Edward Garber

Contractors, whether prime contractors or subcontractors, terminated for default (also known as termination for cause) want to convert that termination for default into a termination for convenience. The termination for default ultimately means the contractor materially breached the contract and would be liable for any cost overrun associated with completing their contractual scope of work. On the other hand, if the termination for default is converted into a termination for convenience, the contractor would be entitled to get paid for the work performed through the termination along with reasonable profit on the work performed and, depending on the contract, reasonable anticipatory profit on the work NOT performed. A huge difference and the fundamental reason contractors terminated for default should aim to convert that termination for default into a termination for convenience!

Under the Federal Acquisition Regulations, contractors terminated for convenience may recover reasonable profit on work performed, but NOT profit for work not performed. (See F.A.R. s. 52.249-2 and 49.202)

But, under the standard AIA A201 General Conditions, if an owner terminates a general contractor for convenience, “the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.” (See AIA A201, para. 14.4.3)

Yet, under the ConsensusDocs 200, “If the Owner terminates this Agreement for Convenience, the Constructor shall be paid: (a) for the Work performed to date including Overhead and profit; and (b) for all demobilization costs and costs incurred as a result of the termination but not including Overhead or profit on Work not performed.” (See Consensus Docs, 200, para. 11.4.2)

As reflected above, a contractual provision will dictate the costs recoverable when there is a termination for convenience. The AIA A201 General Conditions is favorable to a contractor by providing for reasonable overhead and profit on the work not executed. Whether reasonable profit on work not performed is recoverable, the objective should always be converting that termination for default into one for convenience so that at least the contractor can recover for work performed and profit on the work performed along with other associated termination costs that the contract may provide.

When a party is terminated for default, the key issues that will arise will typically be: (a) whether the termination for default was proper, i.e., whether the terminating party procedurally complied with the termination for default provision in the contract, (b) whether the cause or default was material and rose to the level of constituting a default termination, and (c) converting the termination for default into a termination for convenience and the recoverable costs pursuant to the termination for convenience provision in the contract. Again, a termination for default will likely mean that the terminated party owes the terminating party money associated with the overrun for completing their scope of work. A termination for convenience, on the other hand, will likely mean that the terminated party is owed money for work it performed irrespective of any overrun experienced by the terminating party.

A recent ruling in U.S.A. f/u/b/o Ragghianti Foundations III, LLC v. Peter R. Brown Construction, Inc., 2014 WL 4791999 (M.D.Fla. 2014), illustrates a dispute between a prime contractor and a subcontractor on a federal project after the prime contractor default terminated the subcontractor. The prime contractor hired a subcontractor to construct the foundation, slab on grade, and site concrete. As the subcontractor was pouring the slab on grade concrete, it was determined that there were deficiencies in the concrete. The prime contractor sent the subcontractor notice under the subcontract regarding the deficiencies and that the subcontractor needed to provide an action plan prior to future concrete placement. Although the subcontractor responded with a plan including when it was going to demolish the defective portion of the slab, it failed to live up to its own recovery schedule. Accordingly, the prime contractor terminated the subcontractor for default and incurred costs well in excess of the subcontractor’s original subcontract amount to complete the subcontractor’s scope of work. The subcontractor filed suit against the prime contractor and its Miller Act surety and the prime contractor counter-claimed against the subcontractor.

There were numerous interesting issues raised in this case. This article will only touch upon a couple of the legal issues. The first issue was whether the prime contractor properly terminated the subcontractor for default pursuant to the subcontract; if not, the termination should be deemed a termination for convenience. The Court found that the termination was procedurally proper, but declined to determine whether the termination was wrongful, perhaps because the Court determined that once the termination for default was properly implemented pursuant to the subcontract there was no reason to delve into any further analysis. In other words, once the prime contractor procedurally, properly terminated the subcontractor for default pursuant to the subcontract, it appeared irrelevant whether the cause forming the basis of the default was material. This implication is certainly beneficial for the prime contractor and it is uncertain why the Court did not entertain the argument as to whether the procedurally proper termination was wrongful. This determination would seem important because if the termination was wrongful, the terminating contractor would be responsible for its own cost overrun in addition to the costs incurred by the terminated subcontractor. Although, in this case, by the Court finding that the termination for default was procedurally proper, the Court seemed to recognize that there was cause supporting the implementation of the termination for default; otherwise, the termination for default would not have been procedurally proper.

The next issue discussed in this case pertained to recoverable delay-type damages under the Miller Act. The Court expressed:

A Miller Act plaintiff is entitled to recover under the bond the out-of-pocket labor and expenses attributable to delays.

***

[A] damage claim against a surety that does not flow directly and immediately from actual performance [of its agreement] is barred by the Miller Act….A subcontractor cannot recover on a Miller Act payment bond for the cost of labor and materials provided after the termination of work under a government construction project, and cannot recover profits on out-of-pocket expenditures attributable to delay.

Ragghianti Foundations, supra, at *18, 19 (internal quotations and citations omitted).

What does this mean? This means that a subcontractor is not entitled to recover against a Miller Act surety: (a) anticipated lost profits on work not performed, (b) delay-related costs that do not flow directly and immediately from actual performance under the subcontract, (c) profit on delay-related costs, and (d) costs incurred after the termination of the work. These are all categories of damages that are applicable to a terminated subcontractor that it will NOT be able to recover against a Miller Act surety. This is important because if a subcontractor is looking to capitalize on its damages for converting a termination for default into one of convenience, it may want to sue the terminating contractor so that it is not leaving any damages on the table by only suing the Miller Act surety.

CONSTRUCTION CONTRACTS AND YOUR “ORDER OF PRECEDENCE” CLAUSE

Posted on September 28, 2014September 28, 2014 by Edward Garber

During the negotiation of construction contracts there is often consideration as to the priority of the Contract Documents. In other words, in the event of a conflict with the Contract Documents, what is the priority that you want to govern the conflict? To address this, parties may include an order of precedence clause that clarifies how conflicts with the Contract Documents are to be interpreted by prioritizing the Contract Documents.

The AIA Document A201 (General Conditions) deems the Contract Documents as complementary (see § 1.2.1 -“The Contract Documents are complementary, and what is required by one shall be as binding as if required by all….”) without including an order of priority to determine which Contract Document truly governs a conflict. The AIA does not really favor establishing an order of precedence; but, if supplementary conditions are added to modify the A201 General Conditions, the AIA does suggest model language:

§ 1.2.1.1 In the event of conflicts or discrepancies among the Contract Documents, interpretations will be based on the following priorities:

1. Modifications.

2. The Agreement.

3. Addenda, with those of later date having precedence over those of earlier date.

4. The Supplementary Conditions.

5. The General Conditions of the Contract for Construction.

6. Division 1 of the Specifications.

7. Drawings and Divisions 2–49 of the Specifications.

8. Other documents specifically enumerated in the Agreement as part of the Contract Documents.

The EJCDC C-700 (General Conditions) contains virtually identical language as the AIA A201 deeming the Contract Documents as complementary: (see § 3.01.A- “The Contract Documents are complementary; what is required by one is as binding if required by all.”)

The ConsensusDocs 200 (Agreement and General Conditions) takes a much more proactive approach regarding conflicts by containing the following clauses:

14.2.2 In case of conflicts between the drawings and specifications, the specifications shall govern….

14.2.5 ORDER OF PRECEDENCE In case of any inconsistency, conflict, or ambiguity among the Contract Documents, the documents shall govern in the following order: (a) Change Orders and written amendments to this Agreement; (b) this Agreement; (c) subject to subsection 14.2.2 the drawings (large scale governing over small scale), specifications and addenda issued prior to the execution of this Agreement or signed by both Parties; (d) information furnished by the Owner pursuant to subsection 3.13.4 or designated as a Contract Document in section 14.1; (e) other documents listed in this Agreement. Among categories of documents having the same order of precedence, the term or provision that includes the latest date shall control. Information identified in one Contract Document and not identified in another shall not be considered a conflict or inconsistency.

Even Federal Acquisition Regulation 52.236-21 incorporated into government prime construction contracts contains language that, “In the case of difference between drawings and specifications, the specifications shall govern.”

There are certainly pluses and minuses to creating an order of precedence provision. A minus is that implementing a provision takes away from the complementary nature of the Contract Documents. Thus, whatever hierarchy you determine and include is a hierarchy you need to understand because you will be living by it. There is also the concern that the provision is incorporated to perhaps serve as a substitute for properly executed, coordinated, and detailed plans and specifications or is incorporated to reduce the contractor’s risk to check the Contract Documents to address any inconsistencies on the front end. On the other hand, as a plus, these clauses provide necessary guidance in the event there is a claim due to a conflict with the Contract Documents. Most of the time, I tend to favor an order of precedence provision to prioritize direct conflicts in the Contract Documents. Depending on whether you are the owner, the contractor, or even a subcontractor, forethought should be given to the order of precedence of the Contract Documents since there is a good chance this order will be relied on once construction commences.

To illustrate the application of an order of precedence provision, in Hensel Phelps Const. Co. v. U.S., 886 F.2d 1296 (Fed.Cir. 1989), a prime contractor sought an equitable adjustment of its contract. The contractor relied on an order of precedence provision that required the specifications to govern over any conflict between the drawings and specifications (see routinely incorporated F.A.R. 52.236-21). In this case, the specifications called for a minimum of 18” of fill under concrete floor slabs; however, the drawings called for 36” inches of fill. The contractor priced the job with the 18” of fill. During construction, the contracting officer directed the contractor to install 36” of fill which triggered the equitable adjustment. The government, however, argued that the contractor knew of this discrepancy all along. The Federal Circuit Court nevertheless held that the contractor should be entitled to an equitable adjustment since the specifications had priority over this direct conflict:

“Reliance was properly placed on the order of precedence clause to resolve a discrepancy between the specifications and the drawings and this resolution was reflected in the bid. When the government insisted on 36 inches of fill, rather than the 18 inches called for in the specifications, the contractor was required to perform more work than the contract required and more than its bid price contemplated. Consequently, on the record here neither Hensel Phelps [prime contractor] nor Watts [subcontractor] can be said to have profited or otherwise benefited by reliance on the order of precedence clause.”

Hensel Phelps, 886 F.2d at 1299.

HMM–WAIVER OF SUBROGATION–SHOULD IT STAY OR SHOULD IT GO?!?

Posted on September 5, 2014September 5, 2014 by Edward Garber

Parties involved in construction are familiar with the phrase “waiver of subrogation” because there is commonly, and virtually always, a waiver of subrogation provision in the construction contract. For instance, the AIA Document A201 (General Conditions) contains a waiver of subrogation provision for damages or loss covered by builder’s risk property insurance. A waiver of subrogation provision prevents an insurance company from paying a claim and then stepping in the shoes of the insured (through subrogation) to sue a waived third party responsible for the claim. To ensure the waiver of subrogation provision does not conflict with any other rights in the contract, the A201’s waiver of subrogation provision provides: “A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.”

For example, let’s assume a fire during construction caused substantial damage to an owner’s property. The owner submitted a builder’s risk claim and it was determined that the damage caused by the fire (peril) was covered. Let’s assume the fire was attributed to the negligence of the contractor and its electrical subcontractor. With waiver of subrogation language, the carrier cannot pay the claim to the owner and then subrogate to the interests of the owner to pursue claims directly against the contractor and/or electrical subcontractor to recoup the proceeds it paid to the owner. This waiver would apply even though the owner’s contract with its contractor required the contractor to indemnify the owner for damage caused by the contractor or the contractor’s subcontractor’s negligence. Without the waiver of subrogation language, the carrier would not be deprived of this subrogation right.

In addition to the waiver of subrogation relating to builder’s risk property insurance, parties are requesting waivers of subrogation endorsements for CGL policies and other liability policies. With CGL policies, the waiver of subrogation endorsement is referred to as the “Waiver of Transfer of Rights of Recovery Against Others to Us” endorsement. Sometimes parties want a blanket waiver or at least they want to know they are specifically identified in the endorsement to ensure the CGL carrier waives a subrogation claim against it if the carrier pays out insurance proceeds. This endorsement is important because without it a party could be breaching its insurance policy and voiding applicable coverage by contractually agreeing to waive subrogation that is in conflict with the policy’s subrogation language. If a carrier is willing to issue this endorsement (and there are times it may not), it will usually come at a cost through a higher premium, etc., since the waiver of subrogation impacts an insurer’s risk assessment.

I like contractual waiver of subrogation language relating to builder’s risk property insurance claims. As long as the insurance broker and carrier are aware of the contractual waiver so that there is not any issue that the waiver impacts policy language / coverage (and, the broker and carrier should inquire since it’s become boilerplate language in construction contracts), the waiver of subrogation allows a covered claim to be paid without an otherwise waived party worried about whether the carrier is going to try to later recoup losses against it.

From an owner or contractor’s perspective, I also usually like the idea of the party being hired to provide the waiver of subrogation endorsement / waiver of transfer of rights endorsement in its CGL policy irrespective of the requirement to identify the hiring (or paying) party as an additional insured. The primary reason is that in the event there is any issue whatsoever with the additional insured status under the hired party’s policy such that it does not apply to the hiring party (e.g., additional insured status of a general contractor under its hired subcontractor’s policy), with the waiver of subrogation, if the hired party’s policy pays it has at least waived its right to recoup that money against the hiring party through subrogation.

I know there are some parties that do not like waiver of subrogation language, especially with CGL policies, due to underwriting issues that it poses and/or potential increased premium costs associated with the endorsement. Sure, this is true. But, a waiver of subrogation does enable a dispute to be streamlined by allocating risk to a party that is in a position to control the risk and has insurance to cover that risk and by reducing continued litigation associated with a claim.

A BUILDER’S RISK INSURANCE TIDBIT

Posted on August 29, 2014August 29, 2014 by Edward Garber

Builder’s risk insurance is a form of all-risk property insurance that protects an owner’s property / project from perils during the course of construction subject to the exclusions identified in the policy. Sometimes there is the question when negotiating a contract between an owner and general contractor whether to name the contractor as an additional named insured (along with the owner) and/or a loss payee under the builder’s risk insurance policy procured by the owner. A contractor prefers, and should prefer, to be included as a named insured and/or loss payee to ensure it is protected and paid for a covered loss during construction. In reality, it is much better for the contractor to be identified as a named insured; being identified as a loss payee simply means the contractor can be paid insurance proceeds (it can be named on the check), but it is not an insured under the policy.

Each of the standard form construction agreements contain slightly different language regarding a contractor’s interest under a builder’s risk policy procured by the owner. For example, the AIA would require the builder’s risk insurance to include the interests of the owner, the general contractor, subcontractors, and sub-subcontractors. Ok; this makes sense but it does not specifically require the owner to name these entities as named insureds under the policy and/or loss payees. Rather, the AIA contains language that allows the owner to adjust the claim as a fiduciary with the payment made to the owner as a fiduciary. The ConsensusDOCS provide better language for the contractor that would require the owner to name the contractor as a named insured. Again, being identified as a named insured is preferable as it allows the contractor to assert a builder’s risk claim directly against the policy as an insured. And, from an owner’s perspective, sometimes it is preferable to allow the contractor to assert a claim for a loss associated with a peril that may be covered even if the peril is due to the negligence of the contractor. While the standard form contracts require the owner to bear the cost of the deductible, an owner may want to shift that deductible to the contractor if the contractor is seeking to recoup losses under the policy for a peril due to its negligence.

Finally, the standard form contracts do contain a waiver of subrogation for losses against the owner, contractor, subcontractors, etc. to the extent covered by property insurance. This means that the property insurer is waiving rights to recoup insurance proceeds it paid associated with a claim against a third party included in the waiver of subrogation provision. This provision should not be deleted as the contractual waiver of subrogation benefits both the owner and contractor.

THE IMPORTANCE OF SAFETY

Posted on December 1, 2013December 1, 2013 by Edward Garber

Participants in construction NEED to have safety programs and protocols. Many contractors do in order to minimize injury and prevent death and many even employ a safety officer on their projects. Safety protocols are also important to ensure compliance with the Occupational Safety and Health Administration’s (OSHA) health and safety regulations. Safety programs and common contractual provisions require parties to keep their work environment clean and without debris. For example, section 3.15.1 of the AIA A201 General Conditions (2007) provides:

“The Contractor shall keep the premises and surrounding area free from accumulation of waste materials or rubbish caused by operations under the Contract. At completion of the Work, the Contractor shall remove waste materials, rubbish, the Contractor’s tools, construction equipment, machinery and surplus materials from and about the Project.”

Safety programs are not only important for contractors and subcontractors, but also for those invitees that are invited to the construction project. The case of Skala v. Lyons Heritage Corp., 38 Fla. L. Weekly D2485b (Fla. 2d DCA 2013), exemplifies what can happen if an invitee of a general contractor gets injured from construction debris. In this case, the general contractor on an ongoing residential project was interested in hiring a new tile installer for the project. There was an issue with the performance of the original tile installer. The new tile installer was asked to inspect the installed tile work in order to provide an estimate as to what it would cost to fix and complete the work. A contract was not executed and there was no confirmation that a price would even be reached. During the inspection, the new tile installer tripped and fell on known and obvious construction debris while entering the house and suffered fractures in both of this arms. The new tile installer sued the general contractor for negligence asserting that the contractor failed to maintain the premises in a safe condition. The trial court entered summary judgment in favor of the general contractor.

On appeal, the Second District found that the new tile installer was a business invitee (i.e., a person invited to property by the possessor of the property)–”because Mr. Skala [new tile installer] was a business invitee on the property, Lyons Heritage [general contractor], as the possessor of the premises, owed him a duty, as a matter of law, to maintain the premises in a reasonably safe condition.” Skala, supra (internal quotation omitted).

The general contractor, however, would not be liable for injuries caused by known or obvious dangers, such as the known and obvious construction debris, unless it should have anticipated the injuries despite the known or obvious nature of the dangers. This is referred to as the obvious nature doctrine: “The obvious danger doctrine provides that an owner or possessor of land is not liable for injuries to an invitee caused by a dangerous condition on the premises when the danger is known or obvious to the injured party, unless the owner or possessor should anticipate the harm despite the fact that the dangerous condition is open and obvious.” Skala, supra, quoting DeCruz-Haymer v. Festival Food Mkt., Inc., 117 So. 3d 885, 888 (Fla. 4th DCA 2013). Stated differently, the possessor of the property can be held liable for the obvious dangerous condition if he can reasonably foresee that the condition will cause harm and will be encountered by the invitee. Id. quoting Ahl v. Stone Sw., Inc., 666 So. 2d 922, 925 (Fla. 1st DCA 1995) (“A reasonable probability to expect harm to an invitee from known and obvious dangers may arise . . . if the landowner may expect that the invitee will encounter the known or obvious danger, because, to a reasonable person in the invitee’s position, the advantages of [facing the danger] would outweigh the apparent risk.”)

The Second District reversed the summary judgment finding an issue of fact existed as to whether the exception to the obvious danger doctrine applied, that being that the general contractor should have anticipated that the new tile installer would encounter the known and obvious construction debris because, to a reasonable person in the installer’s position, the advantages of facing the construction debris would outweigh the risk.

If the construction debris was not known and obvious to the new tile installer, the general contractor would have also been sued in negligence under a theory that it breached its duty of warning the new tile installer of a latent dangerous condition. See Skala, supra, n. 3 (finding that the general contractor had the duty to warn the new tile installer / invitee of latent dangerous conditions).

This case illustrates one example of the importance of safety. Safety programs should not be taken lightly! Sometimes, with business invitees, it is good practice to have them provide a release before they enter the property to the owner, contractor, and applicable parties.

As an aside, the Concrete Construction Magazine in November 2013 tweeted an interesting 2010 statistic from the United States Department of Labor (the OSHA agency falls within the Department of Labor) itemizing the most common OSHA violations in 2010 were for scaffolding, fall protection, stairways and ladders, personal protective equipment, electrical, health hazards, general provisions, and trenching.

WHAT IS SUBSTANTIAL COMPLETION?

Posted on November 8, 2013November 8, 2013 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.

CAREFUL DRAFTING OF ARBITRATION PROVISIONS TO ENSURE THE STATUTE OF LIMITATIONS APPLIES TO CLAIMS RESOLVED THROUGH ARBITRATION

Posted on November 27, 2011November 27, 2011 by Edward Garber

Many construction contracts include arbitration provisions as the means to resolve a dispute instead of resorting to litigation. Certain owners prefer to resolve their disputes with contractors through arbitration and certain contractors, likewise, prefer to resolve their disputes with subcontractors through arbitration.

The case of Raymond James Financial Services, Inc. v. Phillips, 36 Fla. L. Weekly D2479a (2d DCA 2011), certified the following question to the Florida Supreme Court:

“Does Section 95.011, Florida Statutes, apply to arbitration when the parties have not expressly included a provision in their arbitration agreement stating that it is applicable.”

While this case was not a construction case, the question certified to the Florida Supreme Court was a fundamental issue that applied to ALL arbitration provisions. Section 95.011 is included in Florida Statutes Chapter 95 (“Chapter 95”) dealing with the statute of limitations for actions. The statute of limitations requires lawsuits to be brought within the specified timeframe set forth in Chapter 95 or else the action is time-barred, meaning it cannot properly be asserted under the law. In this case, however, the Second District found that there was nothing in the arbitration provision at-issue that required actions to be brought within the limitations periods set forth in Chapter 95 and, along these lines, nothing in Chapter 95 clarified that the statutes of limitations for actions was intended to apply to disputes resolved through arbitration.

This decision was crucial because if the statute of limitations is not intended to apply to disputes resolved through arbitration, and nothing in the arbitration provision clarifies that the statute of limitations periods set forth in Chapter 95 are intended to apply, then there is technically NO time period for when a dispute needs to be initiated because they could never be time-barred under the law. The corollary of this is that it could open arbitration floodgates because parties that thought they could no longer bring an arbitration claim under the law could now assert an argument that their claim was never time-barred under the law.

Luckily, the Florida Supreme Court answered the Second District’s certified question in the affirmative holding that the statute of limitations DOES APPLY TO ARBITRATION PROCEEDINGS!!! See Raymond James Financial Services, Inc. v. Phillips, 126 So.3d 186 (2013). This means that the defense of statute of limitations can be raised in an arbitration proceeding as a basis to bar an untimely filed claim.

With respect to construction contractors, parties that utilize the AIA Agreements (promulgated by the American Institute of Architects) that select arbitration as the dispute resolution procedure should still safely ensure the agreement contains a provision to the effect:

“In no effect shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim would be barred under the applicable statute of limitations.”

The AIA standard form agreements usually include this provision almost verbatim. This provision should not be deleted. When drafting or negotiating an AIA agreement that includes an arbitration provision, a party should ensure that language to the effect is included in the agreement and not deleted or substantially manipulated so as to render it ambiguous. Also, parties that do not use an AIA agreement and prefer arbitration need to draft such a provision or mimic one after the provision used in the standard form AIA agreements to ensure the statute of limitations applies to claims / disputes resolved through arbitration no matter what.