NOTICE AND CLAIMS PROVISIONS IN CONTRACTS MATTER…A LOT

Posted on February 12, 2023May 14, 2023 by David Adelstein

Technical contractual provisions in contracts can carry the day. Whether you like it or not, and whether you appreciate the significance of the provisions, they matter. Notice provisions in a contract mean something. Following the claims procedure in a contract means something. The moment you think they don’t mean anything is the moment they will be thrown in your face and used as a basis to deny your position for additional money or time. You may think these provisions are being used as a “gotcha” tactic. They very well might be. But these are provisions included in the contract you agreed to so you know this risk before any basis for additional money or time even arises.

The recent bench trial opinion in Metalizing Technical Services, LLC v. Berkshire Hathaway Specialty Ins. Co., 2023 WL 385413 (S.D.Fla. 2023) illustrates the reality of not properly complying with such provisions. The keys when dealing with any notice or claims provision, or really any technical provision in your contract, is to (a) negotiate the risk before you sign the contract, (b) chart the provisions so your team know how to ensure compliance, and (c) make sure you comply with them. Period!

In Metalizing Technical Services, a potentially garden-variety general contractor and subcontractor payment dispute, a subcontractor was terminated from a Florida Department of Transportation project dealing with repairing a causeway in Miami. The remaining subcontract balance of about $682,000 was not in dispute. Rather, the dispute centered on the subcontractor’s work stoppage and hazardous materials claims and the general contractor’s setoffs (i.e., backcharges). The subcontractor bore the burden of proof with respect to its claims and the general contractor bore the burden of proof with respect to its setoffs. The focus of this posting is the subcontractor’s claims and the Court’s application of the subcontract.

Work Stoppage Claim

The subcontractor had a work stoppage claim associated with the owner’s representative ordering a work stoppage. The general contractor argued the subcontractor failed to satisfy the requirements in the subcontract with respect to the claim. The subcontract provided that when the “Subcontractor believes that additional compensation…is due as a result of such suspension or delay, Subcontractor shall immediately notify Contractor in writing.” Metalizing Technical Services, supra, at *15. The subcontractor did NOT provide immediate notification as the only evidence of written notification was almost a month after the work stoppage. Although the subcontractor testified it notified the general contractor via texts and e-mails, none of these writings were introduced into evidence. (Note that the Court did not find waiting a month to provide written notification to be immediate written notification. The Court may have viewed this differently if the texts and emails were introduced into evidence, assuming they existed.)

In addition to the subcontractor’s noncompliance with the notice provision, the subcontract also prevented the subcontractor from recovering for delays that do not impact the Project’s critical path: “Subcontractor shall not under [any] circumstances be entitled to any monetary compensation for delays or impacts whatsoever to any activities or items of Work that are not a Controlling Work Item [an activity or work item on the critical path], as defined in the Prime Contract.” Metalizing Technical Services, supra, at *15. Therefore, “[b]ecause the [work] stoppage did not impact the critical path, no Controlling Work Items were impacted; [subcontractor] is not entitled to recover compensation for items that are not on the critical path.” Id.

And if bases under the subcontract were not enough to bar this claim, the Court found that the subcontractor stilled failed to prove its damages for the work stoppage with a reasonable degree of certainty. The witness supporting the claim could not remember (i) how he generated prices for the claim, (ii) how he calculated costs for the idle equipment, or (iii) the equipment included in the claim.

Hazardous Materials Claim

The subcontractor submitted a claim associated with unexpected hazardous materials discovered at the Project. The presence of hazardous materials was not an issue in dispute. The subcontractor’s compliance with the claims process was an issue in dispute and the subcontract provided that the subcontractor’s failure to comply with the claims process was an absolute waiver of its claim.

The claims process provided that upon the subcontractor’s written request, the general contractor could submit to the owner the claim for additional compensation and institute an action or proceeding to recover any claim or appeal any decision by the owner. Subcontractor was required to post whatever security the general contractor required to cover the general contractor’s costs and expenses. Subcontractor’s written request to appeal the owner’s decision “must be delivered to Contractor within the earlier of five (5) calendar days from Contractor’s notice to Subcontractor [of owner’s] ruling or decision, or as otherwise provided under the Prime Contract [between owner and general contractor], or Subcontractor shall be deemed to have irrevocably waived its claim.” Metalizing Technical Services, LLC, supra, at *6.

The owner initially denied the hazardous material claim and the subcontractor failed to notify the general contractor to appeal the decision within the subcontractual time period. This resulted in a waiver of the claim. Moreover, the general contractor requested the subcontractor to provide $75,000 in security to cover the appeal costs which the subcontractor did not pay. “[General contractor] has no obligation to proceed on [subcontrator’s] behalf because [subcontractor] never posted security.” Metalizing Technical Services, LLC, supra, at *17.

And if these reasons were not enough, the subcontract further provided that subcontractor would not be able to recover any payment from the owner that the owner had not paid subcontractor. The general contractor was able to settle the claim with the owner for about half of the subcontractor’s claim. The subcontractor did not agree with the settled amount. This settled amount was tendered to the subcontractor and the subcontractor was pursuing the delta. However, since the general contractor was never paid the delta from the owner, the subcontractor was not able to recover from the general contractor the additional amounts even if it had not waived the claim.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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

Posted on May 31, 2015November 8, 2024 by Edward Garber

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

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

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

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

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

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

***

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

***

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

***

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

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

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

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

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

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

Of Significance:

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

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

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