THINK BEFORE YOU EXECUTE THAT RELEASE – THE LANGUAGE IN THE RELEASE MATTERS!

Posted on May 27, 2024May 28, 2024 by David Adelstein

If you execute a release in exchange for payment or other consideration, remember the language in the release means something. THE RELEASE LANGUAGE MATTERS! And the meaning in the release may be way more than you intended so please make sure you truly digest and consider release language before executing.

This sentiment could not be truer than in the 2009 decision Bell BCI Company v. United States, 570 F.3d 1337 (Fed. Cir. 2009). In this case, a contractor entered into a modification (change order) with the government. The modification included the following language:

increase the contract amount by $2,296,963 … as full and equitable adjustment for the remaining direct and indirect costs of the Floor 4 Fit-out (EWO 240–R1) and full and equitable adjustment for all delays resulting from any and all Government changes transmitted to the Contractor on or before August 31, 2000.

***

The modification agreed to herein is a fair and equitable adjustment for the Contractor’s direct and indirect costs. This modification provides full compensation for the changed work, including both Contract cost and Contract time. The Contractor hereby releases the Government from any and all liability under the Contract for further equitable adjustment attributable to the Modification.

Bell BCI, supra, at 1339.

The release language was also included in subsequent modifications.

Thereafter, the government issued 113 additional modifications to the contractor, and there were numerous unresolved extra work orders that were not turned into a modification. After the contractor completed the project, it submitted a request for equitable adjustment to the contracting officer. The contracting officer denied the request for equitable adjustment and asserted liquidated damages against the contractor for delays to the project. The contractor filed a lawsuit against the government claiming inefficiencies and delays caused by the cumulative impact and disruption from all the modifications issued by the government. The trial court found in favor of the contractor. The government appealed and the finding was much different. This is why.

Regardless of the cumulative impact claim, the contractor signed a modification that “‘provides full compensation for the changed work’” and that [the contractor] “‘hereby releases the Government from any and all liability under this Contract for further equitable adjustment attributable to the Modification.’” Bell BCI, supra, at 1340. Under the modification and release language, the appellate court held the issue was not whether the contractor sustained a cumulative impact, but whether the contractor released the government for the impact through the language in the executed modification.

The appellate court maintained that a release is interpreted no different than any other contract and parol evidence will be reviewed only in the event of an ambiguity. Bell BCI, supra, at 1341. If there is no ambiguity, the plan language in the release will control. Id.

We hold that the language in paragraph 8 of Mod 93 is unambiguous, and the [trial] court clearly erred in holding that [the contractor] did not release its cumulative impact claims attributable to that modification. The language plainly states that [the contractor] released the government from any and all liability for equitable adjustments attributable to Mod 93. At best, there may be ambiguity as to which claims are “attributable to” a given modification, but we cannot glean any ambiguity about which types of claims are released-Mod 93 clearly, unambiguously releases the government from “any and all” liability. As the Supreme Court stated in United States v. William Cramp & Sons Ship & Engine Building Co., “[i]f parties intend to leave some things open and unsettled, their intent so to do should be made manifest.” 206 U.S. 118, 128, 42 Ct.Cl. 532, 27 S.Ct. 676, 51 L.Ed. 983 (1907). Further, the government’s payment of over $2,000,000 in Mod 93 constitutes adequate consideration for [the contractor’s] release.

In the absence of an ambiguity, we decline to examine the parties’ extrinsic evidence [i.e., parol evidence].

Bell BCI, supra, at 1341-42.

Is this the right ruling? Did the contractor intend to release cumulative impacts such that the ruling from the trial court, that entertained the evidence, should control? Unfortunately for the contractor, the intent did not matter to the appellate court because the plain language of the unambiguous release eliminated the need to hear parol evidence on intent. Hence, the overarching takeaway – think before you execute that release!

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.

A LACK OF SOPHISTICATION WITH THE CONSTRUCTION CONTRACT CAN PLAY OUT IN AN UGLY DISPUTE

Posted on October 16, 2022October 16, 2022 by Edward Garber

There are times where a lack of sophistication can come back to haunt you. This is not referring to a lack of sophistication of the parties. The parties, themselves, could be quite sophisticated. This is referring to a lack of sophistication with the construction contract forming the basis of the relationship. While parties don’t always want to buy into the contract drafting and negotiation process, it is oftentimes the first document reviewed. Because contract terms and conditions are important. They govern the relationship, the risk, scope, amount, and certain outcomes with disputes. However, a lack of sophistication can play out when that contract that should govern the relationship, the risk, the scope, the amount, and certain outcomes doesn’t actually do that, or if it does, it does it poorly. An example of how bad a dispute can play out when it comes to the lack of sophistication on the front end is Avant Design Group, Inc. v. Aquastar Holdings, LLC, 2022 WL 6852227 (Fla. 3d DCA 2022), where a cost-plus contract was treated as a lump sum contract.

Here, an owner planned to perform an extensive interior build-out to a residential unit. The owner had an out-of-country architect; because the architect was not licensed in Florida, the owner hired a local architect/designer to oversee construction and obtain goods and services for the residential interior build-out. The contract was nothing but a proposal of items and costs. The proposal stated the owner “would pay the cost of goods and services of the vendors, plus pay a ‘20% Interior Design & Administrative Fee’” to the local designer. Avant Design Group, 2022 WL at *1. The proposal further stated, “This preliminary budget of the Client’s construction costs include [sic] anticipated costs for construction materials, labor and sales tax. Any other cost, including but not limited to freight, cartage, shipping, receiving, storage and delivery are not included in the preliminary budget and will be invoiced separately.” Id., n.2.

The owner and its local designer executed 92 proposals for purposes of the interior residential build-out. Think about this: 92 proposals. Collectively, all of these so-called proposals formed the basis of the contractual arrangement between the owner and local designer. Terms and conditions, however, appeared to be skimpy at best. The bigger issue, mentioned below, is the application of the 20% fee, as the language would suggest it is a cost-plus contract where the fee of 20% was on top of actual costs.

A dispute arose. The owner thought it was being over-charged so it terminated the local designer. The local designer thought it was underpaid so it recorded a lien. Then, the inevitable lawsuit. At trial, the owner had a forensic expert that testified that the owner was overcharged by over $500,000. This was based on the owner’s position that the contract was actually a cost-plus contract. The local designer claimed it was lump sum. The type of contract—whether it was cost-plus OR lump sum—formed the basis of the dispute, and it mattered a lot. A cost-plus arrangement meant that the local designer would be entitled to a cost of the goods and services plus its 20% fee markup. A lump sum meant that actual costs did not matter–in other words, all of the proposals were simply mini-lump sum arrangements that could factor in the 20% fee markup.

“Generally, absent a finding of ambiguity, parol evidence is not admissible to assist the factfinder regarding the parties’ intent.” Avant Design Group, supra, n.10. Stated differently, expert testimony and the testimony of the parties is irrelevant when the contract is unambiguous. While here, the trial court did not render any findings that the contract was ambiguous, “both parties, without objection, elicited expert testimony regarding the nature of the parties’ contract.” Avant Design Group, supra, n.10. Both parties viewed the type of contract to be a factual issue and the trial court ruled that the contract was a cost-plus agreement. “As ample evidence supports the trial court’s finding that the parties entered into a cost-plus contract that limited [owner’s] payment obligation to the 20% Fee, we affirm the trial court’s principal conclusion regarding the contract’s payment terms.” Avant Design Group, supra, *4.

The determination of whether the contract was cost-plus or lump sum was really the dispute and determined the outcome. It was the dispute. This determination meant that the local designer was overpaid by over $500,000, its lien was fraudulent, and its lien should be discharged. Had the determination been that the contract was lump sum, the entire outcome of the case should have been different. Keep this in mind. If your intent is lump sum, make that intent clear. Conversely, if it is cost-plus, it is a completely different contract relationship and contract administration because you cannot add your markup to what you are already marking up as that is double dipping. Notably, the case of Avant Design Group has a number of interesting issues to be discussed. Those will be probably be discussed separately in shorter postings. The key, though, is that the dispute centered on a cost-plus contract being treated as lump sum, when that was clearly not the case.

PAROL EVIDENCE CAN BE USED TO DEFEAT FRAUDULENT LIEN

Posted on January 27, 2019April 24, 2020 by Edward Garber

Parol or extrinsic evidence can be used to defeat an argument that a lien is a fraudulent lien. And, just because a lien amount exceeds the total contract amount does not presumptively mean the lien is willfully exaggerated or recorded in bad faith. Finally, a ruling invalidating a construction lien can create the irreparable harm required to support a petition for writ of certiorari. All of these issues are important when dealing with and defending against a fraudulent lien and are explained in a recent case involving a dispute between an electrical subcontractor and its supplier.

In Farrey’s Wholesale Hardware Co., Inc. v. Coltin Electrical Services, LLC, 44 Fla.L.Weekly D130a (Fla. 2d DCA 2019), there were various revisions to the supplier’s initial purchase order, both from a qualitative and quantitative perspective, and a ninth-revised purchaser order was issued and accepted. The electrical subcontractor claimed that deliveries were late, unassembled, and did not include the required marking (likely the UL marking), to pass building inspections. As a result, the subcontractor withheld money from the supplier and the supplier recorded a lien in the amount of $853,773.16 and filed a foreclosure lawsuit.

The subcontractor moved for a motion for partial summary judgment that the lien should be deemed a fraudulent lien and invalid because it was overstated by approximately $32,000. The subcontractor argued that taking the amount of the ninth-revised purchase order and deducting the undisputed amount paid to the supplier would result in a lien amount of $825,417.06, approximately $32,000 less than the supplier’s lien amount. The supplier, through an affidavit, argued this delta is nothing more than a good faith dispute and can be explained because the total cost of materials furnished to the job site was based on its initial purchase order and its revised purchase order. The subcontractor countered that the affidavit is parol evidence and should be disregarded because the parties agreed on the total amount of the supplies through the ninth-revised purchase order and the supplier was trying to create a new contract through the affidavit. The trial court agreed and found the lien fraudulent, and issued a partial summary judgment invalidating the supplier’s lien. The subcontractor moved for a petition of writ of certiorari.

Parol Evidence Rule

“[T]he parol evidence rule prevents the terms of a valid written contract or instrument from being varied ‘by a verbal agreement or other extrinsic evidence where such agreement was made before or at the time of the instrument in question.’” Farrey’s Wholesale, supra(citation omitted). The parol evidence rule, however, is not applied to exclude evidence of subsequent agreements modifying the original agreement, or of fraud, accident, or mistake. Id.

The appellate court, reversing the trial court, found that the parol evidence rule “does not bar extrinsic evidence offered for the purpose of showing whether the filing of a construction lien was made in good or bath faith. This is a separate and distinct inquiry that does not trigger the parol evidence rule.” Hence, the appellate court maintained there were disputed issues of material fact as to whether the lien was fraudulent.

The appellate court further found that the trial court erred in finding the lien fraudulent in that just because the lien amount exceeded the ninth-revised purchase order does not mean it was willfully exaggerated. In other words, even if the ninth-revised purchase order was the complete agreement, the lien, in of itself, is not willfully exaggerated just because the lien exceeded the total amount of the contract.

Appeal of Lien

On another important point in this case, because the appeal was based on a writ of certiorari (versus a final appeal of a final dispositive judgment), there had to be irreparable harm to justify the basis of the appeal. The appellate court held there would be irreparable harm if the supplier had to wait until the end of the litigation to appeal because its judgment would then be unsecured (it would be without a remedy to pursue its lien which had been transferred to a lien transfer bond). See Farrey’s Construction Wholesale, supra (“This means that on remand [back to the trial court], all matters pertaining to Farrey’s construction lien, which includes the status of the lien transfer bond, will be returned to their prejudgment postures.”).

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

Posted on December 12, 2015November 6, 2022 by Edward Garber

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

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

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

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

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

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

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

Science Applications Intern, supra, at 756-757.

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

DON’T DRAFT AN AMBIGUOUS SCOPE OF WORK IN YOUR CONSTRUCTION CONTRACT

Posted on November 26, 2014November 26, 2014 by Edward Garber

Contractors should spend time carefully drafting and agreeing to a detailed scope of work. Otherwise, a dispute may arise relating to that scope of work. This dispute can take the form of a change order dispute where the contractor argues that the subcontractor’s change order request was base contract work and, thus, does not entitle the subcontractor to additional compensation. Or, the dispute can take the form of a defect claim where the subcontractor argues that the defect being asserted against it was never within its scope of work to begin with.

If there is a scope of work dispute, a court will look to the contract and any applicable change orders in order to see what the contract requires. If an ambiguity exists relating to the scope of work, the court will determine whether the ambiguity is a patent ambiguity or a latent ambiguity. A patent ambiguity clearly exists on the face of the contract based on defective, insensible, or obscure language used in the contract whereas a latent ambiguity is not apparent from the face of the contract, but becomes apparent when extrinsic / parol evidence is introduced that leads to the contract being interpreted in two reasonably plausible manners. See Barrington v. Gryphon Investments, Inc., 32 So.3d 668 (Fla. 2d DCA 2010). With a patent ambiguity, parol evidence (extrinsic evidence used to clarify the intent of the parties relating to a contractual provision) is NOT allowed to clear up the ambiguity; rather, it is up to the trier of fact (judge or jury) to interpret the patent ambiguity without extrinsic evidence explaining the intent of the parties. See, e.g., Barclays American Mortg. Corp. v. Bank of Central Florida, 629 So.2d 978 (Fla. 5^th DCA 1993) (it was up to trier of fact to interpret letter of credit containing 2 different expiration dates). On the other hand, with a latent ambiguity, parol evidence is allowed to be introduced relating to the parties’ intent to assist the trier of fact in clearing up the ambiguity.

The opinion in Macky Bluffs Development Corp. v. Advance Construction Services, Inc., 2008 WL 109390 (N.D.Fla. 2008) illustrates what can happen if there is an ambiguous scope of work. Here, a developer entered into a change order with a contractor to fix the collapsed wall of a retention pond. The change order required the contractor to haul off collapsed material from the bottom of the pond. To fix the wall, the contractor hauled collapsed material and stockpiled the material on lot #8 (owned by the developer). The contractor reused suitable material in reconstructing the wall in addition to material it excavated from lot #8. The unsuitable material the contractor did not use in reconstructing the wall was spread out and compacted on lot #8 versus being hauled offsite to a dumping site.

Years later, the developer discovered the unsuitable materials had been buried on lot #8 that required it to excavate and remove this material and refill with suitable material. The developer then sued the contractor for the costs it incurred in remediating this issue. The contractor moved for summary judgment arguing that lot #8 was never part of its scope of work and it reconstructed the wall of the retention pond pursuant to the change order. Unfortunately, the change order did not specify whether the contractor was required to haul off unsuitable material to an offsite dumping facility or it was required to leave that material on lot #8. In fact, it does not appear the change order even mentioned that the contractor was going to stockpile collapsed material on lot #8 and reuse suitable material in reconstructing the wall. The owner’s position was that while the contractor could use lot #8 as a temporary storage area, the contractor was always required to haul off unsuitable material to an offsite dumping facility. The contractor disagreed stating it was always going to leave unsuitable material on lot #8 that it could not reuse to reduce the costs associated with fixing the wall. Yet, the change order did not address this issue and was ambiguous as to what the contractor’s scope of work consisted of relative to reconstructing the wall with stockpiled suitable material and what it was required to do with unsuitable material it did not reuse.

The Northern District maintained that the scope of work in the change order contained a latent ambiguity because the change order did not identify where the contractor was required to haul off the collapsed material and both the contractor and owner’s interpretation of this scope of work was plausible and reasonable. The court’s opinion includes a good discussion about the difference between a patent ambiguity and a latent ambiguity:

“Under Florida law, the interpretation of a contract is a matter of law for the court’s determination so long as the terms of the contract are unambiguous. The existence of an ambiguity in a contract is also a matter of law. There are two types of ambiguities that can exist in a contract: patent and latent. A patent ambiguity is one that appears on the face of the contract. A latent ambiguity, on the other hand, exists where the language employed is clear and intelligible and suggests but a single meaning, but some extrinsic / parol evidence creates a necessity for interpretation or a choice among two or more possible meanings. If the ambiguity is patent, then parol evidence cannot be used to clarify the parties’ intent. If the court finds, however, that there is a latent ambiguity in the contract, then parol evidence must be heard in order to explain the meaning of the ambiguous term. After receiving parol evidence clarifying the latent ambiguity, if there is no genuine issue of material fact remaining, the court can resolve the ambiguity as a matter of law. Where, however, the terms of the written instrument are disputed and reasonably susceptible to more than one construction, an issue of fact is presented as to the parties’ intent which cannot properly be resolved by summary judgment.”

Macky Bluffs Development Corp., supra, at *2 (internal citations and quotations omitted).

Had the parties clearly clarified the scope of work relating to how collapsed material was going to be stockpiled on lot #8 and reused and whether unsuitable material was going to be (a) hauled offsite or (b) left on lot #8, there probably would be no scope of work dispute. But, because this issue was not truly defined, it presented an ambiguity that naturally resulted in a dispute when the developer needed to remove the unsuitable material on lot #8. The key is to spend the effort to clearly articulate the scope of work, whether it is base contract work or change order work, to best support your argument when a scope of work dispute subsequently arises.