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Monday, August 28, 2017

Contractors and Subcontractors Beware


Contractors and Subcontractors beware of shopping center, retail and out parcel projects. Big box and specialty retailer store closures may impact collectability for ongoing projects.

Fortune 500: The Death of Retail is Greatly Exaggerated | Fortune.com 




TOP TEN CONSTRUCTION CLAUSES - PART IX - PAYMENT TERMS


TOP TEN CONSTRUCTION CLAUSES – PART IX – PAYMENT TERMS

This article is the ninth in a ten-part series analyzing the top ten critical construction clauses.  In this installment, we analyze the “payment terms” provision, which encompasses a discussion on retainage and final payment.  This article will focus primarily on the updated American Institute of Architects’ Agreement between the Owner and Contractor (AIA Document A101-2017) as well as Florida case law. 

                               I.            OVERVIEW

The payment terms provision is perhaps the most palpable of all construction clauses as each party to a construction contract has unique concerns when it comes to payment.  An owner is concerned about overpaying its general contractor before its work is completed and will require some kind of assurance that the work will be completed.  Meanwhile, a general or subcontractor is concerned about receiving prompt payment so not to create financial hardship.  In negotiating the terms of payment, the goal is to reach a balanced resolution of all concerns.

                            II.            PAYMENT PROCEDURES

The American Institute of Architects’ Agreement between the Owner and Contractor (AIA Document A101-2017) attempts to find this balance by incorporating monthly progress payments based upon applications for payment submitted to the owner after being reviewed and approved by the architect.  The AIA form provides that prior to any application for payment being submitted, the contractor must first submit an itemized schedule of values for the architect’s approval.  The schedule of values allocates a line item value for various items of work.  An application for payment will typically list each item on the schedule of value and provide the percentage complete along with the value of the completed work.  The architect is tasked with reviewing the payment application and signing off on it.  The owner is then responsible for making the determined payment minus any retainage.  The owner’s failure to make payment in accordance with the contractual requirements constitutes a material breach of contract.  See J.M. Beeson Co. v. Sartori, 553 So. 2d 180 (Fla. 4th DCA 1989); see also Newkirk Construction Corp. v. Gulf County, 366 So. 2d 813 (Fla. 1st DCA 1979). 

                         III.            TIMING OF PAYMENT

Under Florida’s Construction Contract Prompt Payment Law, any party with an obligation to make payments under a written construction contract must make the payments promptly once certain conditions have been met.  Fla. Stat. §715.12(4) (2017).  The law generally provides that, unless some exception exists, the obligor has 14 days to make payment to the obligee otherwise the payment due will bear interest at the statutory rate.  Fla. Stat.  §715.12(5)(a) (2017).

With this in mind, AIA Document A101-2017 provides a form provision that leaves it to the contracting parties to set their own deadlines for payment.  The relevant provision reads as follows:

§ 5.1.3 Provided that an Application for Payment is received by the Architect not later than the ______ day of a month, the Owner shall make payment of the amount certified to the Contractor not later than the _____ day of the month.  If an Application for Payment is received by the Architect after the application date fixed above, payment of the amount certified shall be made by the Owner not later than _____ (     ) days after the Architect received the Application for Payment.”

                         IV.            RETAINAGE & FINAL PAYMENT

As previously mentioned, the owner has an interest in ensuring there are sufficient funds to complete the contractor’s scope of work in the event the contractor fails to do so.  Hence, it is common for contracts to provide for retainage, commonly 10% of the contract amount, of each payment application.  The retainage is held by the owner until the contractor reaches some pre-defined stage of construction and all other conditions have been met. 


The American Institute of Architects’ General Conditions of the Contract for Construction is incorporated into AIA A101-2017 by reference.  Section 9.10.2 of the General Conditions contains contractual conditions that the contractor must satisfy in order to receive final payment of the retainage.  Specifically, the contractor is required to submit to the architect 1) proof that all payrolls, bills for materials and equipment, and other indebtedness connected with the work for which the owner or the owner’s property might in any way be responsible have been paid or satisfied, 2) written proof that all insurance required by the contract is in effect and will remain in effect unless written notice is provided 30 days in advance, 3) a written statement that the contractor knows of no reason why the insurance will not be renewable to cover the period required by the contract, 4) written proof of any surety’s consent to final payment, and 5) any additional data that the owner requires to establish the contractor’s payment or satisfaction of all contractual obligations.

Under the AIA, contractors must be conscience of the General Conditions § 9.10.5 which provides that once the contractor accepts final payment it is deemed to have waived all claims not previously made in writing and identified by the contractor as unsettled at the time of the final payment application.

It is important to note that you may encounter non-AIA form contracts.  Regardless of the form used in drafting any construction contract, the payment terms provision should be concisely drafted and touch on all the basics discussed above to reduce ambiguity.  Whether you are an owner, contractor or subcontractor, it is advisable to consult with an attorney knowledgeable in construction contracts to assist you in deciding what payment terms are best suited for your business.




TOP TEN CONSTRUCTION CLAUSES - PART VIII - INCORPORATION BY REFERENCE



TOP TEN CONSTRUCTION CLAUSES
PART VIII—INCORPORATION BY REFERENCE

This is the eighth installment in a ten-part series analyzing critical construction clauses.  This installment analyzes the “Incorporation by Reference” provision. The first seven articles can be found on our blog at http://sotolawgroup.blogspot.com/.

The incorporation by reference clause, sometimes called a flow-down or pour-over clause is the basis by which parties to a contract include upstream contract requirements without specifically attaching them. Typically, this occurs between the contactor and subcontractors. Below is the pertinent section of the incorporation clause taken from AIA form A401.

AIA "Standard Form of Contract Between Contractor and Subcontractor" (A401)

Article 1

The Subcontract Documents 

1.The Subcontract Documents consist of (1) this Agreement; (2) the Prime Contract, consisting of the Agreement between the Owner and Contractor and the other Contract Documents enumerated therein, including Conditions of the Contract (General, Supplementary and other Conditions), Drawings, Specifications, Addenda issued prior to the execution of the Agreement between the Owner and Contractor and Modifications issued subsequent to the execution of the Agreement between the Owner and Contractor, whether before or after the execution of this Agreement, and other Contract Documents, if any, listed in the Owner-Contractor Agreement;... These form the Subcontract, and are as fully a part of the Subcontract as if attached to this Agreement or repeated herein ...

Careless treatment of these clauses can be detrimental to a contractor, subcontractor or supplier's expectations and understandings of what exactly is being agreed to in a contract. From a project Owner or developer's standpoint, incorporation clauses can create unintended conflicts and ambiguities which negatively impact the rights, obligations and liabilities of the parties.

The case of Katner v. Boutin, 624 So. 2d 779 (Fla. 4th DCA 1993) deals with a settlement agreement between two parties, where one party believed that they were receiving a piece of property free of encumbrances. The settlement agreement referenced a lease agreement and a purchase agreement that were executed simultaneously without knowledge of one of the parties. The purchase agreement that was referenced by the lease gave the purchaser the continuing right of first refusal on the sale of the piece of property and created an encumbrance on the property. The court found that there was no intent to be bound by what was in the collateral documents (ie the lease agreement and purchase agreement) because it was not referenced to in the settlement agreement.

So what is required to incorporate a document correctly? The document pretending to incorporate an extrinsic document must state specifically that it is subject to the document to be incorporated and the document incorporated must be specifically described and or referred to in the incorporating document in such a way to make clear that the parties intended to incorporate it.

In the case of Temple Emanu-El of Greater Fort Lauderdale v. Tremarco Indus., Inc., 705 So. 2d 983 (Fla. 4th DCA 1998) there was a contract between the owner and the contractor to install a roof system. One of the provisions of the contract provided that contractor would provide a performance warranty on the roof. The owner later sued the contractor and the contractor tried to use a warranty that was referenced in the document to govern the whole contract. The court found that the contract and warranty were not incorporated merely because the warranty was merely referenced. There was no intent found by the court for the parties to be bound by the warranty.

Incorporating extrinsic documents can create unintended consequences. A recent example of this comes from Int'l Eng'g Servs. v. Scherer Constr. & Eng'g of Cent. Fla., LLC, 74 So. 3d 531, 532-34 (Fla. 4th DCA 2011). IES, a subcontractor appealed the entry of a final summary judgment in favor of its general contractor, Scherer, on a breach of contract claim.

According to the subcontract, IES agreed to perform certain structural steel work on a project in Maitland, Florida. IES performed its work under the contract but was not paid by Scherer. When IES then brought suit against Scherer, Scherer raised the affirmative defense that the subcontract contained a pay-when-paid clause, which provided that payment by the project owner to Scherer was an express condition precedent to paying IES. Scherer argued that because it had not been paid by the project owner, it did not have to pay IES. The lower court entered the summary judgment in favor of Scherer based on the pay-when-paid clause in the subcontract.

The appellate court held that an ambiguity in the contract was created when the subcontract incorporated the prime contract between Scherer and the owner. Article 2 in the subcontract states:

The "Contract Documents" for this Subcontract consist of this Agreement, the terms, conditions or instructions contained in the transmittal letter from the Contractor to the Subcontractor delivering this subcontract for execution by the Subcontractor, any exhibits attached hereto, the Agreement between the Owner and Contractor dated (prime contract), the conditions of the Architect, all approved drawings and architectural plans and specifications, all modifications issued prior to execution of the Agreement between the Owner and Contractor, and all modifications issued subsequent thereto.

The appellate court found that the prime contract, which was incorporated by reference, provided that the owner was not required to pay the contractor until it had paid its subcontractors. The court explained that this created an ambiguity which had to be resolved against the contractor and further interpreted to require the contractor to pay IES within a reasonable time, not when actual payment was received by the owner. Int'l Eng'g Servs. v. Scherer Constr. & Eng'g of Cent. Fla., LLC, 74 So. 3d at 532-34.

Practice Points:

Key contracts clauses typically incorporated by reference:
Venue of dispute
Arbitration or Litigation Option


Waiver of certain damages including consequential damages
Liquidated damages
Pay when paid

Affected party needs to specifically review the upstream incorporated documents and establish at inception the carved out flow down items, which are not accepted!









TOP TEN CONSTRUCTION CLAUSES - PART VII - NO DAMAGES FOR DELAY









TOP TEN CONSTRUCTION CLAUSES
PART VII—NO DAMAGES FOR DELAY

This is the seventh installment in a ten-part series analyzing critical construction clauses.  This installment analyzes the “No Damage for Delay” provision. My first six articles can be found on our blog at http://sotolawgroup.blogspot.com/.

A.    Overview and Background

Most construction contractors and subcontractors assume that if they encounter a delay on the project that is not attributable to them, for example, changes in the sequencing of the work ordered by the project owner, discovery of hazardous materials or unknown conditions at the project, or adverse governmental actions, that they would entitled for reimbursement for damages caused by those delays. Such damages could include unabsorbed home office overhead, remobilization/acceleration costs, or increased materials costs.

However, an increasingly common contract provision, known as the “No Damages for Delay Provision” bars recovery of these damages and poses a substantial risk. It is important to recognize a “No Damage for Delay” provision in a potential contract, understand how and when such a provision can be enforced, and how to protect yourself if such a provision is included in your contract.
       
B.     Sample “No Damage for Delay” Provision

Neither the American Institute of Architects nor ConsensusDocs—two of the foremost authorities on construction contracting—contain a model “No Damages for Delay” provision in their form contracts between owners and general contractors. In fact, both expressly authorize recovery of damages caused by delay.

A sample provision previously used by Broward County that was the subject of an oft-cited Florida appellate court opinion (discussed in further detail below) is:

NO CLAIM FOR DAMAGES OR ANY CLAIM OTHER THAN FOR AN EXTENSION OF TIME SHALL BE MADE OR ASSERTED AGAINST THE COUNTY BY REASON OF ANY DELAYS. The CONTRACTOR shall not be entitled to an increase in the Contract Sum or payment or compensation of any kind from the COUNTY for direct, indirect, consequential, impact or other costs, expenses or damages, including but not limited to costs of acceleration or inefficiency, arising because of delay, disruption, interference, or hindrance from any cause whatsoever, . . . ; provided, however, that this provision shall not preclude recovery or damages by the CONTRACTOR for hindrances or delays due solely to fraud, bad faith, or active interference on the part of the COUNTY or its agents. Otherwise, the CONTRACTOR shall be entitled only to extensions of the Contract Time as the sole and exclusive remedy for such resulting delay, in accordance with and to the extent specifically provided above.

Triple R Paving, Inc. v. Broward County, 774 So. 2d 50 (Fla. 4th DCA 2000).


C.    “No Damage for Delay” provisions are generally enforceable, but beware of exceptions.

As you can see from the “No Damage for Delay” provision in the Triple R Paving case, these provisions are typically extremely broad and insulate the owner (or upstream contractor) from a wide array of damages that would be otherwise recoverable. Although clauses providing for “no damages for delay” are generally enforceable, there are a couple of important exceptions. For example, the courts in Florida have found that “No Damages for Delay” provisions are invalid in cases of fraud, bad faith, or active interference by the owner. See Triple R Paving, 774 So. 2d at 54.

In Triple R Paving, the appellate court found that the contractor submitted sufficient proof that the county’s engineer knew that his plans did not meet horizontal sight distance standards but failed to notify the contractor, despite the fact that the engineer personally agreed to check the sight distance against standards at the time in question. The court found that the facts submitted in support of this claim were sufficient to allow a jury to decide the question of fraud, bad faith, or active interference, despite the existence of an otherwise enforceable “No Damages for Delay” provision.

Newberry Square Dev. Corp. v. Southern Landmark, Inc., 578 So. 2d 750 (Fla. 1st DCA 1991) involved an even more egregious example of active interference, leading the court to invalidate the “No Damages for Delay” provision. In that case, the contractor submitted evidence that the developer delayed in providing approved plans and specifications, delayed in executing change orders and required that construction not proceed without such orders. It was also indicated that the developer repeatedly failed to make timely payments required by the contract. Most significantly, the contractor testified that the developer actually threatened that “he would break me before he’d pay . . . .” Under these circumstances, the court held that there was adequate evidence to present a jury question as to whether the developer actively impeded, or willfully and knowingly delayed, the contractor’s ability to timely perform under the contract, and in those circumstances, the “No Damages for Delay” provision did not preclude the contractor’s recovery.

D.    Conclusion

The “No Damage for Delay Provision” is an effective tool for the owner (or any upstream contractor) to limit exposure to damages caused by unforeseen or unexpected project delays. These protections, however, are not absolute and the owner should ensure that its conduct complies with the implied duties of good faith and fair dealing that are applicable to every contract. Otherwise, the “No Damages for Delay” provision may be invalidated based upon one of the well-established exceptions.

A contractor (or downstream subcontractor) should avoid the “No Damages for Delay” provision where its bargaining position enables contract negotiation. If a contractor cannot eliminate the provision, it should ensure that all of its downstream contracts contain the provision so that it is not liable for damages to its subcontractors that it cannot recover from the owner.  

In addition, a contractor (or downstream subcontractor) must comply with the notice provisions of the contract to be entitled to an extension of time or damages (in the event that the “No Damages for Delay” provision is invalid). See, e.g., Marriott Corp. v. Dasta Constr. Co., 26 F.3d 1057 (11th Cir. 1994). In Dasta Construction, the 11th Circuit held that the contractor’s failure to avail itself of its right to request an extension of time based on project delays precluded it from recovering for damages, even for delays allegedly resulting from the property owner’s active interference. Accordingly, it is critical that the contractor adheres to the notice requirements of the contract, which often requires written notice served in a particular manner within a short period of time after discovery of the delay.

The foregoing is not meant to be an exhaustive discussion of the “No Damages for Delay” Provision and is intended only as a general primer regarding some of the primary issues involving this clause. Consult with an attorney experienced in drafting “No Damage for Delay” provisions so that together you can negotiate a provision suitable for your business.


Tuesday, August 1, 2017

Firm Lawyer Jose A. Rodriguez, Esq. Achieves Board Recognition as a Construction Law Expert



       PRESS RELEASE

               FIRM LAWYER JOSE A. RODRIGUEZ, ESQ ACHIEVES

BOARD RECOGNITION AS A CONSTRUCTION LAW EXPERT

        The Soto Law Group, P.A., is pleased to announce that Jose A. Rodriguez, Esq., has been recognized by the Florida Bar as a Board-Certified Specialist in Construction Law. Board certified lawyers are evaluated for professionalism and tested for expertise. Of the lawyers eligible to practice law in Florida, 7 percent have earned board certification. 

          Board certification is the Florida Bar's highest level of recognition of an attorney's competence and experience in one or more of the 26 areas of law approved for certification by the Supreme Court of Florida. Only attorneys who have earned the Florida Bar's “board-certification” distinction are allowed to describe themselves as legal specialists or experts in a specific field of practice. 

         To receive his designation as a Florida Board Certified Specialist in Construction Law, Mr. Rodriguez was required to demonstrate expert competency in various areas of construction law. The Soto Law Group, P.A., is very proud that Mr. Rodriguez is the third of its lawyers to achieve distinction as a specialist in Construction Law. Mr. Rodriguez joins his colleagues, Felena Talbott, Esq., and Oscar Soto, Esq., as firm lawyers who are Board Certified in Construction Law.