Contractor Stung By Liquidated Damages

Posted by: Hilger Hammond On: 10th November 2017 | no responses.

By Aileen Leipprandt

The recent case of Abhe & Svboda Inc. v MDOT (Court of Appeals, August 2017), underscores the difficulty in challenging Liquidated Damages, particularly where a contractor does not comply with delay claim provisions.

This case arose from the late completion by Abhe & Svboda, Inc (ASI) of a contract with the Michigan Department of Transportation (MDOT) to clean and paint part of the Mackinac Bridge. The contract specified Liquidated Damages (LDs) of $3,000 a day for each day of late completion. The contract also gave ASI the right to seek a time extension for bad weather, provided that ASI asserted the request within the time period required by the contract. ASI did not timely complete the project and the State assessed LDs of about $1.9 million for being 644 days late.

ASI sued the State challenging the LDs assessment for a number of reasons. For instance, ASI argued that the LDs should not apply to 362 days of the planned winter shutdown during which it was impossible for MDOT to suffer any losses and that the LD clause was void for failing to be a good-faith effort to estimate losses. ASI also argued that MDOT’s dilatory behavior in approving ASI’s scaffolding plan caused 56 days of delay. ASI argued that 459 days of work were caused by environmental circumstances beyond its control. The trial court rejected all of ASI’s arguments and granted summary disposition to the State. ASI appealed.

The Court of Appeals affirmed the ruling that the Liquidated Damages provision was not a penalty. The Court deemed it irrelevant that ASI could not work during the planned winter shutdown, because LDs were based upon the total delay, not discreet periods of time during the contract performance.

The appellate court also rejected ASI’s argument that MDOT’s own dilatory behavior in failing to timely approve ASI’s scaffold plan prevented the assessment of liquidated damages. The Court affirmed the general principal that a party seeking to impose LDs cannot interfere with the other party’s performance causing the other party to fail and triggering LDs. However, in this case, the contract provided a mechanism for ASI to seek an extension of time. Since MDOT could contractually extend the time for performance, then MDOT causing a delay was not synonymous with obstructing ASI’s performance unless MDOT improperly failed to grant an appropriate extension. Because ASI did not timely request a time extension, MDOT did not breach the contract by declining to grant that request. Further, the contract did not support ASI’s argument that ASI could wait until the end of the project to seek a time extension; instead, ASI was required to seek an extension each and every time an impediment to its work occurred.

Lesson Learned – parties must understand and negotiate liquidated damages provisions at the front end of a project and then strictly abide by claim procedures. Otherwise, the parties run the risk of an unfavorable outcome at project completion.

Aileen Leipprandt practices in the areas of commercial and real estate litigation and construction law. She has represented a variety of clients in these areas, including developers, design professionals, contractors, subcontractors, owners, sureties, manufacturers, governmental agencies, insurers, and suppliers. 

Construction Contract Clauses, Part 7 – Indemnification and Insured Contract Coverage

Posted by: Hilger Hammond On: 10th October 2017 | no responses.

By: Mark A. Rysberg

Indemnification provisions frequently appear in construction and commercial contracts. They operate to shift risk from the party being provided indemnification to the party providing indemnification. The principle behind such risk shifting is to shift potential risks onto the party or parties that are best able to prevent, mitigate, or insure those risks. In that respect, indemnity provisions do not necessarily need to be a source of disagreement during contract negotiation.

Consider, for example, indemnification provisions that require one party to indemnify and defend other parties from the risks relating to personal injury and property damage. At first blush, the party who is to provide such indemnity may feel that they should not assume those risks. However, agreeing to a well-drafted provision requiring indemnification for personal injury or property damage can be a benefit to all of the parties—including the party providing the indemnity. Here is how that can occur.

Most general liability policies include insured contract coverage. What that does is provide coverage for certain losses arising from the contractual agreement to indemnify a third-party. In the example above, if a claim for personal injury or property damage was asserted against an indemnified party, the indemnified party could in turn assert an indemnity claim which may trigger coverage under the indemnifying party’s general liability policy. In that scenario, the transfer of risk has ultimately allowed the contracting parties to shift the risk onto an insurer. The end result is the possibility of insurance coverage coupled with the probability being reduced that the contracting parties find themselves litigating their respective liability so they may instead focus on completing the construction project.

Properly negotiated and drafted, indemnification provisions are tools which can shift risk potential to an insurer and reduce the chances of liability litigation, benefiting all of the parties.

Mark Rysberg practices in the areas of construction law and commercial litigation having represented clients involved in the construction industry with complex matters before numerous state courts, state appellate courts, federal trial courts, federal bankruptcy courts, and federal appellate courts.

If you enjoyed this article, you might also like “Waiver of Claims for Insured Losses.”

 

Construction Contract Clauses, Part 6 – Waiver of Claims for Insured Losses

Posted by: Hilger Hammond On: 29th June 2017 | no responses.

By: Mark A. Rysberg

Many insurance sections of construction contracts contain language whereby the parties involved in the construction project waive all claims against all other parties involved in the project for insurable losses such as property damage and personal injuries.

Owner and Contractor waive all rights against each other and their respective officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them for all losses and damages caused by, arising out of or resulting from any of the perils or causes of loss covered by such policies and any other property insurance applicable to the Work; and, in addition, waive all such rights against Subcontractors and Engineer, and all other individuals or entities identified in the Supplementary Conditions as loss payees (and the officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of them) under such policies for losses and damages so caused.

These clauses are good for all of the parties involved as they eliminate disputes and shift the risk of loss onto the parties’ respective insurance carriers. Contractors and subcontractors should work with their insurance agents and attorneys to understand these provisions, as well as, to properly shift insurable risks onto third-parties through the acquisition of appropriate insurance coverages.

If you enjoyed this article, you may also like Construction Contract Clauses, Part 5 – Conversion Clauses.”

Construction Contract Clauses, Part 5 – Conversion Clauses

Posted by: Hilger Hammond On: 29th June 2017 | no responses.

By: Mark A. Rysberg

A conversion clause arises in the context of contract termination. There are generally two types of termination; termination for cause and for convenience. Each type of termination differs with respect to the basis for termination, as well as the limitations on payment rights the terminated party retains post-termination. A conversion clause operates to convert a wrongful termination into a termination for convenience. The following is an example of a conversion clause.

If it is determined, by litigation, arbitration or otherwise, that termination for default was unjustified for any reason, the termination shall be deemed a termination of convenience and Subcontractor’s remedies shall be limited to those provided for as a termination of convenience.

In a practical sense, these clauses protect a party that terminates a contract for cause by nullifying the effect of a possible wrongful termination. The exposure for damages is, in turn, limited to the amount that is required to be paid as if the contract had been terminated for convenience.

Typically, the amount owed for a termination for convenience will be much less than the damages for a wrongful termination as the termination provisions in a contract will typically limit the amount owed in a termination for convenience situation to the amount of the work properly performed at the time of termination. In contrast, damages for a wrongful termination could include lost profits on the entire contract irrespective of whether the work was performed.

Contractors and subcontractors that have both upstream and downstream relationships should be on the lookout for these types of clauses. When they are encountered in an upstream contract, they should be included in any downstream contracts covering portions of that scope of work. The reason being is to eliminate the possibility of being faced with a wrongful termination claim by a lower-tier contractor while simultaneously having recovery limited in a claim against an upstream contractor. A best practice would be to review each contract you are presented with and coordinate the terms therein with the terms of any contract you in turn issue downstream.

If you enjoyed this article, you may also like “Construction Contract Clauses, Part 4 – Express Trust Clauses.”

 

Labor Under the Federal Miller Act: The Known Unknown

Posted by: Hilger Hammond On: 25th April 2017 | no responses.

By Daniel Hatch

Here’s what we know. On federal projects, the Miller Act requires prime contractors to furnish a payment bond “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person.” The Act authorizes “every person that furnished labor or material in carrying out work provided for in a contract” who has “a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond.”

Further, we know that the Act is “highly remedial in nature” and “entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects.” However, while liberally construed in favor of subcontractors, the Miller Act is not without limit.

Beyond notice, timeliness, and venue requirements, which are all necessary elements to state a prima facie claim for relief under the Miller Act, many forget to analyze the obvious: whether the subcontractor performed “labor” within the purview of the Miller Act. Despite the ostensibly inclusive language in the Miller Act requiring a bond for the protection of all persons supplying labor and materials in carrying out the work, several federal courts have imposed limits on the types of work constituting “labor” on construction projects.

To have a viable claim for unpaid work under the Miller Act, the subcontractor’s work must: (1) be performed “in the prosecution of work provided for in a contract for which a payment bond is furnished”; and (2) qualify as “labor” within the meaning of the Miller Act.

Work is performed in the prosecution of the contract when it is within the original scope of work for the project. Generally, the majority of federal courts, including the Sixth Circuit for us Michiganders, agree that neither warranty work nor corrective work satisfy this element.

Assuming the work is performed in the prosecution of the contract, the work must also qualify as “labor” which is not further defined in the Miller Act. The United States District Court for the South Division of Ohio first addressed the definition of labor under the Act in 1982 holding that, while case law interpreting the term is relatively sparse, labor must include physical toil.

Today, there is still no bright line test used to determine what constitutes labor under the Miller Act. The Eighth Circuit was the first federal appellate court to address the issue holding that labor must include some physical work and not work solely involving “technical and professional skill and judgment.” Thereafter, the Fourth Circuit expanded on the Eighth Circuit’s decision holding that labor includes professional supervisory work to the extent it “involves superintending, supervision, or inspection at the job site.”

Albeit, labor may better be defined by way of what does not qualify rather than what does. Here are some examples of work that was not considered labor under the Miller Act:

Project Administration. “Living on the job site and performing routine office maintenance [e.g., cleaning of the office and bathrooms, negotiating new contracts, determining bid amounts and change orders, preparing bid proposals, negotiating and signing new subcontracts and purchase orders] is not enough to constitute labor that went towards completing the construction job.

Contract Administration. “Paying invoices, reviewing proposals, and supervising hiring are clerical or administrative tasks which, even if performed at the job site, do not involve the physical toil or manual work necessary to bring them within the scope of the Miller Act.”

Lesson Learned: Federal courts are adopting an increasingly narrow definition of “labor” under the Miller Act. Don’t forget to analyze whether the subcontractor performed work provided for in the contract that qualifies as labor when assessing a Miller Act claim.

Unlicensed Builder Beware

Posted by: Hilger Hammond On: 17th November 2015 | no responses.

Michigan Supreme Court Gives Homeowners Exclusive Power of Avoidance When Contractor Lacks License 

By Suzanne Sutherland

The Michigan Supreme Court recently issued a decision that determined if an unlicensed builder is entitled to payment when he makes a contract with a homeowner. Epps v. 4 Quarters Restoration & Emergency Insurance Service (September 2015). The Supreme Court decided that an unlicensed builder could be compensated, and that contracts between a homeowner and unlicensed builder are enforceable, but only at the homeowner’s option.

In July 2006, Danny and Joyce Epps’ Detroit home was flooded. The Eppses contacted their insurance company, Auto Owners, and were referred to Troy Willis of 4 Quarters Restoration and Emergency Insurance Services. Willis showed the Eppses a book of prior work that included a copy of his residential builder’s license. But Willis didn’t tell the Eppses that his license was revoked six months earlier. The Eppses hired Willis, authorizing him to sign insurance checks on their behalf and collect the claim proceeds directly from Auto Owners.

Willis received $128,000 in insurance payments for restoration work on the Epps’ home. The Eppses then disputed whether the restoration was satisfactory and complete. The Eppses claimed that Willis was never entitled to payment because it is against Michigan law for an unlicensed builder to perform restoration work on a residential property. The Eppses sued Willis for conversion, arguing that Willis had no right to cash the insurance checks and had essentially stolen from them.

The Supreme Court determined that the prohibition on residential work by unlicensed builders was intended to protect homeowners. If the contract was void, neither the homeowner nor the unlicensed builder could enforce it. That might limit a homeowner’s recovery in some circumstances. Even though an unlicensed builder can be paid for work on a contract with a homeowner, only the homeowner can sue if problems arise. The Supreme Court concluded that the homeowner can decide unilaterally whether to enforce the contract.

The Supreme Court showed little sympathy to unlicensed builders that violate Michigan law, and adopted an approach that best protects the interests of homeowners.

Contractor’s Common Law Indemnity Claim Against Architect and Engineer Fails

Posted by: Hilger Hammond On: 16th October 2014 | no responses.

wood constructionBy Aileen Leipprandt

A general contractor’s common law indemnification claim against the project architect and structural engineer was dismissed where the general contractor could not establish that it was liable for the wrongdoings of either the architect or structural engineer. Sachse Construction & Development Co, LLC v AZD Associates, et al (Mich Ct. Appeals 2014). 

In this case, Sachse Construction & Development was the general contractor for a condominium project located in Royal Oak. The condominium association sued Sachse claiming numerous construction defects. Sachse, in turn, sued the project architect and the structural engineer asserting a variety of theories including (1) common-law indemnification; (2) third-party beneficiary; (3) unjust enrichment; and (4) negligence.

As to its common law indemnity claim, Sachse argued that the damages sought by the condo association were the result of the malpractice of the architect and engineer, not Sachse. The trial court disagreed with Sachse, ruling that the evidence presented did not establish any claim by the condominium association for damages caused by the architect or engineer. Instead, the association had sued Sachse for construction defects solely related to Sachse’s work. The trial court dismissed Sachse’s indemnity claim and Sachse appealed.

The Court of Appeals upheld the trial court’s ruling, affirming the longstanding principle that in order to prevail on a claim for common law indemnification, the party seeking indemnity must show: (1) that it has been held liable for the acts of another, and (2) that it is “free from fault in the underlying wrongful act that gave rise to the liability at issue.”

Hilger and Hammond to Speak at CFMA 2014 Midwest Regional Conference

Posted by: Hilger Hammond On: 23rd September 2014 | no responses.

0307Stephen Hilger and Benjamin Hammond will participate as speakers at the CFMA 2014 Midwest Regional Conference, Tuesday, September 23, 2014 in Oak Brook, Illinois. CFMA is dedicated to bringing together construction financial professionals and those partners serving their unique needs. CFMA serves more than 6500 members via 89 chapters located throughout the US and Canada.

Stephen Hilger was invited to present “Top 20 Contract Clauses. Hilger is engaged in complex commercial litigation with an emphasis on construction law, has tried many cases in multiple state courts, and has appeared in several state courts of appeal, the Michigan Supreme Court, United States District Courts, United States District Courts of Appeal, the United States Supreme Court on cert, and multiple arbitration tribunals across the country.

Benjamin Hammond will be discussing “Construction Defects”. A significant portion of Hammond’s practice concerns construction law, where he is routinely engaged in complex litigation. Hammond’s clients are representative of all parties involved in construction, including owners, design professionals, general contractors, subcontractors, and suppliers.

New Michigan Law Allows Architects and Engineers to Use Electronic Seals and Signatures

Posted by: Hilger Hammond On: 15th January 2014 | no responses.

1191990_61729697By: Benjamin H. Hammond

For several years architects and engineers have had the technical ability to affix an electronic seal or signature to drawings, but were prevented from doing so under the law when submitting those plans to governmental authorities for approval. That has now changed and the law in Michigan has finally caught up with technology.

Effective February 25, 2014, architects and engineers will be able to submit a plan, plat, drawing, map, title sheet of specifications, addendum, bulletin or report to most governmental agencies for approval with an electronic seal and signature.

House Bill 4585 provides that a “seal” now includes an electronic seal, and a “signature” now includes an electronic signature. “Electronic seal” means a seal created by electronic or optical means and affixed electronically to a document or electronic document. “Electronic signature” means a signature created by electronic or optical means and affixed electronically to a document or electronic document with intent to sign the document.

However, the bill does not require plans and reports be submitted electronically and allows for individual local units of government that do not have the capability to accept and store documents electronically to still require paper copies to be submitted. One should double check with the local authority prior to the submission of any plans to ensure they will accept electronic seals and signatures.

These subtle yet important changes should improve the efficiencies and time involved in submitting plans for approval and receiving the green light on projects across the state.

Michigan Contractors May Face New Law — The Michigan False Claims Act

Posted by: Hilger Hammond On: 18th October 2013 | no responses.

law books 2
By: Mark A. Rysberg

Earlier this year, a bill was introduced in the Michigan House of Representatives to enact a False Claims Act (“MFCA”).  H.B. 4020, 2013.  If enacted, the MFCA would establish civil remedies and penalties for presenting false or fraudulent claims to the State of Michigan and local governmental entities.  Those remedies and penalties may include the possibility of exemplary damages, attorneys’ fees, and costs.  Similar laws in the context of federal contracting are intended to, among other things, prevent government contractors from receiving compensation for work that was not performed, and provide an incentive for whistleblowers in the form of receiving 15-20% of the government’s recovery.

First, contractors working on public projects in Michigan should evaluate their payment application practices.  The payment application process typically involves two forms—a payment application and sworn statement.  Those forms may provide the basis for a MFCA action if a contractor makes a construction claim, change order request, or demand for payment that is inconsistent with the sworn representations in prior sworn statements or applications.  Contractors should consider the substance and representations contained in that documentation.

Second, applications and sworn statements generally require a notarized signature, which is sworn testimony regarding the accuracy of those documents.  A sworn statement typically identifies: the names of the persons performing the work, providing materials, or providing any labor for the project; the contract amount for each person; the amount paid to each person; and the amount currently owed to each person, as of the date of the sworn statement.  Payment applications similarly certify that the work represented in the application has been completed, that the applicant has paid for all work represented on prior applications, and that the amount currently requested is due.

These forms create a snapshot of the project based exclusively on the sworn testimony of the applicant.  When these documents are prepared monthly they provide a history of payment and performance over the entire project.  When prepared correctly, these documents should consistently track the critical aspects of the project.  Difficulties arise when claims for additional payment are not accounted for in payment request documentation.

Contractors should keep the False Claims Act in mind when preparing payment requests and construction claims on public projects.  Under the MFCA, as currently proposed, claims are generally defined as “a request or demand, whether under a contract or otherwise, for money or property that is” presented to the government or others acting on its behalf.  That means that payment applications, sworn statements, change order requests, construction claims, and pre-litigation payment demands are claims under the False Claims Act.

Contractors should take care to only submit requests for payment, of any kind, that have been substantiated with documentation and analysis.  Inflating claims for purposes of negotiation, or making claims that, at the time they are made, are not supported could lead to a violation, or perceived violation, of the MFCA.  To avoid possible problems, contractors should develop claim preservation and submission practices so that the contractor can quickly respond to the submission requirements included in most construction contracts, while at the same time being able to support such claims.  In turn, timely claim and change order requests can be incorporated into payment application documentation to prevent inconsistencies with prior sworn representations.

The introduction of the MFCA sends a clear message.  Contractors performing work on public projects should be proactive.  Policies and procedures intended to avoid a possible violation of the False Claims Act should be implemented in advance of the legislation being enacted.  In addition to avoiding a violation, such measures are simply good business.