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.”

 

Construction Contract Clauses, Part 4 – Express Trust Clauses

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

By: Mark A. Rysberg

An express trust clause can be used in a construction contract to create a trust over payments received by a contractor or subcontractor. The effect of establishing a trust is that it creates property rights in construction project payments and obligates the contractor receiving such payments to fulfill the fiduciary duty of using the trust funds to pay the named beneficiaries. The following is an example of an express trust clause:

All payments made by Contractor to Subcontractor shall be held in trust for the benefit of the Contractor and those persons having contracted with Subcontractor to provide materials or labor to the project.

 

These clauses can act as a sword or shield depending on the situation. In scenarios involving non-payment downstream, an express trust clause can provide the named beneficiaries (owners, contractors, subcontractors, and suppliers) with additional claims that can be asserted against a trustee that has received payment but failed to in turn issue payment downstream. These clauses can also protect all of the parties from claims asserted by unrelated creditors and bankruptcy trustees that may attempt to take the funds.

In short, if you run across an express trust clause you need to have a clear understanding of what your obligations may be. To that end, having contracts reviewed before execution and discussing these issues with legal counsel is an important step in protecting yourself.

If you enjoyed this article, you might also like “Construction Contract Clauses, Part 3 – Site Investigation Clauses.”

Construction Contract Clauses Part 2- Flow-Through Provisions

Posted by: Hilger Hammond On: 15th November 2016 | no responses.


By: Mark A. Rysberg

Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

Flow-through provisions are common in construction contract documents. In essence, when a general contractor enters into a construction contract with an owner, the general contractor obligates itself to perform certain functions and services for the owner. The general contractor then subcontracts some of those functions to sub-contractors. A flow-through provision is language in a contract that makes one party obligated to fulfill the obligations of another party. In essence, by way of example, if properly drafted, it could prevent a subcontractor from arguing that the obligations it owed a general contractor were different from the obligations the general contractor owed the owner. However, the language of these provisions needs to be carefully read and construed to determine precisely the specific obligations of the parties.

Further, flow-through provisions can work two ways: A subcontractor can owe a responsibility to the owner, and likewise, a general contractor can owe a subcontractor the same obligations that an owner owes the general contractor. The form and extent of flow-through provisions depends specifically upon the language of each contract document. Consider the following example:

The Subcontractor shall be bound to the Contractor by the terms of this Agreement and, to the extent that provisions of the Contract Documents between the Owner and Contractor apply to the Work of the Subcontractor as defined in this Agreement, the Subcontractor shall assume toward the Contractor all the obligations and responsibilities which the Contractor, by those Documents assumes toward the Owner and the Architect/Engineer, and shall have the benefits of all rights, remedies and redress against the Contractor which the Contractor, by Those Documents, has against the Owner, insofar as applicable to this Subcontract, provided that where any provision of the Contract Documents between the Owner and Contractor is inconsistent with any provision of this Agreement, this Agreement shall govern.

These clauses are important for several reasons. However, at its core, these provisions are intended to transfer risk from one party to another. Risk transfer is important in construction contracting because it is important to put the risk on the party that is in the best position to prevent the risk or insure around it. In that sense, flow-through provisions can be thought of as serving the purpose of aligning the parties’ performance obligations with regard to insurance and risk transfer.

Construction contracts have many different clauses that are intended to work together to accomplish risk transfer and to define performance obligations. When the parties to a contract have a different understanding about what terms are in a contract, problems can result. Therefore, it is important to understand and include thoughtfully planned and precise contract clauses in your construction contracts.

Attorneys who practice in construction law can be a valuable resource for contract review and in-house training that is intended to avoid costly mistakes later.

If you enjoyed this article, you might also like “Construction Contract Clauses Part 1: Integration Clause.”

Construction Contract Clauses Part 1: Inegration Clause

Posted by: Hilger Hammond On: 8th November 2016 | no responses.

2016-11-08_13-01-55By: Mark A. Rysberg

Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

The first clause to be considered is the integration clause. An integration clause is language in a contract that prohibits telling a court or an arbitration panel that prior oral arguments, or even prior written agreements, are part of the contract documents. For example, suppose an owner and a general contractor enter into an agreement. The agreement has ten elements, and the parties were discussing orally the eleventh element. If this oral eleventh element is not reduced to writing and included in the written document, chances are that that oral provision will not be enforced due to the fact that the contract is “fully integrated” because it contains an integration clause. A “fully integrated” contract means that all of the prior dealings between the parties have culminated into the written contract and a court or arbitration panel will not look beyond the written contract to determine the obligations of the parties. The following is a common example of an integration clause.

The Contract Documents enumerated in this Agreement form the contract for construction, represent the entire and integrated agreement between the parties hereto and supersede all prior negotiations, representations or agreements, either oral or written.

Notice that the language above makes it clear that the only contract terms are those embodied in the contract documents that are specifically identified in the contract. In other words, prior oral and written agreements are not part of the contract if an integration clause is included. Now, consider why this is important.

First, a written contract is intended to specify all of the terms of the agreement. If an integration clause is not included, there can be significant questions about the terms of the agreement.

Second, enforcing oral or piecemeal contracts is costly and difficult. Imagine having to piece together a contract at the end of a project based on notes, emails, and memory. That can be a difficult, if not impossible, task.

Third, basing decisions on a contract that is not fully integrated can be risky. As you may imagine, decisions to default or terminate are usually made based on the language of the contract. The precursor to those decisions is usually performance requirements set out in other sections of the contract, such as payment timing and scheduling. If one party’s expectations are based on the belief that one of those terms was agreed upon orally before the contract was signed and the other believes those terms are defined by the signed contract, there can be a serious problem because the parties will likely operate on different understandings of their respective obligations. As a result, the party issuing a default may actually be the party in default.

Construction contracts have many different clauses that are intended to work together to accomplish risk transfer and to define performance obligations. When the parties to a contract have a different understanding about what terms are in a contract, problems can result. Therefore, it is important to understand and include planned and precise contract clauses in your construction contracts.

Attorneys who practice in construction law can be a valuable resource for contract review and in-house training that is intended to avoid costly mistakes later.

If you enjoyed this article, you might also like “Construction Contract Clauses Part 2: Flow-Through Provisions.”

 

Crossing a Finish Line Can Be Tough

Posted by: Hilger Hammond On: 16th September 2015 | no responses.

The following article was originally published in Builder’s Exchange Quarterly. Summer 2015 edition.

track-finish-1442273By Aileen Leipprandt

It was reported that elite runner, Hyvon Ngetich, literally crawled the last two tenths of a mile to cross the finish line in the Austin Marathon on February 15, 2015. After leading most of the race, her body simply gave out. Instead of calling it quits, she crawled on her hands and knees to the end, taking third place with a time of 3:04:02.

Closing out a construction project is not that dramatic, nor should it be. As legal advisors to the construction industry, however, we often see relationships disintegrate at the final stages of the Project. What can you do to finish strong?

First, start well to finish well. Even before groundbreaking, prepare for close out by clearly defining responsibilities and deliverables in your contract. It’s easier to negotiate terms at the beginning of a project when relations are cordial, rather than the end when parties get sidetracked by unresolved claims. Clearly define Substantial and Final Completion and the relationship of those dates to warranty obligations, insurance requirements, liquidated damages and the statute of limitations. Specify when the Owner’s obligation for operation, maintenance, security, insurance and utilities begins to avoid gaps in insurance coverage. Evaluate whether warranty and as-built requirements are commercially reasonable. Confirm the punch list procedure has sufficient controls so that the process does not get bogged down by endless additions. And, to minimize subcontractor claims, negotiate a reduction in
retention as milestones are met.

Second, timely address claims to the extent you can. Deferred claims merely fester, derail close out and ultimately spawn calls to the legal team. Strive to neutralize claim language to avoid igniting emotion during the project.

Third, establish clear and efficient financial controls. You don’t want to chase missing lien waivers nor do you want to absorb trailing invoices that are too stale to present to upstream parties.

Fourth, don’t overlook the importance of comprehensive owner training on capital equipment. Proper handover of sophisticated systems can reduce callback and prevent damage to systems, thereby reducing warranty claims or contractor/design professional blame for operational challenges.

Fifth, carefully document all policies of insurance that apply to the project while the policy numbers, carriers, coverage limits and additional insureds are easily identifiable.

Finally, think creatively about solutions to end a difficult project on a high note. Diminish arm wrestling over whether work is truly defective by providing a warranty bond or extending the warranty. Do not overlook the reputational value gained through a smooth close out process. It’s not just first impressions that matter. Especially on construction projects, last impressions have a bigger and lingering impact. Just as Hyvon Ngetich’s heroic effort to cross the finish line in Austin, Texas left a lasting image of courage and perseverance, much can be gained when construction stakeholders focus not only on “when” a project should be completed, but also on “how.”

 

 

General Contractor Not Entitled to Indemnity From Subcontractors Where General Contractor Liable Under Common Work Doctrine

Posted by: Hilger Hammond On: 2nd January 2014 | no responses.

bluepaintBy Aileen Leipprandt

In the recent case, National Fire, et al. v Kosters & DeVries, Inc., (Nov. 2013), the Court of Appeals rejected a general contractor’s request for indemnity from its subcontractor for a construction injury accident that occurred in a common work area. In National Fire, Pioneer (the general contractor), subcontracted with Kosters & DeVries (K&D) for K&D to provide painting services on a condominium project called Union Square. One of K&D’s employees was injured during the work. The employee sued Pioneer and others claiming that Pioneer was negligent for failing to guard against a “readily observable” and “avoidable” danger in a common work area, often called the “Common Work Area Doctrine.”

While that personal injury suit was pending, Pioneer’s general liability carrier, National Fire, separately sued K&D in a “declaratory judgment action” seeking a court order that K&D must indemnify Pioneer under the indemnity provision in the parties’ subcontract. The trial court agreed with National Fire and entered an Order, stipulated to by National Fire, requiring K&D to indemnify Pioneer for any liability imposed on Pioneer arising from acts or omissions of K&D or its employees.

Meanwhile, in the personal injury lawsuit, the jury entered a verdict in favor of the injured worker, assigning 70% of the fault for the injuries to the injured employee and 30% of the fault to Pioneer. Thus, the injured worker’s total recovery was reduced by 70%. National Fire paid the plaintiff that portion of the jury verdict (30%) related to Pioneer’s assessed liability. National Fire then sought to garnish K&D for this payment claiming that K&D was required to indemnify Pioneer pursuant to the Declaratory Judgment Order. The trial court agreed. The Court of Appeals, however, reversed, finding that Pioneer’s liability arose because of Pioneer’s own negligence in failing to maintain a safe common work area. The appellate court reasoned that to the extent that K&D’s employee was negligent, the jury had already reduced the verdict by 70% to reflect that employee’s negligence. Therefore, the remainder of the jury verdict, 30%, related only to Pioneer’s negligence for which Pioneer was not entitled to indemnity from K&D per the language of the Declaratory Judgment Order.

Consider, however, if Pioneer’s subcontract (and the ensuing Declaratory Order) had required K&D to indemnify Pioneer, even for Pioneer’s own fault (except where Pioneer was solely negligent), Pioneer (and therefore National Fire) could have sustained the indemnity claim. Instead, K&D’s indemnity obligation was limited to those circumstances as described in the Declaratory Order. Lesson learned – the language of any indemnity provision (and Court Order based on such provision) must be carefully drafted.