August 07, 2018
Author: Elissa Gainsburg, Esq.
Organization: Pardo Gainsburg, PL
A. Forms Of Project Delivery Methods
The most common types of construction contracts entered into between owners and general contractors, and general contractors and subcontractors, are “lump sum contracts”, “cost plus contracts” and “unit price contacts”.
A lump sum, or “stipulated sum” contract sets forth a specific sum to be paid to the contractor in exchange for performing all the work within the scope of the contract. Under this type of contract, the contractor assumes the risk that its performance of the work within the scope of the contract will cost more than it had anticipated, since it will not be reimbursed for any additional costs incurred while performing the work required by the Contract.
A cost plus contract provides that the contractor will be reimbursed for all costs actually incurred while performing the work within the scope of the contract, plus an agreed upon percentage or fixed amount for profit and overhead. This type of contract often includes a “guaranteed maximum” or “cap” which fixes the maximum sum to be paid the contractor for the cost of performing the work. In addition, the cost plus contract often includes incentive clauses that allow the contractor to share in any savings realized by the agreed upon maximum contract price. Although the cost plus contract generally does not include the contractor’s off site overhead and administrative expenses as a cost of the work for which reimbursement is required, parties to a cost plus contract must be careful to spell out which costs are included, and which are excluded, before the contract is executed to avoid a potential dispute over which costs will be included in the final contract price.
Finally, a unit price contract sets forth a price to be paid the contractor for completing each of several identical or similar “units” of work. This type of contract is often used on jobs where the contractor is required to perform a series of similar tasks, although the total number of tasks to be performed has not yet been determined at the time the contract is signed.
Other types of construction contracts being used more frequently on public jobs include the “design/build” contract and the “construction management” contract. The design/build contract is usually a phased agreement under which the design-builder and the owner first develop a design concept and a budget and then the design-builder develops construction drawings and finally builds the project. The design-build contract is intended to vest responsibility for both the design and construction of the project in a single entity.
Under the “construction management” contract a contractor or construction manager is typically employed to administer and manage the project, either instead of or in conjunction with the project architect. In many cases the construction manager acts as the owner’s agent for the purpose of “subcontracting” the work. In other instances the construction manager is a consultant to the owner and oversees the work of a general contractor who subcontracts the work.
B. The Subcontract And Flow-Through Relationships
The purpose of a “flow-through” clause is to assure that the general contractor’s subcontractors are bound to the prime contractor in the same manner that the prime contractor is bound to the owner. It essentially requires the subcontractor to stand in the shoes of the prime contractor with regard to the rights and obligations encompassed in the prime contract to the extent they arise within the purview of the subcontract. The primary clauses for which a flow-through clause is important are the following:
- Payment Clause, including required documentation for payment;
- The Scheduling Clause;
- The Changes Clause;
- Damages Clause (Actual, Liquidated, Consequential)
- Indemnification requirements; and
- Claims and Disputes provisions.
C. The Key Clauses
1. Payment Clause And The Pay-If Or When-Paid Scenarios
One of the essential elements necessary to create an enforceable contract is the exchange of consideration between the parties. The most common consideration given in a construction contract is the exchange of labor, services and/or materials for pay. Absent an agreement or understanding concerning payment to be made to the contractor in exchange for its work, no binding contract could exist.
Typical construction contracts contain separate and distinct provisions regulating progress and final payments for the work performed. Progress payments are payments made to the Contractor on specified dates for the work completed as of specified times or at designated stages of the project. Construction contracts ordinarily require the contractor to submit an application for progress payment to the owner indicating the amount of work completed by the end of each payment period, together with supporting documentation that substantiates the contractor’s right to payment.
When an architect provides contract administration, the contractor’s application for payment is typically required to be submitted to the architect for review and approval prior to the time payment becomes due. If the architect is satisfied that the percentage of work set forth in the application for payment has in fact been satisfactorily completed, the architect certifies the application for payment, and payment is required to be made within the time set forth in the contract. Since the time involved in performing a detailed inspection of all the work would significantly delay payment of each application, construction contracts ordinarily provide that an architect’s certification of payment does not constitute acceptance of the work, but merely represents that the work appeared in the application and the quality of work appears to conform to the intent of the contract documents.
Several methods are commonly used to determine what percentage of the contract price must be paid in accordance with each separate application for payment. Under a lump sum contract, the owner and contractor ordinarily agree upon a “schedule of values” prior to commencement of the work that reflects the cost of completing each separate portion of the work. On each application for payment the contractor indicates the percentage of each portion of the work completed, which is multiplied by the total cost of that work reflected on the “schedule of values” and added together to arrive at the progress payment due.
Under a “cost plus contract”, the contractor is required to submit satisfactory proof of actual costs incurred, such as time slips, paid invoices, delivery tickets, etc. Under the “unit price contract”, the number of units completed is simply multiplied by the agreed upon unit price to establish the amount due.
It is common in the construction industry to subject progress payments to “retainage”, which is an agreed upon percent, (ordinarily 10%), of the amount due that is withheld from each progress payment to provide security until completion of the contract work. Construction contracts typically include provisions allowing the owner under a Prime Contract, and the contractor under a subcontract, to pay for the correction of deficient work and/or to withhold damages incurred under the contract from payments otherwise due, and retainage provides a fund from which these costs can be paid. Earned retainage is ordinarily paid at the time of final payment.
Construction contracts ordinarily require payment of the entire unpaid balance of the contract sum, including retainage (final payment) within a specified time period after the contract has been fully performed. In order to obtain final payment the contractor is ordinarily required to correct any work that was not performed in accordance with the contract documents, provide sufficient evidence that the necessary insurance and warranties are in effect, provide consent of the surety, if any, to final payment and provide an affidavit or other sufficient evidence that any indebtedness connected with the work for which the owner or his property might be liable has been satisfied, including releases and waivers of liens or bonds. Although acceptance of final payment by the contractor ordinarily constitutes a waiver of claims for additional compensation except those previously made in writing and identified as unsettled at the tie a final application for payment is submitted, the contractor generally remains responsible for liens, claims, security interests and encumbrances arising out of its work, failure of the work to comply with the contract documents that was not apparent upon final inspection, and the performance of warranty work.
An interesting clause commonly found in subcontract agreements that has been the subject of much litigation is the “pay when paid” clause. This clause ordinarily provides that final payment shall not be due the subcontractor until final payment has been received by the contractor from the owner. In what appeared to be an effort by the judiciary to protect subcontractors form bearing the financial burden of irresponsible owners, the Florida Supreme Court declared that “pay when paid” clauses are unenforceable unless they clearly shift the risk of non-payment by the owner to the subcontractor, and do not conflict with any other terms in the contract documents. OBS Company, Inc. v. Pace Construction Corporation, 558 So. 2d 404 (Fla.1990); Peacock Construction Company, Inc. v. Modern Air Conditioning, Inc., 353 So. 2d 840 (Fla.1977). If the language in a “pay when paid” clause is ambiguous, the clause will be interpreted as fixing a reasonable time within which the contractor must pay its subcontractor. DEC Electric, Inc. v. Raphael Construction Corp., 558 So.2d 427 (Fla.1990). Bentley Construction Development & Engineering, Inc. v. All Phase Electric & Maintenance, Inc., 562 So.2d 800 (Fla. 2nd DCA 1990). The following “pay when paid” clause was found to shift the burden of non-payment by the owner to the subcontractor:
“Final payment, inclusive of retention, shall be made within 30 days of completion of the construction project, acceptance of the same by the owner, and as a condition precedent, receipt of final payment of [contractor] from the owner or prime contractor, as the case may be.” Dyser Plumbing Company v. Ross Plumbing & Heating Inc., 515 So.2d 250 (Fla. 2nd DCA 1987) The Court in OBS v. Pace also declared that even a valid “pay when paid” clause will not provide a defense to claims against the contractor’s surety under a payment bond.
2. The Scheduling Clause
It is important that the parties each acknowledge, understand and agree on the duration of time necessary to perform the agreed-upon work under the contract. The American Institute of Architects contracts typically provide for the parties to agree upon several factors relating to scheduling, such as the following:
_ The contractor confirms that the time is a reasonable one.
_ The date specified is the date specified on the agreement. A201 also provides for a blank for a different date. If no agreement is established in a notice to proceed, the contractor must give five days’ notice before he begins to allow security holders to perfect their liens and establish their priorities. A101/201 does not give specific directions as to whether the contractor must actually commence work when the period for measuring compliance commences.
_ Substantial Completion; requires a contractor to “proceed expeditiously”
_ The contractor will conform to the most recent schedule.
_ Sets up a system of schedules for submittals.
_ Limits time extensions for inclement weather
_ Requires a notice of intention to claim a time extension to include an estimate of the probable effect of delay on the progress of the work.
_ Leave the amount of time extension to the architect.
_ Claims by either party must be made within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later. Claims must be made by written notice. An additional Claim made after the initial Claim has been implemented by Change Order will not be considered unless submitted in a timely manner.
_ If the Contractor wishes to make Claim for an increase in the Contract Time, written notice as provided herein shall be given. The contractor’s Claim shall include an estimate of cost and of probable effect of delay on Progress of the Work In the case of a continuing delay only one Claim is necessary. The 21 day time limit applies.
_ If adverse weather conditions are the basis for a Claim for additional time, such Claim shall be documented by data substantiating that weather conditions were abnormal for the period of time and could not have been reasonably anticipated and that weather conditions had an adverse effect on the scheduled construction.
Written documentation is required. The contractor must prove that the specific weather conditions delayed the work. Alternate provision for owners:
_ Extensions of time will not be granted for delays caused by unfavorable weather, unsuitable ground conditions, Inadequate construction force, or the failure of the Contractor to place orders for equipment or materials sufficiently in advance to insure delivery when needed.
3. The Changes Clause
When an owner and contractor enter into a construction contract, it is anticipated that the project will be built in accordance with plans and specifications prepared by an architect. These plans typically are prepared prior to the execution of the contract, and detail the specific components of the project and the one in which they should be constructed. Although every owner anticipates that there will be no changes and consequent extra cost to the project, this is virtually never the case.
As there is no perfect construction, neither are there perfect plans and specifications. In addition, in the great majority of projects, the owner desires to make additions, deletions, or other modifications. If the owner and contractor were required to renegotiate the entire contract every time such a change occurred, the parties would devote most of their time to contract negotiation, rather than construction.
As a method to alleviate this potential. problem, as a general rule, construction contracts contain one or more clauses dealing with changes to the work. These clauses attempt to encompass all potential situations in which modifications to the construction process may necessarily be required as a result of a variety of potential causes. While the primary purpose of the changes clause is to permit such changes to the work with a pre-arranged method of negotiation established, other purposes are of benefit to both sides. The typical change order will allow the parties to:
1. Fix the cost of the modification.
2. Fix the adjustment of time to perform the work.
3. Fix the parameters of the work necessary to be performed.
4. Fix procedure for resolution of claims if no agreement as to price and time can be immediately negotiated.
5. Allow the owner to correct errors in the plans and specifications or seek additions to the. scope of work.
6. Confirm to the contractor that it will be paid for additional work performed.
7. Permit, the owner to modify the method of construction.
This ability to modify the contract is at variance with most contracts which require consent of the other party before modification can be made. The typical changes clause permits the owner to have a pre-existing consent to make modifications within the scope and character of the project.
Examples of changes clauses are as follows:
• A change order is a written order to the contractor signed by the owner and the architect, issued after execution of the contract, authorizing a change in the work or an adjustment in the contract sum or the contract time. The contract sum and the contract time may be changed only by change order. A change order signed by the contractor indicates his agreement therewith, including the adjustment in the contract sum or the contract time.
• The contractor, without invalidating the contract, may order changes in the work within the general scope of the contract consisting of additions, deletions or other revisions, the contract sum and the contract time being adjusted accordingly. All such changes in the work shall be authorized by change order and shall be performed under the applicable conditions of the contract documents.
• The owner may make changes in the drawings and specifications or the drawings and specifications or scheduling of the contract within the general scope at any time by written order. If such changes add to or deduct from the contractor’s cost of the work, from the contract shall be adjusted accordingly. All such work shall be executed under the conditions of the original contract, except that any claim for extension of time thereby shall be adjusted at the time of ordering such change.
• General provisions of the U.S. Government Standard Form: (A) The contracting officer may at any time without notice to the sureties by written order designate as indicated to be a change order, make any change to the work within the general scope of the contract, including but not limited to, changes: (1) In the specifications including drawings and designs),-; or (2), In the method or manner of performance of the work; or (3) In the government finished facilities, equipment, material, services or site; or (4) Directing acceleration in the performance of the work.
In addition to the above, the General Conditions, AIA Document A201, began offering another method of owner directed changes, that being Construction Change Directives (CCDs). The CCD is defined as:
A construction change directive is a written order prepared by the architect and signed by the owner prepared by the architect and signed by the owner and architect, directing a change in the work and stating a proposed basis for adjustment, if any, in the contract sum or contract time, or both. The owner may by construction change directive, without invalidating the contract, order changes in the work within the general scope of the contract consisting of additions, deletions, or other revisions, the contract sum and contract time being adjusting accordingly. A construction change directive shall be used in the absence of total agreement on the terms of a change order.
The above provisions allow the owner to direct that the modified work be performed even when there is no agreement by the contractor as to the cost or time adjustment which may be necessary. If no agreement can be reached, the architect determines the adjustment of the contract sum and contract time subject to later modification The CCD provision is an adoption of force account work in private construction.
Each of the above provisions is consistent in one respect, that being that the owner can modify the work without the assent of the contractor. However, the changes which may be directed by the owner must be those which are in the scope and character of the project. For example, modifications concerning the layout or changes of material or additions to the types of sizes of equipment to be used in a structure, are generally within the scope of the contract. However, where an owner determines that a two story building will become a ten story building, the scope and character of the construction has been changed. Such a revision could be considered a “cardinal change”. A cardinal change requires the consent of the other party Saddler v. United States., 287 F.2d 411, (Ct.Cl. 1961).
In Saddler, the contractor on a project for the construction of a levy embankment, contended that it was due additional costs due to the substantial increase in its requirement to provide additional quantities of materials to the project. The contractor alleged that due to a cardinal change which was outside the scope of the specifications, it was entitled to additional compensation for which it would not otherwise have been entitled. The United States insisted that the change order did not alter the quality, character nature or type of work originally contemplated, and therefore, no compensation was due. The Court of Claims stated:
The number of changes is not, in and of itself, the test by which it should be determined whether or not alterations are outside if the scope of a contract. ... A single change which is beyond the scope of a contract may be serious enough to constitute an actual breach of that contract. p413. The court went on to discuss a change in a construction contract in another case in which an entire building was eliminated from a hospital complex, and quoted as follows:
Certainly the authority vested in the contracting officer by this article'6f the contract to make "changes in the drawings and/or specifications of this contract and within the general scope thereof, did not vest him with the authority to eliminate entirely from the contract building no. 17. If he could eliminate one building from the contract under the guise of making changes in the drawings and specifications, he could likewise eliminate two or any number of buildings and thus entirely change the contract. The elimination of building no. 17 amounted to a cardinal change or alteration of the contract itself, a thing that could only be consummated with the consent of both parties to the contract... The plaintiff believes that the change which resulted in more than doubling the amount of weight to be placed was a cardinal change in the contract into which he had entered. We must agree with this contention. p. 414 As stated in Wunderlich Contracting Co. v. United States, 351 F.2d 1956 (Ct.Cl. 1965):
Each case must be analyzed on its facts and in light of its own circumstances, giving just consideration to the magnitude and quality of the changes ordered and their cumulative effect upon the project as a whole... p. 966.
From the above discussion, it is clear that major fundamental changes in the construction requested by an owner may be considered cardinal changes, and may not be properly the subject of a change order without the assent of the contractor. In addition to the above categories of changes, many construction projects also have become modified by “field orders” issued by the architect. A field order was long ago defined in AIA General Conditions as:
“Minor changes in the work not involving an adjustment in the contract sum or an extension of the contract time and not inconsistent with the intent of the contract documents”. AIA Document A201, General Conditions of the Contract for Construction (1970 Ed).
Although field orders have disappeared from the AIA General Conditions after the 1970 Edition, many architects still use this method to make such minor modifications to the contract. Although strictly speaking, such modifications should require no cost adjustments, occasionally field orders do contain some type of modification of the contract time and price. The CCD referred to above is undoubtedly an outgrowth, in part, of this method of change.
In addition to contractual changes clauses, occasionally a project will be affected by what is termed a Constructive change” to the project. Constructive change is one in which there is no directive to modify the work, but modification occurs as a result of outside influences or unwillingness of the owner to agree that change in contract time and place is necessary. Constructive changes typically occur in public projects, and examples may be generally categorized as:
1. Additional work or modification to the contract schedule resulting from defects in the plans and specifications.
2. Work directed to be performed in accordance with an owner's misinterpretation of the requirements of his plans and specifications.
3. Effects of third parties on the work; and
4. Constructive acceleration of the contract time.
Authority to Issue Change Orders
If change orders were executed in accordance with the terms of the contract provisions, prior to the commencement of work, there would be no question as to the authority to issue change orders. For example, in AIA Document A201, it is clear that the owner and the architect must execute a change orders. In the perfect project, all change orders would therefore be agreed upon before the specific work is commenced and executed by the owner, architect and contractor. Thereupon, the work would be performed, payment would be made, and everyone would move on to the next project.
However, as those familiar with the construction industry all know, this situation seldom, if ever, occurs. Even on projects where an attempt is made to execute change orders in conference with the contract documents, there occur instances where either this is not possible or practical, or just not done. Frequently, changes will be requested by the owner, either directly, or through his agents or employees, prices obtained from the contractor, and work performed before the execution of a change order. Just as frequently, the price for change orders is not agreed upon before the end of the construction and these unexecuted change orders result in litigation between the parties.
The question therefore is who is authorized to issue a change order? Again, there is no question in cases where the contract terms set forth specific persons or entities who may be allowed to originate additional work, that there is authority. It may be the owner, architect, contracting officer, clerk of the works, or others. However, most contracts inevitably involve changes requested by persons who may not be directly authorized by the contract to make such requests, or in a form not accordance with the contract provisions. For example, a contract may provide that a change to the work may only be allowed if directly made by the owner. In such a case, how does a contractor proceed if the architect directs him to perform work immediately, and for which he is promised payment? The item of work will generally be performed during the course of the project. It will be expected that there will be no problem later in the job collecting. A problem may arise, however, when the owner refused to pay for the work and claims that he has not authorized its performance, either through the architect or in accordance with the contract.
Other situations may arise in projects where the owner has his own representative on site to generally observe the construction. Most owners will not agree that their representatives are there to supervise the work, or direct its performance, even though in many instances that is exactly what they do. If changes are requested by the representative, who typically would also review the requisitions of the contractor in authorizing payment, does the contractor wait to execute a written change order between the parties or proceed with the work? In many instances, the contractor, again, will assume that he will be paid for that work, as authorized by the owner's representative and expect to be paid. When the owner comes back at the end of the job and claims he did not authorize that change, the contractor is again faced with a serious problem.
Fortunately, the courts have protected the contractor by applying principles of estoppel and waiver to such situations. Specific cases involving these issues have been determined by Florida Courts. In Bryan & Klefstead, 237 So.2d 236, the issues involved claims by the contractor against the owner which included claims for extra work performed in enlarging two canals on the owner's property. After commencement of the work on the project, the owner's engineers determined that the canals described in the plans and specifications would have to be substantially enlarged, and directed that this work be done. The question of their authority to bind the owner to payment for this additional work was simply determined by the court:
Whether or not the engineers had actual authority to authorize the additional work, clearly they had the apparent authority to do so. Therefore, plaintiff’s (owners) are bound by the engineers’ actions. Stiles v. Gordon Land Co., (Fla. 1950) 44 So. 2d 417; Russell v. Eckert, (Fla. App. 1965), 195 So. 2d 617; O’Neal v. Crumpton Builders, Inc., (Fla. App. 1962), 194 So. 2d 344. The court applied simple principles concerning apparent authority in establishing that the engineer’s direction to perform the work entitled the contractor to compensation.
In the case of Fletcher v. Laqua Vista 275 So.2d 579 (Fla. lst DCA 1973), the court dealt with the question as to whether the total sum payable to the contractor pursuant to a valid written contract be increased without the owner's written consent. In this case, the contract, an AIA form contract, set forth that a change order was valid if executed by both the owner and architect. In Fletcher, only the Architect had executed the change order. The owner claimed that without his signature on the change order, no sums were due.
The court in Fletcher, allowed recovery by the contractor and set forth perhaps the most important consideration in dealing with cases of this kind. The court said:
As is vividly illustrated by the above review, the printed AIA contract is replete with ambiguities, contradictions, and is an attempt to give all things to both parties. In such situation, the manner in which the parties themselves have interpreted the contract through their course of dealings is of utmost importance. p.580.
The important concept, the course of dealings between the parties, can be of tremendous benefit where the contractor has nor fulfilled the requirements of the contract with regard to changes and is faced with an owner who does not thereafter acknowledge that he had previously agreed to make payment. Fletcher went to say:
The record in this case is filled with the testimony to the record that both appellants and appellee had relied on architect Frye to make adjustments in the contract sum and have abided by his decision. Appellants knew that there would be at least a slight overage in the sums spent by appellee for overhead, but had never objected. Appellants accepted decreases in the cost of millwork, which were incorporated into a change order signed only by the architect Frye and the contractor. The parties themselves have interpreted the contract to allow an increase and a decrease in the contract sum with only the written signature of architect Frye. Even if the contract does not grant this authority to architect Frye, the parties through their course of dealings have interpreted and modified the document so as to place in the hands of architect Frye the final authority to authorize increases and decreases in the contract sum.
This concept of course of dealing is of importance not only with regard to the specific authority of a person or entity to issue a change order, but important to the entire construction process, and particularly with regard to oral change orders.
Oral Change Orders
Although contractors spend both time and money in preparing, negotiating, and finally executing contracts containing specific requirements with regard to the performance of additional work on a project, it is still common practice to not only commence, but also completely perform items of additional and extra work on a project upon an oral directive. The term "oral change order" frequently becomes synonymous with the term unpaid change order An owner will frequently agree to pay for work orally, especially if it is delaying the course of construction and then at the time when payment is due, not be so agreeable. This can occur due to the very reasons why it is desirable to execute written change orders. The contract price may not be what is expected, the scope of the work may be more than what was anticipated, or the time requested may be in excess of that reasonable. On the other hand, the owner may just not want to pay for the work and rely upon the contract provisions to avoid payment.
Contractor should be aware that provisions requiring the execution of a written change order for extra work have been upheld. Acquisition Corp. of America v. American Cast Iron Pipe Company 543 So.2d 878 (Fla. 4th DCA 1989). In addition, in the execution of a change order anticipated to cover a specific item of extra work, all items of work should be included within the change order or reserved for future determination within the change order. In the absence of such consideration, a claim that the other items should have been included within the change order will likely be denied. Indian River Construction Company vs. City of Jacksonville, 350 So. 2d 1139 (Fla. 1st DCA 1977).
Oral agreements to perform construction work are enforceable, and the law implies an obligation on the part of a person requesting that work be performed to pay for it. As stated in Delotto v. Fennell, 56 So. 2d 518 (Fla. 1951):
When parties enter into an agreement or contract for construction work and during the progress thereof alterations or changes are requested in the form of extras and otherwise, then the law implies an obligation to pay the reasonable costs thereof in addition to the stipulated sum named by the parties in the original agreement. (p. 520.)
See also, Forest Construction, Inc., vs. Farrel -Cheech Steel Company, Florida Diversified properties Division, 484 So. 2d 40 (Fla. 2nd DCA 1986); Southern Bell Telephone & Telegraph Company vs. Acme Electrical Contractors, Inc., 418 So. 2d 1187 (Fla. 4th DCA 1982); Davis vs. Department of Health and Rehabilitative Services, 461 So. 2d 210 ( Fla. 1st DCA 1984).
In addition, where additional work is required to make the work conform to the contract plans, it has been held that the work does not require a written change order to allow for recovery. See Acquisition Corp. of America, supra; City of Miami v. Nat Harris & Associates, Inc., 313 So. 2d 99 (Fla. 3rd DCA 1976).
The problem occurs where there are contractual provisions requiring that there are contractual provisions requiring that there be a written change order before there is an entitlement to payment. If the contract requires the owner’s prior written consent before claims for additional compensation will be allowed, such a provision, unless waived, is enforceable in Florida. Shore Drive Apartments v. Frank J. Rooney, Inc., 253 So. 2d 478 (Fla. 4th DCA 1971); Tuttle/White Construction, Inc., v. State, 371 So. 2d 1096 (Fla. 1st DCA 1979). The critical issue, therefore, is waiver, and as with cases cited with regard to the authority to order changes, there has been a line of cases establishing that waiver of such contract terms can occur. Broderick v. Overhead Door of Fort Lauderdale, 117 So. 2d 240 (Fla. 2d DCA 1959); Doral Country Club v. Curcie Brothers, Inc., 174 So. 2d 749 ( Fla. 3d DCA 1965); Pan American Engineering v. Poncho’s Construction, 387 So. 2d 1052 (Fla. 5th DCA 1980); King Partitions v. Donner Enterprises, 464 So. 2d 715 (Fla. 4th DCA 1985).
Perhaps the most well-known case involving waiver of the requirements of written change orders is Broderick, supra. In Broderick, the question arose concerning the contract price of the contractor to the owner. There was a question as to whether or not certain items not supported by written change orders should be allowed. While stating that the contract specified that extras must be authorized in writing, and that such a provision is valid and enforceable, the Court of Appeals went on to say:
We also recognize, however, that such a provision may be waived; and a waiver of the provision may be established by the subsequent course of dealing between the parties. . . Ordinarily, a written agreement cannot be abrogated nor modified by executory or parol agreement; but if the parol agreement has been accepted And acted upon by the parties, this rule does not apply. . . Extras, by statutory definition, consist of labor or services performed or materials furnished for improvement of real property authorized by the owner 'In addition to labor, services, or materials covered by the previous contract between the same parties. In the case here considered, the testimony, supported in part by the exhibits, amply establishes that during the construction of the building there were many changes in the plans authorized by the owners for extras incorporated in the construction, although these authorizations were not made in writing by the owners.The concept of course of dealing between the parties is many times the method by which contractors, in practice, perform the work.
4. Damages: Actual, Liquidated and Consequential
Actual damages are, as their name implies, the actual damages suffered by the aggrieved party. Typically, a party’s actual damages in the event of a breach of a contract will be greater than an agreed-upon liquidated amount. There are a number of categories of damages that a party may not take into consideration when determining the amount of proposed liquidated damages upon executing the contract, but which will be realized as actual damages in the event of a delay in completing the project. For the Owner, these damages include, but are not limited to, the cost to complete and correct and incomplete or deficient work left by the contractor, continued construction loan costs, costs to placate prospective purchasers (in a condominium) or tenants (in a commercial building) pending completion, tax ramifications and lost opportunity costs. For a Contractor, the additional costs may include loss of bonding ability and other costs that may not be recoverable under extended general conditions or otherwise.
The term “liquidated damages” has been defined as “a sum stipulated and agreed upon by the parties, at the time of entering into a contract, as being payable as compensation for injuries in the event of a breach” 17 Fla. Jur.2d, Damages § 98, at 116 (1980). A liquidated damages clause is generally enforceable in Florida when the damages that would result from a breach are uncertain at the time the contract is drawn; the amount stated as liquidated damages represents a reasonable forecast of just compensation for the harm caused should a breach occur and the language is clear that the parties intended to provide for liquidated damages and not a penalty. See: Hyman v Cohen, 73 So.2d 393 (Fla. 1954); Hawk’s Cay Investors, Ltd. v. Brandy Marine of the Keys, Inc., 524 So.2d 681 (Fla. 4th DCA 1988). However, there are no concrete rules as to whether a stipulated sum is a penalty or a valid liquidated damage provision and the courts will always determine the issue on a case-by-case basis, considering the particular facts involved. Moreover, a liquidated damages clause that appears enforceable at the time of contracting may later be declared invalid when circumstances at the time of breach render enforcement of the provision unconscionable. Multitech Corp. v. St. Johns Bluff Investment Corp., 518 So. 2d 427 (Fla.1st DCA 1988).
Contracting parties may impose liquidated damages for the breach of certain contractual provisions while providing actual damages for the breach of others. As a result, construction contracts often award liquidated damages for the failure to complete performance under the contract on or before an agreed upon completion date while providing for the recovery of actual damages for failure to build in strict accordance with the plans and specifications. This provision, if reasonable, is ordinarily enforceable as liquidated damages as opposed to a penalty since the parties can be expected to rely upon the completion date set forth in the contract, and any failure to meet the completion date will most certainly result in damages, the actual amount of which would have been difficult to ascertain at the time the contract was executed. However, where the acts or omissions of the non-breaching party contribute to the breach activating the liquidated damages provision, a liquidated damages provision will generally not be enforced. Midstate Hauling Company v. Watson, 172 So.2d 262 (Fla. 2nd DCA 1965) citing United States v. United Engineering & Contracting Company, 234 U.S. 236,(1914).
Consequential damages are those, as the name implies, consequential to the act or failure giving rise to a claim of breach of the applicable contract; they are not the type of damages one would anticipate in the event of a breach of the contract. The AIA specifically excludes consequential damages, citing such damages as rental expenses, loss of use, income, profit, financing, business and reputation and loss of productivity as damages that would be consequential to the owner. The AIA also cites consequential damages for the contractor as principal office expenses, losses of financing, business and reputation and loss of profit other than profit arising from the subject project.
5. Indemnification Requirements
Construction contracts often contain indemnification clauses requiring the parties to indemnify and hold each other harmless from claims and liabilities arising out of their performance, and the performance of others over whom they maintain control on the project. In light of the numerous parties and separate contracts ordinarily involved in a construction project, these indemnification provisions often provided an important chain of contractual responsibility between a party who is damaged and a wrongdoer with whom he may not otherwise be in privity.
Under Florida law a party to a construction contract may obtain indemnification for his own negligence from another party, although in order to do so the contract must contain a specific “monetary limitation” on the extent of indemnification, or the person indemnified must have given “specific consideration” to the indemnitor. Fla. Stat. §725.06. The monetary limitation and/or specific consideration given to the indemnitor should appear within the indemnification clause in the contract.
6. Claims And Disputes Provisions
Many construction contracts now contain arbitration clauses requiring the parties to submit disputes arising under the contract to arbitration, as opposed to a court of law. Arbitration in the state of Florida is governed by Chapter 682 of the Florida Statues. Arbitration has become a more popular method of resolving construction disputes because it is generally a quicker and less formal process than civil litigation. In addition, the arbitrators appointed to resolve the construction dispute, who are often selected by agreement of the parties themselves, have specialized knowledge in the field of construction whereas a judge or jury may have no independent prior knowledge of what is customary in the construction field. While a corporate party is not required to retain counsel in arbitration, as they would be in litigation, a party does have a right to be represented by an attorney in arbitration proceedings. Finally, arbitration offers the parties privacy as opposed to proceedings in a court of law which are generally a matter of public record.
On the other hand, because arbitration proceedings do not follow specific rules of civil procedure or evidence, they do not afford the parties the same procedural safeguards intended to exclude prejudicial and unreliable evidence that are provided in a court of law. By agreeing to arbitration, parties to a construction contract waive their right to a trial by jury and are often bound by laymen’s decisions regarding issues of law that are ordinarily decided by a judge. In addition, absent clear mistake of law that appears on the face of an arbitration award, fraud, corruption or misconduct by the parties or the arbitrator, a party who is dissatisfied with the results of arbitration will likely have no basis to appeal the arbitration award. Florida Statute Chapter 682 is referred to as the Florida Arbitration Code; however, since Chapter 682 is limited in its scope, many arbitration agreements utilize the rules and services of the American Arbitration Association (“AAA”). The American Arbitration Association has even established the Construction Industry Rules to govern the procedure for construction disputes. These forms and rules can be obtained from the AAA Arbitration clauses in contracts are generally enforceable and unless both sides waive arbitration, parties can be compelled to attend arbitration in accordance with the contract. Because of this, parties should be cautious as to the breadth of their contractual arbitration clause. An arbitration clause can be as broad as requiring every issue that arises under or in relation to the contract to be arbitrated, or as narrow as to address only certain specific issues. The parties should always understand that everything that could conceivably fall under the ambit of the provision will be arbitrated (unless the parties agree to the contrary at the time of the dispute) and also recall that they can always agree at a later date to arbitrate any dispute.
An arbitration agreement must contain the procedures and rules to be used during the arbitration proceedings. Furthermore, the arbitration agreement should be definite as to what issues can be arbitrated. Vague arbitration provisions are not enforced by the Courts. See, Wood Hopkins Contracting Co. v. C.H. Barco Contracting Co., Inc., 301 So.2d 479 ( Fla 1st DCA 1974) However, subcontracts with incorporation clauses containing an arbitration clause are enforceable. See, Marthame Sanders & Co. v. 400 West Madison Corp., 401 So. 2d 1145 (Fla. 4th DCA 1981). A party to an agreement or provision for arbitration may move to compel the other party to submit to arbitration. If the Court is satisfied that there exists no issue regarding the making of the provision or agreement, it shall grant the application. Fla. Stat. § 682.03; See, Collier Land Corporation v. Royal Palm Beach realty, Inc., 338 So. 2d 859 (Fla. 3d DCA 1976).
When a party files a lawsuit for determination of the controversy he waives his right to arbitration. See, Ojus Industries, Inc. v. Mann, 221 So. 2d 789 (Fla. 3d DCA 1969). However, in Collier Land v. Royal Palm Beach Realty, Inc., 338 So.2d 859 (Fla. 3d DCA 1976) the Court held that although the Plaintiff filed a complaint and then a motion to compel arbitration, the motion to compel arbitration did not constitute a waiver as the Plaintiff’s conduct was not so inconsistent with its arbitration demand. In Beverly Hills Development Corp. v. George Wimpey of Florida, Inc., 661 So. 2d 969 (Fla 5th DCA 1995) the Court held that waiver of arbitration may occur by active participation in a lawsuit or by taking action which is inconsistent with the right to arbitrate. Nevertheless, if a contractor is proceeding under the arbitration provisions, it may simultaneously file a lien and a foreclosure complaint to preserve its lien rights. See, Oakdale Park, Ltd. v. Byrd, 648 So. 2d (Fla. 1st DCA 1977); Genstar Southern Development, Corp. v. Troup Bros., Inc., 396 So. 2d 211 (Fla. 3d DCA 1981).
While the parties can agree otherwise in their contract, the AAA rules provide for the use of a three member panel of arbitrators if the amount of the claim is greater than $200,000. The parties are provided with a list of arbitrators from which each may strike four without cause. Thereafter, each party numbers the potential arbitrators remaining on its list in the order of preference. The AAA then chooses the three arbitrators from each party’s list. One arbitrator hears the dispute if the amount of the claim is less than $200,000; however the parties may choose to have a three member panel at a charge of approximately $2000. The parties may also establish a mechanism in their contract to choose arbitrators. One option is to allow each party to choose an arbitrator and the have each party’s arbitrator choose the third arbitrator.
The arbitrator(s) have the power to administer oaths, issues subpoenas for the attendance of witnesses and for the production of documents, and may apply to the court for orders compelling attendance and compliance. Fla. Stat. § 44.304(7) Within 30 days of the adjournment of the arbitration proceedings, the arbitrator(s) normally notify the parties of their decision. At that time the transcript and decision is sealed and filed with the clerk. F.R.C.P. 1.820(g). If either of the parties is not in agreement with the result, such party has the right to request that the circuit court amend or vacate the arbitration decision. However, a party may apply for vacation of an arbitration award only if the award was obtained by fraud, corruption or undue means, or if the arbitrator was biased in conducting the proceedings. Fla. Stat. § 682.13. There are numerous advantages to arbitration, including but not limited to, speed in resolution of the dispute, the reduced cost versus protracted litigation, and the fact that hearsay evidence may be admissible as an arbitration panel can hear all evidence they consider significant. Also, arbitration may proceed without discovery being conducted and the arbitrator(s) may have expertise in construction, and thereby better able to make a determination on the dispute than a jury panel. However, arbitration may proceed too quickly, preventing a party from obtaining documents and witnesses necessary to present its case. One must keep in mind that arbitration proceedings can also result in erroneous conclusions that may not be subject to reversal since the arbitration panel does not have to justify its reward, which may be based upon error in law or fact.
Mediation is a confidential process and the parties may refuse to disclose and prevent any other individual present at the mediation from disclosing all communications made during these proceedings.
Mediation is less costly than proceeding with litigation proceedings, which may involve a lengthy discovery process and trial. Additionally, mediation may be more time effective as opposed to the extended litigation of a case. However, if mediation is enacted before litigation, sufficient discovery (i.e. -depositions, interrogatories, requests for production) may not have been conducted, thus mediation may be premature and unproductive. Additionally, if the parties are not willing to make any concessions regarding the claims asserted, this proceeding will not be fruitful. Parties must recall, however, that all actions filed with Florida courts must be mediated prior to proceeding to trial. Consequently, whether such mediation is to take place early on in the process or closer to trial is within the hands of the parties, but whether mediation will occur at all is not.
Litigation is, by far, the most costly and time consuming process for resolving matters between parties. Parties should be represented by counsel and, in the case of a corporate party, must be represented by counsel. Following the filing of a lawsuit, each party is permitted to take discovery of the other side, including, but not limited to, requests to produce documents, respond to interrogatories and admit or deny certain statements. Parties are also permitted to depose individuals with knowledge of the issues between the parties. This may include personnel on behalf of the contractor and the developer, the contractor’s subcontractors and others with knowledge of the project. Even the speediest of litigation often cannot be concluded in less than two years. The contractor, par foreclose upon a claim of lien. While a contractor may sue a developer for breach of their contract within five years of the date of the breach, the statute of limitations is more severely curtailed for a suit to foreclose on a claim of lien. Pursuant to Fla. Stat. § 713.22(1), a contractor must file its lawsuit to foreclose upon a claim of lien in the circuit court within one (1) year of the recording of the claim of lien. In the event that the property owner files a notice of contest of lien pursuant to Fla. Stat. § 713.22(2), the time to file the subject lawsuit is shortened to sixty (60) days from the date of the service of the owner’s notice.
As discussed above, a Court may refer all or any portion of a contested civil action filed to mediation. Fla. Stat. §44.302(2); F.R.C.P. 1.700 Furthermore, the parties may stipulate to mediate any issue between them at any time. F.R.C.P. 1.700. The discovery proceedings in the litigation are not suspended during mediation unless stipulated by the parties or ordered by the Court. F.R.C.P. 1.710(c) The mediator is selected by the parties, or if the parties cannot agree then the mediator is appointed by the Court. F.R.C.P 1.710(f). The mediator will report to the Court if the parties are unable to reach an agreement, and will also inform the Court if the parties reached a partial or final agreement. If a partial or final agreement is reached, the report of the agreement or a stipulation of dismissal shall be filed. F.R.C.P. 1.730(a)(b). The Court may also order nonbinding Arbitration, as discussed in Fla. Stat.§ 44.303. Once arbitration proceedings are initiated, whether by order of the court or decision of the parties, the Court is without jurisdiction to make any decisions regarding factual issues other than the making of the agreement. See, Modern Health Care Services,Inc. v. Puglisi, 597 So. 2d 930 (Fla 3d DCA 1992).