August 29, 2018
Author: Bruce Partington
Organization: Clark Partington Hart Larry Bond & Stackhouse
The relationship of the various contracts involved in a construction project can fairly be visualized as both a spider’s web and a stream or river. At its core are the owner/architect and owner/contractor agreements. From that “core” proceed outward the web of relationships between the contractor and its subcontractors and suppliers, to their respective subcontractors and suppliers, and so on. The flow of funds follows this same pattern “downstream” and the responsibilities for the ultimate work and its quality flow back upstream, or back to the center of the web, although the center of the web may later be occupied by persons other than the original Owner (e.g. tenants, purchasers).
The real and central question here is risk allocation. Construction contracts are, at their most fundamental level, “risk allocation” documents. “If X happens, Y is responsible.” “If Z happens, the risk is shared. . .” While there is a visceral tendency to transfer as much risk as possible away from oneself, this is ultimately poor logic. When considering the allocation of risk, one should ask three questions:
1. Who is in the best position to control or manage the risk?
2. Who is able to insure the risk?
3. Finally, does it make sense to allocate risk in this way?
An approach to risk allocation that thoughtfully and fairly answers those questions will ultimately result in fewer or less consequential disputes because the allocation of risk will be perceived as “fair,” and even rational, at the outset. If it’s perceived that way at the beginning of a project, it will also likely be when conflict arises during the project.
Statutory and Common Law Warranties
Layered atop this web of relationships are obligations that are imposed by law, most prevalent in residential projects. Whether residential or commercial, there is an obligation to meet the minimum requirements of the building code and other legal requirements. It is likely legally impossible to disclaim this responsibility.
There are often contractual efforts to disclaim or limit these implied warranties, but their effectiveness is mixed. For residential projects, warranty disclaimers are likely going to be ineffective, regardless of how vigorously expressed in the contract. There is no specific case addressing this, but the judicial system in Florida has historically taken a very homeowner-friendly view on similar issues because a home is typically the largest single investment most people ever make. For example, an “as is” clause in a sales contract for residential real property is unenforceable, and the seller has an affirmative obligation to disclose known problems with the property.
The law also implies warranties of fitness, good workmanship, and that the work was performed in a “good and workmanlike manner.” For residential construction, a warranty of “habitability” is also implied by law. There is also a warranty that equipment and materials will be installed as the manufacturer requires, unless there is a documented basis for deviating.
For commercial properties, this is typically less of an issue because of the relative sophistication of the parties, and the resulting “default” to more balanced, standard forms like the AIA forms. Moreover, the courts in Florida are less protective of commercial parties, and typically allow parties to contract for whatever risks and responsibilities they elect to assume. However, it is doubtful that an obligation to construct (or design) to applicable codes could be effectively disclaimed or limited, particularly when one party has a statutory or regulatory obligation to comply with such codes (such as a licensed contractor). Also, condominiums, residential or commercial, carry statutory warranties that are unavoidable.
The warranties prescribed by statute for condominiums run not only from the developer, and also from the contractor and subcontractors, to unit purchasers. However, the warranties are not entirely equivalent, and most attentive developers will require that the warranties given by the contractor and subcontractors reasonably equate to those the developer is giving to unit purchasers.
More specifically, § 718.203, Fla. Stat., implies warranties by the developer, and also by the contractor and subcontractors that run directly to the “purchaser of each unit.” The developer gives warranties of “fitness” and “merchantability.” The contractor and subcontractors (with one exception) give warranties of “fitness” only.
The sole (and puzzling) exception here is that the developer gives a warranty regarding a list of systems or “elements” of the building, but for some reason the “electrical” elements of the building, which are included in the developer’s list, are absent from the list of warranties provided by the contractor and subcontractors directly to unit purchasers. There is no rational explanation for this absence. The cynical explanation is the strength of an individual lobby or lobbyist, which is probably, but unfortunately, correct. The Florida Bar’s Construction Law Committee has raised this issue several times in recent years, but the response seems to be that this would be a very difficult statutory modification to pass. As a result, the “work around” for attentive developers is to have the contractor warrant (and require its subcontractors to warrant) the work to the developer (and unit purchasers) to the same extent required by the statute or otherwise implied in law. A prudent contractor, whether the attentive developer requires this or not, should still require its subcontractors on a condominium project to warrant their work to the Contractor (and owner/developer and unit purchasers) to the same extent that the developer/owner is warranting their work to unit purchasers because there are a variety of other avenues to pass the risk downstream from the developer to the contractor, regardless of whether the warranty is specifically defined in the statute.
The visceral approach to risk allocation – shift it all away from me! – should not be viewed as creating a safe haven. It is more likely than not that a court (or jury) addressing this issue will look at the contractual provision from a perspective of fundamental fairness. If a contractual provision is perceived as unfair or overreaching, the likely outcome will often not favor that provision. As a result, the most sensible approach is to address risk allocation deliberately and fairly. Don’t ignore warranties or obligations implied by law, or assume that you can contract around them. An attempt to do so could be suspect later as an attempt to avoid a legal obligation. Use the “smell” or “mother” test. Does it smell right? Would you accept it if you were on the other side of the contract? Would you use that clause if you were contracting with your mother?
Defining Scopes of Work
An Owner has a legitimate expectation that the product delivered by the Contractor will meet the Owner’s intentions for the project. As a consequence, the Owner and design professional need to ensure that those expectations are adequately defined in the plans and specifications (and related documents such as addenda, value engineering memoranda, change orders, etc.) and that the “Contract Documents” fully describe the Contractor’s “scope of work.”
The Contractor, likewise, has a distinct interest in ensuring that work it is not self-performing is adequately and completely described in the “scopes of work” of the subcontractors to which it is delegating some portion of its own “scope of work.” The Contractor also has a thoroughly legitimate interest in making sure that there are no “gaps” in the scopes of work it is not performing when compared to the broader overall scope of work it owes the Owner. In other words, there should be no gaps when the work the Contractor is self-performing, and the work the Contractor is delegating to subcontractors, is compared to the full scope of work the Owner is “buying.” As a result, most subcontracts have broad clauses which “flow down” (the river analogy) obligations from the prime contract to its subcontractors, and “flow up” warranties and “quality” obligations upstream to the Contractor which the Contractor owes to the Owner. Surely, it is appropriate and prudent to ensure that the proper and complete scope of work is described in the subcontract.
Sometimes, however, subcontracts seem to “flow down” too much. It doesn’t make sense to “flow down” to the framing subcontractor every part of every contract document to that subcontract, yet clauses which do so are not uncommon. This introduces an inherent ambiguity into the subcontract and the subcontractor’s scope of work, particularly where licensing is involved. Is the framing subcontractor really responsible for the work which would require an electrical contractor’s license to perform? Wouldn’t that delegation be illegal because of the licensing obligations for electrical contracting work?
Often, subcontractors will sign these broad delegations of work without carefully considering the implications. The simple addition of language such as “relevant to the Subcontractor’s Work” is a significant clarification, although it obviously leaves open the definition of “relevant.” A better approach is to refer to specific specifications sections or divisions (including the sections or divisions referenced in those sections or divisions). For example, the subcontract should probably always reference Divisions 00 and 01 of the specifications, and then could reference specific divisions, “and other portions of the Contract Documents referenced therein.” Another approach – ultimately less favorable to the Contractor – would be simply to reference the subcontractor’s bid (assuming it is specific).
The “right” approach can vary not only by project but also by trade. A sophisticated subcontractor in a highly specialized trade may very well produce a detailed bid that is entirely sufficient for purposes of defining the scope of work for a subcontract (although the pertinent project specifications should still be referenced).
Regardless of the approach, from a subcontractor’s perspective, the bid or price should be very specific about what is included, and what is excluded, from the price. In short, the allocation and definition of work should fairly encompass the full scope of work, but the Contractor should not rely on broad delegations to transfer or shift obligations not fairly encompassed within a subcontractor’s bid or expected scope.
The additional moments at the front end of a project to clarify a subcontractor’s obligations are, ultimately, worth the time.
The issue is mirrored on the “flow up” provisions of warranties and other “work quality” standards. There are several levels to this issue which correspond to the “layers” of the contract or project. For example, if the project is a condominium, as discussed above, the developer likely expects that the warranties flowing “upstream” from the Contractor and its subcontractors will mirror those which the developer is providing. Likewise, the Contractor should reasonably expect that the subcontractors support their work, and fairly expects subcontractors to endorse the obligations of the Contractor to the Owner relative to the subcontractor’s work.
On the other hand, does it really make sense to have a provision that, after incorporating all of the contract documents into the subcontract, says that the subcontractor owes the contractor all of the same obligations that the contractor owes the owner, regardless of the subcontractor’s actual scope?
Here is the most fundamental aspect of the problem of such broad flow up/down language: When pressed in litigation or arbitration, a court/judge/jury/ arbitration panel simply may not accept that the Contractor intended that every subcontractor have the same global obligations as the prime contractor. If the Contractor testifies or implies that this degree of delegation is what was intended, their credibility is likely shot and the Contractor loses. If the Contractor says that something less was intended – the Contractor has just made the contract and its delegation of work ambiguous, and the contract will most likely be construed in favor of the subcontractor since such a broad clause would not have been drafted by the subcontractor.
Heads the subcontractor wins, tails the contractor loses. Is that what you, as a general contractor really intended?
The scheduling and coordination of the thousands (at least) of tasks that have to be accomplished for a successful construction project is one of the most fundamental roles and responsibilities of a Contractor. As such, most owner/contractor agreements define a time for performance. Also, most industry standard form contracts require the contractor to produce a schedule against which the Owner and Architect can measure the Contractor’s progress. The requirements and complexity of these scheduling requirements can vary widely, but generally there is a requirement that the Contractor promptly notify the Owner if the project is deviating materially from the schedule.
The complexity of the scheduling requirements rationally varies with the complexity of the project. For a health care facility, a full “critical path” schedule with monthly detailed updates and analysis may be entirely appropriate. For a residence of a few hundred thousand dollars, that level of formal scheduling is absurd. On the other hand, though, a residential owner of a small project is still reasonably entitled to know whether the project is on track or not because of the need to schedule things like movers, loan closings, delivery of furnishings, etc.
Some residential contracts contain no time requirement, which is ultimately an invitation to conflict. Even if there are no specific time requirements, the law will imply an obligation to perform within a “reasonable time” which undoubtedly will mean very different things to the owner and to the contractor.
Another provision often found in subcontracts that is material to allocating risk is the extent to which scheduling provisions flow down to subcontractors. This can manifest itself in several different ways.
On the one hand there are subcontract provisions that give the Contractor total control over the schedule, duration and integration with other trades. In its worst implementation, this would allow a Contractor to compress the duration for a late trade to an unreasonable point to try to “catch up” for delays entirely not the fault of the trade whose performance times has been compressed.
Some of these same contracts will give the Contractor that level of control, but then require the subcontractor to coordinate its work with other trades, which is fundamentally the obligation of a general contractor.
Another manifestation of this problem is a contractor directing a subcontractor to show up and commence work when the preceding work is not to the point that the succeeding trade can begin. No one would contend that this is fair, yet, in reality it happens with some frequency.
The unfortunate consequence of all of this is that it creates a contentious relationship in a project which is at “crunch time” for completion. Is that productive? If it’s “crunch time” wouldn’t it be more productive to have a cooperative relationship? On the other end of the spectrum would be a guaranteed duration for the subcontract work, which may or may not make sense in the context of the project, because there can be rational ways to manage and reduce duration if fairly planned in advance. Whether a guaranteed duration makes sense may also vary by trade. Some trades cannot accelerate by throwing more people at the project. Some can. So, as with so many other things, creating a universal, “one size fits all” rule could well be a bad idea.
Again, adopting a rational approach to risk allocation up front, and ensuring a constant flow of accurate information, even for subcontractors whose work is not ready to commence, will result in overall benefits to the project. An approach of instigating conflict is unhealthy and will ultimately exacerbate problems that already exist. Schedules on construction projects are always important and even critical to every project. However, a project is more likely to come in “on time” with cooperation rather than conflict.
The Importance of Following Notice Provisions in Contracts
Almost all contracts in the construction industry -- public or private; prime or subcontract – have provisions that prescribe some level of notice to other parties before the party can have a claim for more money or more time. Most contracts also specify that the failure to meet the notice requirements is a bar or waiver or is otherwise preclusive of the claim. If it were only that simple. . . .
There is substantial authority in Florida (in both state in federal court – applying Florida law), that the failure to follow notice requirements can preclude a valid claim. On the other hand, there are also examples where courts find ways around the notice requirement upon undefined notions of general equity or fairness or other “noncontractual” bases which the court may never even express.
The resulting “real world” interpretation is to assume that the notice provisions in contracts will be enforced, and to follow them as precisely as humanly possible – indeed even beyond what is reasonably possible. While this sounds absurd, at least attempting to do what might be impossible – or stating plainly and formally that it’s impossible, will go a long way to validating the ultimate claim.
In one case, a contractor was hired to dredge the slips along a port to a deeper depth. The port knew, but did not disclose, that there was likely a great deal of debris within the prism to be dredged. Indeed, a number of the “Liberty Ships” from World War II were physically dismantled, in the water, in the area, and those waiting to be dismantled had been anchored to large reinforced concrete “cubes” sunk to the bottom of the bay. As a result the debris on the bottom included thick pieces of steel plate, wire cable, thousands of tires, and the “cube” concrete anchors. The contractor had dredged ports often before, and so expected some level of debris, but nothing on the order of what was encountered – and which was entirely invisible because it was beneath the surface of the bottom.
The contract required that in the event that unexpected conditions were encountered, the contractor was required to notify the owner in an abbreviated time frame not only that the unexpected conditions had been encountered, but also, within that time period, of the expected monetary amount of the resulting claim and the expected delay. The contractor timely notified the Port of the conditions being encountered, but also said that because of the nature of the problem, there was no feasible way of estimating the monetary or time impacts of the delay. The Port never objected.
The dredging continued. The dredging contractor went through hundreds and hundreds of “teeth” for its hydraulic dredge, and even broke an 18” rolled steel dredge shaft. When the head would hit some of the obstacles, the dredge – a 100” long dredge powered by a locomotive engine, would literally lift halfway out of the water as the rapidly spinning head and shaft suddenly stopped, transferring its entire inertia back to the dredge.
When the project completed, the dredging contractor supplemented its initial claim with a submission of its costs and damages. The city withheld final payment because the project was completed late, and asserted the liquidated damages provision in the contract as an offset to the final payment due.
After a judge trial, the judge held that because the contractor had not estimated the potential extra cost and delay when the problems first began, the contractor was not entitled to any additional compensation because it had not strictly complied with the contract’s notice requirements. However, the court also held that the Port could not recover liquidated damages, and owed the contractor the full final payment, interest, and attorneys fees and costs. On the other hand, there are also cases where a contractor asserted no claim at all for additional compensation until years after the project was completed, and failed to meet any of the contract’s notice requirements, but yet was held entitled to compensation.
The point of these examples is to demonstrate that the outcome of any construction claim is unpredictable. You might feel strongly that you’re “right” and morally and ethically you may well be – but you don’t get to decide the case. If the judge or jury feels that you shouldn’t be allowed to get around the contractual notice requirements – you may end up on the short end of the stick. On the other hand, if you can convince the judge or jury that you’ve been “wronged” you may get a benefit that, contractually, you should not receive.
As a result, the cautious approach as an owner, design professional, contractor, or subcontractor is to document, professionally, potential claims and put the party or parties who may be responsible for the claim on notice, within the time requirements and informational parameters required by the contract. To do this, one should become familiar, up front, with the applicable contract’s notice provisions, and hew closely to them. In addition, if the contract to which you are a party incorporates claims or notice provisions of another contract, you should insist on being informed of those provisions, or document that you have requested them and been refused.
In short – be familiar with the notice requirements of your contract and ignore them at your peril.