Construction Contracts: Pay Attention to the Preamble

Alexander Barthet | Sage Construction and Real Estate | February 16, 2017

I recently filed a lawsuit on behalf of a subcontractor who hadn’t been paid. The prime contractor named in the suit countered, saying that the company name listed in the contract’s preamble wasn’t the right company. When we looked into it, we found that the prime contractor had three nearly identical names, and the proper entity wasn’t the one listed in the contract’s preamble.

Pro-tip: You can usually verify company names by checking with your state’s online business registry. Florida, for example, provides an easy way to search business records on its Sunbiz.org site.

When you’re dealing with contracts that can be 15 to 80 pages long, company names and other information in the preamble may seem minor in comparison to other terms and provisions in the contract. But like any part of a legal document, a preamble’s significance shouldn’t be overlooked.

A preamble is a short explanation of the contract usually, but not always, found on the document’s first page. It typically includes:

  • Name and address of the project
  • Name and address of the project owner
  • Name of the design professional, if applicable
  • Short description of the work, such as electrical contracting or construction management (A more detailed description of the work will go into the contract’s scope of work section.)
  • Overall price
  • Start and end dates of the work
  • Retainage amount

A preamble will also include whether you are required to furnish a bond. When working with subcontractors, I’ve often been surprised at how many don’t know if the prime contractor also has provided a bond. If you are a subcontractor, this is important to know if you want to assure you will get paid. Also, if you provide a bond and the prime contractor doesn’t, it can create a tremendous amount of risk for you as a subcontractor if something goes wrong.

Correctly executed contracts set the stage for a project’s success while protecting your company’s rights.  Start your contract due diligence from the very beginning with the preamble.

Building a Favorable Project Record During Construction Disputes

Ben Pollock and Craig Ledet | King & Spalding | February 2017

The value and importance of the written record in a dispute arising from a major construction project cannot be overstated. Even when project personnel are available to provide first-hand accounts—which often is challenging after construction is complete—the contemporaneous evidence concerning the information available to the parties while the work was ongoing is always powerful. Accordingly, owners and contractors alike should take care to ensure the project record chronicles the facts, preserves rights, and lays the foundation in real time for their position regarding how unforeseen costs and delays should be borne. Moreover, parties should not shy away from important dialogue in the fear that they will be seen as making excuses or threatening litigation. Recording key project facts and presenting reasonable interpretations of entitlement are steps beneficial to problem-solving, good contract management, and risk evaluation … as well as litigation should a dispute become intractable. This article discusses the value of ensuring your ongoing project generates a robust and accurate written record.

The Project Record Should Record the Project

A major construction project should create a voluminous amount of material of its own account. Diligent contractors will generate a number of reports and analyses as a matter of course, and prudent owners will require certain deliverables as well as place a representative at the site to observe and report. While lawyers usually are not significantly involved in the drafting of such records, legal teams and contract administrators may play a role in ensuring that standardized documents are generated and circulated in a timely and accurate manner. To that end, an important service can be rendered to the project by requesting to review such documents, asking about their status, or otherwise emphasizing the importance of such contemporaneous evidence to the project team.

Once a potential change or claim arises, the legal team can help ensure arguments are based in the contract and facilitate consistency among the various types of documents.  Involving the legal team in the review and editing of formal letters and reports can create a uniform message that pervades all types of project records. It is not helpful if a claims manager drafts letters alleging entitlement to additional time and money because of an impact event, but the management team fails to mention the event in the monthly deliverables. Creating “parallel” tracks of documents—one set prepared to advance the project and another seemingly for potential litigation—negatively impacts credibility and can be avoided with oversight.

The record itself may have a role to play in litigation, sometimes becoming a proxy for how and why a project suffered an impact. A contractor might tout well-organized and crisply-executed procedures to show its control over the project, thereby demonstrating the impact of an event could not have been avoided or mitigated. Yet in another case, an owner may point to poor contractor processes, seeking to establish that delays and increased costs are attributable not to excusable events but to ineffective project management. While also serving as a fundamental part of the strategic and planning process, a stout project record—or lack thereof—can prove to be important should a dispute escalate.

He Said What?

The legal team can also add value to the project team by ensuring that important meetings, conversations, and first-hand perceptions are recorded in written format. Drafting and publishing meeting minutes is not often pursued with urgency, but maintaining a record of the issues discussed is important. Ideal practice is to get the minutes agreed and signed:  while the parties may disagree on the impact of the meeting, there should be no dispute about what was actually discussed.

Internal note-taking and record-keeping also is important. Project personnel who use diaries or scribble observations in notebooks should be reminded to preserve these materials. The project team should be encouraged to take notes following informal meetings or phone calls with your contract partner in which something important is discussed or disclosed. Whether such notes become part of the project record or are employed merely to refresh recollection, contemporaneous evidence generally is more accurate and compelling than a witness’ attempt to recall a conversation from months or years before. And an attorney or paralegal should take good (and privileged) notes when project personnel are interviewed. The usual concerns about a witness’ memory and availability are often exacerbated in disputes arising in major construction projects, as personnel may work at another company and/or sit halfway around the world shortly after the project ends.

Build Your Case Through the Project Record

Owners and contractors alike should be diligent in creating documents that chronicle important facts and assert positions regarding their impact, generally in formal correspondence and change management documents. As an initial point, all parties should be mindful of notice requirements in the contract and ensure that all obligations are met.

Contractors should send to the owner prompt notification of any event that threatens to impact time or costs, even if the extent of the impact is not yet known. While it may be tempting to wait until an analysis can be completed, delays should be avoided. Even a brief correspondence that provides a preliminary account is far better than no communication at all, and certainly is preferable to arguing whether a delay created prejudice or waived rights. Indeed, a letter promising to investigate can bolster a later correspondence disclosing the results of such a study. Yet it cannot be forgotten that the real purpose of notice requirements is to ensure owners are informed of a potential problem and have the opportunity to participate in the solution. Prompt notice is therefore beneficial on many fronts: the project team can fully engage; the parties jointly may attempt to mitigate the impact; and the litigator later can demonstrate either that the parties were or were not timely aware of the pertinent facts.

Owners should take an active and diligent approach to project oversight as well, and it would be a mistake for an owner to allow the contractor to solely control the written record. Notice letters should be sent to contractors promptly when milestones are missed or achieved. Recovery schedules and mitigation efforts should be formally demanded whenever necessary, along with appropriate support including resource allocation and work plans. And a contractor’s attempt to create a record concerning the causes and effects of an impact event should not be met with silence. While a prompt analysis and determination concerning a contractor’s alleged entitlement is ideal, prudent owners will draft and send letters at least recording key facts (especially those not cited by the contractor’s documents), acknowledging the claim and promising to investigate … as well as setting clear expectations that work will continue and impacts will be mitigated as practicable.

Regarding format: formal letters should be used for all important communications. Emails are wonderful vehicles for person-to-person interactions and information gathering, but they carry an informal air and do not bear the same weight as official project correspondence. Additionally, emails can be more difficult to track down than formal letters which are numbered, catalogued, and signed. When appropriate, use the formalities of the project to your advantage and document what is important.

A Potential Claim Is a Long Way From Litigation

Not infrequently, an owner or contractor will be reluctant to send a formal letter, concerned it will make them look litigious or difficult, and will decide to remain silent or try to “make it work” for the good of the project. The myth that this is helping the project should be exposed for what it is!  The truth is that changes and claims should be expected on major projects, and there is a big difference between being litigious and enforcing the contract. Building a fair and accurate project record ensures timely communication between the parties and chronicles facts while they are fresh.  Engaging with one’s contract partner and offering interpretations allows all sides to evaluate their positions and make informed and timely decisions. In these ways, active project management actually helps mitigate the impact of an event, allows the parties to evaluate risks in near-real time, and facilitates early resolution of many potential disputes. Perish the thought that a party should act one way if it desires to be a good contract partner and another way if it wants to preserve rights with an eye toward litigation. Prudent owners and contractors will investigate, take positions, and enforce or preserve their rights through project documents.

To combat any perceived negative repercussion, consider how the message is delivered and remember that tone and style matter. Take reasonable, supportable positions that bolster your credibility and implicitly appeal to fairness. In other words, don’t create bad documents by making unreasonable arguments. Notice letters are productive when they focus on communicating the objective facts, and can be especially effective when they include action plans, promises to problem-solve, or requests for assistance. At minimum, ensure the key issues and evidence are flagged promptly and all contractual requirements are met. Sophisticated parties should understand both the need to preserve rights and the value of contract compliance. By documenting a consistent and reasonable position, you can better facilitate a solution but also begin to persuade the fact-finder should litigation indeed result.

Let It Go

In the process of establishing your company’s position and building the record, an important consideration is when to stop. Once you have cited the important facts and reserved your rights, consider whether you really need to draft another letter. At some point, an exchange of writings may do little more than entrench each side in its position and escalate the situation—ill will and a careful review of the dispute resolution provisions may follow. Accordingly, once you have committed in writing what you need to preserve your rights and position, consider the best way to move forward, resolve (or work around) the potential dispute, and get on with the business of advancing the project. Meetings and personal conversations may be better suited to move the ball forward:  strive to recognize when the written record has done its job.

Conclusion

It is easy to perceive a tension between getting the project built, preserving the relationship between the parties, and preparing the record for potential litigation, but this is really a fallacy. Owners and contractors alike are best served by ensuring there is a robust and well-organized project record. Having accurate information readily available provides the ability to promptly investigate and evaluate impact events, which not only reduces the likelihood of a dispute but will better position your company should resolution prove impossible. Moreover, quick engagement may mitigate the impact itself, thereby allowing work to progress and the consequences to be reduced. In these ways, maintaining a detailed and thorough record serves both project progress and business interests for all.

Forever Barred? Does Sending a Pre-Suit Notice of Construction Defects Prevent Dismissal of a Lawsuit Based on the Statute of Repose

Jeffrey S. Wertman | Berger Singerman LLP | February 13, 2017

The Fifth District Court of Appeal will soon decide whether sending a pre-suit notice of construction defects under Florida’s Construction Defect Statute, Section 558, Florida Statutes, commences a construction defect action and simultaneously tolls the 10-year statute of repose.

In Busch v. Lennar Homes, LLC, Case No. 5D16-1626 (Fla. 5th DCA), Mr. Busch, a homeowner, appealed the trial court’s dismissal of his lawsuit alleging claims for breach of contract, building code violations, negligence, and deceptive and unfair trade practices. The parties executed a Purchase and Sale Agreement under which Lennar served as general contractor to construct Mr. Busch’s home. Mr. Busch served Lennar with a pre-suit notice of construction defects on or before July 19, 2015. On September 17, 2015, Mr. Busch filed suit against Lennar based on alleged defects in constructing the Home. The trial court dismissed those claims based on the statute of repose, Florida Statutes § 95.11(3)(c).

Florida Statutes § 95.11(3)(c) provides:

“In any event, the action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.”

On appeal, Mr. Busch did not dispute that the certificate of occupancy was issued, and actual possession occurred, more than ten years prior to the commencement of the action. Rather, Mr. Busch asserted that his claims were not barred, or should not be dismissed because the date of completion of the Purchase Agreement, the fourth prong in the Statute of Repose, could not be ascertained from the Complaint. Second, Mr. Busch argues that prior to filing his Complaint, he served Lennar with a notice of claim under Florida Statutes Chapter 558 (“the Chapter 558 Notice”) and under § 558.004(10), and the decision of the Florida Supreme Court in Musculoskeletal Inst. v. Parham, 745 So. 2d 946 (Fla. 1999), the Chapter 558 Notice tolled the expiration of the Statute of Repose. The Musculoskeletal Court held that a medical malpractice action is “commenced” for purposes of the statute of repose when the pre-suit notice is provided. Musculoskeletal Institute, 745 So. 2d at 954. Further, the tolling provisions in the medical malpractice statutes apply to the statute of limitations and the statute of repose. Id. According to Mr. Busch, there is no logical distinction that can be made between the construction defect statutory scheme and the medical malpractice scheme.

In response, Lennar asserts the date of “completion” of the Purchase Agreement may be determined solely by the allegations of, and exhibits to, the Complaint. Lennar further argues the reasoning underlying the Musculoskeletal Inst. decision applies only to medical malpractice claims, and therefore has no application here.

The Fifth District Court of Appeal will hear oral argument on March 23, 2017.

Notably, Section 558 specifically provides that a proper notice of construction defects tolls the statute of limitations, a legal doctrine which extinguishes the right to prosecute an accrued cause of action after a period of time. However, Section 558 is silent as to the tolling of statute of repose and there is no Florida cases directly addressing whether service of a pre-suit notice of construction defects commences a construction defect action and tolls the statute of repose.

We will follow this case closely.

When Construction Contracts Go Sideways in Bankruptcy

Tracy Green | California Construction Law Blog | February 10, 2017

The contractor on a project files a bankruptcy case. How should the property owner and subcontractors proceed? When a party to a contract files bankruptcy, the other party’s actions are constrained by the bankruptcy code.

Types of Bankruptcies

The typical bankruptcy case involves a chapter 7 complete liquidation, chapter 13 reorganization for an individual, or a chapter 11 reorganization or liquidation. In a chapter 7 the business ceases to operate and a panel trustee is appointed immediately upon the filing of the case. The chapter 7 trustee’s duties are to liquidate assets for the benefit of creditors and to prosecute litigation that can result in assets for the creditors. In a chapter 13, the individual debtor continues to operate, and there is a trustee, but the trustee’s roll is limited to reviewing the chapter 13 plan and making sure that the plan is performed. In a chapter 11, the debtor retains control of its assets and continues to operate its business until a plan is confirmed. During the chapter 11 period before a plan is approved, the debtor will decide which contracts it wants to assume or reject, all while operating the company and preparing a plan.

Benefits of Bankruptcy for the Debtor

Bankruptcy laws replaced debtor’s prison. The bankruptcy filing stops all actions against the debtor because immediately upon the filing an automatic stay is imposed. In addition to stopping litigation and collection efforts, the automatic stay prevents set off of debts. Another benefit is that a debtor can eliminate contracts that are burdensome and minimize the financial impact of getting out of those contracts. Of course, the ultimate goal of the debtor is to reduce the amount that creditors are paid.

Benefits of Bankruptcy for the Creditor

There can be little good news when someone who owes you money files bankruptcy. However, the silver lining is that in bankruptcy any creditor can ask the debtor for financial information related to the debtor. Creditors can look at past transfers and can look to see if insider’s received inappropriate distributions. If needed, a creditor can ask the court to appoint a trustee to protect assets. If nothing else, creditors will be assured that all creditors are receiving the same distribution, and the debtor is not paying favorites more money.

Executory Contracts

Under the Bankruptcy Code, contracts that have performance due by both parties to the contract are considered executory contracts, and the debtor can choose whether to assume (keep the contract) or reject the contract (end its ongoing obligations). Parties to contracts that are rejected will have an unsecured claim in the case like all of the other creditors who have pre-petition claims. If the debtor assumes a contract, the debtor must cure defaults at the time the Court authorizes the debtor to assume (or the debtor must prove that the cure can happen soon), and the debtor must establish that it can provide adequate assurance of future performance under the contract going forward.

Executory contracts can be assumed and assigned to third parties unless they are not assignable under non-bankruptcy law. For example, personal contracts cannot be assigned under California state law. If a construction contract involves Jill performing a service, it cannot be assumed. However, if the contract is with the Hill, LLC, it may be assumable. If the contract expired before the bankruptcy case commenced, then it cannot be assumed. Provisions in contracts that terminate the contract upon the filing of a bankruptcy or other insolvency proceeding are called ipso facto clauses and are not enforceable by the bankruptcy court (but may be enforceable outside of the bankruptcy court). It is important to note, that in the Ninth Circuit, a debtor is considered to be a different legal entity from the entity that existed before the filing, and it is required to assume contracts that it wants to continue to use. Although a contract may not be assumable under the Bankruptcy Code, the parties are free to consent to have the contract assumed.

If a contract is assumed by the debtor and the debtor breaches that contract, the damages will be treated as an administrative claim, which will entitle the creditor to be paid before the unsecured creditors.

Read every pleading sent by the debtor. If the debtor is asking the court for permission to assume your contract you should:

  1. Determine if there is a default and make sure that the debtor can prove that it is going to have the funds or the ability to cure the default;
  2. Make sure that the debtor proves that it can perform under the contract going forward;
  3. If the contract is being assumed and assigned to a third party, make sure that the third party will be able to perform.

If the contract cannot be assumed under the law but you are willing to proceed with the debtor, use that opportunity to negotiate extra protections into the agreement going forward. These issues should be considered for pre-bankruptcy negotiations also.

  1. Identify specific milestones that must be met by some measure other than (and in addition to solvency) as a basis for terminating the contract if not met;
  2. If applicable, consider requiring joint checks be written to you and the debtor;
  3. Spell out grounds for termination, replacement for non-performance, and the right to set off funds otherwise due to the debtor.

Liens and Bonds

The bankruptcy code provides an exception to the automatic stay for parties to perfect their mechanic’s liens. There is a big difference between enforcing a lien and perfecting a lien. Enforcement is not allowed without applying to the court for permission. Also, the automatic stay generally only applies to the debtor. Therefore, if the contractor files a bankruptcy, and a lien holder has rights against a property owner, and that owner is not in bankruptcy, there is no automatic stay that prevents enforcement of the obligation. This applies to guarantors and bonds as well. A debtor can ask the court to intervene under some circumstances, but the automatic stay may not apply. If the demands on the bond exceed the value of the bond, it may be brought into the bankruptcy to resolve payment issues, if not otherwise resolved. As a property owner paying a subcontractor directly when a contractor is in bankruptcy, you want to make sure that you are making payments that you are compelled to make under the law so that the debtor does not come back and ask you to pay again. When in doubt, obtain an order from the bankruptcy court authorizing the payment.

Getting the Work Done

If the debtor is the contractor and has ceased working the project, a motion should be made in the bankruptcy court to compel the assumption or rejection of the contract so, if necessary, a new contractor can be brought in to finish the job. If the debtor is being replaced, bankruptcy court approval is necessary or you could be in violation of the automatic stay. The motion should ask the court to authorize the owner to deduct money from the holdback to pay the new contractor if necessary. Applying the holdback is a set off under bankruptcy law, therefore to avoid violating the automatic stay, the court must pre-approve the setoff. Setoffs can be done before the bankruptcy case is filed, if allowed under the contract. To avoid problems getting paid, the availability and reliability of payments sources should be clarified and memorialized in an order. Also, creditors should continuously monitor the bankruptcy case, as some cases can become administratively insolvent—meaning from a practical standpoint post-petition creditors may not get paid even though a court order says that they will be paid. Keep a very close eye on when and where the money goes. If the owner or contractor files bankruptcy, subcontractors need to obtain approval to stop performance by filing a motion to ask the debtor to reject or assume the contract and provide assurances of future performance.

Preferences

Payment made on or before 90 days of the filing can be clawed back under some circumstances. The claw back can only happen if the payment was on an antecedent debt, payment came from the debtor, the debtor was insolvent, and the creditor received more than it would have in a chapter 7 liquidation. There are defenses a creditor can raise, such as ordinary course of business, new value or contemporaneous exchange. However, if the payment is on a lien that encumbers the debtor’s assets, then there is no preference. A mechanics lien on property owned by someone other than the debtor does not assist the creditor as a preference defense, but may assist in obtaining payment. A timely made payment may fall within the ordinary course of business defense, but care should be taken when late payments are received. If given the choice between taking a possible preference that may be avoided or not getting paid, most creditors will accept the money and take their chances. Also, the clock on the 90 days starts running on the date that the check clears the debtor’s bank. This is reason to deposit all checks as soon as possible to get the time running, and consider holding off on releasing third parties or liens, if possible, until you are sure that there is no bankruptcy filing in the 90 day period after payment.

Doing Business with a Distressed Contractor

If it looks like a party with whom you are doing business may file bankruptcy and the party is in default, consider terminating the contract before the bankruptcy case is commenced in compliance with contract terms to avoid being caught up in the bankruptcy. Make sure that your contract includes protections such as requiring owners to write joint checks or, if applicable, to provide lien waivers. If you are working with a party on multiple projects, you may want to provide that a default on one contract is default on all contracts, and payments are subject to setoff.

A “Recovery” Against Insurers in Oregon does not Require a Money Judgment

Dwain Clifford | The Policyholder Report | February 8, 2017

Last week, the Oregon Supreme Court made it just a little easier for an insured to recover the attorney fees that it has been forced to spend in compelling an insurer to pay up. In Long v. Farmers Ins. Co. of Oregon, the Supreme Court resolved an old ambiguity about what “recovery” means under the fee-shifting rule in Oregon’s insurance statutes. This decision should put to rest at least one opportunity for gamesmanship by insurers in Oregon.

Under ORS 742.061, an insurer must pay its insured’s attorney fees if the insured’s “recovery” is greater than any offer made by the insurer within six months after the insured submitted a proof of loss. This rule is meant to encourage quick investigations and settlements of coverage claims, an obligation that insurers violate at their peril for dragging their heels or low-balling the insured with take-it-or-leave-it settlement offers. Take longer than six months to make a justifiable offer? Then pay the freight for the insured’s attorney fees in taking the dispute to court.

leak
An Old Leaky Faucet is licensed under CC 2.0.

Long well illustrates how insurers try to game this requirement for a “recovery” by delaying, delaying, delaying, and then paying on the eve of a bad judgment — without paying the insured’s attorney fees. The insured in Long was a homeowner whose leaky sink damaged her home. She discovered the damages in December 2011 and submitted a proof of loss for the “actual cash value” the next month (which “far exceeded the sum that Farmers” had determined and paid). A year later, Farmers had still not paid the claim, so she sued and forced Farmers to submit the claim to appraisers, who determined that Farmer’s initial offer and payment had been far too low. Farmers finally paid this additional liability (for the “actual cash value” part of the claim only) in July and August 2013 — over 18 months since the claim was reported and the proof of loss submitted.

The case went to trial in February 2014. The insured, of course, was no longer seeking a money judgment for the “actual cash value” of the damages because, by that time, Farmers had already paid it. Farmers then convinced the trial court that “recovery” under ORS 742.061 could mean only a money judgment, which led to the court’s decision not to award the insured’s attorney fees because the final judgment — two years later — was not for an amount greater than the low-ball offers made by Farmers within six months of the proof of loss in January 2012.

The Oregon Supreme Court refused to countenance this nonsense. The LongCourt recognized that the purpose of the fee-shifting statute is to “discourage expensive and lengthy litigation.” By the time that Farmers paid the fair “actual cash value” of its insured’s loss in July and August 2013, the insured had already been litigating the case for eight months. The Court interpreted “recovery” in light of this purpose, holding that “mid-litigation payments” choked out of an insurer count as a “recovery” that comes too late for the insurer to avoid paying the insured’s attorney fees:

The statute ensures that, when insureds file suit to obtain what is due to them under their policies, they do not win the battle but lose the war by expending much or all of what they obtained in the litigation on attorney fees.

Careful readers of this blog will remember this post from October 2014, which discusses the Triangle Holdings case, an Oregon Court of Appeals opinion refusing to award attorney fees to the insured because it had accepted “mid-litigation payments” from the insurer that made the coverage dispute “moot.” Under Long, insureds should no longer have to worry about refusing an insurer’s settlement offer just to preserve the right to chase that insurer for the attorney fees that it took to get the offer on the table.

Finally, Long offers a wrinkle about payment that insureds ought to mind carefully. According to the Court, the insured submitted “proof of her replacement costs” just before trial. The Court treated this proof as a second “proof of loss” for the “replacement cost” of the repairs that the insured made, holding that the insured could not recover fees incurred in obtaining this payment. It is unclear when the repairs were made and what “proof” the insured had submitted long before this point, but insureds ought to claim and document all damages as soon as possible to start the six-month clock ticking.