Time to Review Contracts and Be Prepared for Construction Delays, Suspensions and Terminations

Thomas H. Dart and Drew F. Chesanek | Adams and Reese

With the ongoing spread of COVID-19 (coronavirus), it is becoming inevitable that the preventative measures being implemented will have significant financial impacts on the construction industry. Accordingly, owners and contractors should be reviewing their contracts for their projects and prepare now for coronavirus-related delays.

Reviewing the Contract

The first order of business is to review the contract to determine what provisions may be relevant for either the owner or contractor to extend, suspend or terminate performance under the contract.

Often, there may be several theories to address the pervasive effects we are now facing, and may face, of the coronavirus. These include force majeure, impossibility of performance and contractual remedies to address delays confronting the project.

Whether an owner or contractor is seeking to extend time limits, explain delays, suspend activities, invoke force majeure/impossibility clauses or terminate the contract, it is crucial that both owners and contractors alike follow the required notice requirements as failure to do so may make any such notice voidable and ineffective under the contract.

AIA Contract

The AIA form contract, one of the most widely used forms for construction projects, contains standard language for termination or suspension clauses that could potentially be triggered by the coronavirus pandemic. Section 1.6.1 and 1.6.2 in the standard AIA A201-2017 form typically provides the format and method of delivery for notices.

In 2017, the AIA standard form was amended and this also amended a portion of the contractual termination provisions. While it is easy to tell each party to “read the contract,” there are certain provisions both owners and contractors should focus on when dealing with coronavirus-related delays.

For Contractors

Typically, § 8.3.1 of the Standard AIA outlines the basis for extensions of time for substantial completion of a project. The standard language allows for extensions of a reasonable time for “other causes beyond the Contractor’s control.”

Therefore, if a contractor is seeking an extension of time due to coronavirus, it is important to show how the current pandemic is causing delays beyond the contractor’s control.

Although epidemics are often not mentioned as grounds for delaying performance and arguably could be anticipated, the far-reaching effects of the coronavirus and the regulatory restrictions placed by the government to control the virus are unprecedented.

Additionally, § 14.1.1 allows the contractor to terminate the contract if the work has stopped for a period of 30 consecutive days through no act or fault of the contractor for either (i) issuance of an order of a court or other public authority having jurisdiction that requires all work to be stopped; or (ii) an act of government, such as a declaration of national emergency that requires all work to be stopped.

On March 13, 2020, President Trump issued a declaration of national emergency, and certain jurisdictions may soon require work be stopped, thus potentially triggering the requirement for a contractor to terminate the contract for cause.

For Owners

Owners also likely have potential recourses to suspend or terminate performance, and thus payments, under a contract.

Under §14.2 of the AIA A201-2017 standard form contract, an owner may terminate the contract if the contractor repeatedly refuses or fails to supply enough properly skilled workers or proper materials.

Additionally, an owner may be allowed to terminate the contract or order the contractor to suspend or delay work in whole or in part for such a time period as the owner may determine either with or without cause. These clauses are frequently amended or altered to address the associated cost implications of suspension or termination.

Cost Implications

The seminal issue in the event that either the owner or contractor invokes any of the aforementioned provisions, is a determination of the entitlement to, and amount of, damages. In some instances, the contract may address these issues, which can range from a fixed amount or for lost profits or the costs to cure.

For instance, under the standard AIA contract, in the event an owner terminates the contract for “convenience,” i.e., without any cause, the owner is liable to the contractor for work properly executed, costs incurred by reason of the termination (including any costs attributable to the termination of any subcontracts) in addition to the termination fee, if any.

However, if the owner suspends for convenience, the contract sum and contract time shall be adjusted for increases in the cost and time caused by such suspension or delay and include profit.

Other contracts may have provisions that where an owner terminates without cause or as a “convenience,” the owner is liable to the contractor for a termination fee determined pursuant to a stated amount or through a formula. The courts have held that any fee or “liquidated damages” are proper where the damages are not readily ascertainable at time of drawing of contract and are not merely a penalty.

If the owner were to terminate for cause, the contractor may not be entitled to receive any further payment until the project is completed. In the event the unpaid balance of the contract sum exceeds costs of finishing the project, such excess may be required to be paid to the contractor. In the event the costs or damages exceed the unpaid balance, the contractor may be liable to pay the difference to the owner.

As mentioned, both owners and contractors should expect that the coronavirus will result in construction-related delays or, in some cases, termination of the project. Therefore, it is important for contractors and owners to review their contracts so they may appropriately plan and prepare for the corresponding implications.

Lien Rights: Remedies for Potential Issues on the Project

Amandeep S. Kahlon | Bradley Arant Boult Cummings

Liens are one of the primary tools for the construction industry to secure payment claims. However, lien rights and remedies vary between states, and these distinctions are often difficult for owners, contractors, and subcontractors to navigate. Because many states apply lien laws strictly—meaning technical non-compliance can result in forfeiture of lien rights or defenses—it is important to be informed regarding lien requirements and comprehend potential issues that may arise if lien rights are asserted on your project. Let’s walk through a few of those potential issues here.

PRE-CONSTRUCTION LIEN NOTICES

Several states have enacted laws that require parties to file notices prior to the start of construction. For example, some states require or permit an owner to file a notice of commencement in the county records where the construction project is located. The notice of commencement typically highlights the name and contact information for parties like the owner, contractor, surety (if applicable), and lender, as well as providing information regarding the property and project address. In most states, an owner or contractor is required to disseminate the notice of commencement to subcontractors either via mailing to subcontractors or posting at the jobsite.

Once a notice of commencement is filed, it generally triggers an obligation for subcontractors and other entities on the project to file or send out a separate notice identifying information like the subcontractor’s contact information, the services to be performed by the subcontractor, the price of such services, etc. These notices typically must be sent out shortly after the notice of commencement is recorded or shortly after construction commences. A subcontractor who fails to send such a notice may forfeit its lien rights on the project. Conversely, an owner who fails to properly record a notice of commencement may forfeit the defenses afforded under the notice of commencement statute against any potential lienors. Other states require a preliminary notice of the right to lien to be sent out by contractors, subcontractors, and suppliers irrespective of any corresponding notice of commencement filed by the owner. In these states, the preliminary notice must typically be sent prior to receiving any payment on a project or within a set time after the start of providing labor or materials on a project. Failure to satisfy an applicable preliminary notice can bar a subcontractor or supplier from later perfecting an otherwise valid lien on a project.

STATUTORY REQUIREMENTS

Many states require precise compliance with lien filing requirements. Statutory provisions may outline specific forms to be used in lien notices and filings. Other statutes may require certain language to appear in lien notices or waiver forms in order for them to be effective. Because substantial compliance may not be sufficient to perfect your lien rights or enforce lien defenses, it is critical that you and your project team understand a particular state’s lien notice and filing requirements prior to beginning work on a project.

TIMING REQUIREMENTS

Preliminary notices, notices of right to lien, and lien filings themselves often must be filed within a specific time period as defined by statute. It is important to keep track of those deadlines; otherwise, you may lose out on your right to file a lien. In the same vein, an upstream contractor or owner may benefit from being informed about the timing requirements for a lien filing and be able to defeat otherwise valid liens and enforcement actions by noting deficiencies in the timing of required filings.

In order to monitor these timing requirements, contractors and subcontractors need to be aware of when their lien rights accrue in a particular state. Typically, lien rights accrue upon the date work was last performed on a project. But, that date is not always certain. For example, does warranty work a subcontractor returned to site to perform extend the time that subcontractor has for filing a lien?

If you have a valid lien, you need to be conservative in calculating your time for filing, so you do not run afoul of a deadline that may extinguish your lien rights. This can be a difficult task when negotiating final payment requirements or a payment dispute with an owner or contractor, especially a party with which you have an existing relationship. These negotiations may drag on, and, because lien filings of any kind can be a pain for an upstream party to deal with, it may make you hesitant to assert lien rights to avoid upsetting your commercial relationship. But, by hesitating, you may inadvertently waive your lien rights, so proceed cautiously.

LIEN WAIVERS

Lien waiver forms and requirements are usually fiercely negotiated in construction contracts and subcontracts. As a party signing a waiver, you need to be aware of the rights you are waiving upon execution of a partial or final waiver. Consider whether the form asks for waiver of all claims, including lien claims, or just lien claims. That distinction may materially affect your ability to sue for relief irrespective of whether you have valid lien rights. Consider also whether you have appropriately reserved your rights on a disputed payment or extra work claim prior to signing any lien waiver or release. You may inadvertently waive your right to seek relief if you sign a comprehensive waiver, even where the owner is aware of the extra work claim prior to execution of the waiver.

As an owner or contractor enforcing a waiver provision, consider whether you have included all required statutory language in the lien waiver form. Some states require specific language to be included in all lien waiver forms to help make downstream parties aware of the rights they are potentially waiving. An upstream party also needs to consider whether the lien form is enforceable as written. Some states will not enforce an unconditional waiver sent prior to receipt of payment.

CLOSING THOUGHT

The topics above outline some of the standard lien issues that arise in construction law. But, there are a host of other issues that may arise. It is important to spend time understanding the lien law in the state where you are performing work. You may consider consulting with a local construction attorney to highlight for you any particular requirements of a state before you enter into a contract, and, similarly, if you anticipate encountering a lien issue once construction begins or as you approach substantial completion, reaching out to an attorney to discuss filing requirements may prove invaluable.

To Be Or Not To Be An Additional Insured?

Smith Gambrell & Russell

It is the question many in the industry have asked in light of the 2018 New York Court of Appeals decision in the Gilbane case. (Gilbane Bldg. Co./TDX Constr. Corp., et al. v. St. Paul Fire & Marine Ins. Co., et al., 31 N.Y. 3d 131 (2018)). In Gilbane the court held that a party was not entitled to coverage as an additional insured when such party did not have a written contract with the policy holder requiring such status. Additional insured status may be very important in that, in addition to affording an additional insured a legal defense, it may provide coverage against risks that are not adequately covered by the additional insured’s own insurance.

Gilbane involved a project manager who was listed as an additional insured on a general contractor’s insurance policy, but did not have a written agreement with the general contractor obligating it to insure the project manager as an additional insured. When a claim arose and the project manager sought coverage from the general contractor’s carrier, coverage was denied because the language of the contractor’s policy required that there be a written contract between the parties in order for additional insured status to be afforded. This policy provision, which is extremely common, was deemed to be enforceable.

Gilbane involved sophisticated commercial parties in connection with a large-scale construction project, but the ruling affects anyone seeking coverage as an additional insured in New York. Property owners, both commercial and residential, commonly require any contractor working on their property to deliver a “certificate of insurance” naming the property owner as an “additional insured.” This often arises when a resident owner wishes to renovate his/her apartment in a co-op or condo building or an adjacent owner is performing construction, and in connection with the construction, requires access to the neighboring co-op or condo. The co-op or condo typically reviews an insurance certificate provided by the contractor’s insurance broker to confirm the covered parties as well as the limits and types of coverages that are in place. However, even after this due diligence is completed, the reality is that the listing of the additional insureds on the certificate of insurance may be ineffective to actually confer that additional insured status. In fact, the industry standard ACORD forms used for certificates of insurance contain disclaimers specifically intended to defeat claims that their issuance creates any rights in favor of the parties to whom they are issued.

Additional insured requirements and endorsement review have always been essential in New York, but Gilbane caused those in the industry to reconsider what had long been accepted as standard practice. In order to effectuate additional insured status, many insurance companies now require a separate contract under which the insured has agreed with the relevant parties to add them as additional insureds to the subject policy. This can be accomplished with a simple agreement, but it still needs to be carefully drafted and reviewed and it must be entered into before the incident giving rise to the claim takes place. A standard indemnification or hold harmless clause will not suffice. Insurance policies may also require that additional insureds be added to policies by special endorsement.

In short, be wary of any certificate of insurance purporting to convey “additional insured” status from a party with whom you are not in direct contractual privity or whose insurance policy has not been reviewed as to how an additional insured is to be designated. When in doubt, it is always best to double-check with your insurance broker, managing agent’s risk manager, or counsel.

Mutual or Concurrent Delay Caused by Subcontractors

David Adelstein | Florida Construction Legal Updates

How are delay damages treated when two subcontractors cause a mutual or concurrent delay to the project?

Assume multiple subcontractors concurrently contributed to an impact to the critical path resulting in a delay to the project.  The delay caused the prime contractor to: (1) be assessed liquidated damages from the owner and (2) incur extended general conditions.  The prime contractor will be looking to the subcontractors for reimbursement for any liquidated damages it is assessed along with its extended general conditions costs.

There is really no great case that addresses this point when two (or more) subcontractors mutually or concurrently delay the project.  It is also not uncommon, and frankly expected, that a subcontractor will point the finger at another subcontractor for the cause of the delay or that another subcontractor was concurrently delaying the project.

The prime contractor should absolutely, without any exception, undertake efforts with a scheduling consultant to allocate the delay caused by subcontractors.  Taking an approach that joint and several liability applies between multiple subcontractors and/or not trying to apportion delay because the subcontractors concurrently delayed the critical path at the same time is probably not the best approach. The prime contractor should have an expert render an opinion as to the allocation of the delay period amongst responsible subcontractors that delayed the critical path. Not doing so, in my opinion, is a mistake.

For example, in the unpublished decision in Alcan Electrical & Engineering Co., Inc. v. Samaritan Hosp., 109 Wash.App. 1072 (Wash. 2002), a dispute arose between a general contractor and its electrical subcontractor on a hospital project.  The general contractor looked to recoup assessed liquidated damages caused by the electrical subcontractor.   The project was 201 days late attributable to the electrical subcontractor and, largely, the mechanical subcontractor. The trial court determined that the electrical subcontractor was only liable for 31 days of delay.

An appeal arose because the general contractor wanted to hold both subcontractors jointly and severally liable for the 201 days of delay. The Washington Court of Appeals was not accepting this argument.  Instead, it held that that the amount of delay attributable to the two subcontractors is a question to be resolved by the trier of fact.  This is exactly what the trial court did by finding that of the 201 days of delay, 31 days of delay was caused by the electrical subcontractor while the remaining 170 day of delay was caused by the mechanical subcontractor.

But, in another example from an unpublished decision, U.S. el rel. Belt Con Const., Inc. v. Metric Const. Co., Inc., 314 Fed.Appx. 151 (10th Cir. 2009), a general contractor looked to allocate liquidated damages to its masonry subcontractor due to delays to the construction of a federal training center.  The subcontract allowed the general contractor to equitably allocate delay damages among subcontractors as long as its decision was made in good faith.  The trial court, affirmed by the appellate court, found that the general contractor did not allocate the damages in good faith because the initial delay analysis it performed was submitted to the owner and allocated ALL of the delay to the owner.  Then, for purposes of trial, it simply adopted its trial expert’s analysis that allocated delay to subcontractors.  This issue alone hurt the contractor and, importantly, its expert’s credibility at trial.  (This is a reminder that there should be ONE delay analysis for the project and what is presented to the owner should not be conflicted with by delay analysis separately presented to subcontractors.)

Moreover, the court, applying California law, found that there was no law that supported the apportionment of a true concurrent delay. But, in my opinion, this did not make much sense because at trial both the general contractor and subcontractor’s experts rendered opinions allocating the delay caused by the culpable subcontractors.

Irrespective of the Court’s decision in this case, the best approach, mentioned above, is to allocate the delay period.  Thus, if two subcontractors mutually contributed to a 30-day window of time, an expert should be used to analyze that 30-day window of time to allocate the days to the two subcontractors.  Again, taking the approach that joint and several liability should apply or that an allocation is not necessary is a mistake.

Reverse Preemption Is Alive And Well In Washington State

Larry P. Schiffer | Squire Patton Boggs

Most reinsurance contracts have binding arbitration provisions. The Federal Arbitration Act (FAA) sets out a national policy in favor of arbitration. Yet, there are states that expressly preclude arbitration provisions in insurance contracts. Does that apply to reinsurance contracts?

In Washington Cities Insurance Authority v. Ironshore Indemnity, Inc., No. 2:19-cv-0054-RAJ, 2020 U.S. Dist. LEXIS 39633 (W.D. Wash. Mar. 6, 2020), a public entities association organized for the purse of self-insuring risks and jointly purchasing insurance and reinsurance, purchased a reinsurance agreement that included an arbitration provision. A dispute arose concerning the settlement of a police misconduct lawsuit, which the cedent presented to the reinsurer for payment. The cedent commenced an action because of the reinsurer’s denial. The reinsurer moved to compel arbitration and the cedent moved to establish that the arbitration clause was void.

Washington, it turns out, is one of several minority states that have express provisions in their insurance laws that prohibit arbitration provisions in insurance agreements. RCW § 48.18.200 expressly provides that insurance contracts delivered or issued for delivery in Washington cannot contain a provision depriving the courts “of the jurisdiction of action against the insurer.” As the court noted, although the FAA would normally preempt a conflicting state law under the Supremacy Clause of the US Constitution, the McCarran-Ferguson Act creates a system of reverse preemption for state insurance law. The court cited examples of cases that hold, and noted that the parties did not appear to dispute, that under the McCarran-Ferguson Act, RCW § 48.18.200 preempts Chapter I of the FAA.

The court then articulated the dispute before it: (1) does reinsurance qualify as insurance and (2) does the anti-arbitration provision apply to reinsurance agreements where the reinsurance was purchased by a joint self-insurance program. The court concluded that the answer to both questions was yes.

The court examined the definition of insurance under Washington law, RCW § 48.01.040, and concluded that “reinsurance” comes within the definition of “insurance.” The court noted that both are contracts where one undertakes to indemnify the other or pay a specified amount upon determinable contingencies. The court found no basis to find that the reinsurance agreement did not fall within the definition of insurance. Moreover, the court noted that nothing in the statute’s text expressly excluded reinsurance and that a review of other sections showed that the legislature knew how to specifically exempt certain types of insurance from the section and to carve reinsurance out of other sections.

The court also concluded that the statute governing the joint self-insurance program that created the cedent did not contain any language saving arbitration provisions in reinsurance contracts purchased by the cedent. Although the statute suggested that the legislature authorized the cedent to purchase their own reinsurance, the statute did not reference arbitration provisions or authorize the inclusion of arbitration provisions in those contracts. The court refused to read into the statute that which the legislature omitted.

The court concluded that there was nothing in the statutory language or the relevant case law to support the reinsurer’s arguments and the motion to compel arbitration was denied.