Federal Contractors – Double Check The Terms Of Your Contract Before Performing Ordered Changes

Jonathan Schirmer | Ahlers Cressman & Sleight | May 14, 2019

As federal contractors may be aware, the general rule when performing a contract for the federal government is that only the contracting officer (“CO”) can bind the government. Often, the CO delegates responsibility to a contracting officer’s representative (“COR”). While in some cases a COR may be able to bind the federal government, the contract may limit that ability exclusively to the CO.

Important for our clients, it is the responsibility of the contractor to determine whether the COR can legally bind the federal government when ordering changes to the scope of work. [1] This is true even when a COR possesses apparent authority to order changes to the work, and when the project is almost exclusively overseen by COR’s. [2]

A recent case highlights the dangers of a contractor relying on the orders of a COR when performing work outside the scope of a contract. In Baistar Mechanical Inc., a contractor was awarded a maintenance and snow removal contract with the federal government. The contract expressly stated that only the CO had contracting authority regarding additional or changed work. [3] However, Baistar, the contractor, argued it was directed by the contracting officer’s representatives to perform work outside of the contract.

The government terminated the contract and refused to pay for the work. Baistar sued, claiming the directions from the COR’s created an implied contract for the extra work. The court denied recovery for the costs of the additional work. The court stated that even where a contract is managed almost exclusively by COR’s who believe and act as if they have the authority to order changes in the work, the risk falls on the contractor to verify the authority of the government’s agent.[4] Because the terms of the contract limited the ability to order changes in the scope of the work to the CO, Baistar was barred from recovering the costs of the work performed.

The crux of the case is that even where a contracting officer’s representative appears to have the authority to direct changes to the scope of work, and even if the agent mistakenly believes they have such authority, the risk falls on the contractor to ensure they are performing work that is either stated expressly in the contract, or is directed by an appropriate government agent.

While it may be tempting to follow the work orders of a COR who has been managing the majority of a contract and interacting with workers, contractors must be careful not to rely on such orders without conducting due diligence. Consultation with the contract language, legal counsel, or requesting a copy of a written delegation of authority from the CO is advised before performing work ordered by a COR, otherwise contractors face the risk they will not be compensated for such work.

Comment: This case highlights the risk associated with performing ordered changes outside the scope of a government agent’s authority. However, the court did reserve a narrow “emergency exception” allowing recovery for additional work ordered by a government agent without authority in an emergency. This exception may allow recovery for contractors performing additional work in some situations, but consultation with legal counsel and the contracting officer is still advised. Thanks to Alexandra E. Busch for initially bringing this case to our attention in the ABA Forum on Construction Law Newsletter.

[1] Baistar Mech., Inc. vs. United States, 128 Fed. Cl. 504, 518 (2016).
[2] Id. at 518-19.
[3] Id. at 513.
[4] Id. at 518-19.

Ohio Court of Claims Upholds Necessity of Contractors and Sureties to Follow Contractual Dispute Resolution Process

Casey Cross | Bricker & Eckler | July 10, 2019

In Berkley Ins. Co. v. Kent State University, Case No. 2018-00579, 2018-Ohio-5453 (Dec. 6, 2018), the Ohio Court of Claims held that when a construction contract contains a mandatory dispute resolution process, that process must be followed. Otherwise, the surety or contractor’s claim is irrevocably waived.

In summary, Kent State University (KSU) hired R & M Electric Co., Inc., doing business as “Summit Electric” (Summit), to provide electrical construction work to renovate KSU’s School of Art. Several months after work commenced on the project, KSU found Summit in default and terminated the company shortly after it had abandoned the project. As Summit’s surety, Berkley Insurance Company (Berkley) engaged a takeover contractor in accordance with its performance bond and paid valid claims under its payment bond, which subrogated Berkley to Summit’s interest in the contract funds. On June 8, 2017, KSU sent a letter to Berkley notifying it of the university’s intent to issue back charges and assert withholding claims against contract amounts. After receiving the letter from KSU, Berkley expressed its objections through a number of communications with the university. Berkley argued that the back charges and withholdings were improper, because KSU lacked supporting documentation and KSU did not complete its initial accounting process until June 2017.

The court disagreed with Berkley and held that the contract between the parties included a mandatory dispute resolution clause:  “[T]he Contractor shall initiate every Claim by giving written notice of the Claim to the A/E and the Contracting Authority within 10 days after the occurrence of the event giving rise to the claim.” According to this provision, failure to initiate a claim in that ten-day timeframe constitutes an irrevocable waiver of the claim. Berkley’s objections to KSU, even though written, did not amount to claims under the mandatory dispute resolution provision contained in the contract.

The court reasoned that even though it may not deem the language in the contract just or equitable, the language is nevertheless clear and unambiguous as to the parties’ intent. Therefore, the “court must simply apply the language as written.” The court found it undisputed that Berkley failed to properly assert its claim within ten days and, thus, irrevocably waived its claim.


It’s Not What You Thought You Signed That Counts: Chancery Court Rejects Plaintiffs’ Claims For Breach of Contract Plaintiffs Thought They Had Made

Remsen Kinne and Alidad Vakili | K&L Gates | July 1, 2019

In Concerned Citizens of the Estates of Fairway Village, et al, v. Fairway Cap, LLC and Fairway Village Construction Inc., C.A. No. 2017-0924-JRS (Del. Ch. March 6, 2019), homeowners resident in Fairway Village, a residential planned community (“Plaintiffs”) claimed that plans and actions taken by one of the community’s developers, defendant Fairway Cap, LLC (“Fairway Cap”), to construct, own and lease townhouse condominiums in the community for use as rental apartments breached contractual provisions of Fairway Village’s governing documents. In its verdict for defendants, the Court of Chancery (the “Court”) rejected those claims, and concluded that Plaintiffs failed to prove a breach of contract and denied Plaintiffs’ motion for summary judgment.

In proceedings prior to trial, the Court granted Plaintiff’s motion for preliminary injunction and enjoined defendants from renting townhouses in the community pending the outcome of the trial. Subsequently, the Court dismissed Plaintiffs’ breach of fiduciary duty and fraud claims, leaving only the breach of contract cause of action for trial.

In its findings the Court indicated that Fairway Cap initially wanted to acquire and develop only certain lots within the Community. The prior owner of the undeveloped lots in the Community defaulted on its loan presenting Fairway Cap with the opportunity to purchase the defaulted loan. By purchasing the defaulted loan, Fairway Cap was able to acquire all the remaining undeveloped lots within the Community. After several years of sluggish sales, Fairway Cap re-evaluated its objectives and decided the best and highest use of the remaining lots would be to build townhouses for use as rental apartments, maintain ownership, and rent them to long-term tenants. Testimony at trial indicated this would result in Fairway Cap owning and leasing more than 76% of the community’s condominium units, in turn potentially increasing financing costs for homeowners purchasing and refinancing units and reducing Fairway Village’s property values.

The decision’s analysis first addressed Plaintiffs’ argument that Fairway Village’s governing documents contain restrictive covenants prohibiting the developer’s plans. Plaintiffs bore the burden of proof, the Court held, to identify contractual restrictions on the use of Fairway Cap’s property and how those restrictions had been breached. The Court noted that in real property-related contract breach claims such as Plaintiffs’, the law facilitates free use of land not otherwise validly restricted.

The Court ruled that Plaintiffs failed to meet their burden of proof because they did not identify any contractual commitment that restricted Fairway Cap from owning and renting units in the Community. The Court found that the governing documents clearly provided that a builder or developer can own units to sell or to rent and that “express references to, or implicit recognition of, an owner’s right to rent its condominium unit for residential purposes through the governing documents are too numerous to cite.” A recital in a peripheral declaration document stating that the developer “will offer Condominium Units for sale to the public”, the Court determined, was not incorporated in the governing documents and at best reflects only a then-present intention of the developer, “not … a promise to refrain from all other permitted uses in perpetuity.”

Next, the Court addressed Plaintiffs’ request for a permanent injunction (i) to prevent the developer from constructing townhouses for use as rental units, and (ii) to require the developer to construct townhouses for sale that conform with those already constructed. The Court held that by failing to prove a breach of contract, Plaintiffs also had not proven any predicate wrong and corresponding right of action as required for the Court to grant an equitable remedy such as a permanent injunction. That remedy may not be invoked, the Court indicated, to prevent the developer from lawfully exercising its contractual rights or from putting its property to a lawful use.

The Court rejected Plaintiffs’ contention that the Court should view the Fairway Village’s governing documents “in a macro sense” through Plaintiffs’ eyes. Instead, the Court stated that Delaware law requires adherence to the objective theory of contracts in interpreting the governing documents, “by ‘standing in the shoes of an objectively reasonable third-party observer’ who is bound to give ordinary meaning to the words used by the parties and to enforce the agreements as written when that meaning can be readily discerned.” The Court did not accept Plaintiffs’ argument that Fairway Cap’s rental plan should be enjoined because it fundamentally alters the community and its governance scheme, leaving the developer in control of Fairway Village’s condominium council, even though homeowners contemplated that control would be turned over to them, in support of which Plaintiffs cited references in the governing documents requiring the developer’s consent to certain amendments. The Court went on to observe that no restriction in the governing documents or in law prohibited Fairway Cap’s ownership of multiple units and resulting voting control. The Court noted that Plaintiffs’ “vague sense” of being treated unfairly is not sufficient to justify granting equitable relief.

Notably, in reaching its verdict for the defendants, the Court pointed out that the “Plaintiffs cannot prevail on their breach of contract claim by proving Defendants breached the contract Plaintiffs thought they had made.”

What You Need to Know About Home Improvement Contracts

Garret Murai | California Construction Law Blog | June 15, 2019

Given the variety of problems that can arise on a construction project, from defects to delays, it’s difficult to draft a construction contract that addresses every possible problem exactly right. However, so long as you adequately address the “big three” of scope, price and time, it’s also difficult to draft a construction contract wrong.

That is, with one exception.

And that one exception, in California, is home improvement contracts. In 2004, the California State Legislature enacted the state’s Home Improvement Business statute (Bus. & Prof. Code §§7150 et seq.). Section 7159 of the statute sets forth what must be included in home improvement contracts.

It’s a section that could have been written by Felix Unger of the Odd Couple. In addition to setting forth required language that must be included in a home improvement contract, it directs where that language is to be set forth in a home improvement contract, and even how it is to be presented, down to type sizes.

So here’s what you need to know about home improvement contracts.

What types of projects do home improvement contracts apply to?

A home improvement contract must be used when repairing, remodeling, altering, converting, modernizing, or adding to “residential property.” It includes residential remodeling projects involving the construction, erection, replacement or improvement, not only of the interiors of residential property, but also exterior improvements including driveways, swimming pools (including spas and hot tubs), terraces, patios, awnings, and porches, underground structures including fallout shelters and basements. It also includes, some might be surprised, even fences.

What types of projects do home improvement contractsnot apply to? 

A home improvement contract does not need to be used for:

  • New (i.e., ground up) residential construction;
  • Work with an aggregate contract price, including labor, services and materials, of $500 or less;
  • “Service and repair contracts” in which: (1) the contract is for $750 or less; (2) the buyer initiated the transaction; (3) the contractor does not sell the buyer goods or services beyond those necessary to take care of the particular problem that caused the buyer to contact the contractor; and (4) no payment is due until the work is completed (Note: There are specific requirements for service and repair contracts as well, however. See Bus. & Prof. Code §7159.10).
  • The sale, installation, and service of a fire alarm system if the sale and installation costs do not exceed $500 (Note: There are specific requirements for fire alarm system contracts as well, however. See Bus. & Prof. Code §7159.9).
  • Costs associated with monitoring a burglar or fire alarm system.

Do home improvement contracts apply to work performed for tenants?

Yes. The statute defines a “home improvement contract” as an “agreement . . . between a contractor and an owner or between a contractor and a tenant, regardless of the number of residence or dwelling units contained in the building in which the tenant resides, if the work is to be performed in, to, or upon the residence or dwelling unit of the tenant.”

Do home improvement contracts apply to work on apartment buildings and mobile homes?

The statute doesn’t specifically address apartment buildings or mobile homes. However, given the breadth of the statute, it appears that it would apply to mobile homes generally and, at the very least, to work performed in, to, or upon the residential units of an apartment building excluding common areas.

What must be contained in a home improvement contract?

Here’s the Felix Unger list. Brace yourself:

  • Fomatting: A home improvement contract: (1) must be in writing; (2) must be legible if handwritten (although you would be crazy to handwrite a home improvement contract); (3) must identify the type of contract by including the words “Home Improvement” in at least 10-point boldface type;  (3) text must be in a typeface no smaller than 10-point type, except as otherwise provided; and (4) headings must be in a typeface no smaller than 10-point boldface type, except as otherwise provided.
  • Timing: Before any work commences, a home improvement contract, signed and dated by the contractor and the buyer, must be provided by the contractor to the buyer. A home improvement contract must also include the following statement in at least 12-point boldface type: “You are entitled to a completely filled in copy of this agreement, signed by both you and the contractor, before any work may be started.”
  • Dates and Addresses: A home improvement contract must include on the first page: (1) the date the buyer signed the contract; and (2) the name and business address of the contractor to which the applicable “Notice of Cancellation” may be mailed, immediately preceded by a statement advising the buyer that the “Notice of Cancellation” may be mailed to the contractor at the address indicated.
  • Licenses and Registrations: A home improvement contract must include: (1) the name, business address and license number of the contractor; and (2) the name and registration number of the home improvement salesperson that solicited or negotiated the home improvement contract, if applicable.
  • Scope of Work: A home improvement contract must include the heading “Description of the Project and Description of the Significant Materials to be Used and Equipment to be Installed” followed by a description of the project and description of the significant materials to be used and equipment to be installed. For swimming pool projects, the description of the project must include a plan and scale drawing showing the shape, size, dimensions, and the construction and equipment specifications.
  • Contract Time: A home improvement contract must include the heading “Approximate Start Date” followed by the approximate date on which work is to commence and the heading “Approximate Completion Date” followed by the approximate date in which work is to be completed.
  • Contract Price: A home improvement contract must include the heading “Contract Price” followed by the contract price in dollars and cents.
  • Downpayment: If a downpayment will be charged, a home improvement contract must include the heading “Downpayment” followed by the amount of the downpayment and the following statement in at least 12-point boldface type: “THE DOWNPAYMENT MAY NOT EXCEED $1,000 OR 10 PERCENT OF THE CONTRACT PRICE, WHICHEVER IS LESS.”
  • Progress Payments: If progress payments are to be made, a home improvement contract must include the heading “Schedule of Progress Payments” followed by the amount of each progress payment in dollars and cents and, for each progress payment, the specific work or services to be performed and materials and equipment to be supplied. In addition, a home improvement contract must include the following statement in at least 12-point boldface type: “The schedule of progress payments must specifically describe each phase of work, including the type and amount of work or services scheduled to be supplied in each phase, along with the amount of each proposed progress payment. IT IS AGAINST THE LAW FOR A CONTRACTOR TO COLLECT PAYMENT FOR WORK NOT YET COMPLETED, OR FOR MATERIALS NOT YET DELIVERED. HOWEVER, A CONTRACTOR MAY REQUIRE A DOWNPAYMENT.”
  • Extra Work and Change Orders: A home improvement contract must be incorporate a change order form. In addition, a home improvement contract must include the heading “Extra Work and Change Orders” followed by the statement: “Extra Work and Change Orders become part of the contract once the order is prepared in writing and signed by the parties prior to the commencement of work covered by the new change order. The order must describe the scope of the extra work or change, the cost to be added or subtracted from the contract, and the effect the order will have on the schedule of progress payments.” In addition, a home improvement contract must include a statement notifying the buyer that the buyer may not require a contractor to perform extra work or change order work without a change order, that the failure to issue a change order does not preclude recovery of compensation for work performed based on legal or equitable remedies to prevent unjust enrichment, and that change orders must be in writing and address: (1) the work covered by the change order; (2) the amount added or subtracted from the home improvement contract; and (3) the effect the change order will have to progress payments and the completion date.
  • Contract Documents: If other documents are to become a part of a home improvement contract, a home improvement contract must include the heading “List of Documents to be Incorporated into the Contract” followed by a list of documents to be incorporated into the home improvement contract.
  • Waiver and Releases: A home improvement contract must include a statement that, upon satisfactory payment being made for any portion of work performed, the contractor shall furnish the buyer with a “a full and unconditional release from any potential lien claimant claim or mechanics lien.”
  • Insurance: A home improvement contract must include, either within the home improvement contract or as an attachment to the home improvement contract, a notice indicating whether the contractor carries commercial general liability insurance and workers’ compensation insurance using specific language. See Bus. & Prof. Code §7159(e) for specific language.
  • Payment and Performance Bonds: A home improvement contract must include a notice, in close proximity to the signatures of the contractor and buyer, informing the buyer that the buyer has the right to require the contractor to have a payment and/or performance bond.
  • Mechanics Lien Warning: A home improvement contract must include a notice with the heading “Mechanics Lien Warning” using specific language. See Bus. & Prof. Code §7159(e)(4) for specific language.
  • CSLB Contact Information: A home improvement contract must include a notice in at least 12-point type providing contact information for the California Contractors State License Board using specific language. See Bus. & Prof. Code §7159(e)(5) for specific language.
  • Buyer’s Right to Cancel: A home improvement contract must provide buyers with a three-day or seven-day right to cancel. A seven-day right to cancel must be provided where work is to be performed on residential property damaged by a sudden or catastrophic event in which  state of emergency has been declared by the President of the United States, the Governor of the State fo California, or local executive officer or governing body. A three-day right to cancel must be provided in all other circumstances. A home improvement contract must include either a three-day or, if applicable seven-day, right to cancel form using specific language. See Bus. & Prof. Code §7159(e)(6) and (7) for specific language.

Do home improvement contracts have to be stipulated sum (i.e., fixed price) contracts or can they be time and material (i.e., cost plus fee) or guaranteed maximum price contracts (GMP)? 

This is a serious drawback of the statute as I see it, although I also understand the rationale behind the statute, which is to provide a “simple” construction contract for consumers. A home improvement contract may only be a stipulated sum contract. Let me repeat that. A home improvement contract may only be a stipulated sum contract. No time and material or GMP pricing is allowed. This can create problems for contractors who aren’t building to plans or where the plans don’t provide the necessary detail for contractors to accurately estimate their costs. The solution in these situations: Build the risk into your stipulated sum contract price. Yes, you may not get awarded the project. But, it’s a lot better than being underwater on a project.

Can contractors charge a “mobilization” fee in addition to, or in lieu of, the “Downpayment” provision under the statute?

The statute provides that any downpayment may not exceed $1,000 or 10% of the contract price, whichever is less. Some contractors try to get around this, sometimes for reasonable reasons such as long lead times for certain items like windows, doors and cabinets in which a contractor must pay a material supplier a deposit exceeding $1,000, by including a “mobilization fee” or “start-up fee” of many thousands of dollars immediately after beginning work. Contractors who do this should know that they are taking a risk. In fact, I would say that, if the charge isn’t legitimately for “mobilization” costs billed after the fact, it is illegal under the statute which prohibits contractors from collecting payment for “work not yet completed” and “materials not yet delivered.”

Can contractors invoice progress payments based on the percentage of work completed rather than based on set dollar amounts for certain milestones achieved?

Many contractors are used to billing based on percentage of work completed. For example, if a contractor has completed 20% of framing, the contractor will bill 20% of the value of framing as set forth in a previously agreed-upon schedule of values, typically, monthly or some shorter period such as every two weeks. You can’t do this in a home improvement contract. The statute requires that progress payments be set forth in “dollars and cents” and be tied to “the specific work or services to be performed and materials and equipment to be supplied.” For contractors, the lesson here in order to keep your cash flow moving in order to pay for labor and materials, is to carefully negotiate the progress payment schedule so that you don’t find yourself getting your first payment after drywall is completed in a whole-house remodel.

Can owners insist on a “hard” completion date rather than the “Approximate Completion Date” as provided under the statute?

Contractors aren’t the only ones who have to make adjustments when entering into home improvement contracts, buyers do as well. Typically, a buyer will insist on a “completion” or “substantial completion” date that is a hard date, not an “approximate” date, when construction will be completed or substantially completed. Some owners, based on this “hard” date, will also include liquidated damage provisions providing that if construction is not completed or substantially completed by the hard date, the contractor will owe the owner liquidated damages, typically, on a per-day basis. It’s hard toprovide that certainty when the statute provides that a home improvement contract is to include the heading “Approximate Completion Date” followed by the approximate date of completion. Here’s the solution: While the statute sets forth what must be included in a home improvement contract, it doesn’t set forth what may be included in addition to what is set forth in statute. As such, if I were representing an owner, I would try to negotiate a hard “not-to-exceed” date beyond the “Approximate Completion Date.”

Can you include provisions other than what is set forth in statute?

Yes. The statute sets forth what must be included in a home improvement contract. It doesn’t set forth worth what may be included in a home improvement contract beyond what is set forth in statute.

No Rest for the Weary: Project Completion Is the Beginning of Litigation

Albert Li and Bob Fitzsimmons | Construction Executive | April 30, 2019

In today’s environment, most construction projects end up in some form of litigation. Construction is full-time employment for lawyers – from contract negotiation to project management, lien and payment issues. Years after project completion, a company still can face construction defect litigation and be served with a Notice of Opportunity to Repair, which in most states is now codified into statute. This is the beginning of what most likely will become a lawsuit, involving many of the subcontractors.

WATCH OUT FOR THE CONSTRUCTION CONTRACT BLAME GAME

The first phase of post construction litigation involves the review of contract and insurance policy language in an attempt to transfer responsibility in the litigation to other parties.

Before construction began, contract negotiation focused on budget and timeline. In the post-construction phase, two less noticed provisions of the contract are critical – indemnity and insurance.

Indemnity is a contractual obligation of one party to compensate the loss occurred to the other party due to the act of the indemnitor or any other party. The duty to indemnify is usually, but not always, coextensive with the contractual duty to “hold harmless” or “save harmless.” Many states have restrictions that must be observed in order to enforce a right to indemnification. Some states prohibit it altogether, and some allow the indemnitee to be indemnified for its own negligence. Frequently, standard contracts run afoul of state restrictions. Consequently, it is critical that local law be considered in the contract negotiation phase.

PROPER INSURANCE COVERAGE IS IMPERATIVE

Insurance can also provide an alternative means to transfer responsibility to another party in the litigation. Many construction contracts contain a provision requiring that one party make the other party an “additional insured” on its policy. Most insurance policies issued to construction companies contain a provision that automatically makes a company an additional insured if the contract requires it. The contract and policy language encounter are endless in their variety. The extent of the coverage provided may be dictated by contract language, so it important to be well advised in the contract negotiation process.

Obtaining the benefit of being an additional insured can get extremely complicated. Commercial general liability policies usually cover damages that occur within the policy period. In construction defect cases, the damage may have occurred in any of the years between the certificate of occupancy and the first notice of any problems. 

Generally speaking, all of the policies that provide coverage between the certificate of occupancy and first notice of damage would be “triggered.” For example, a general contractor in a litigation involving the work of 10 subcontractors, where the certificate of occupancy was five years before the first notice of damage, may be covered under 50 different policies (10 subcontractors multiplied by five years of policies), all with different coverage provisions.

The insurance industry has attempted to address some of the insurance complexity by offering wrap-up policies such as owner controlled insurance programs (OCIPs) and contractor controlled insurance programs (CCIPs), in which all of the contractors on a project are required to obtain coverage through one program. 

POTENTIAL FOR CONFLICT OF INTEREST

This concept works well in case of a single occurrence, such as a personal injury or property damage incident. All of the project contractors are covered under the same policy and, therefore, have the same interest and can be represented by the same lawyers. However, in construction defect cases, there are frequently issues that may affect the coverage provided under the policy. For instance, the type of damage may not be covered by the insurance, leaving the contractor responsible. If the damage is not covered, one contractor may want to argue another contractor is responsible. Consequently, a joint defense, even though agreed to in the contract, cannot ethically be provided by one law firm.

Most importantly, keep in mind that these issues need to be addressed before engagement with the owners concerning the alleged deficiencies.