Timing is Everything: Defending Subcontractors Against Breach of Construction Contract Claims

Andrew T. Marshall | Butler Weihmuller Katz Craig | October 31, 2018

Transfer of risk and liability are common occurrences in the field of construction. National builders often employ a single licensed general contractor to oversee the totality of its construction projects throughout the state of Florida. While this use of a “qualifier” technically complies with Florida law, it leaves unlicensed superintendents with the lion share of day-to-day responsibility for the quality of a project’s overall construction. In order to shift the responsibility of quality construction away from the builder, subcontract agreements are often drafted in such a manner that requires every subcontractor to agree to comply with all applicable plans, specifications, building codes, ASTM and industry standards. Additionally, to ensure risk transfer is accomplished, builders mandate, through its subcontract agreements, the placement of the builder as an additional insured on the subcontractors commercial general liability (“CGL”) policy.

Residents who begin to experience damage to their property as a result of construction defects  often file suit against the builder directly. The builder in turn initiates suit against its subcontractors to effectively transfer its potential liability exposure. While builders often assert a multitude of claims against each subcontractor, it is almost guaranteed that a breach of contract claim will be one of the claims asserted. Two of the more common breach of contract allegations proclaim that pursuant to the contract, the subcontractor was obligated but failed: 1) to construct the project in accordance with the plans and specifications, applicable building codes, and industry standards, and 2) to name the builder as an additional insured on the subcontractors CGL policy.

Because builders often assert these claims several years after original construction, it is important to consider and evaluate the statute of limitations for every such claim. Generally, the applicable statute of limitations period for a breach of contract action is five (5) years. 95.11(2). However, an action founded on the design, planning, or construction of an improvement to real property must be brought within (4) years.  95.11(3)(c).  When two statutes ostensibly conflict, the more specific statute controls, even when the more specific statute provides for a shorter limitation period. Therefore, a claim for breach of a construction contract has a four (4) year limitations period.[1]

As with any statute of limitations analysis, the date of accrual is the most important factor involved.  As such, practitioners would be wise to also remember that accrual of a breach of contract claim begins at the date of breach.[2] Any breach of the contract based upon the subcontractor’s failure to construct in accordance with the plans must begin to accrue no later than the date the subcontractor’s work on the project was completed. If the subcontractor completed its work on the project over four (4) years prior to the filing of the lawsuit by the general contractor, a motion for summary judgment based upon statute of limitations should be filed.

Likewise, a similar analysis should occur when defending a subcontractor from a breach of contract claim based upon the failure to add the builder as an additional insured. Unless specified within the contract, the accrual date for this type of claim is more fluid as it is subject to when the subcontractor was required to add the builder to its CGL policy. The accrual date should be confirmed through requests for admissions, interrogatories or deposition testimony provided by the builder’s corporate representative.[3] Armed with a confirmed accrual date, a practitioner can determine whether suit was filed within the four (4) year limitations period and possibly secure dismissal through the filing of a dispositive motion.

[1] Suntrust Bank of Florida, Inc. v. Don Wood, Inc., 693 So. 2d 99 (Fla. 5th DCA 1997)“General rule that more specific statute controls when two statutes ostensibly conflict applies to construction of statutes of limitations, even when more specific statute provides for shorter limitation period.”

[2] Hartford First Ins. Co., 995 So. 2d 576 “We hold that in the context of a subcontract, where a contractor accepted the work of the subcontractor and paid in full for that work, the action accrued when the subcontractor finished its work.” See also Access Ins. Planners, Inc. v. Gee, 175 So. 3d 921 (Fla. 4th DCA 2015)(“For purposes of the statute of limitations, a cause of action for breach of contract accrues at the time of the breach”); State Farm Mut. Auto. Ins. Co. v. Lee, 678 So.2d 818, 820 (Fla.1996); Med. Jet, S.A. v. Signature Flight Support–Palm Beach, Inc., 941 So.2d 576, 578 (Fla. 4th DCA 2006) (“Florida has followed this general rule that a cause of action for breach of contract accrues at the time of the breach, ‘not from the time when consequential damages result or become ascertained.’ ”) (quoting Fradley v. Cnty. of Dade, 187 So.2d 48, 49 (Fla. 3d DCA 1966)).

[3] Make certain that the corporate representative deposition is properly noticed and that you have identified the subcontract and the requirement of additional insured placement as a topic of inquiry within the Notice of Taking Deposition.

Does the Miller Act Trump Subcontract Dispute Provisions?

Christopher Horton | Smith Currie & Hancock | May 9, 2018

The Miller Act

All general contractors performing public building or public works contracts with the federal government must be familiar with the Miller Act. It is a requirement for doing business with the federal government. Pursuant to the Miller Act, a general contractor entering into a public building or public works contract with the federal government must furnish a payment bond in an amount equal to the contract price, unless the contracting officer determines that it is impractical to obtain a bond in that amount and specifies an alternative bond amount.

Miller Act payment bonds guarantee payment to certain subcontractors and suppliers supplying labor and materials to contractors or subcontractors engaged in the construction. As a result, subcontractors have an avenue of relief should they not get paid for work done on the project. Specifically, subcontractors have a right to bring an action against the surety within 90-days after the date on which the person did or performed the last labor or furnished or supplied the last of material for which the claim is made. Any such action must be brought no later than one year after the date on which the person did or performed the last labor or furnished or supplied the last of material. 40 United States Code § 3133.

Limiting Subcontractor Claims

General contractors handling federal work routinely include provisions in their subcontracts that require their subcontractors to exhaust certain dispute procedures prior to filing suit for non-payment or for additional compensation and damages based on alleged extra work, changed conditions, or other grounds. By employing these provisions, general contractors attempt to control the process by which their subcontractors seek recovery for additional compensation or damages. Generally, these provisions require subcontractors to submit their claims through the general contractor against the government, in accordance with the Contract Disputes Act, rather than bringing suit directly against the general contractor under the Miller Act.

For general contractors, these provisions offer a way to avoid costly litigation that may have only arisen because of the government’s denial of a change order or other government action affecting the cost of the project. For subcontractors, however, these provisions limit their rights to recovery and may increase costs associated with recovery. Most importantly, participation in a contract mandated dispute resolution procedure will not toll or extend the Miller Act’s one-year deadline for filing. The one-year deadline is, for the most part, absolute.

Are Miller Act Limitations Enforceable?

General contractors cannot avoid Miller Act lawsuits unless their subcontractors have executed waivers expressly releasing their rights under the Miller Act after the subcontractors have furnished labor or material for use in the performance of the contract. This provision of the Miller Act was added in 1999 to prevent general contractors from requiring that their subcontractors waive Miller Act rights as a precondition to obtaining work on federal projects. It is also directly relevant to the validity of contract provisions requiring exhaustion of dispute procedures prior to initiating Miller Act lawsuits. While some courts interpret these provisions as a de facto waiver of rights under the Miller Act, other courts differ on whether these provisions are enforceable.

Court Decisions Concerning Dispute Remedy Exhaustion Provisions

A number of federal courts have determined that subcontract terms conflicting with the provisions of the Miller Act are unenforceable. Based on this determination, courts have considered whether subcontract provisions requiring exhaustion of dispute procedures prior to initiating a Miller Act suit conflicts with the waiver provisions of the Miller Act. Only a few federal courts have addressed this issue. The majority of courts that have (D.C., Maryland, Nebraska, New Jersey, Pennsylvania, Virginia), have found that such provisions are unenforceable and do not require dismissal or stay of a Miller Action lawsuit. These courts have focused on the language of the provisions at issue. In these cases, the provisions set forth in the subcontract have conditioned the subcontractor’s right to recovery under the payment bond on the completion of the dispute procedures. By requiring that a subcontractor exhaust other procedures first, the courts have determined that the provision conflicts with the waiver requirements set forth in the Miller Act. The provisions at issue in these decisions also fail to expressly cite to the Miller Act.

A minority of courts (Louisiana, California, and Hawaii) have upheld dispute exhaustion provisions and entered dismissals or stays of Miller Act. Contrary to the decisions referenced above, the courts rendering these decisions based their rulings upon the fact that the provisions at issue included express language that required a stay for Miller Act claims pending exhaustion of the dispute procedures. The courts also found that the provisions were not so extreme as to constitute a waiver. The subcontractor’s Miller Act remedies remained intact pending exhaustion of the contractual dispute procedures.

“Best Practices” for General Contractors and Subcontractors

As is discussed above, only a few states have considered whether dispute provisions requiring exhaustion of remedies are enforceable. The majority of states that have considered the issue have refused to enforce the stays or dismissals required by such provisions. But it is fair to say that the law is still evolving on this issue. General contractors and their counsel should consider the following when drafting these types of provisions: (1) whether the Miller Act is expressly referenced; (2) whether the provision includes a disclaimer that the provision does not serve as a waiver of any Miller Act rights; and (3) whether enforcement of the provision is in furtherance of ongoing dispute procedures contemplated by the provision. The last item is great import because it will always be difficult to convince a court to dismiss or stay a claim if the parties are not in the process of moving forward with the dispute procedures referenced within the applicable provision.

On the other hand, subcontractors should consider whether such provisions should be stricken from their subcontracts when negotiating the terms. If not, subcontractors and their counsel should fully consider whether it is better to proceed with the dispute procedures prior to filing a Miller Act lawsuit or whether filing and later challenging the provision in court is a better option. If the one-year deadline is approaching, subcontractors must either file a Miller Act suit or lose their Miller Act rights.

The General Assembly Seems Ready to Provide Some Consistency in Mechanic’s Lien Waiver

Christopher G. Hill | Construction Law Musings | March 5, 2018

Back in 2015, the Virginia General Assembly amended the mechanic’s lien statute (Va. Code 43-3) here in Virginia to preclude any contractual provision that diminishes a subcontractor or supplier’s “lien rights in a contract in advance of furnishing any labor, services, or materials.” However, this amendment was only applicable to subcontractors and suppliers. For political and other reasons, general contractors in Virginia were left out of this change. This omission by the legislature put Virginia general contractors in the position of potentially being forced by project owners to waive their mechanic’s lien rights without the ability to run that risk down stream to their subcontractors and suppliers.

A recent bill enrolled during this legislative session, HB823, provides some remedy to this inconsistency. This bill (a .pdf of which can be obtained here) amends Virginia Code 43-3 and Virginia Code 43-21 to effectively preclude full contractual waiver of lien rights by general contractors with one caveat. That caveat is that with the amendment to 43-21 relating to priority of liens the general assembly has specifically authorized pre or post provision of labor or materials subordination of general contractor mechanic’s liens to any deed of trust on the property in question. In short, general contractors got at least partial relief from the contractual bind that the previous legislation put them in.

Of course this begs the question of whether subcontractors and suppliers can be forced to subordinate their lien rights given the above-quoted language. Would doing so constitute diminishing those rights through the loss of priority? In the past few years, I haven’t seen a case that answers this question. As always, I recommend that you review the statutes yourself, preferably with the advice of an experienced Virginia construction attorney.

“Good Faith” May Not Be Good Enough: California Supreme Court to Decide When General Contractors Can Withhold Retention

Erinn Contreras and Joy O. Siu | Construction & Infrastructure Law Blog | March 7, 2018

It is industry standard in California for owners of a construction project to make monthly payments to a contractor for work it has completed, less a certain percentage that is withheld as a guarantee of future satisfactory performance. This withholding is called a retention. Contractors generally pass these withholdings on to their subcontractors via a retention clause in the subcontract. Under such clause, if a subcontractor fails to complete its work or correct deficiencies in its work, the owner and the general contractor may use the retention to bring the subcontractor’s work into conformance with the requirements of the contract.

When and how retention payments must be released are governed by, among other statutes, Civil Code section 8800 et seq. Specifically, Civil Code section 8814, subdivision (a), states that a direct contractor must pay each subcontractor its share of a retention payment within ten days after the general contractor receives all or part of a retention payment. Failure to make payments in accordance with Section 8814 can subject an owner or a contractor to a (1) two percent penalty per a month on the amount wrongfully withheld, and (2) claim for attorney’s fees for any litigation required to collect the wrongfully withheld retention payments. (Civ. Code, § 8818.)

However, there exists an important exception to the ten-day deadline: whenever a “good faith dispute exists between the direct contractor and a subcontractor,” a direct contractor may withhold from the subcontractor’s retention an amount not in excess of 150 percent of the estimated value of the disputed amount. (See Cal. Civ. Code, § 8814, subd. (c) (Section 8814(c)).) There is very little in the statute or case law, however, defining what constitutes a “good faith dispute” sufficient to justify withholding funds from the retention.

The California Supreme Court has decided to fill this void, and granted a petition for review in United Riggers & Erectors v. Coast Iron & Steel, Case No. S231549 (United Riggers). The California Supreme Court certified the issue of whether “a contractor [may] withhold retention payments when there is a good faith dispute of any kind between the contractor and a subcontractor, or only when the dispute relates to the retention itself in the case of.”

In United Riggers, 243 Cal.App.4th 151 (2015), the General Contractor, Coast Iron & Steel Co. (Coast), entered into a direct contract with an owner and a subcontract with United Riggers & Erectors (United). After the work was completed, and after Coast received its retention from the owner, Coast continued to withhold United’s retention on the ground that United had submitted various change order requests and damage claims that Coast disputed, citing Section 8814(c)’s good faith provision.

The Court of Appeal disagreed with Coast and held that this was not permissible under Section 8814(c), holding “a contractor is entitled to withhold a retention payment only when there is a good faith dispute regarding whether the subcontractor is entitled to the full amount of the retention payment.” (Emphasis added.) The Court of Appeal then remanded for an assessment of interest and attorney’s fees due to United for the delayed retention payment claim. In reaching this conclusion, the Court of Appeal reasoned that “[t]o excuse Coast in this case from paying United the retention payments would unduly increase the leverage of owners and primary contractors over smaller contractors and subcontractors by discouraging subcontractors from making legitimate claims for fear of delaying the retention payment.” Such a consequence was not to be borne, the Court of Appeal explained, in light of the “broader remedial purpose of the prompt payment statutes” to “encourage general contractors to pay timely their subcontractors and to provide the subcontractor with a remedy in the event that the contractor violates the statute.”

This policy concern was the primary focus of the California Supreme Court at the oral argument in United Riggers, which took place on March 6, 2018. Coast’s counsel began with a “plain meaning” analysis of Section 8814(c), juxtaposing its language with Civil Code section 8812—which expressly states that retention payments may only be held when “there is a good faith dispute between the owner and direct contractor as to the retention payment due.” (Emphasis added.) This predicated Coast’s argument that if the Legislature intended to limit the scope of disputes between direct contractors and subcontractors to those relating to the retention itself in Section 8814, the Legislature would have done so as it did in Section 8812 related to owners and direct contractors. The Court pushed back against this construction of the statute, positing whether under such interpretation, a general contractor would be able to withhold retention payments for a dispute related to any issue, even one outside the scope of the contract, such as a property border dispute. If this were the case, Justice Kruger cautioned, such interpretation would allow contractors to leverage the disbursement of retention payments to resolve separate disputes on unrelated projects.

The case has been submitted, and an opinion is expected to be issued in approximately 90 days. The opinion will certainly have wide-reaching effects in the construction industry. Namely, in the common event of contractor and subcontractor disputes, contractors will have to be cautious in assessing offsets against the retention, particularly in situations where the dispute involves mixed claims of changed and delayed work and subcontractor deficiencies, lest they be liable for prompt payment penalties and attorneys’ fees.

Contractors Beware: Your Subcontractor Provided Additional Insured Coverage may have Gaps

David S. Lynch | Kilpatrick Townsend | February 14, 2018

Construction contracts generally require subcontractors to extend additional insured status on the subcontractor’s policies for the benefit of the contractor who relies on this coverage to protect it from claims arising out of the subcontractor’s work on the project. The intent is to place the risk of loss for the subcontractor’s work on the subcontractor’s liability policies. In order to assure that the subcontractor has complied with these contract requirements, contractors generally require the subcontractor to provide a certificate of insurance. However, even though a subcontractor has technically provided the required insurance, the insurance may not meet the expectations of the contractor that the risks to the contractor associated with the subcontractor’s work be covered under the subcontractor’s policy.

One such circumstance occurred to a general contractor in Illinois, who required a subcontractor to name it as an additional insured on the subcontractor’s general liability policy. Vivify Constr., LLC v. Nautilus Ins. Co., 2017 Ill.App.(1st) (2018). The subcontractor complied and had the contractor added to its policy as an additional insured. However, the subcontractor’s policy also contained an endorsement which effectively narrowed coverage under the policy. While liability policies contain employee exclusions which remove from coverage claims made by employees of the insured seeking coverage, this endorsement broadened the exclusion to remove from coverage claims made by any employee of any insured, whether the employer was the party seeking coverage or not.

An employee of the subcontractor was injured on the job and filed a lawsuit against the contractor. The contractor sought coverage for the claim under the subcontractor’s policy as an additional insured. The subcontractor’s carrier denied coverage relying on the broadened employee exclusion. This denial was upheld.

Another circumstance occurred in connection with the construction of a house. D.R. Horton Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740 (Tex. 2009). The homebuilder required the foundation subcontractor to include the homebuilder as an additional insured under its liability policy. The subcontractor obtained the required endorsements, but they limited additional insured coverage to losses arising out of the negligence of the subcontractor. When the homebuilder was sued by the homeowners for defects in the foundation of the house, the homebuilder sought coverage under the foundation subcontractor’s general liability policy as an additional insured. Since the pleading filed against the homebuilder did not include any allegations against the subcontractor, the court determined that the additional insured endorsement was not triggered and that the insurance company did not owe the homebuilder a defense to the lawsuit.

The lessons to be learned are first to specify what types of coverage subcontractors are required to carry, to specify any limitations on coverage that are not acceptable, and to specify the exact additional insured endorsements the subcontractors are required to obtain. If possible, it is recommended that the subcontractor’s policies be reviewed in advance to determine whether there are any limitations on coverage which would inhibit the intended transfer of the risk of loss for the subcontractor’s operations to the subcontractor’s insurance coverage. If a review of the policies is not possible, it is recommended that the subcontractor be required to produce a copy of any endorsements to the policy.