VOLUME 26, NUMBER 1 SPRING 2012

www.smithcurrie.comAtlanta, GA Charlotte, NC Ft. Lauderdale, FL Las Vegas, NV Los Angeles, CA San Francisco, CA Tallahassee, FL Washington, DC

COMMON SENSE CONTRACTING

702

INSIDE THIS ISSUE

702 Subcontractor termination on design-build projects: Beware: the process can be far more complicated than a termination on a tradi-tional project.

703 Florida: Pay-if-paid provision negated: Enforceable pay-if-paid clause effectively negated by a seemingly routine incorporation by reference provision.

704 Miller Act coverage: When, if ever, does an architect/engineer receive the benefit of this payment bond protection on a design-build federal project?

705 Eichleay overhead recovery: Does a four-year suspension of work on a federal proj-ect entitle the contractor to payment of extended overhead? The answer could well be No!

706 Can a contractor manage its risk by delegating (subcontracting) its duties to an independent contractor? In Tennessee, at least, certain implied duties are not delegable.

707 Terminations: If the contract stipulates a condition precedent to the right to terminate a contractor (subcontractor) for default, failure to satisfy that condition precedent may negate an otherwise valid termination for cause.

708 Late proposals on federal projects: With increasingly strict access requirements to federal facilities, many contractors elect to submit proposals or bids via e-mail. Unfortunately, hitting the Send Button does not end the risk of late receipt by the contracting officer. When does the contractors risk end?

709 Contractual indemnity provisions are often strictly interpreted: More importantly, these contract provisions need to be evaluated in light of applicable state laws which may bar their enforcement.

Subcontractor Terminations on Design-Build ProjectsOwners like design-build constrution because it places more risk on the design-builder, which

accepts the responsibility for both design and construc-tion. Design-builders have success when they under-stand these risks, assemble a knowledgeable team, and stick to projects in their comfort zone. Contractors run into trouble in design-build when they chase unfamiliar work, team up with unfamiliar designers, or use unprov-en subcontractors.

While design-build may reduce the number of owner disputes, disputes between design-builders and its team members can be as common as subcontractor disputes on a traditional design-bid-build project. However, disputes among design-build team members can be more difficult to manage and resolve because risks and expectations may not be properly evaluated on the front end and responsibilities and relationships are not cor-rectly defined and allocated in the contract documents.

Terminating a Design-Build Subcontract The decision in BMAR Associates, Inc. v. Midwest

Mechanical Group, 2010 U.S. Dist. Lexis 40183 (D. Md., April 23, 2010), illustrates that problems that may seem straightforward on a traditional project can be extremely complex in design-build. For example, if a subcontractor defaults on a design-bid-build project the general contractor generally has the right to terminate the subcontractor and hire a replacement. The new subcontractor takes over where the defaulted sub left off, and the subcontract termination clause provides the basis for determining the liability of the defaulting sub-contractor. However, a subcontractor default in design-build can be far more complicated when the terminated subcontractor had design responsibilities. Terminating a member of the design team creates far different prob-lems than terminating a worksite subcontractor.

In BMAR, a design-builder doing medical renovations subcontracted out the design and construction of the boiler work to a mechanical subcontractor. The subcon-

continued to work out the details of their relationship.

Responsibility for Design IssuesThe second subcontractor not only refused to accept design

responsibilities, it raised numerous complaints about the poor design. A major dispute arose when that subcontractor as-serted construction claims for design errors and omissions. The design problems led the replacement subcontractor to stop work, and litigation ensued.

The design-builder argued that both parties understood that the design responsibility would transition to the new subcontractor. E-mails between the parties certainly showed that the design-builder was seeking a transition of both aspects of the boiler work. However, no agree-ment on design was reached before a subcontract was ex-ecuted on the field work. This new subcontract contained an integration clause providing that all prior negotia-tions were merged into the written agreement. Once the subcontractor signed that new subcontract, the document controlled over all prior discussions. Contractually, the only agreement was for the field work based on the de-sign documents developed by the first subcontractor.

Once this subcontract was issued, the new subcon-tractor had no reason or desire to accept any design responsibilities. The problem the design-builder ran into could not be blamed on the new subcontractor taking advantage of a misstep at the time the new subcontract was issued. The negotiations over design had never produced an agreement because the replacement sub did not want to accept design responsibilities. The design-builder failed to appreciate the new subcontractors posi-tion and assumed that everything could be worked out. Most importantly, the design-builder failed to understand that properly addressing the design issue was crucial to any resolution.

Were There Alternatives?The design-builder failed to fully evaluate the issues

when it considered replacing the first subcontractor due to its bonding problem. Questions that should have been raised by the design-builder were never properly considered. Why didnt the design-builder require the original subcontractor to post the surety bonds at the beginning of performance? Was a better alternative waiving the bonding requirement and allowing the origi-nal subcontractor to do the field installation? Should the design-builder have demanded the first subcontractor remain as the designer of record and take responsibil-ity for any design problems that may arise? Was there any contract vehicle available to the design-builder that would have allowed field work to commence yet keeping pressure on the new subcontractor to accept a transition of design responsibilities?

On a design-build project, changing any member of the design team raises challenges that need to be care-

2

tract divided the boiler package into two design phases and a separate construction phase. The subcontract required the subcontractor to provide payment and per-formance bonds covering its construction responsibilities.

Because the subcontractor anticipated self-perform-ing the installation work, it did not prepare the con-struction documents to the same level of detail that an independent designer might have provided. The subcontractor intended that any design issues arising during construction would be addressed and resolved by its field forces. The design-builder left the technical details of the boiler design to the subcontractor.

When field work was ready to commence, the sub-contractor could not provide surety bonds. In response to this bonding problem, the design-builder sought out a substitute subcontractor to do the field work. The design-builder was aware of the added complexity cre-ated by the first subcontractors design responsibilities and understood it could not simply terminate this sub. Rather, the design-builder began negotiating a transi-tion of the full boiler package to a second subcontractor. In addition, the design-builder instructed the original subcontractor to complete the boiler design.

Substituted Subcontractor for Field WorkThe design-builder held extensive discussions with a

proposed substitute subcontractor about the transition but no overall agreement was ever reached. During this same time the original subcontractor was trying to convince the design-builder to allow it to perform the field work without the required bonds, or be excused from all further project involvement.

The time required for these negotiations increased scheduling pressures to get the field work started. These scheduling pressures ultimately caused the design-builders project manager to issue the replace-ment subcontractor a lump sum subcontract for the field work. The new subcontract incorporated the boiler design developed by the first subcontractor but failed to place any specific design responsibilities on the new subcontractor. The replacement subcontractor im-mediately went to work.

The design-builder wanted a single source of respon-sibility for the boiler work and intended to continue negotiations that would result in the replacement sub-contractor accepting the transition of all boiler design obligations. However, once the installation subcontract was issued, the new subcontractor stopped all discus-sions about design. The design-builder argued that the new subcontractor knew that an essential term of the arrangement was for the new subcontractor to take over all responsibilities (including the design). According to the design-builder, the new subcontract was intended only to allow field work to commence as the parties

3

fully evaluated. Plowing ahead due to scheduling con-cerns can backfire as it did for the design-builder on this Maryland case when it failed to understand the different risks and responsibilities created by the design-build ele-ments of the project. Without fully understanding these differences a design-builder can make significant errors when any change in team members must be made.

Joseph C. Staak(404) 582-8026

jcstaak@smithcurrie.comMember of the State Bars of Georgia, Florida,

Alabama and the District of Columbia

Florida: Pay-If-Paid Provision Negated

It is the sign of the times, contractors routinely try to avoid solely bearing the burden of non

payment. Today, a paid-if-paid clause is a standard subcontract provision. Pay-if-paid clauses are enforce-able in a majority of states so long as the conditions are clearly and unambiguously expressed. The burden of clear expression falls squarely on the contractor. How-ever, it may not be enough just to craft a seemingly en-forceable paid-if-paid provision. A contractor wishing to use a paid-if-paid provision should carefully review the other contract provisions to ensure consistency. A general rule of contract interpretation is that a contract must be read as a whole and each provision given its full meaning. Therefore all payment clauses, including those that are incorporated by reference, must be in harmony. A recent Florida case illustrates how an in-corporation by reference clause, which incorporates the terms of the prime contract into the subcontract, can negate an otherwise enforceable pay if paid provision.

BackgroundIn International Engineering Services, Inc. v. Scherer

Construction & Engineering of Central Florida, LLC, 74 So.3d 531 (Fla. 5th DCA 2011), International Engineer-ing Services, Inc. (IES) entered into a subcontract agreement with Scherer Construction & Engineering of Central Florida, LLC (Scherer) for structural steel work. IES performed all the work under the subcon-tract but did not receive payment from Scherer. IES filed suit for breach of the subcontract and Scherer asserted a single affirmative defense: that the subcon-tract contained a pay-if-paid clause, which provided that payment by the owner was a condition precedent to Scherers obligation to pay IES.

The Pay-if-Paid ProvisionThe subcontract contained two payment provisions

found in Article 6 and Article 7. The relevant part of Article 6 read:

Subcontractor agrees that all progress payments and final payment to Subcontractor are contingent

upon and subject to Owners acceptance of Sub-contractors work and upon Contractors receipt of payment from Owner. Subcontractor agrees to accept the risk of non-payment if Contractor is not paid progress payments and/or final payment from Owner, for any reason. Subcontractor further agrees that Owners payment to Contractor of all progress payments and final payment for any work performed by Subcontractor, other Subcontrac-tors and Contractor shall be an express condition precedent to any obligation of Contractor to make any progress payment, retainages, or final payment to Subcontractor, and Subcontractor hereby waives all right to commence litigation or arbitration until payment is made to Contractor.

Article 7 provided:Final Payment shall be due when the work de-scribed in this Subcontract is fully completed and performed in accordance with the Contract Docu-ments, is satisfactory to the Owner and Architect and Final Payment has been made by the Owner to Contractor.The court held that Article 6 was a clear expression

that the parties intended for IES to assume the risk of nonpayment. The court also found that if read in isola-tion, Article 7 would be ambiguous and unenforceable. However, the court ruled: when Article 6 and 7 are read together, it is apparent that the parties expressly and unambiguously intended to shift the risk of non-payment to IES for progress payments and final pay-ments.

Prime Contract Incorporation Creates an AmbiguityThe courts inquiry did not stop at the two subcon-

tract payment clauses. The court also looked at Article 2, an incorporation by reference clause that provided:

The Contract Documents for this Subcontract consist of this Agreement, the terms, conditions or instructions contained in the transmittal letter from the Contractor to the Subcontractor deliver-ing this subcontract for execution by the Subcon-tractor, any exhibits attached hereto, the Agree-ment between the Owner and Contractor dated (prime contract), the conditions of the Architect, all approved drawings and architectural plans and specifications, all modifications issued prior to ex-ecution of the Agreement between the Owner and Contractor, and all modifications issued subsequent thereto.The prime contract contained the following provision

relating to payment by the Owner to Scherer:Neither final payment nor any remaining retained percentage shall become due until the Contrac-tor submits to the Architect (1) an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owners property might be

703

4

responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied.The prime contract provided that the owner was

not obligated to pay Scherer until Scherer paid all of its subcontractors. The court found the pay-if-paid provision ambiguous because the prime contract was incorporated by reference into the subcontract, requir-ing Scherer to pay IES before the owner paid Scherer. The prime contracts payment provision conflicted with the subcontracts pay if paid clause; therefore the pay if paid clause was unenforceable.

Practical TipThis case illustrates the importance of thoroughly re-

viewing all the terms of the contract for consistency. If a general contractor incorporates a prime contract into a subcontract by reference, it should read the terms of the prime contract thoroughly. Incorporation by refer-ence or other type of flow down clauses are routinely used in construction; therefore careful attention must be paid when drafting such provision as to avoid the unintended consequences illustrated in this case.

Y. Lisa Coln Heron(954) 761-8700

lcheron@smithcurrie.comMember of the State Bar of Florida

Miller Act Coverage for Architects and Engineers

Yes or No?Introduction

Over the last two decades, federal agencies have elected to utilize project delivery systems other than the traditional design-bid-build method. The most frequently employed alternative has been the design-build method, which involves the integration of design and construction services within a single contract, and places the responsibility for both the project design and construction on the prime contractor. Although the government may retain some design responsibility, the primary beneficial effect of this project delivery system (from the governments perspective, of course) is that it shifts many of the risks associated with the design from the government to the prime contractor. Prime contractors that do not have in-house design capability must contract with a design firm to perform the neces-sary design work. Unlike the design-bid-build context, in which the government contracts separately with a design firm, in the design-build context the designer is removed from a direct contractual relationship with the government, and is instead placed in much the same position as any subcontractor providing materials or construction services to the prime contractor.

Without the protection of contracting directly with the government for payment, the designer must de-pend entirely on the prime contractor for compensa-

tion. Unlike subcontractors, however, for whom the Miller Act was created to protect against non-payment by the prime contractor, a design firm faced with the risk of non-payment may only rely upon the protection of the Miller Act for compensation in limited circum-stances. The key to determining which circumstances may provide that protection lies in the nature of the services provided. Federal courts have consistently held that design professionals that do not perform on-site supervisory or inspection-related services cannot recover under the Miller Act. For those firms that do perform such services, a recovery is still likely to be very limited.

Subcontractor Miller Act RightsUnder well-established federal law, no firm supply-

ing materials or labor has lien rights against federal property, rights which would typically exist in the context of private construction. The U.S. Supreme Court has stated that [n]othing is more clear than that laborers and materialmen do not have enforceable rights against the United States for their compensa-tion. They cannot acquire a lien on public buildings. U.S. v. Munsey Trust Co. of Washington, D.C., 332 U.S. 234 (1947). The Miller Act thus provides protection for subcontractors and others whose labor and materials go into federal construction projects. MacEvoy Co. v. United States, 322 U.S. 102, 107. This is protection that would otherwise exist via lien rights. To provide similar protection, the Miller Act requires the prime contractor on a federal project to post performance and payment bonds in the amount of the contract for the protection of all persons supplying labor and material on the project. 40 U.S.C. 3131(b)(2). The Miller Act provides that any person who has furnished labor or material in the prosecution of work provided for in a contract with the government may bring suit against the payment bond for unpaid amounts, provided that the person or entity bringing suit has a direct contrac-tual relationship with either the prime contractor or another subcontractor. 40 U.S.C. 3133.

Designer/Architect Coverage under Miller ActNotwithstanding the inclusive language in the Act

concerning the broad range of contractors who qualify for its protections, a design firm providing professional services to a prime contractor on a federal project will not have rights under the Miller Act to make a claim against the prime contractors payment bond. This is true universally on federal projects, with one very limited exception when the designer performs on-site supervision or inspection duties in addition to (or in lieu of) typical design services such as the preparation of plans, details and specifications. Federal courts have long and consistently ruled that a contractor providing professional services does not fall within the Miller Acts definition of labor unless the professional services in question are supervisory in nature.

The court in American Surety Co. of New York v. United States ex rel. Barrow-Agee Labs., 76 F.2d 67

704

5

(5th Cir. 1935) addressed the question of what consti-tutes labor under the Heard Act (the precursor to the Miller Act) in the context of work performed to inspect and analyze loads of gravel being placed for the con-struction of roads in Louisiana. After noting that the work in question involved considerable physical labor and some experience and skill, the court concluded that [a]n ordinary workman could do it after being shown and having some practice. While such a task hardly qualifies as a professional service as that phrase is typically employed to describe the scope of work performed by design professionals on todays projects, it served as the basis for the courts discussion of the limited circumstance in which a design professionals services would constitute labor under the Act. It may be true that the term labor in this statute, as generally in statutes relating to mechanics liens, refers to physical labor rather than technical and professional skill and judgment, but an architect or other skilled man who actually superintends the work as it is being done is by the weight of authority furnishing labor.

More recently, in United States ex rel. Thayer v. Metro Construction Corp., 330 F. Supp. 386 (E.D.Va. 1971), the court ruled that an engineer who prepared designs, drawings and specifications was not protected by the Miller Act and could not make a claim on the prime contractors payment bond. In Thayer, the plain-tiff sued to recover payment for providing engineering services. The plaintiffs sole duties were to prepare the design, drawings and specifications for the project. The court ruled against the plaintiff because he was not a consulting engineer, did not have any supervisory role on the project and had no obligation to see that the contract was completed.

Later cases have continued the reasoning of Thayer by focusing on the nature of the services; subsequent decisions have emphasized that those services must be not only supervisory, but also performed on-site, in or-der to qualify for Miller Act protection. In United States ex re. Naberhaus-Burke, Inc., v. Butt & Head, Inc., 535 F.Supp. 1155 (S.D. Ohio 1982), an engineer who was a second tier subcontractor was employed to furnish calculations and certain specified shop drawings for the project. The court first noted that the term labor as used in the Miller Act has been construed to include physical toil, but not work by a professional, such as an architect or engineer. Nonetheless, the court then found that the engineer could recover under the Miller Act, but only for the performance of on-site services that included actual superintending, supervision, or inspection of the project. The court in United States ex rel. Olson v. W.H. Cates Construction Co., Inc., 972 F.2d 987 (8th Cir. 1992) adopted this line of reasoning as well, finding that only certain professional supervi-sory work is covered by the Miller Act, namely, skilled professional work which involves actual superintending, supervision, or inspection at the job site.

In United States ex rel. Barber-Colman Co. v. United

States Fidelity & Guaranty Co., 19 F.3d 1431, 1994 WL 108502 (4th Cir. 1994) (unpublished opinion), an engineer employed by a subcontractor who went out of business during the project sought compensation directly from the Miller Act surety for work preparing drawings and other non-supervisory work performed for the defunct subcontractor. The court, citing the Butt & Head opinion, ruled that the tasks performed by the engineer did not fall within the accepted defini-tion of labor in the Miller Act, and re-iterated that a design professional can only recover under the Act to the extent that its services included on-site supervision or inspection. The subcontractor therefore could not be compensated under the payment bond for the off-site design services of its engineer.

United States ex rel. Gulf Insurance Co., 313 F.Supp.2d 593 (E.D.Va. 2004) is an example of a court emphasizing the type of service performed over the location of performance. In that case, a project management subcontractor who was retained by the prime contractor specifically to provide on-site proj-ect management, supervision, administrative and oversight services sought payment for those services under the Miller Act. After taking care to acknowledge that on-site services performed by a professional can qualify for Miller Act coverage, the court ruled that in the circumstances presented, the on-site supervisory duties actually performed were not sufficiently hands on to qualify. Specifically, the court held that paying invoices, reviewing proposals, and supervising hir-ing were clerical or administrative tasks which, even if performed at the job site, did not involve the physical toil or manual work necessary to bring them within the scope of the Miller Act.

Conclusion: A Pyrrhic Victory?Design firms performing purely off-site design re-

lated services, as opposed to supervisory services or conducting investigations on-site, are not protected by the Miller Act. Federal courts have consistently ruled that professional services do not qualify for payment bond coverage unless there is a supervisory element to those services. Even for firms that perform some on-site supervisory work that is covered by the Miller Act, the recovery available is very likely to be limited to the value of the on-site work. In most situations, this is likely to be a small portion of the overall value of a design services contract, leading to the conclusion that even a successful claim may not be worth the cost required to pursue it.

Charles E. Rogers(404) 582-8032

cerogers@smithcurrie.comMember of the State Bar of Georgia

Stephen J. Kelleher(202) 452-2140

sjkelleher@smithcurrie.comMember of the State Bars of Georgia,

District of Columbia, and Virginia

6

Multi-Year Suspension But No Eichleay Recovery

IntroductionThe Eichleay formula is the exclusive method

of calculating unabsorbed home office overhead costs when the federal government, by direction or construc-tively, causes a delay in the completion of a construc-tion contract. Unabsorbed overhead costs are indirect costs which would have been absorbed by the contract but for the delay. Home office overhead is a recover-able item of delay damages because the contractor does not realize direct billings during the period when the project is delayed. When the government suspends the contract work, the other contracts held by a con-tractor have to absorb additional indirect costs, but a contractor cannot recover these increased costs under the other fixed price contracts.

A recent decision from the U. S. Court of Federal Claims, The Redland Co., Inc. v. United States, 97 Fed. Cl. 736 (2011), illustrates that the application of Eichleay for recovery of damages is not automatic. Rather, Eichleay is applied in situations in which con-tract performance has begun and the contractor was put on standby. Redland illustrates the difficulty in meeting the standby requirement.

Requirement Not DocumentedIn Redland, the contractor (Redland) which had

received a notice to proceed from the Air Force to remove and repave an aircraft parking area at Home-stead Air Reserve Base (HARB), Florida, was not entitled to recover any unabsorbed home office over-head damages incurred during a subsequent four-year suspension because the suspension order was issued before performance started and Redland failed to es-tablish that it was on standby.

On December 1, 2000, Redland received both the notice to proceed and a second order to suspend its work for an indefinite period of time. Four years later, the suspension was lifted but substantial delays en-sued. Ultimately, the 61 day contract was delayed by 387 days. Believing that Redland was not responsible for any of the delays in completion, the contracting of-ficer granted the contractor a time extension until the day that the work was accepted on January 11, 2006, and did not assess any liquidated damages.

After completion, Redland sought damages in the amount of $698,939.16 and alleged nine claims. The lions share of the claim in the amount of $429,478.53 consisted of unabsorbed home office overhead incurred during the four year suspension of work. The remaining amounts related to the delay and additional work dur-ing the period of performance.

The Court of Federal Claims held that the contrac-

tor was not entitled to Eichleay damages for the claim of unabsorbed home office overhead damages for the four years of suspension because it had not started performance at the time the suspension order was is-sued. The court rejected Redlands argument that the issuance of the notice to proceed triggered the start of performance. Work actually began on October 18, 2004 after the Air Force issued a second notice to proceed. Nevertheless, the court analyzed whether Redland sat-isfied the conditions of being put on standby during the four year suspension.

Three elements must be established to establish recovery under the Eichleay formula. First, the contrac-tor must prove a government-caused delay or sus-pension of uncertain duration. Second, the contractor must prove that the delay extended the original time for performance of the contract; and third, the con-tractor must prove that the government required that it remain on standby during the period of delay or suspension.

Although Redland satisfied the first two elements, the contractor failed to demonstrate that the govern-ment required that it was on standby during the suspension period, waiting to work immediately or on short notice. Indeed, the delay was of indefinite du-ration and it affected all of the work; however, there were no facts that the contractor started performance before receiving the suspension order, or any indirect evidence that it was on standby. To do so, a contrac-tor must show that: (1) the period of suspension was not only substantial but was of an indefinite duration; (2) plaintiff was required to be ready to resume work on the contract, at full speed as well as immediately; and (3) there was effective suspension of much, if not all, of the work on the contract, citing P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1370 (Fed.Cir. 2003).

Redland did not have any equipment or personnel at any location waiting idly for work at HARB or doing work that could be immediately stopped. Redland was asked to detail what resources it had available during the period of suspension, and the vice president could not identify any specific resources, but merely claimed that it would have used either in-house equipment or rental equipment. These were not signs that they were ready to commence work at HARB immediately. It stated that [t]hese are signs of a fully employed construction company that would increase its resources to perform additional work, not one that was waiting on standby with its existing resources constantly at the ready. The court was not persuaded by the conclusory statements made by Redland employees that it was on standby. Additionally, the arguments that the contractor had personnel and equipment available to perform immediately and at full speed were unavail-ing because it had not yet even entered into a contract

705

7

with one of the primary subcontractors who performed nearly the entirety of the repaving work. The courts decision failed to discuss the effect of the suspension on the contractors bonding capacity.

The court rejected Redlands assertion that when the government extends the period of contract perfor-mance, that a rebuttable presumption exists that the government was at fault for the delay because the mere grant by the government of a contract exten-sion does not indicate that the government is at fault; rather, one of a number of other events external to the government could be responsible. citing England v. Sherman R. Smoot Corp., 388 F.3d 844, 857 (Fed. Cir. 2004).

What Does Standby Mean?The Redland decision discusses the strict limita-

tions imposed by the standby requirement. Without express language in the suspension or other order putting a contractor on standby, the contractor bears the burden of proving standby by demonstrating that it was required to resume work at full speed, as well as immediately or on short notice.

The court noted that a contractor is not on standby if it is given a reasonable amount of time to gather to-gether its equipment and personnel after a suspension is lifted. If the government requires immediate resump-tion of the work, but only with a reduced work force that allows the contractor to gradually increase its work force, the contractor is not on standby.

In order to be on standby, the contractor must be required to keep at least some of its workers and necessary equipment at the site, even if idle, ready to resume work on the contract, i.e., doing nothing or working on something elsewhere that allows them to get back to the contract site on short notice. However, when a contractor makes extensive use of subcontrac-tors and cannot guarantee the availability of those subcontractors, or in this case, does not enter into a contract with one of the primary subcontractors until the time of performance, a contractor does not have personnel and equipment available on the worksite to perform immediately and at full speed as required for a claim to recover unabsorbed overhead.

CommentWithout express language putting a contractor on

standby in a written suspension order, a contrac-tor faces enormous hurdles meeting the standby requirements to recover unabsorbed overhead. Red-land confirms the additional limitations imposed on Eichleay damages because it is only available in situa-tions where contract performance has begun, and the Eichleay formula is the exclusive method for calculating unabsorbed overhead in those situations.

This decision still leaves open the possibility of recovering home office overhead under alternate al-

location methods where contract performance has not yet begun. In Nicon, Inc. v. United States, 33 F.3d 878 (Fed. Cir. 2003), the Federal Circuit declared that [w]hen contract performance has not begun, but all of the other strict requirements for entitlement to home of-fice overhead are met, there is no bar to the award of home office overhead in a termination for convenience settlement, provided a reasonable method of alloca-tion is available on the particular facts of the case. Here, Redland could not establish that it could meet the Eichleay requirements for entitlement to home office overhead; thus, it could not collect damages under a modified formula.

Evangelin Lee702/228-9400

elee@smithcurrie.comMember of the State Bar of Nevada

Tennessee: A Contractors Implied Non-Delegable Duty

A recent Tennessee Supreme Court case, Fed-eral Insurance Co. v. Winters, 354 S.W. 3d 287

(Tenn. 2011), addressing two previously unresolved issues in Tennessee, concluded that a contractor has an implied duty to perform work in a careful, skillful, and workmanlike manner and that, absent the owners consent, this duty is not delegable to subcontractors.

One Sentence TakeawayIn Tennessee, contractors face liability for breach of

contract based on an independent subcontractors fail-ure to perform work in a careful, skillful, diligent, and workmanlike manner.

BackgroundMartin Winters, a contractor, entered into an oral

contract to replace the roof of a home owned by the Emersons. Winters was incapable of replacing the entire roof, so, without informing the Emersons, he subcontracted out the work. Within a few months of the works completion, the roof began to leak. When notified of the problem, Winters agreed to repair the roof and hired a different subcontractor, Bruce Jacobs, to remedy the problem.

Winters and Jacobs entered into a written subcon-tract providing in part that any and all work will be the responsibility of Bruce Jacobs and [a]ny and all leaks/damages caused by work performedwill be [his] responsibility to repair or replace. While per-forming the repairs, Jacobs used a propane torch on the roof. Shortly after Jacobs completed his work, a fire occurred, causing over $800,000 in damages to the house. Winters was not present while Jacobs was performing the repairs. A fire investigator found that Jacobs use of the propane torch caused the fire. Nei-

706

8

ther Winters nor Jacobs had liability insurance coverage when the fire occurred.

Procedural HistoryThe Emersons insurance company, Federal Insur-

ance Company, covered the damages to the house and then filed suit against Winters, asserting that Winters had an implied duty to perform the roofing work skill-fully, carefully, diligently, and in a workmanlike man-ner. Furthermore, Federal argued that this implied duty was non-delegable, making Winters liable for Jacobs negligence in burning down the house. The trial court granted Winters motion for summary judgment, find-ing that Jacobs, not Winters, was liable, and that no implied non-delegable duty existed that would make Winters liable for Jacobs work. The Tennessee Court of Appeals reversed, finding that Winters did have an implied duty and that the duty was not delegable, thus making Winters liable for Jacobs work. The Tennes-see Supreme Court agreed, based on the existence of a non-delegable implied duty, which Winters breached when Jacobs actions caused the house to catch fire.

Tennessee Supreme Courts DecisionThe court based its decision on two primary factors.

First, the court concluded that construction contracts are service contracts and that service contracts carry an implied duty to perform the service skillfully, care-fully, diligently, and in a workmanlike manner. Thus, any construction contract contains the implied duty to perform the work in a skillful, careful, diligent, and workmanlike manner. Second, the court ruled that a contractor could not avoid this implied duty by delegat-ing the work to a subcontractor. Therefore, contractors remain liable under the contract for work performed by subcontractors.

Although at first glance this decision seems to ex-pose the contractor to inescapable liability, the decision contains two caveats. First, it has no effect on tort lia-bility. A contractor remains protected from tort liability for a subcontractors actions, assuming the subcontrac-tor is an independent contractor. Second, the owner and contractor can agree to release the contractor from liability for a subcontractors actions and negligence. Therefore, while the contractor may not delegate the duty to perform services skillfully, carefully, diligently, and in a workmanlike manner on its own, the contrac-tor may still avoid liability for subcontractors work by obtaining a release from the owner for work performed by independent subcontractors.

Practical Implications

Put It In Writing: Oral contracts are cheap and easy, until a dispute arises. Once a dispute arises, the cost savings quickly become negligible in light of lost productivity and litigation costs. Put the deals terms in writing. A well-drafted contract can address and

resolve many potential issues between the parties. If Winters and the Emersons had entered into a well-written contract then their dispute may have been avoided.

Understand Independent Contractor Status: While a contractor is not liable under tort theories for the acts of an independent contractor, the contractor may be liable under a breach of contract theory if the contract is not performed in a skillful, careful, diligent, and workmanlike manner. Under Winters, contractors face liability for subcontractors negligent construction, and other tort centered claims, under breach of contract theories.

Insurance is Irrelevant: Wright exposes contractors to liability for breach of contract based on an implied duty, not tort claims based on negligence. Because insurance policies frequently exclude breach of con-tract damages from coverage, contractors ultimately face liability for damages not covered by insurance. From an insurance standpoint, contractors would be better off if courts allowed recovery in tort instead of contract because the tort claims would be covered by existing insurance policies.

Contractors, Obtain a Release: Contractors should attempt to obtain a release from the owner when-ever possible. The release should relieve the con-tractor from liability to the owner for a subcontrac-tors actions. This is especially important on larger projects where a contractor faces liability for work performed by a large number of subcontractors, sub-subcontractors and so on. Under Wright, a contrac-tor potentially faces liability for breach of contract for work performed by any person on the project that is not performed in a skillful, careful, diligent, and workmanlike manner.

ConclusionWright has the potential to have widespread rami-

fications on the construction industry. At minimum, the court, by creating a non-delegable implied duty to perform work in a careful, skillful, and workmanlike manner, exposes contractors to liability that often falls outside of existing insurance policies coverage.

Lochlin B. Samples(404) 582-8116

lbsamples@smithcurrie.comMember of the State Bars of Georgia and Tennessee

Satisfying Termination ConditionsThe power to terminate a construction contrac-tor for cause is a powerful tool for an owner.

It enables the owner to eliminate the source of delays

707

9

and sub-standard work. When a termination is ex-ecuted properly, a project can get back on track before things spiral out of control. However, if careful atten-tion is not given to the contractual conditions such as an architects certification of cause for a termination, the result may be claims of wrongful termination which serve to complicate and protract what was already a less-than-desirable situation. One of the pitfalls that can lead to an ineffective termination is the failure to perform a condition precedent, or a prerequisite, required by the contract. As a recent Indiana court il-lustrates, if the owner does not strictly comply with the prerequisite for the architects certification, the termi-nation may not be valid.

Required Strict Compliance In July 2002, the Town of Plainfield (Plainfield)

entered into a standard AIA contract with Paden En-gineering (Paden) to provide a steel package for a recreation/aquatic center. The contract provided sev-eral reasons for which Plainfield could terminate Paden and provided that, before termination, Plainfield was obligated to obtain the architects certification that sufficient cause exists to justify termination. In other words, Plainfield could only terminate a contractor af-ter the architect certified that sufficient cause existed to justify the termination.

The project did not run smoothly, and Plainfield and Paden each contended that the other was causing delays. In September 2003, Steve Craney, a project coordinator with the projects architectural firm, sent the following e-mail to a Plainfield representative:

This individual [Padens project manager] and his company continue to multiply the challenges with completion of the project. We need to seriously consider having a meeting with our team and the attorneys in order to reach agreement on what is to be done. The additional months that have been added to the schedule, as a result of the lack of performance on the part of Paden, is caus-ing or possibly will be causing addition[al] money to cover the many hours that were not budgeted! Is this the point where we agree to call an end to this situation? I feel we really need to talk! Thanks!

Plainfield issued a Notice of Termination to Paden in October 2003.

During the subsequent litigation, Paden argued that the termination was invalid because Plainfield failed to establish a condition precedent to the termination. An Indiana appeals court analyzed whether the necessary pre-condition to termination was met in the case styled as Town of Plainfield v. Paden Engineering Co., Inc., 943 N.E.2d 904 (Ind. Ct. App. 2011).

At issue was whether the e-mail from the architects project coordinator was close enough to meet the

requirement that the owner receive a pre-termination certification from the architect as required by the contract. The court ruled in Padens favor and found that the e-mail communication was not an architects certification because the sender did not claim that he was an architect nor did he claim that he was rendering an architects certification; rather, he was merely ex-pressing his agreement with the termination of Paden.

Obtain a Proper Architect CertificationTermination conditions are not new and are not go-

ing away, so it would be wise to understand how these conditions can be satisfied. The Indiana appellate courts, as early as 1903, ruled that a condition prec-edent must be strictly complied with in order to justify the drastic action contemplated. White v. Mitchell, 65 N.E. 1061, 1062 (1903). The prevalence of issues involving termination conditions is guaranteed to con-tinue into the foreseeable future. Termination condi-tions are included in the AIA Document A201 2007 in section 14.2.2 of the general conditions: the owner, upon certification by the [Architect] that sufficient cause exists to justify such action, may terminate employment of the Contractor.

Therefore, if an effective termination is going to take place under the standard AIA contracts, the owner must obtain a certification by the architect on the project that sufficient causes exists to justify termination. The architects certification will become an important document and the likely subject of great scrutiny by a contractor that has been terminated. Therefore, the certification must be carefully crafted to withstand a challenge.

Often, the reason the owner desires to terminate a contractor is due to a series of events that have caused the owner to lose confidence and trust in the contrac-tors abilities. The underlying cause of the soured rela-tionship could relate to a personality clash between the owner and contractor that continually sours as stress-ors related to a fast-paced project build up. While a myriad of compelling reasons may justify removal of a contractor, an architects certificate cannot depend on those reasons. Instead, as specified in 14.2 of the A201, the certificate must be based on the existence and knowledge that one of the four following conditions exists:

(1) Contractor repeatedly refuses or fails to supply enough properly skilled workers or proper mate-rials;

(2) Contractor fails to make payment to Subcontrac-tors for materials or labor;

(3) Contractor repeatedly disregards applicable laws or codes;

(4) Contractor is guilty of a substantial breach of a contract provision.

10

The dissatisfied owner should require the architect to review all of the relevant documents and conditions to make a determination of whether the alleged short-comings can be sustained. If so, the architect may then carefully craft a certification.

The architects certificate should be dated on or near the date that the termination notice is served on the contractor and should clearly set forth concrete ex-amples of the contractors failure. A prudent owner will assure that the architect ties the certification to rel-evant project records that support the assertions.

ConclusionA owner needs to be keenly aware of the contractual

conditions to termination for cause. With the proper amount of caution, an owner may be able to ensure that an informed architect issues a carefully-crafted certificate to effectively eliminate a troublesome con-tractor. However, a haphazard termination without a robust architects certificate may lead to an increasingly costly and complicated litigation following termination of the contractor.

Patrick V. Douglas954/769-5325

pvdouglas@smithcurrie.comMember of the State Bar of Florida

Late Bids/ProposalsProposing or bidding on federal government contracts requires that a contractor strictly

comply with multiple regulations, as well as the re-quirements stated in the agencys solicitation (RFP or IFB). If a contractor fails to do so, the likely result is that the expensive and time consuming proposal effort is wasted because the submission is rejected as non-responsive. Although a proposal can be rejected as non-responsive for numerous reasons, one of the more easily avoided grounds for rejection is because it was submitted late. The recent decision, Watterson Con-struction Co. v. United States, 98 Fed. Cl. 84 (2011), illustrates an agencys literal application of the rule that a proposal must be submitted on time. Fortunately, in that case the contractors proposal was eventually ac-cepted, albeit one year later. However, it still presents a very serious lesson regarding the timely submittal of proposals or bids.

In Watterson Construction the offerors were allowed to submit proposals to the Corps of Engineers (COE) by hand delivery, regular mail, or e-mail. The propos-als were due on or before 12:00 p.m. on March 16, 2010. Watterson Construction sent the e-mail contain-ing its proposal at approximately 11:01 a.m. on that date. The proposal did not arrive at the relevant COE e-mail in-box until 12:04 p.m. and it was rejected as late.

Unbeknownst to Watterson Construction, the COEs

e-mail server was inundated by e-mails at that particu-lar time. The resulting e-mail storm slowed the COEs servers to a crawl delaying the delivery of all e-mails.

Although the end result was that the contractors proposal was ultimately found to be timely, that did not happen until more than one year later and only after Watterson Construction incurred significant expenses working to overturn the rejection decision. But why did the COE reject the proposal even after realizing that the delayed delivery was not Wattersons fault and that it had actually sent the proposal almost an hour early? Simply put because the COE strictly interpreted the Federal Acquisition Regulation (FAR) governing the submittal of proposals to federal agencies as meaning that Wattersons proposal had not reached or been received by the designated government office (in this case the e-mail in-box) before the deadline.

Fortunately, Watterson Construction clarifies how the rules governing electronic proposal submissions should be handled by the federal government. The rule that was unclear before this case states that the proposal must reach or be received by the designated govern-ment office before the deadline. Watterson argued that the designated government office was the COEs server, not the actual designated e-mail in-box. Watterson also argued that, even if their proposal was late, the Gov-ernment Control exception should be applied such that it should be considered because the proposal had been received at the government installation designated for receipt of offers and was under the governments con-trol prior to the time set for receipt of offers.

In the end, the court concluded that the proposal should be accepted because the Government Control exception for late submittals applied and the des-ignated government office was the COE server. The Watterson Construction opinion contains a much more detailed analysis of a number of other applicable rules but this is a key point. But the lesson to be learned is that government agencies strictly interpret the rules governing the submittal of proposals.

Although Watterson was eventually able to have its proposal considered, the lesson here is that the earlier contractors submit their offers the better. Some might say that goes without saying. However, it all too often happens that proposals are submitted at the very last minute due to the nature of compiling sub-contractors proposals and finalization of the proposal. It is impera-tive that a contractor plan for last minute contingencies when compiling and submitting a proposal in response to a RFP on an IFB.

So, what can a contractor do to ensure the timely submittal and acceptance of a proposal?

Closely review the solicitation and confirm (then reconfirm) the due date and time, the location to which it must be delivered, and the form in which it must be delivered;

708

11

Ensure that all sub-contractors proposals are re-ceived as far in advance of the proposal deadline as possible;

Plan for the technology being used to submit the final proposal may break down or not be available. Redundancy is the key here. For example, have a back-up copier, computer, fax machine, and/or print-er, make sure all the relevant individuals cell phones are charged, save multiple copies of the proposal on various media such as a hard drive and a memory stick;

If hand delivering the proposal, ensure that there are multiple ways of getting to the delivery point in case there is a traffic or security access delay; and

Last, but not least, as a general rule of thumb, as-sume that what can go wrong, will go wrong.

Jay R. Houghton(800) 832-6946

jrhoughton@smithcurrie.comMember of the State Bar of California

Georgia: Contractual IndemnityTwo recent decisions by Georgia appellate courts have addressed the issue of contractual

indemnity. The Supreme Court of Georgia in the Ken-nedy Dev. Co., Inc. v. Camp, 290 Ga. 257 (2011) found that an indemnity provision in an assignment and assumption agreement was unenforceable. Kennedy, the developer of an upstream subdivision, assigned all of its rights and responsibilities to the upstream subdivisions homeowners association. The previous owner of the land of the subdivision had entered into agreements with a downstream subdivision and its homeowners association to permit the future upstream subdivision to use the lake on the downstream subdivi-sion as its detention pond in exchange for a promise to make certain repairs and improvements to the pond and to maintain the pond. Camp owned some property adjacent to the downstream subdivision and alleged that the excess storm water from the upstream subdi-vision significantly increased the amount and velocity of the runoff from the downstream subdivisions lake which drained into a creek on Camps property, result-ing in erosion, tree loss, and other damage.

Georgias Anti-Indemnity Statute InterpretedThe assignment agreement by Kennedy to the up-

stream subdivisions homeowners association included a provision providing that the homeowners association would hold Kennedy harmless from any debts, claims, actions, damages, judgments, or costs which arose prior to and after the agreement and are related to the construction, maintenance, repair, or operation of the subdivision. Georgia has a anti-indemnity statute

which makes certain indemnity agreements unenforce-able if they meet two requirements. The provision must relate in some way to a contract for construction, alteration, repair, or maintenance of certain property and promises to indemnify a party for damages aris-ing from that partys sole negligence. The first part has been interpreted broadly, including real property leases, design contracts, contracts with subcontractors, commercial and residential leases, in addition to tradi-tional construction contracts.

The Georgia Supreme Court found that the agree-ment satisfied the first part of the test and also satis-fied the second part in that the agreement provided that the homeowners association will indemnify and hold harmless Kennedy as to any or all claims, no matter the origin of the claim or who is at fault. Therefore, the agreement satisfied both conditions for application of the anti-indemnity statute and the provi-sion was therefore invalid.

The teaching point here is that an indemnity provi-sion may not be enforceable if it relates to the expan-sive view of construction, alteration, repair, or mainte-nance of property set forth in the Kennedy decision and if it purports to indemnify against the indemnitees sole negligence.Indemnity Enforced

The Georgia Court of Appeals in JNJ Foundation Spe-cialists, Inc. v. D.R. Horton, Inc., 717 S.E. 2d 219 (Ga. App. 2011) found a contractor liable to the owner for damages claimed by a person injured in an automobile wreck. The injured person claimed that traffic control at the project was inadequate. The contract between the owner and the general contractor had a provision with language similar to that in the Kennedy case. It required Horton to indemnify and defend the owner as indemnitee for any claims arising out of or connected with the construction work. This indemnity agreement did not limit the contractors liability to claims for which it or its subcontractors had been at fault. The Court of Appeals found that the indemnitor contractor had a duty to defend and hold harmless regardless of fault or causation.

Since the contractors CGL insurance policy covers harm caused by negligent acts but not the breach of a contractual duty, there may be no insurance cover-age where the contractors actions or inaction did not contribute to the harm. When such a broad indemnity provision is included in a contract, legal counsel should be consulted before executing the contract to modify the indemnification provision to provide that some act of the contractor must have contributed to the harm.

Hubert J. Bell, Jr.(404) 582-8027

hjbell@smithcurrie.comMember of the State Bars of Georgia,

District of Columbia, and Florida

709

This communication is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that the Internal Revenue Service may impose on the taxpayer.

Address Change? To ensure you continue receiving our newsletter, please e-mail your address changes to schnewsletter@smithcurrie.com.

CommentsorSuggestionsIf you have questions regarding a particular topic or article, please note that we have included the contact information on the primary author(s) for each article. If you have general comments or suggestions for a topic, please contact the supervisory editors, Scott Walters (Telephone: (404) 582-8062; E-mail Address: gswalters@smithcurrie.com) and Thomas J. Kelleher, Jr. (Telephone: (404) 582-8016; E-mail Address: tjkelleher@smithcurrie.com).

12

Upcoming Seminars and Programs by Smith Currie & Hancock Attorneys

Supervisory Editors: Thomas J. Kelleher, Jr., and G. Scott Walters.

Construction Law 101, Online Course at www.constructionlawyers.com; Course Text: California Infrastructure Proj-ects: A Guide to Successful Contracting and Dispute Resolution; MCLE Credit: 9 hours (California State Bar Approved); Cost: Free; now through 2013. Ernest C. Brown.Georgia Construction Lien and Public Contract Bond Law, April 4, 2012, AGC of Georgia, Macon, GA. S. Gregory Joy.Advanced Federal Contracting Is-sues, April 16, 2012, AGC of America, Washington, D.C. Thomas J. Kelleher, Jr., Eric L. Nelson.International Construction and Con-struction Finance since the Financial Crisis, April 18, 2012, ABA International Section, New York, NY. James F. Butler.Legal Issues and Contract Clauses, April 19-20, 2012, AGC of America, Po-tomac, MD. Philip E. Beck.Protecting Your Payment Rights and Getting to Final Payment, April 24, 2012, ABC of Georgia, Atlanta. GA. G. Scott Walters.Getting Paid, Waivers and Liabilities, April 26, 2012, Associated Builders and Contractors, Inc., San Antonio, TX. G. Scott Walters and Gene J. Heady.Public Construction Contracts and Procurement Law: State and Federal Perspectives, April 27, 2012, Lorman Education Services, Cobb Galleria Centre, Atlanta, GA. S. Gregory Joy, Thomas J. Kelleher, Jr., and Joseph C. Staak.

Key Subcontract Clauses, May 7, 2012, Turner School of Construction Manage-ment, Pembroke Pines, FL. Lisa Colon-Heron.ConsensusDOCS, May 18, 2012, Arkan-sas Association of Healthcare Engineer-ing, Inc., Little Rock, AR. Philip E. BeckSpecial Issues: Landlord/Tenant, Notice of Commencement/Notice to Contractor, Bankruptcy, May 18, 2012, ICLE, Atlanta, GA. Robert O. Fleming.Law of Construction Defects and Fail-ures, June 7, 2012, HalfMoon Seminars, Atlanta, GA. Kirk D. Johnston. Federal Contracting Workshop on Total Operating Cost Requirements, June 8, 2012, AGC of America, Washing-ton, D.C. Thomas J. Kelleher, Jr.The Practical Impact of Design-Build on the Design Engineer, June 15, 2012, Georgia Engineering Alliance, Palm Coast, FL. Joseph C. Staak.Construction Projects Best Practices for Owners, July 10, 2012, Federal Publications, Hilton Head, SC. James F. Butler.Construction Risk Avoidance and Mitigation, July 19, 2012, ABC Florida Space Coast Chapter, Orlando, FL. Thom-as J. Kelleher, Jr., Joseph C. Staak, John M. Mastin.

For additional information on any of these seminars or programs, please contact the listed Smith Currie & Hancock attorney.