Inside this Issue
- A1 - “Pay-If-Paid Clause” Enforced as Condition Precedent to Subcontractor Right to Payment
- A2 - Engineer Required to Indemnify Client for Costs of First Party Claim, Including Attorneys Fees to Extent Attributable to Engineer
- A3 - Contractor Cannot Recover for Extra Work Performed without Change Order Approved by Authorized Officials
- A4 - Liquidated Damages Properly Assessed against Design-Builder Without Regard to Whether Excessive Compared to Actual Damages
Article 1
“Pay-If-Paid Clause” Enforced as Condition Precedent to Subcontractor Right to Payment
See similar articles: Pay-If-Paid | pay-when-paid | Payment Disputes | Quantum Meruit
A “pay-if-paid” clause was enforceable to deprive a subcontractor (Sub) to sue the general contractor (GC) for withheld retainage where the project owner, a condominium developer, failed to pay the balance it owed to the general contractor which would have included payment for the sub’s retainage. The Alabama Supreme court in Lemoine Company v. HLH Constructors, Inc., 62 So.3d 1020 (AL, 2010), stated that the contract clause made payment from the owner to the GC an absolute condition-precedent to the GC’s duty to pay the Sub. The Sub argued that a separate “pay-when-paid” clause in the same contract required payment within 30 days regardless of whether the GC was ever paid. The court rejected that argument and also rejected the Sub’s argument that it could recover under the theory of Quantum Meruit. Allowing quantum meruit recovery would render the “pay-if-paid” clause meaningless and be contrary to the clearly expressed intent of the parties to the contract. Moreover, according to the court, “when an express contract exists, an argument based on quantum meruit recovery in regard to implied contract fails.” Where the parties clearly agreed upon their respective rights and liabilities in the contract, the “law will permit the enforcement of that agreement as written.” “This Court has consistently held that the freedom to contract is an inviolate liberty interest.”
The “pay-if-paid” clause of paragraph 5 of the contract provided the following:
Notwithstanding anything else in this Subcontract or the Contract Documents, the obligation of [GC] to make any payment under this Subcontract ... is subject to the express and absolute condition precedent of payment by [Vista Bella]. It is expressly agreed that [GC] and its surety shall have no obligation to pay for any work done on this Project, until [GC] has received payment for such work from [Vista Bella]. ... [Sub] expressly assumes the risk of nonpayment by [Vista Bella].
The GC argued that the above-quoted language clearly states that the Sub assumed the risk of nonpayment by the Developer to the GC and that the condition precedent in that paragraph is enforceable. The court agreed, finding:
The facts of this case indicate that [GC] and [Sub] “knowingly, clearly, and unequivocally enter[ed] into [the subcontract] whereby they agree[d] that the respective liability of the parties [would] be determined by some type of agreed-upon formula,” namely, the condition precedent of paragraph 5; therefore, “Alabama law will permit the enforcement of [the subcontract] as written,” and Vista Bella's payment to [GC]under the general contract is an enforceable condition precedent to [Sub’s] right to payment under the subcontract.
The Sub argued that the condition precedent in paragraph 5 conflicts with the “pay-when-paid” clause of paragraph 4 of the subcontract and that “the conflict should be resolved in favor of the prior clause.” Paragraph 4 provided, in pertinent part, that “a final payment, consisting of the unpaid balance of the Price, shall be made within 45 days after the last of the following to occur: (a) ...; (b) ...; (c) Final payment by [Developer] to [GC] under the Contract on account of the Work.”
The court did not see any conflict between the two clauses, but instead found that the “pay-when-clause” does not create a right that was expressly waived by the very clear “pay-if-paid” provision which served as an absolute condition precedent to the right to any payment.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No.2 (Feb 2012).
Copyright 2012, ConstructionRisk.com, LLC
Article 2
Engineer Required to Indemnify Client for Costs of First Party Claim, Including Attorneys Fees to Extent Attributable to Engineer
See similar articles: Attorneys Fees | duty to defend | Indemnification clause
Pursuant to a contractual indemnification clause, a trial court awarded damages of $810,000 in attorneys fees against an engineer in favor of a project owner, Wal-Mart Stores, Inc., on a jury verdict of $48,600 in actual property damages. Wal-Mart’s first party claim against the engineer, a general contractor, and others was for damages arising out of stress and failure within a store and parking lot on which the engineer had provided geotechnical and design services to allow the store and lot to be built on a layer of clay just below the surface. A jury found the total damages to the building were $486,000, with engineer being 10% at fault and the general contractor being 90% at fault for the damages. With regard to the parking lot, the jury found no liability on the part of the engineer, but instead found Wal-Mart 50% liable and a general contractor 50% liable, and awarded Wal-Mart $1.6 million in damages for the parking lot. In a post-trial motion, Wal-Mart sought to recover its attorneys fees incurred in the litigation on all the claims (both the ones it succeeded on and the ones it lost). The court awarded the entirety of the attorneys fees against the engineer pursuant to the indemnity provision of the contract. This was reversed on appeal, with the court holding that Wal-Mart’s recovery of attorneys fees should be limited to those claims upon which it prevailed against the engineer. Wal-Mart Stores, Inc. v. Qore, Inc., 647 F.3d 237 (5th Cir., 2011).
The indemnification clause in question provided the following:
The Testing and Inspection Firm [Qore] further agrees to indemnify and hold Wal–Mart free and harmless from any claim, demand, loss, damage, or injury (including Attorney's fees) caused by any negligent act or omission by the Testing and Inspection Firm, its agents, servants, or employees.
An initial question to be determined by the court was whether this indemnification only applied to claims brought against Wal-Mart by third parties or whether attorney’s fees were permitted in a first-party dispute (i.e., Wal-Mart directly against the engineer) as well. The court held that the language of the indemnity clause allowed recovery in first-party actions.
Even if first party claims were to be included in the indemnification, however, the engineer argued Wal-Mart’s recovery of attorney’s fees must be limited to those incurred in prosecuting the single claim upon which Wal-Mart prevailed against the engineer, and only to the same fractional share of liability on the building repair claim. Moreover, the engineer argued that the fees were not recoverable under state law. The court agreed that the attorneys fees would not be imposed under state common law or statutory law, but explained that attorney’s fees may be awarded where provided for by contract as was the case here. The court stated:
Here, the attorney's fee provision in the testing and inspection contract entitled Wal–Mart to reimbursement for those attorney's fees “caused by any negligent act or omission” on the part of Qore in performing work under the contract. Qore's duty to reimburse Wal–Mart for its reasonable attorney's fees was limited accordingly to those fees proximately and legally “caused by” Qore's negligence, and the matter of causation could only be addressed once the jury made findings on the issue of Qore's negligence. Until then, Qore's legal liability remained latent for indemnification purposes. See Hopton, 559 So.2d at 1013 (“[T]here must be legal liability before a claim of indemnity arises.”). Because Wal–Mart's indemnification rights were derivative of Qore's negligent acts or omissions, i.e., the fault allocated to Qore on the building repair claim, Qore is only liable for the reasonable attorney's fees Wal–Mart incurred in enforcing those rights. All other fees were not “caused by” Qore within the meaning of the testing and inspection contract, and could not be awarded thereunder. Wal–Mart's recovery should have been limited to those attorney's fees incurred in proving Qore's liability on the building repair claim.
The court concluded that because the engineer was not found liable on two of three claims submitted to the jury, and the claims were not inextricably tied to a single claim but were readily capable of partition from each other, the attorney’s fees likewise should have portioned among Wal-Mart’s successful and unsuccessful claims. The fees could have been easily segregated along two lines, “those fees incurred in proving liability relating to planning and design, and those fees dedicated to proving liability relating to construction.” The court concluded “Wal-Mart’s successful and unsuccessful claims were not so interwoven that the district court could not have differentiated among Wal-Mart’s attorney’s fees incurred in prosecuting the various claims and defendants.” For these reasons, the appellate court concluded that the trial court’s award of attorney’s fees was an abuse of the court’s discretion and vacated the award accordingly.
Comment: As noted by the court in this case, responsibility for paying attorneys fees incurred by another party can arise by express contract language despite the fact that they would not otherwise be recoverable under state common law or statutory law. When negotiating indemnification clauses in design professional contracts (and other types of contracts as well) it is important, therefore, to carefully craft the clause so that the obligation to indemnify is limited to the extent of damages caused by the design professional’s negligence, and to make the clause applicable only to damages arising out of third party claims against the Indemnitee. It is often assumed that the indemnity clause is only intended to respond to legal liability that the Indemnitee incurs as a result of third party claims, but that may be a bad assumption, as the decision in this case demonstrates that if that is the intent it needs to be clearly stated.
Design professionals should also be aware that the contractual liability exclusion in their professional liability policy states that there is no coverage for liability assumed under indemnification clauses that would not have been imposed by law (meaning either state common law or statutory law). If the only legal basis for recovery of attorneys fees from the design professional is the contractual indemnification language, there is no insurance coverage for those fees since they are not “damages” that would be awarded by the court in the absence of the contract language.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No.2 (Feb 2012).
Copyright 2012, ConstructionRisk.com, LLC
Article 3
Contractor Cannot Recover for Extra Work Performed without Change Order Approved by Authorized Officials
See similar articles: Change Orders | Contract - Notice Requirements | Design-Build | Estoppel | Implied Contract | Quantum Meruit | Unjust Enrichment
A design-build contractor that entered into a fixed-price contract to upgrade the heating, air conditioning and ventilation (HVAC) system in college dormitories satisfactorily performed all the work it was contracted to do, but also performed significant additional work to correct problems with the existing HVAC system that had not been identified at the outset of the project. Although the additional work was “approved” by the Construction Manager for the University, it was not submitted and approved by the University Purchase Department as required by the contract to obtain a change order. The court in Mallory & Evans Contractors and Engineers v. Tuskegee University, 2010 WL 5137580 (M.D. Ala., Dec. 2010), granted the University’s summary judgment motion dismissing the contractor’s law suit for breach of contract and unjust enrichment – finding that the contractor requirements were clear and the contractor could not rely justifiably on the purported approval of the changes by the CM. Nor could the contractor recover under the principles of unjust enrichment or quantum meruit since there was an express contract applicable to the relationship between the contractor and university, and where there is an express contract there can be no implied contract or quantum meruit.
The original contract amount was $3,850,535. The changes claimed by the design-builder amounted to $765,915. For the design-builder to prevail on its breach of contract action, it would have to prove the University obligated itself contractually to pay the extra cost for the additional work. The University argued that the purchase order specifically required prior approval by the Purchasing Department for such changes that exceed the original contract amount and that satisfying that requirement was a condition precedent to any right to be paid extra. The court agreed. Even if the CM may have represented that he had authority to approve payment of the extra work, this does not bind the University since it was not the University itself that made any representation to the design-builder that it could rely upon the CM instead of going through the official process required by the terms of the contract. As stated by the court, “The scope of an agent’s apparent authority is defined based on the principal’s [University’s] representations to third parties concerning the agent’s authority…. Apparent authority ‘rests upon the principle of estoppel, which forbids one by his acts to give another an appearance of authority which he does not have and to benefit from such misleading conduct to the detriment of one who has acted in reliance upon such appearance.” The University made no such representations in this case, it was only the CM who may have made representations.
With regard to the fact that the design-builder may have encountered “unforeseen contingencies with respect to the amount of work that needed to be done,” the court said that is irrelevant because “The contract did not give [design-builder] a mandate to get the work done no matter the cost.” The court states that the design-builder “did not protect itself contractually in [its] … proposal for unforeseen contingencies [ and ] is not entitled to compensation for the additional work simply because it was done.” No recovery is available for the design-builder under the principles of unjust enrichment or quantum meruit, because the court states “[U]nder Alabama law, claims of both an express and implied contract on the same subject matter are generally incompatible.” For these reasons, the court granted summary judgment against the design-builder.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No.2 (Feb 2012).
Copyright 2012, ConstructionRisk.com, LLC
Article 4
Liquidated Damages Properly Assessed against Design-Builder Without Regard to Whether Excessive Compared to Actual Damages
See similar articles: Design-Build | Liquidated damages
Where a design-builder (“contractor”) was assessed liquidated damages by the Contracting Officer under a U.S. Coast Guard contract for the design and construction of prefabricated metal buildings, the contractor filed suit against the Government seeking remission of the liquidated damages based on its argument that the amount set for the LDs was arbitrary and not consistent with actual damages. The court denied the contractor’s motion for summary judgment on the issue of liquidated damages, concluding that there was no evidence that when the amount of the liquidated damages was established during contract formation that the LDs were without reasonable relation to any probable damage which may follow from delay or breach of contract. The contractor sought to prove that the LD rate was arbitrary by showing that different rates had been used by the Coast Guard on different similar projects, and also that certain components of damages included with the LDs (e.g., Govt personnel costs and administrative costs) were inappropriately included. In rejecting the contractor’s argument, the court stated that just as a contractor can recover its own personnel and administrative costs as part of damages claimed against the Government in various claims, so likewise the Government can claim its personnel and administrative costs when it has a claim against the contractor. As far as different rates being applied by the Government on other projects, the court said the only relevant matter was whether the rate on this particular project was appropriate – and that is judged principally by what appeared reasonable at the time of contract execution. K-Con Building Systems, Inc. v. United States, 97 Fed.Cl. 41 (2011).
The court’s analysis of the matter is so well stated (with supporting case law) that it will be quoted herein at length as follows:
Liquidated damages are used “to allocate the consequences of a breach before it occurs,” Jennie–O Foods, Inc. v. United States, 580 F.2d 400, 412 (Ct.Cl.1978) (per curiam), which “save[s] the time and expense of litigating the issue of damages,” DJ Mfg. Corp. v. United States, 86 F.3d 1130, 1133 (Fed.Cir.1996). Liquidated damages “serve a particularly useful function when damages are uncertain in nature or amount or are unmeasurable, as is the case in many government contracts.” Priebe & Sons, Inc. v. United States, 332 U.S. 407, 411, 68 S.Ct. 123, 92 L.Ed. 32 (1947). Thus, “[w]here parties have by their contract agreed upon a liquidated damages clause as a reasonable forecast of just compensation for breach of contract and damages are difficult to estimate accurately, such provision should be enforced.” Jennie–O Foods, Inc., 580 F.2d at 413–14; see also FAR 11.501 (noting that use of a liquidated damages clause is proper if damages “would be difficult or impossible to estimate accurately or prove” and that the “rate must be a reasonable forecast” of the anticipated damages).
On the other hand, courts will not enforce a liquidated damages clause when the amount of liquidated damages is “plainly without reasonable relation to any probable *50 damage which may follow a breach,” Kothe v. R.C. Taylor Trust, 280 U.S. 224, 226, 50 S.Ct. 142, 74 L.Ed. 382 (1930), or is “so extravagant, or so disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or as to imply fraud, mistake, circumvention, or oppression,” Wise v. United States, 249 U.S. 361, 365, 39 S.Ct. 303, 63 L.Ed. 647 (1919). In these circumstances, liquidated damages amount to a penalty. Priebe & Sons, Inc., 332 U.S. at 413, 68 S.Ct. 123; United States v. Bethlehem Steel Co., 205 U.S. 105, 118–21, 27 S.Ct. 450, 51 L.Ed. 731 (1907).
When presented with a challenge to a liquidated damages clause, a court must judge the clause “as of the time of making the contract” and without regard to the amount of damages, if any, actually incurred by the nonbreaching party. Priebe & Sons, Inc., 332 U.S. at 412, 68 S.Ct. 123; accord Bethlehem Steel Co., 205 U.S. at 119, 27 S.Ct. 450 (noting that courts will enforce liquidated damages clauses “without proof of the damages actually sustained”); Steve Kirchdorfer, Inc. v. United States, 229 Ct.Cl. 560, 565–67 (1981) (upholding an award of liquidated damages although no actual damages were sustained); Young Assocs., Inc. v. United States, 471 F.2d 618, 622 (Ct.Cl.1973) (“It is enough if the amount stipulated is reasonable for the particular agreement at the time it is made.”). The party challenging a liquidated damages clause—typically, in government procurement cases, the contractor—bears the burden of proving that the clause is not a penalty. DJ Mfg. Corp., 86 F.3d at 1134; Jennie–O Foods, Inc., 580 F.2d at 414. The burden is a heavy one “because when damages are uncertain or hard to measure, it naturally follows that it is difficult to conclude that a particular liquidated damages amount or rate is an unreasonable projection of what those damages might be.” DJ Mfg. Corp., 86 F.3d at 1134. And because of this difficulty, it is generally improper for a court “to inquire into the process that the contracting officer followed in arriving at the liquidated damages figure that was put forth in the solicitation and agreed to in the contract.” Id. at 1137; see also id. at 1136 (noting that courts will enforce a liquidated damages clause, “regardless of how the liquidated damage figure was arrived at,” if the amount of liquidated damages is reasonable).
The court further stated that if the contractor’s position is that the LD rate is unreasonable because a component of the rate is improper, the contractor must prove that the component amount is improper as it relates to the particular contract at issue. And that determination is based on what was reasonable when the contract was entered into rather than what may look reasonable in hindsight. As stated by the court:
In other words, it is plaintiff's burden to demonstrate that the Coast Guard could not have expected, at the time the parties executed the Elizabeth City contract, to spend $8,444 per month on inspection services if the project was delayed. Merely asserting that $8,444 per month is unreasonable because the Coast Guard used different amounts for different projects does not suffice.
On the issue of whether the contractor should be excused from paying liquidated damages because it was delayed due to defective specifications, the court found the contractor did not prove either that as a design-builder, the contractor did not prove that the Government was legally responsible for the specifications, but that even if Contractor had established that the Coast Guard caused a delay through the provision of defective specifications, the contractor had not proved that the Coast Guard affected the critical path of performance and thereby delayed the overall contract completion. For these reasons, the court denied the design-builder’s motion for summary judgment.
Comment: This case reiterates an important point that needs to be understood by contractors and that is that it is difficult to challenge the Liquidated Damages rate after they are imposed – arguing that the actual damages are lower or that in hind-sight the LD’s are unreasonable. The key as stated by the court is whether the amount set for the LDs was reasonable based on information available to the Contracting Officer at the time the contract was executed.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 14, No.2 (Feb 2012).
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