Inside this Issue

A1 - Pay When Paid Clause Unenforceable
A2 - Parties may contractually agree to extend a statute of limitations
A3 - Sovereign Immunity Protects Inspector from Wrongful Death Action by Family of Highway Construction Worker
A4 - No Damage for Delay Clause Barred Subcontractor from Recovering Financial Damages for Accelerating its Work Due to Delay Caused by Others

Article 1

Pay When Paid Clause Unenforceable

See similar articles: Pay-If-Paid | pay-when-paid

Contractor’s delay of more than 90 days to pay subcontractor was per se unreasonable and the pay-when-paid clause was unenforceable to hold up payment. Subcontractor was entitled to recover attorneys fees incurred in litigating against the Contractor to recover what was due. In this case the contractor didn’t contest that the subcontractor performed the work and was entitled to payment. But because the project owner had not released final payment to the Contractor for the work, Contractor argued that it was entitled to enforce the pay-when-paid provision of the contract. In order not to forfeit its right to file a mechanics lien, the subcontractor filed suit when 90 days past due was approaching. State statutory language applicable here expressly prohibits parties from conditioning payment to the subcontractor upon the owner’s payment to the general contractor and makes any agreement to the contrary unenforceable. Because the GC here used the pay when paid provision to condition its payment to the Sub it attempted to make owner payment a condition precedent for payment to the Sub. Such a condition precedent is unenforceable. J&H Grading & Paving, Inc. v Clayton Construction Company, Inc., 441 S.C. 272 (2023).

The applicable state statue provides:

“Notwithstanding any other provision of law, performance by a construction subcontractor in accordance with the provisions of its contract entitles the subcontractor to payment from the party with whom it contracts. The payment by the owner to the contractor or the payment by the contractor to another subcontractor or supplier is not, in either case, a condition precedent for payment to the construction subcontractor. Any agreement to the contrary is not enforceable.”

The court stated that this statute expressly prohibits a general contractor from conditioning payment to the subcontractor upon payment to the general contractor. Any agreement to do so is contrary to the statute and therefore unenforceable. As further explained by the court:

“The record shows Clayton used this “pay when paid” provision to condition its payment to J&H upon its first receiving payment from Herlong. When J&H invoiced Clayton for final payment, Clayton relied upon the “pay when paid” provision and refused to pay because it had not yet received payment from Herlong. The clause therefore created a condition precedent for payment to J&H in violation of section 29-6-230. Thus, we find the circuit court did not err in concluding section 29-6-230 expressly prohibits parties from agreeing to condition payment to a subcontractor upon payment to the general contractor and therefore the “pay when paid” provision of the Subcontract was unenforceable.”

Risk Management Comment:

Not all states forbid the enforcement of a paid-if-paid clause. When we review subcontracts where they may be enforceable we seek to add language requiring that in no event will the subcontractor be paid uncontested funds later than 90 days from invoice. If the general contractor will not agree to that change, we recommend adding a clause to the payment provisions allowing the subcontractor to suspend its services until payment is received. We use a clause such as the following:

“If payment of any undisputed amount due and owing to Subcontractor is not made within 45 days of submittal of the invoice for such amount, Subcontractor shall, upon seven (7) days written notice, be entitled to suspend its services until such payment is made.

This at least eliminates the possibility of the subcontractor having to continue performing further services without pay.

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 26, No. 3 (March 2024).

Article 2

Parties may contractually agree to extend a statute of limitations

See similar articles: Freedom of Contract | Statute of Limitations

Article written by J. Kent Holland, Jr. and Joanne Dekker

Public School District sued Contractor for alleged defective construction of a school after flooding caused extensive damage to the school. About one year later, School District added Architect for defective design. School District and Contractor settled their dispute leaving Architect as the only defendant. Architect sought dismissal of the case on the grounds that the time limits for bringing suit under Colorado Construction Defect Action Reform Act (“CDARA”) barred the School District’s suit. School District argued that the contract language provided for a longer time period that covered the filing of its lawsuit against Architect.

In arriving at its decision, the trial court determined that the plain language of the CDARA did not prevent the parties from modifying the accrual period for bringing suit for defective services. The appellate court agreed and determined that allowing the parties to agree to a longer time period did not violate public policy considerations such as encouraging timely dispute resolution, decreasing litigation and reducing the costs of insurance for design professionals. South Conejos School District RE-10 v. Wold Architects Incorporated, 2023 WL 6152563, 2023 COA 85, ___ P.3d ____ (2023).

The contract language in question provided the following:

Unless a longer period is provided by law, any action against [Wold] brought to recover damages for deficiency in the design, planning, supervision, inspection, construction or observation of construction or for injury to person or property shall be brought within two years after the claim for relief arises and is discovered by [the District]; ... “Discovered” as used herein means detection and knowledge by [the District] of the defect in the improvement that ultimately causes the injury, when such defect is of a substantial or significant nature.

In contrast, the CDARA statute provides the following:

A “claim for relief arises ... at the time the claimant ... discovers or in the exercise of reasonable diligence should have discovered the physical manifestations of a defect in the improvement which ultimately causes the injury.”

The Architect argued that the district court erred by accepting the accrual provision in the contract rather than CDARA's accrual provision. The Architect reasoned that the accrual provision in section 6.17.1 of the contract is void as against public policy because it violates the policies underlying statutes of limitation generally and the CDARA accrual provision more specifically.

The appellate court concluded that nothing in the CDARA stated that a different accrual time is invalid. “If a statute of limitations can be waived or shortened, … it is difficult to see why, absent a contrary legislative direction, it cannot be extended.”

In reaching its conclusions in this specific case, the court explained how important it deemed the right of parties to have their contractual terms enforced. It quoted from an earlier decision that, “[T]he right of private contract is no small part of the liberty of the citizen, and ... the usual and most important function of courts of justice is rather to maintain and enforce contracts, than to enable parties thereto to escape from their obligation”)…. [The Architect] and the District are sophisticated parties that, by contract, sought to allocate business risks in advance…. [Noting the trend in Colorado and elsewhere to protect the ability of the parties to negotiate the allocation of risk and reward associated with a construction project, we see no reason to disturb that risk allocation.”

Comment: When negotiating contracts design professionals often revise the dispute resolution procedures to shorten the time period for suits to be filed. The contract in this case is unique in that instead of shortening the time period, it extended it. The court enforced the contract as negotiated – applying the “freedom of contract” principles. It is important for all parties not to hope for a court to fix their poor contract to make it more reasonable than what the parties negotiated.

About the author: Article written by J. Kent Holland, Jr. and Joanne Dekker. This article is published in ConstructionRisk Report, Vol. 26, No. 3 (March 2024).

Article 3

Sovereign Immunity Protects Inspector from Wrongful Death Action by Family of Highway Construction Worker

See similar articles: Sovereign Immunity

HNTB Corporation was working as an agent of the State of Florida on a highway construction project – performing as the Construction Engineering Inspector – inspecting the installation of smart electronic signage poles along I-10 corridor. Its role was to oversee the general contractor’s compliance with project contract requirements. An employee of the general contractor was killed when he fell off the back of a truck at the end of a workday. The family of the deceased filed a negligence complaint against HNTB alleged that HNTB willfully and wantonly beached its contractual duty to provide safe project conditions by overlooking job site safety violations of the contractor. The appellate court held that as an agent of the State, HNTB was entitle to summary judgment based on it being cloaked with sovereign immunity. HNTB Corporation v. Milstead, 369 So. 3d 749 (Florida 2023).

The issue that was argued by the plaintiff in this case was that HNTB lost its sovereign immunity defense because it acted with “willful and wanton” behavior. In analyzing the issue the court stated:

HNTB's conduct, either by overlooking day-to-day MOT placement deficiencies, or by failing to monitor and alert SICE to on-site safety considerations, does not rise to the level of “willful and wanton” as it applies to the facts relevant to the incident that resulted in Stinson's death. Both parties agree that HNTB is a state agency, contracted to oversee the engineering aspects of installation of optical cable and smart signs along the I-10 corridor. As a state agency, pursuant to section 768.28(9)(a), HNTB is immune from suit unless it committed the acts outside the course and scope of employment, or unless the actor was acting in bad faith or with a malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.

***

The phrase “wanton and willful disregard of human rights [or] safety,” as used in section 768.28(9)(a), has been interpreted as “conduct much more reprehensible and unacceptable than mere intentional conduct,” and “conduct that is worse than gross negligence.” (citations omitted). Although several Florida courts have sometimes permitted the question of bad faith, malice, or willful and wanton conduct to be sent to the jury, the acts challenged involved far more than mere negligence.

The court further explained how the word “willful” should be interpreted when applying the immunity statute. It sated:

“The word “willful,” like many other words in our language, is elastic, and is of somewhat varied signification according to the context in which it is found and the nature of the subject-matter to which it refers. Sometimes “willfully” is used synonymously with “voluntarily.” In construing statutes of a penal or quasi penal nature, however, a clear distinction is recognized between a mere “failure” and a “willful failure.” As used in such statutes, a “willful failure” to obey is almost universally held to mean something more than a mere inattentive, inert, or passive omission. “Willful,” when used in such statutes, denotes some element of design, intention, or deliberation, a failure resulting from an exercise of the will, or a purpose to fail. A “willful failure” denotes a conscious purpose to disobey, a culpable omission, and not merely innocent neglect. A failure without any element of intention, design, or purpose, and resulting merely from innocent neglect, is not a “willful” failure. Every voluntary act of a person is intentional, and therefore in a sense willful, but, generally speaking, and usually when considering statutes of the character mentioned, a voluntary act becomes “willful” in law only when it involves some degree of conscious wrong on the part of the actor, or at least culpable carelessness on his part, something more than a mere omission to perform a previously imposed duty.”

Applying the above reasoning to the issues in this case, the court found that the alleged acts or omissions might be characterized as negligence, “but they do not rise to the level of ‘willful and wanton,’ and are remote from the circumstances that led to [ the] tragic accident.”

Risk Management Comment

When reviewing contracts we sometimes see language stating that the engineer or contractor agree to waive any sovereign immunity or other types of immunity that might be available to them under state law. We recommend striking that waiver language. The protection afforded by such immunity statutes is appropriate. We so no reason to ask the engineer or contractor to waive the protection afforded by such an immunity statute.

Article 4

No Damage for Delay Clause Barred Subcontractor from Recovering Financial Damages for Accelerating its Work Due to Delay Caused by Others

See similar articles: acceleration | Delay | No-Damages-For-Delay

Subcontractor had a lump sum multimillion dollar contract. A “no damages for delay” in the contract stated that the Subcontractor recognized the potential for its Work to be delayed by others and would not be compensated for any costs caused by such delay unless the project owner compensated the prime contractor for the same. The project got significantly behind schedule and the prime and owner settled a delay claim which included a new obligation for the prime to pay $250,000/per week liquidated damages if the project was not completed by the newly established deadline. To meet the new schedule the prime requested the subcontractor to increase its manpower. The subcontractor submitted a proposal with a cost increase of over a million dollars. No cost increase was approved for the accelerated work and the subcontractor eventually filed suit to recover. In its complaint, the subcontractor asserted its scope of work was materially and substantially changed by having to reschedule its work from the summer months to the winter months. Summary judgment was granted against the subcontractor (and affirmed on appeal) based on the applicability of the no damages for delay clause in the contract. The subcontractor Thermal Technologies, LLC v. Prime Contractor Industrial Constructors, Inc., 221 N.E.3d 8701 (Indiana 2023).

The original work plan had envisioned the subcontractor completing the pipe portion of the Project across a four-month period in the spring and summer of 2019. The prime contractor’s directive for the pipe insulation to be finished by the end of January 2020 meant the subcontractor had to complete the majority of its work in less than two months during winter conditions on Lake Michigan's shoreline. Over $1.6 million of the subcontractor’s claim was comprised of a claim for ‘changed conditions, schedule overrun, delays in work releases, and other impacts described in the Complaint’ and as defined in the Subcontract.

To avoid the application of the “no damages for delay” clause, the subcontractor characterized its delay claim as an acceleration of its own work schedule based on the prime contractor’s instruction to “increase manpower” or ‘accelerate’ its schedule in a meeting in December 2019. The subcontractor maintains that during this meeting Prime Contractor directed the subcontractor to increase manpower to complete its work by the end of January 2020, thereby compressing the schedule and accelerating the pace at which Prime Contractor was requesting the subcontractor to complete its work. The subcontractor argued that because other aspects of the project had encountered delays, it was required to complete its work faster in order to comply with the new deadline. “As such, the subcontractor argues that ‘[t]he impacts that the subcontractor has claimed on this Project are not damages for ‘delay’ at all but rather damages which were incurred due to Prime Contractor-directed change to the subcontractor's work and the adverse impacts incurred due first to Prime Contractor's ‘disruption’ and then to Prime Contractor's ‘acceleration.’”

Further, the subcontractor argued that because Prime Contractor moved the subcontractor's portion of the Project work to the winter months, the additional costs which it now claims derived from “productivity impacts resulting from a variety of causes but predominantly winter weather, absenteeism, low morale, and worker fatigue stemming from being directed to work at a break-neck pace from December 2019 until the finish.”

“While we can support a distinction between delay and acceleration under certain circumstances, it would seem that in many cases, if not in most cases, the alleged ‘acceleration’ is in fact the result of ‘delay,’ or, to put it differently, because of delay caused by or attributable to the owner or a contractor, a contractor or subcontractor is of necessity forced to compress or speed up the work necessary to be completed before the contract completion date. Here, the time compression that caused the acceleration of the subcontractor's work was itself caused by delay in the work of predecessor trades. Because the early stages of the Project were not completed as expeditiously as planned by other contractors, the subcontractor's work could not commence until later than expected. Thus, The subcontractor was delayed and thereby forced to accelerate the pace at which it performed its work in order to meet the Project's deadline. Because the subcontractor's ‘acceleration’ costs were the result of delay, and delay damages are not recoverable under the unambiguous terms of Article 8.8 of the Subcontract, The subcontractor's claim must fail. Pursuant to the provision, the only recovery the subcontractor is entitled to in case of delay is an extension of time; however, no party designated evidence that the subcontractor requested Prime Contractor for a time extension at any point during the course of the Project.”

The subcontractor argued that disregarding the specific character of the damages sought, the contractual language embedded in Article 5 “’reserves the right to the contractor to make changes to the work’ and, in turn, entitles a subcontractor to seek an adjustment in the contract price when the contractor changes the scope of the work or the conditions under which the work is to be performed.” The subcontractor argued that the prime contractor’s directive to increase its manpower and work overtime to complete it work within the agreed upon project completion date constituted a “change to the work” thereby entitling the subcontractor to compensation.

“Regardless as to whether Prime Contractor's request amounts to a change, as contemplated within Article 5, Subsection 5.1 clearly provides that “[t]he Subcontractor will not proceed with furnishing or providing any Changes without receiving, in advance, the Contractor's written authorization to perform the Changes.” The subcontractor conceded that no such signed change order has been designated before this court …. “Mindful of the clear and unambiguous terms of Article 8.8 of the Subcontract which prohibits damages for delay, the subcontractor's claim against Prime Contractor, in the absence of any designated evidence indicating that [project owner] reimbursed Prime Contractor for delay damages, fails.”

Comment: A “no damages for delay” clause in a subcontract is quite common. It permits a subcontractor to recover only a time extension but deprives the subcontractor of additional compensation to recover extra costs incurred during the delay. This particular decision, however, goes beyond what I see as the typical bar against paying additional compensation. Where a prime contractor specifically requests or demands that its subcontractor accelerate its work or requires the work to be performed during bad weather winter months instead of the planned summer months, these costs seem like they should be compensated under a change order. And where a change order is not granted, it seems a jury should be allowed to decide the merits of the case instead of having a court grant a summary judgment. I am only providing this as a general observation. I was not involved in this case and don’t have any facts on which to really question the court’s decision here.

Search

Get the Newsletter

Contract Guide for Design Professionals

Recent Newsletters

All Newsletters

Risk Management Workshops

Life Skills Workshop Slides

Contract Clauses – Papers and Articles

Construction Risk Management

ConstructionRisk Report (March 2024)