Inside this Issue

A1 - Indemnification - Negotiating a Reasonable Clause
A2 - Individual Doing Business as a corporate name Held Individually Liable
A3 - Liquidated Damages Are Restricted When Contractor Completed Major Two Phases of Three- Phase Government Project
A4 - Default Termination was Improper and was Converted to Termination for Convenience

Article 1

Indemnification - Negotiating a Reasonable Clause

See similar articles: Contract Clauses | Indemnification clause

Check out my 4 minute video showing how our firm redlines changes to an indemnification clause to allocate the risk more reasonably for the Indemintor. This is available on the Kent Holland YouTube Channel.

This video addresses key risk allocation issues in a typical indemnification clause. We show how we would recommend redlining to revise an uninsurable indemnity clause under a professional insurance policy. Our revisions limit indemnity to third party tort claims and the damages from such claim only to the extent caused by the Indemnitor's willful misconduct or negligence. We also delete from the list of Indemnitees "agents and representatives" as being too broad. And we show other ideas as well.

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. 23, No. 6 (October 2021).

Article 2

Individual Doing Business as a corporate name Held Individually Liable

See similar articles: Arbitration | d/b/a | Individual Liability

In an interesting case that went on for many years, a homeowner obtained judgment against an individual who claimed only his corporate entity should have been subject to arbitration. The primary reason this occurred is that the homeowner suit named as the defendant, “Randy Bosarge, d/b/a Superior Builders and Developers.” The defendant then replied to the complaint using the same nomenclature. When the arbitrator awarded judgment against the individual that individual appealed to circuit court – arguing that only the company could be a proper defendant. The court agreed, but this was reversed on appeal, with the appellate court concluding that the appeal from the arbitrator’s award was untimely made, and that in any even, arbitration awards should only rarely be reversed or amended by courts. Hartzler v. Bosarge, 2021 WL 973069 (Ct. Appeals Mississippi (2021).

This case is a good demonstration of why not to agree to arbitration in lieu of litigation. The homeowner first filed suit in this case in about 2010. The complaint alleged breach of contract, breach of warranty, and negligent construction. The defendant filed a motion to send the case to arbitration as apparently required by the contract. The motion was made in the name of the Individual d/b/a the corporate name. In 2017 the arbitrator made a decision in favor of the homeowner. The decision against the defendant was in the name of the Individual d/b/a corporate name.

The homeowner in 2018 obtained a court order confirming the arbitration decision. A year after than in 2019, the homeowner filed a suggestion for a writ of garnishment on the judgment. One full year after the judgment was entered against the individual, he filed a motion to quash the garnishment – arguing that he should not be bound individually to the arbitration award or the court’s affirmation of that award. The court agreed, and granted the motion, thereby amending the judgment to be solely against the corporate entity and not the individual.

That court decision was appealed, and the appellate court concluded that reversed. In doing so, it concluded that a circuit has no authority to modify a construction related arbitration award unless the exceptions outlined under the arbitration statute apply. Arbitration proceeds “are so final and binding, trial courts must be careful to ‘review, confirm, or modify’ all arbitration awards through an ‘extremely limited lens.’” The court here held that the identity of the defendant was not an “evident mistake” warranting modification.

Risk Management Comment: My office reviews well over 2,000 contracts a year for various clients and we routinely strike out arbitration clauses and replace them with litigation as the preferred means to resolve disputes that fail to resolve through mediation. Litigation can be quicker and less expensive that arbitration. Decisions can be appealed much more readily than can be arbitration awards which are almost impossible to successfully appeal.

Article 3

Liquidated Damages Are Restricted When Contractor Completed Major Two Phases of Three- Phase Government Project

See similar articles: Design-Build | Liquidated damages | Substantial Completion

Federal Government Assessed liquidated damages (LDs) against Design-Build contractor who failed to timely complete the final phase of a three-phase contract. Armed Services Board of Contract Appeals held that the government failed to property apportion the daily LD rate based on the fact that contractor had substantially completed the first two phases, and the government was unreasonably attempting to assess the full daily rate of LDs to the small percentage of work remaining to be completed under phase III. Appeal of Sauer Inc., 21-1 BCA 37845, 2021 WL 1725380 (2021).

This project involved a design-build contract for the design and construction of the 82^nd Airborne Division Headquarters in Fort Brag, North Carolina. The Request for Proposals (RFP) identified a “primary facility” that included the “Command Headquarters”. The RFP also identified what it called “supporting facilities” such as “water and sewer service”, etc. A liquidated damages provision in the RFP stated damages of $4,365.81 per day would be assessed if the Contractor failed to complete the work within the time specified by the task order.

Three separate Project phases were identified in the RFP. The Task Order specified LDs to be applied to completion of the project but did not tie these LDs to completion of the three separate phases of construction. When the government issued notice to the contractor that it was assessing LDs in the amount of $144,071 for a total of 33 days late completion. This was for work that the contractor performed on Phase 3 work.

On the appeal to the Board, the contractor asserted that 98.7 percent of the total construction-related costs were placed in Phase I – construction of the new headquarters building. The government denied that allegation but failed to explain why. In its certified claim to the contracting officer and ultimate appeal to the Board, the contractor claimed that the government improperly assessed LDs after substantial completion of the project had been achieved by the contractor.

In analyzing the issues on appeal, the Board noted that LDs cannot be assessed after substantial completion has been achieved, and that this particular case turns on the question of when a project with three phases has achieved substantial completion. The contractor asserts that substantial completion was achieved when the government obtained beneficial occupancy of the headquarters building.

The government relies on previous Board decisions for the proposition “that a project requires completion of all phases to achieve substantial completion.” That reliance was misplaced, said the Board because unlike those other cases, the “record here indicates no follow-on work waiting to be performed by another contractor at the site, or that the Project was not available for its intended use” because the parking lot had not been completed.

The Board also disagreed with the government’s assertion that “by parsing the contract into separate distinct phases, the parties agreed that each phase would have functionally equivalent importance regarding performance.” No evidence here supported a finding that completion of the Phase III work was functionally equivalent to completion of Phase 1. “The government offers no evidence that strict compliance of all three phases truly was “essential.”

Appellant was found by the Board to be entitled to summary judgment on the issue of substantial completion because the government “failed to reference sufficient evidence demonstrating that a reasonable fact finder could decide in favor of the government on the issue of substantial completion of Phases I and II". But the Board was unable to make this same determination regarding substantial completion of Phase III. That issue will await determination by the fact finder at trial.

With regard to the LDs assessed by the government, the Board held that “The government’s assessment of the full amount of daily liquidated damages after substantial completion and acceptance of the first two phases is unreasonable". Regardless of whether the LD “rate” that was established pre-contract award was reasonable, the Board held that this contractor had the right to challenge the reasonableness of the government’s decision not to apportion that rate, even though contractor had completed Phases I and II. Granting in part, the contractor’s motion for summary judgment, the Board held that “judgment is granted in part on the issue of [Contractor’s] challenge to the government’s assessment of liquidated damages and its failure to apportion liquidated damages based upon [contractor’s] substantial completion of Phases I and II of the Task Order.” The case will now go to trial to determine the remaining factual issue regarding substantial completion of Phase III and the proper apportionment of the LD damage rate to Phase III – unless, of course, the parties are able to settle for some smaller LD amount acceptable to the contractor and the government.

Article 4

Default Termination was Improper and was Converted to Termination for Convenience

See similar articles: Attorneys Fees | burden of proof | Default Termination | prevailing party

Where a city default terminated its construction contractor that was building the nation’s first arterial roadway with pervious concrete, the contractor filed suit against the city challenging the default, and asking the court to turn it into a convenience termination. The trial court found in favor of the contractor and this was affirmed on appeal, with the court also holding that the City was not entitled to an offset for any defective work discovered after termination because it failed to provide the contractor with the contractually required notice and opportunity to cure. Prevailing party attorneys fees were also awarded to the contractor.

A key finding by the court was that the city failed to act in good faith because, after giving contractor 15 day notice of nine contract violations, the contractor took steps to remedy the breaches and, on several occasions, asked to meet and discuss the City’s concerns. The City’s engineer refused – and instead responded, “the required actions seem to be clear, therefore I don’t see the need for a meeting.” This refusal to meet and discuss the details with the contractor “implicated the concerns of bad faith on the City’s part.” The appellate court held that the “City’s withholding of ‘satisfaction’ with the [contractor’s] proposed remedy was unreasonable.” This, therefore, became a termination for convenience. In addition to recovering costs, the contractor was also entitled to recover its attorneys fees from the city. Conway Construction Company v. City of Puyallup, 197 Wash. 2d 825 (2021).

The court began its analysis by stating that pursuant to the Standard Specifications that are incorporated into the contract terms, if a default termination is determined to have been improper, the termination automatically becomes a termination for convenience.

Because this was a transportation project, the city’s Public Works Contract here incorporated the Washington State Department of Transportation’s Standard Specifications for Road, Bridge and Municipal Construction (Standard Specifications). The Standard Specifications set forth several bases upon which the city could default terminate its contractor, and provided:

“Once the Contracting Agency determines that sufficient cause exists to terminate the contract, written notice shall be given to the Contractor and its Surety indicating that the Contractor is in breach of the Contract and that the Contractor is to remedy the breach with 15 calendar drays after he notice is sent…. If the remedy does not take place to the satisfaction of the Contracting Agency, the Engineer may, be serving written notice to the Contractor and Surety … Terminate the Contract.”

The City argued that the trial court should have asked whether the City “was satisfied” with the Contractor’s remedial efforts. Instead, the court agreed with the contractor’s argument that the proper test was whether the contractor neglected or refused to correct defective work. If the contractor made an attempt to remedy the defaults, then termination was improper. The appellate court concluded that both of the above are required.

Based on the contractor's steps to remedy the defaulting conditions, and the fact that it reached out to the city to determine whether its efforts were sufficient (repeatedly requesting a meeting which was denied by city), the court found “substantial evidence to support the trial court’s conclusion” that the contractor was not neglecting or refusing to correct the defects.

Although the appellate court found that the city was correct that the contract allowed it to terminate if the contractor’s remedy didn’t satisfy the city, “the City must act reasonably and in good faith in deciding it is satisfied.” Here, “the trial court’s findings of fact establish that the City’s actions leading up to termination were unreasonable or made in bad faith.” “The City engineer testified that he had lost confidence in [contractor’s] ability to perform the Contract to his satisfaction... Loss of confidence, however, is to grounds for default termination.” For these reasons, the appellate court found that withholding of “satisfaction” with the proposed remedy was unreasonable.”

The burden of proof fell on the city to show not only that the contractor initially defaulted, but under the federal case law, the court also held that the city the burden of proving that the termination of the contract for default was justified. Here, the city “failed to meet its burden to show that termination was justified by a continuing default at the time of termination.”

City was not permitted to recover an offset for alleged defective contractor work. The city argued it should be able to claim an offset for defective work it discovered after terminating the contract. The appellate court here cited Oregon case law for the proposition that a party that terminates a contract for convenience is not entitled to offset for defective work without giving the other party the contractually required notice of the defects and an opportunity to fix them. It would be inconsistent for the city to both terminate the contract for convenience and then seek damages against the contractor as if it had been terminated for default. The court concluded that although this Oregon case law is instructive, the court here need only decide this issue based on the plain language of the contract that required the city to provide notice of defective work and an opportunity to fix it. Since the city failed to do that, it cannot seek to recover the offset damages.

Attorney fees can be recovered by the contractor. Contract language here stated: “The Owner and Contractor each agree that in the event either of said parties brings an action in any court arising out of this Contract, the prevailing party in any such lawsuit shall be entitled to an award of its cost of defense.”

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