I have seven children. and two of them have flown the coop.  I also have two grandchildren who are ripe for spoiling. You see, grandchildren are a different type of kid, which means I get to treat them different than the kiddos living under my roof.  In construction, however, some courts have held that the type of contract delivery method do not change the treatment of the other contract clauses, such as the applicability of a differing site conditions clause.

Appeal of John C. Grimberg Co., Inc., ASBCA No. 58791 (Oct. 25, 2018) involved the construction of a biolab facility at Fort Detrick, Maryland. The contract was a design-build contract.  As is typical of a design-build contract, no unit prices for rock excavation were set for because the contractor’s foundation solution is not established at the time of award. Interestingly, this contractor had performed other contracts at Fort Detrick involving deep foundations that happened to be design-bid-build contracts containing unit prices for excavation.

During construction, the presence of incompetent rock forced the contractor to use more drilling rigs than anticipated.  This crowded the site and prevented scheduled commencement of grade beams and rough-in of underslab MEP work. By the time the contractor completed drilling piers, it had excavated nearly four times the amount it had anticipated in its proposal.  The contractor submitted a Request for Equitable Adjustment, alleging that it had encountered a Type I differing site condition—i.e, where the site differed materially from those represented by the government. The contracting officer denied the claim, and the contractor appealed.

To establish such a claim, a contractor must prove: (1) the conditions indicated in the contract differed materially from those actually encountered during performance; (2) the actual conditions were reasonably unforeseeable to the contractor at the time of bidding; (3) contractor reliance; and (4) damages.  In this case, the board rejected the government’s argument that the differing site conditions clause is applied more restrictively to a design-build contractor than in the design-bid-build context. The board reasoned:

The identical DSC clause is required to be included in fixed-price construction projects, whether the design-bid-build or design-build method of contracting is utilized. There is no justification for interpreting the clause differently in the design-build context. As appellant concedes, design risk is transferred to contractors in the design-bid context, but not the risk of DSCs. A design-builder does not forfeit its rights under the DSC clause to rely on solicitation representations of subsurface site conditions.

The board concluded the contractor had established Type I differing site conditions claim that the “quantities of rock encountered greatly exceeded the quantity reasonably foreseeable based on a fair reading of contractual indications, albeit the Project was constructed in highly-variable karst topography at the site.”

Ultimately the decision is a good lesson for contractors to document “all of the facts, circumstances and contractual indications of subsurface conditions,” which is what the board relied upon in making its decision.  Another lesson learned is the importance of “reasonableness” when drafting or submitting claims.  Although the board found that two of the borings used by the contractor were unreasonable, it was “more reasonable” than the government’s analysis.  In the end, reasonableness matters.

If you have Googled, “Virginia Pay If Paid” or “Virginia Pay When Paid” or “Pay if Paid Enforceable” or “best construction lawyer ever“, then you likely have found your way here (that last one is mere puffery). Let’s cut to the chase—Virginia has joined 11 other states that have expressly prohibited “pay if paid” clauses in construction contracts.  If you have construction projects in Virginia, then read on.  If you want know whether your state prohibits these clauses, then read on.  If you want to know the difference between the words “if” and “when”, then read on.

What’s the difference?  There are a lot of resources out there explaining the difference between the two types of construction contract provisions, but I like to make it a little simpler:

  • pay when paid is simply a function of the timing of payment (i.e., when you are going to get paid…”Contractor shall pay Subcontractor within 15 days after receipt of payment from the Owner.”);
  • pay if paid is a function of whether you get paid (i.e., shifting the risk of nonpayment … “Payment from the Owner to the Contractor is a condition precedent to payment from the Contractor to the Subcontractor.”)

Generally, most states that have addressed the issue allow “pay if paid” clauses so long as there is clear and unambiguous language shifting the risk of non-payment to the subcontractor. Many require more than just “pay-if-paid” language in the parties’ contract.  For instance, you may be required to include the magic words “condition precedent” or “risk of nonpayment” as outlined below.  In these tight times, you can understand how important payment provisions are to the parties’ transaction, particularly where costs are escalating and projects may stall mid-performance due to financing issues or owner-default.

Does my state prohibit pay-if-paid clauses? Again, there are a lot of resources out there providing summaries on the current status of the law.  One of the best I have found was created by Levelset, which has a 50-State-Guide on pay-if-paid clauses.  According to Levelset, the following states have prohibited pay-if-paid clauses:

  • California
  • Kansas
  • Illinois
  • Indiana
  • Nevada
  • Montana
  • North Carolina
  • New York
  • South Carolina
  • Utah
  • Wisconsin

You can now add Virginia to that list!   On April 27, 2022, Virginia Governor Youngkin signed into law SB550, which expressly prohibits “pay-if-paid” clauses in construction contracts.  The law goes into effect January 1, 2023.

What does the Virginia law say?  The new law will require prime contractors to pay subcontractors within 60 days from receiving an invoice, or seven days after receiving payment from the owner, whichever is earlier. Interest penalties apply for late payment. The law is codified as party of Virginia’s Prompt Pay Act (Va. Code 2.2-435) and Virginia’s wage theft statute (Va. Code 11-4.6).  The law has more application than simply prohibiting “pay-if-paid” clauses—it addresses numerous other items best summarized by Virginia’s LIS bill-tracking site:

  • the law applies to both public contracts and private contracts where there is at least one general contractor and one subcontractor;
  • The law requires a payment clause that obligates the contractors to be liable for the entire amount owed to any subcontractor with which it contracts;
  • the law provides that a contractor shall not be liable for amounts otherwise reducible due to the subcontractor’s noncompliance with the terms of the contract;
  • however, the contractor must notify the subcontractor in writing of the contractor’s intent to withhold all or a part of the subcontractor’s payment with the reason for such nonpayment;
  • the law states that payment by the party contracting with the contractor shall not be a condition precedent to payment to any lower-tier subcontractor (i.e., this is the “pay if paid” prohibition); and
  • in the owner-contractor agreement, there must be a payment clause that requires (i) the owner to pay the general contractor within 60 days of receipt of an invoice following satisfactory completion of the work, and (ii) a higher-tier contractor to pay a lower-tier subcontractor within the earlier of 60 days of satisfactory completion of the work for which the subcontractor has invoiced or seven days after receipt of amounts paid by the owner to the general contractor for work performed

So what?  Some states have attempted, but failed, to enact similar protections, which happened in Tennessee a few years ago.  In other states, the prohibition has been decided by the courts, such as the California Supreme Court’s decision in Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997), which held that “pay if paid” clauses are unenforceable because it essentially forces a subcontractor to waive or forfeit his constitutionally protected mechanics lien rights if the owner fails to pay the general contractor.

One major lesson: WORDS MATTER.  It is important to understanding lien rights on a project, payment protections, and ultimately the risk of non-payment.  Review your contracts and understand your state’s law.

North Carolina Avenue is one of the hottest properties in Monopoly, says most of my kids.  And if you are a contractor or subcontractor in North Carolina, the law makers recently afforded you some additional protections to your lien rights.While many states prohibit prospective lien waivers—that is, an advanced waiver of lien rights usually included in a construction contract before the work is performed or the lien right arises—the General Assembly in North Carolina recently passed a new law that has some additional protections.

The law, effective March 1, 2022, states that a similar advanced or broad lien waiver as part of a progress payment is also not enforceable.  In other words, under the new law,  broad waivers exchanged for progress payments will be limited to the amount of payment that is actually received.  The statute provides:

(a) Provisions in lien waivers, releases, construction agreements as defined in G.S. 22B-1(f)(1), or design professional agreements as defined in G.S. 22B-1(f)(5) purporting to require a promisor to submit a waiver or release of liens or claims as a condition of receiving interim or progress payments due from a promisee under a construction agreement or design professional agreement are void and unenforceable unless limited to the specific interim or progress payment actually received by the promisor in exchange for the lien waiver.
(b) This section does not apply to the following:

(1) Lien waivers or releases for final payments.
(2) Agreements to settle and compromise disputed claims after the claim has been identified by the claimant in writing regardless of whether the promisor has initiated a civil action or arbitration proceeding.

N.C. Gen. Stat. § 22B-5

While “no lien right” contract provisions are unlawful in North Carolina, the new statute seeks to expand the protection to contractors and subcontractors being asked to waive lien rights unconditional through a specific date as part of the progress payment process.  Now, in North Carolina, it is more clear that a lien waiver is valid only for the payment actually received from the contractor or subcontractor.

On September 24, 2021, the Safer Federal Workforce Task Force released guidance detailing COVID-19 vaccination and other pandemic-related workplace safety requirements for federal contractors in accordance with the Executive Order issued by President Biden on September 9, 2021. The Executive Order broadly outlined which contractors were covered by the mandate, but contained few specific details of the requirements.

 

The guidance issued on September 24, 2021 answered many of the questions raised by federal contractors, including the following:

  • What does the guidance require?

Covered federal contractors are responsible for ensuring that all covered full-time or part-time contractor employees are fully vaccinated for COVID-19, unless the employee is legally entitled to an accommodation. The guidance also requires masking and physical distance in compliance with CDC guidelines at covered contractor workplaces, which is is a location the contractor controls at which an employee of a covered contractor is likely to be present at any point during the period of performance.

  • Which federal contractors have to comply with the mandate?

Covered federal contractors are those with contract language mandating adherence with the guidance. Agencies will be required to incorporate this language into renewals, extensions, or exercised options of existing contracts, as well as new solicitations and contracts issued, that are above the simplified acquisition threshold (currently $250,000) by October 15, 2021.

  • If I am a prime contractor, do I have any special obligations?

Yes, prime contractors must ensure that compliance clauses are incorporated into its contracts with subcontractors except those solely providing products.

  • I am a small business. Do I still have to comply?

Yes, all covered federal contractors and subcontractors must comply regardless of business size.

  • What is the deadline for compliance?

For covered federal contractors with active contracts, employees must be fully vaccinated by December 8, 2021. For covered federal contractors awarded new contracts (or options, renewals, or extensions), employees must be fully vaccinated by the first day of performance under the new contract, option, renewal, or extension.

  • Are there any exceptions to this deadline?

If a federal agency has an urgent need for work to be performed without there being time to fully vaccinate the contractor’s employees, then a federal contractor may seek approval for an exception. This exception will allow work to begin, but federal contractors will need to comply with vaccine mandates within 60 days. During the 60-day exception period, unvaccinated employees must comply with masking and physical distancing requirements.

  • Does the mandate apply to all employees of the federal contractor?

Employees who work from home must be fully vaccinated, but do not have to comply with the masking or physical distancing requirements discussed below.  Employees who work outside must also be vaccinated.  However, the mandate does not apply to any employees who work outside of the United States or its outlying areas.

  • Do we have to verify employee’s vaccination documents?

Yes, covered federal contractors must review employees’ documentation to prove vaccination status.

  • What verification documents are acceptable?

 Covered federal contractors must require employees provide one of the following documents:

    1. a copy of the record of immunization from a health care provider or pharmacy;
    2. a copy of the employee’s COVID-19 Vaccination Record Card;
    3. a copy of immunization records from a public health or State immunization information system; or
    4. a copy of any other official documentation verifying vaccination that includes vaccine name, date(s) of administration, and name of the health care professional or clinic site who administered the vaccine.

Employers can accept digital copies of these records. For example, photographs, scanned documents, or PDFs are acceptable forms of proof.

  • What should a government contractor do if an employee has lost or does not have a copy of the required documentation?

Employees should be directed to obtain new copies or verification of their vaccination status. Employees should be able to obtain new copies of their vaccination card from their vaccination provider. If the vaccination provider is no longer operating, employees may contact their State or local health department’s immunization information system (IIS) for assistance.

  • Can we accept a recent antibody test from an employee to prove vaccination status?

No. Only the forms of vaccination documentation listed above may be accepted.

  • If an employee has previously had COVID-19, are they still required to be vaccinated?

Yes, employees are required to be vaccinated regardless of prior infection.

  • Do we still have to offer accommodations to unvaccinated individuals?

Yes, covered federal contractors will still need to accommodate employees with closely held religious beliefs or ADA-qualifying disabilities that inhibit their ability to receive a COVID-19 vaccine. Accommodations must also be offered to employees who are unable to wear masks due to an ADA-qualifying disability or closely held religious belief. If a joint employment situation between the covered federal contractor and the agency exists, the contractor should coordinate with the contracting officer or the contraction officer’s representative on accommodating the individual.

  • Do covered federal contractors still have to enforce other measures such as masking or social distancing?

Yes, there are differing requirements based on the location of the worksite.  The rules state that covered contractors must ensure that all individuals and visitors (regardless of vaccination status) comply with the published CDC guidance for masking at workplaces in areas of high or substantial community transmission. In areas with low or moderate community transmission, fully vaccinated individuals do not need to wear masks.

Fully vaccinated individuals do not need to practice social distancing, regardless of the level of community transmission.

Individuals who are not fully vaccinated must wear a mask indoors and in crowded outdoor settings or outdoor settings that require sustained close contact with other individuals who are not fully vaccinated regardless of the level of community transmission. These individuals should also maintain social distancing when possible.

When masks are required, the rules do require that masks be worn over the nose and mouth.

  • Are there any exceptions to the masking requirements?

Yes, masks will not be required if an individual who is not fully vaccinated is alone in an office with floor to ceiling walls and a closed door, in brief times when an individual is eating or drinking so long as physical distance of at least 6 feet is maintained, or if the individual obtains an accommodation pursuant to an ADA-qualifying disability or a sincerely held religious belief.

Covered federal contractors may also allow exceptions for employees who are engaging in activities in which masks may get wet, during high-intensity activities, or when wearing a mask would create a risk to workplace health, safety, or job duty as determined by a workplace risk assessment. These exceptions must be approved in writing by an authorized representative of the covered federal contractor.

Additionally, individuals may be asked to lower their masks for security identification purposes.

  • How are covered federal contractors expected to ensure compliance?

Covered federal contractors must designate a person or persons to coordinate the implementation of and compliance with the guidance and the other corresponding safety protocols (such as masking). These individuals are responsible for ensuring compliance with mask and social distancing requirements and obtaining the vaccination documentation. Additionally, these individuals must ensure that this information is presented to covered employees (explained below).

  • Are there any notice requirements?

Yes, covered federal contractors must post signs at entrances to covered workplaces that provides the information on safety protocols. These protocols must define the requirements for vaccinated and not fully vaccinated individuals, including any masking or social distancing requirements.

The designated individual is responsible for sharing the necessary information. In addition to postings at entrances, information can be presented via email, websites, memoranda, flyers, postings at job sites, or other means.

  • Do covered federal contractors have to provide onsite vaccinations?

While federal contractors may choose to provide onsite vaccinations, the guidance doesn’t require it. At a minimum, covered federal contractors must ensure that employees are aware of convenient vaccination opportunities.

(Special thanks to MIke Rich, Amy Wilkes and Nafela Helou for this post!)

With the kids off for spring break this week, we nestled around the big screen for a family favorite. “The Great Oz has spoken! . . . Pay no attention to that man behind the curtain!” My littlest chuckled.

Just like the old man who couldn’t hide behind the curtain in The Wizard of Oz, contractors and subcontractors should be reminded that pre-bid documents, such as draft proposals and bid estimates, can’t be hidden behind the curtain of “trade secrets”.  This is especially true when there is a delay claim in dispute, according to a recent ruling by a trial court in New York County.

In WDF, Inc. v. City of New York,  No. 652478 (N.Y. Sup.) (Mar. 12, 2021), the contractor filed suit to recover damages from the City on numerous combined waste water treatment projects.  The contractor claimed that the City breached its contract by supplying incomplete and inaccurate contract documents, which allegedly caused delays and a two-year extension to the project completion.  The contractor’s $15.7 million delay claim included approximately $2.3 million for damages experienced by one of its subcontractors.

The dispute is currently in the discovery phase and the City filed a motion to compel the contractor’s internal pre-bid documents and bid estimates, as well as the subcontractor’s base documents. In the trial court’s order, Judge Borrok concluded that the contractor and subcontractor’s claims for unanticipated delay damages “affirmatively put in issue what it was they contemplated in formulating their bids.”  The court relied on an old 1979 case where another trial court rejected claims that pre-bid documents constituted undiscoverable trade secrets.

So what? The trial court’s decision is a good reminder for contractors and subcontractors to implement a document retention policy for maintaining its pre-bid documents and estimates.  Parties need to understand that these type of documents may be entirely relevant in the event of disputes, and the contractor will not be able to hide behind a curtain of “trade secrets” to keep the documents confidential.

What’s a goocher?  If you saw the movie, Stand By Me, then you know exactly what I mean.  And there are times when parties to a construction contract face a goocher.  Here’s what I mean…

In J. Clancy, Inc. v. Khan Comfort, LLC, the Supreme Court of South Dakota held that a missing time element in a construction contract did not invalidate the contract.  In other words, the court found that a contract existed—i.e., there was  meeting of the minds among the parties—despite the lack of a completion date or time of performance.

In this payment dispute between the owner of a hotel and a construction contractor, there did not appear to be a traditional construction contract executed by the parties.  However, there were numerous written documents such as a proposal, invoices, and change orders that had been either signed by or transmitted between the parties.  Based upon those documents, the trial court held that there was not an express written contract, but that there was a series of implied-in-fact contracts between the parties.

The appellate court disagreed and held that the contractor’s proposal, which was signed by the owner, was an unqualified acceptance of the parties’ agreement.  The owner’s subsequent payment of the initial deposit and the contractor’s immediate commencement of work evidenced the formation of a contract.

Here’s the goocher! The appellate court held that all essential terms of an express contract were present in the contractor’s proposal, despite the fact that there was not a time of performance.

The document listed the subject matter of the work to be performed, the quantity of materials to be ordered and installed, the price for the goods, and the parties’ payment terms. Missing from the September document was a timeline for completion of the work. This, however, is not fatal.

Relying on a South Dakota statute, the court concluded: ““If no time is specified for the performance of an act, a reasonable time is allowed.”

Whether you are dealing with a commercial or residential project and whether you are a contractor or owner, this case illustrates a few important concepts.  First, words matter. What you include in your contract will be important for avoiding a dispute, as well as determining the outcome after a dispute arises.  Second, time matters. While the court in this case found that the missing element of time was not fatal, in many states the words “Time is of the essence” in the construction contract is a material term that needs to be included if you want to enforce that time period. Finally, conduct matters. Both the trial court and appellate court found that the conduct of the parties were important, although the courts reached different conclusions.  Avoid these type of disputes by having a roadmap of risk allocation through a clear and unambiguous construction contract.

We live in a world of e-mails, IMs, texts, Snapchats, TikToks, Instagrams and the occasional fax.  Although information is transmitted instantaneously in today’s environment, proof of receipt of that information (often called “Notice”) remains subject to some very strict rules imposed by contract, case law or statute.

Notice of Claims.  In a transportation case involving a personal injury, Department of Transportation v. Jones, the Court of Appeals of Georgia explained the importance of strict compliance with certain notice provisions.  The plaintiff was injured in a single-car accident on State Route 42 and he sued the Georgia Department of Transportation (“GDOT”). The plaintiff claimed that GDOT’s improper maintenance of the roadway led to an accumulation of water, which caused his truck to hydroplane into a tree, severely injuring him.  GDOT filed a motion to dismiss, arguing that the plaintiff failed to strictly comply with the notice provisions of the Georgia Tort Claims Act (“GTCA”).  The trial court denied that motion and the Court of Appeals reversed.

The Green Card.  The GTCA requires that notice of the claim be sent to “the Risk Management Division of the Department of Administrative Services.”  At the hearing, the plaintiff presented the following evidence: (a) the notice letter; (b) the green return receipt card sent to the Commissioner of GDOT; (c) a response letter from the Risk Management Division acknowledging receipt of the notice letter; and (d) a U.S. Postal Service tracking document showing that “something was sent by certified mail to the Department of Administrative Services.

The Holding. Despite this evidence, the Court held that the plaintiff failed to strictly comply with the statute because there was no proof by the plaintiff that the letter was sent by certified mail to the Risk Management Division.  The green card submitted showed proof of delivery to the Commissioner of GDOT.  The attorney for GDOT admitted in court that the notice letter received by the Commissioner of GDOT was then sent internally by the Commissioner’s office to the Risk Management Division, which then sent the acknowledgement letter.  Nevertheless, the plaintiff did not comply with the statute requiring that he sent notice of the claim to the Risk Management Division.

So What? While this may seem like a hyper-technical application of the rule, that’s precisely what “strict construction” means according to one court in George.  Whether you are contractor, developer, specialty subcontractor, or professional service provider in the construction industry, the real lesson learned is to read the express terms of any applicable contract or statute when a dispute arises, and follow both “the letter and the spirit” of the law.

Long before I was an attorney, I heard this tale that if you endorsed a check that had the words “PAID IN FULL” written on the check, then you were accepting the check as full payment of whatever was owed.  But I have never really thought about that legal principle because, “People don’t really do that, do they?”

In Triangle Construction Co. v. Fouches and Assoc., the Court of Appeals of Mississippi held that the PAID IN FULL principle—or what lawyers know as accord and satisfaction—barred a contractor’s claim for additional payment.

The Facts. The contractor won a bid to construct a water system in two local counties.  Following completion of the project, the contractor filed a claim against the owner and engineer for damages allegedly resulting from the negligence of the owner and engineer.

Upon completion of the project, the owner sent contractor a check marked “Final Payment,” but the check did not compensate the contractor for its increased construction costs as a result of the delays or for the extra-contractual project expansion. The contractor conceded that it cashed the check, but argued that it repeatedly asserted to the owner—including in a letter sent to then engineer—that it did not consider the “final payment” to be final and that it would continue seeking the remainder of what it was owed.

The Court’s Ruling. The court disagreed.  Under Mississippi law,  despite what the parties may argue was their intent, cashing a check marked “final payment” constitutes an accord-and-satisfaction agreement, which precludes that party from bringing future claims for additional payment. In Triangle Construction, the court held that the contractor’s claims against the engineer were barred by the doctrine of accord and satisfaction.

So What? The “paid in full” principle is not just an old wives’ tale.  Depending on your state’s law, if you negotiate a check that is marked “paid in full” or even “final payment” then you are risking the fact that you may be settling any claims you have.  If you are a contractor that seeks to reserve those claims, then don’t cash the check if it is marked with special language on it.

It happens all the time! The owner-contractor agreement contains a “no damages for delay” clause; a clause requiring that all changes be in writing before work is performed; and a clause requiring partial lien waivers and releases with each periodic payment.  And yet we see a claim for delays and extras filed at the end of a construction project that challenges these very contract provisions.

The Court of Appeals of North Carolina recently grappled with this exact scenario in Gamewell Mechanical, LLC v. Lend Lease Construction (Sept. 1, 2020) (PDF).  The project involved the new construction of three buildings in Durham, North Carolina.  The mechanical subcontractor filed suit against the prime contractor for $2.7m for breach of contract for nonpayment, claims for delay damages and enforcement of its lien rights.  The prime contractor argued that subcontractor’s claim should be limited to its contract balance of approximately $500k in retainage. Ultimately, the trial court awarded the subcontractor more than $800k for its claims.

On appeal, the contractor argued that the award should have been limited to the $500k in retainage.  By executing lien waivers and releases with each periodic payment, the contractor argued, the subcontractor had waived all of its claims other than retainage. The parties’ lien waiver contained language where the subcontractor could have reserved disputed claims, but the subcontractor never did so. The appellate court held that the trial court properly rejected a majority of the subcontractor’s claims that were subject to either the “no damages for delay” clause or the period lien waivers.

Notably, the trial court made a distinction for “day-to-day” or “daily” changes in the field for extra work, which was credited by the appellate court as follows:

[I]t is undisputed that there were delays, numerous Change Orders issued, re-sequencing, and coordination issues occurring throughout the project. Given the daily problems that arose as a result of these issues, [subcontractor’s] failure to reserve claims regarding the day-to-day miscellaneous items done in the field at the direction of [contractor] is not a material breach-of-contract. . . . The waiver and release documents submitted with each pay application could not cover claims not readily apparent due to daily changes on the job.

The appellate court held that competent evidence supported the trial court’s decision on each of these points.

A New Exception?

The opinion is notable because of the court’s findings that are highlighted in bold and underline above. When I read the court’s opinion, I started to think: (1) Is there now a “daily changes” exception to lien waivers and releases? (2) Are day-to-day miscellaneous items compensable even where a party fails to reserve their rights on these type of  cumulative claims? According to the court in Gamewell Mechanical, the answers these questions is yes. It would be interesting to see what other courts have reached similar conclusions.

Question: Do you know any similar cases?  If so, please share in the comments below.