In a case decided on November 17, Inland Atlantic Old National Phase I, LLC et. al. v. 6425 Old National, LLC, the Fourth Division Court of Appeals of Georgia ruled on fiduciary duties owed under joint venture agreements, applied rules of contract construction, and briefly addressed substantial versus strict compliance.
Background: The parties – Inland Atlantic and Old National – entered a joint venture LLC and made other necessary agreements to develop a shopping center. During Phase I (of II), issues arose with the quality of an on-site contractor, which Old National failed to properly supervise. Due to complications in Phase I, Inland Atlantic did not hire Old National for Phase II. Old National brought suit and Inland Atlantic counterclaimed. After the trial court ruling granting and denying various parts of motions of summary judgment, both parties cross-appealed. In this consolidated appeal, the Court of Appeals addresses these claims and the trial court’s treatment of summary judgment.
A court may grant summary judgment, alleviating the need for a full trial, for the party requesting it – the movant – if there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law.
Fiduciary Duty as Managing Member of LLC:
According to Georgia statutes (OCGA § 23), a fiduciary duty exists “where one party is so situated as to exercise a controlling influence over the will, conduct, and interest of another or where, from a similar relationship of mutual confidence, the law requires the utmost good faith.” Breach of such a fiduciary duty requires (1) the existence of a fiduciary duty, (2) the breach of which (3) proximately causes damage.
Additionally, a member of a limited liability company only owes statutory duties to that LLC if the member is managing an aspect of the LLC’s business affairs. That duty owed is one of good faith and the care an ordinarily prudent person. (OCGA § 14-11-305) If a member of an LLC is not managing as aspect of LLC business, this duty does not apply (unless otherwise provided for by agreement). Therefore, a member of an LLC without managerial responsibilities has no duty to the company by just performing its duties as a member.
In this week’s Inland Atlantic decision, a joint venture agreement between Inland Atlantic and Old National delegated some managerial duties to Old National. Inland Atlantic argued that that the trial court should not have granted summary judgment to Old National on Inland Atlantic’s breach of fiduciary duty claim with regard to the parties’ joint venture agreement. The appellate court agreed, ruling that Old National might have had a fiduciary duty to Inland Atlantic under their joint venture agreement. This is a remaining question of fact as to whether Old National was managing some of the LLC’s affairs; therefore, summary judgment was inappropriate.
Fraud and Fiduciary Duty to Disclose Material Facts:
A fiduciary relationship includes the duty to disclose material facts. Therefore, suppression of a material fact by a fiduciary party constitutes fraud.
Fraud requires the defendant, having both (1) scienter (knowledge of one’s wrongdoing) and (2) the intention to induce the plaintiff to act (or refrain from acting), to (3) make a false representation to the plaintiff, (4) on which the plaintiff justifiably relies and which (5) causes damage to plaintiff.
Here, Inland Atlantic claimed Old National committed fraud and negligently misrepresented the abilities of site-work contractor “Lewis,” whom Old National insisted on hiring and who was having “financial difficulties” before being retained. Old National insisted on using Lewis and may have known of their financial trouble, but represented that Lewis would be able to finish the project.
Inland Atlantic contended that granting summary judgment to Old National on Inland Atlantic’s claims for fraud and misrepresentation was inappropriate. The appellate court agreed, as there was a material question of fact as to whether Old National was managing some of the LLC’s business affairs (as examined above) and therefore owed a fiduciary duty to Inland Atlantic under their joint venture agreement. If such a fiduciary duty existed, then Old National had the duty to disclose material information regarding Lewis’s ability to complete the project. Since a question of fact remains, this court reversed the grant of summary judgment on the fraud and negligent misrepresentation claims.
Rules of Contract Construction – Examining Breach of Contract and Indemnification Claims:
When a court evaluates a contract claim, the court looks at the plain meaning of the contract terms. If these terms are ambiguous, making the contract unclear, the court must apply rules of contract construction. First, the court will ascertain the intent of the parties at the time the contract was executed. If the intent cannot be determined, then the terms of the contract are material questions of fact for a jury to answer.
The rules of contract construction also provide that indemnification terms should be construed strictly against the indemnitee. Furthermore, ambiguity should be construed against the drafter.
In Inland Atlantic, Old National argues that the trial court erred in not granting them summary judgment on Inland Atlantic’s breach of contract claim. However, the plain and unambiguous terms of the contract provide that Inland Atlantic’s actions do not waive their right to a breach of contract claim. Furthermore, there were two remaining questions of fact based on the evidence of record: (1) Did Inland Atlantic waive their right to a breach of contract claim by making final payment without notifying Old National of its deficiencies? And (2) Did Old National breach the contract by failing to properly supervise and manage the project? With these questions of fact unanswered, summary judgment on the breach of contract claim was appropriately denied.
Old National also contends that the lower court erred in denying their motion for summary judgment on Inland Atlantic’s indemnification claim. The indemnification provisions say that both parties indemnify each other, making both parties indemnitees and indemnitors. This is an ambiguous term. So, who is the proper indemnitee is a remaining question of fact for the jury to answer since the rules of contract construction fail to solve the issue here.
Substantial Compliance Required:
A party to a contract must only substantially comply with the contract termination clause. Strict compliance is not required. (See Rome Healthcare LLC v. Peach Healthcare System, 264 Ga. App. 265, 272 (5) (590 SE2d 235) (2003).)
Here, Old National contends that the trial court erred in not finding that a contract was not terminated. Inland Atlantic was not required to strictly comply with the contract term stating that either party could terminate with 30 days written notice. Inland Atlantic’s repeated notifications to Old National regarding Old National’s deficiencies may be considered substantial compliance. Again, this is question of material fact for a jury to decide.
Conclusion: This case is another reminder of the importance of contract drafting on construction projects; specifically, here are some practical tips which we can take away from this decision:
1. Joint Ventures between contractors may include fiduciary responsibilities between the parties.
2. Fiduciary relationship includes the duty to disclose material facts. Therefore, suppression of a material fact–such as the possibly inability of a subcontractor to fully perform its contract– by a fiduciary party constitutes fraud.
3. Construction contract terms need to be unambiguous.
4. Read your contract to understand (and follow) the termination provisions.
by Mark A. Cobb
If you are a Georgia contractor or subcontractor who uses written contracts (and if you are not using written contracts, you should!), then this blog might save you some legal costs and or headaches. To improve your contracts, just follow the eight simple tips below!
What this blog article is not: Previously, we have written about the best contract terms and the vital contract terms that every construction contract should include. This is not a repeat of that material. This article is not full of legal jargon and nuanced technicalities rather, we are providing your with eight simple–but sound–contract improvements which you are able to apply to your contracts today!
Why we are writing this blog article (in other words, The Problem With Your Contracts)? Regardless whether you are a general contractor or a specialty trade subcontractor, you want to have a successful, problem-free project. A properly written contract can provide great strides to clarifying the project scope and the parties expectations. The construction contract lawyers at the Cobb Law Group regularly review, draft, and negotiate various types of Georgia construction contracts on behalf of their clients. Needless to say, our clients have varying personalities and goals, but we have noticed that a significant number use a “boilerplate” contract that they highjacked several years ago from another contractor or subcontractor. To this template, from time-to-time, they have added other terms which they thought useful and borrowed from other contracts they ran across. Through time, an original boilerplate which may have had some practical use has been cobbled into a hodgepodge of redundancies and contradictions, and these problems can make your contract unenforceable. Thus, we are giving you some very basic tips which you can put into use today and improve, at least a little, your contracts without hiring a lawyer.
Disclaimer About the Use of Any Forms: Although there are some very good and very useful form banks created expressly for the construction industry (such as the AIA Contracts, the EJCDC contracts, the DBIA contracts, and ConsensusDOCS), there really isn’t any “form” that can provide for all of the unique complexities of any specific construction project without substantial modification; thus, we strongly recommend that forms should be viewed only as a starting point, and they must be carefully reviewed and amended to meet the unique needs of the project and the parties. In other words, there is no such thing as a “boilerplate” contract which will work in every situation.
A Word on Readability: Your contracts should be easy to read and easy to understand; if they are not, then you probably need to start-over from scratch. You will see that many of the tips covered in this article suggest making your contract easy to read. Something which is easier to read is more likely to be read and understood which encourages better performance. So, make it a goal to make your contracts more readable.
1. Read Your Contract and Check for Redundancies. Redundancies are repetitions; let me repeat that: redundancies are repetitions. A quality contract should not have redundancies as they take up space and time; and, needless to say, they are unprofessional. More importantly, however, redundancies may open the door for ambiguity or even inconsistencies. Saying more than once that “The Subcontractor acknowledges that he has read the General Contract, all plans and specification, and is familiar therewith” more than once does not make the covenant any truer. If you contract also says “The Subcontractor acknowledges that he has has access to review a copy of the General Contract”), then it may cause some confusion which could be detrimental to your goal of passing the risk to the subcontractor.
2. Read Your Contract for Inconsistencies. Inconsistencies in a construction document also show an unprofessionalism, and they, too, can make your contract meaningless. Consider the following example: Parties to a contract may consent to a a method of resolution in the event of a dispute. If one section of the contract refers to “mediation” whereas another section refers to “arbitration”, then if a dispute occurs, it may be unclear in which forum the resolution should be handled–this might land you in court for resolution!
3. Group Similar Provisions Together. Nobody wants to read a contract (much less interpret a contract) where provisions on the same topic are spread throughout the document. For example, do not have provisions regarding “Payment” at the beginning of the contract, the deadlines regarding the due date for payment applications in the middle of the contract, and a paid-when-paid provision at the end of the contract. Move these provisions closer to each other then, it will be easier to read the contract, in general, and it will be easier to spot redundancies or inconsistencies as well.
4. Use Effective Headings for Each Contract Provision. Headings are a terrific and easy way to make your contract easier to read and, perhaps, increase its enforceability:
First, good heading it makes it easier to locate pertinent provisions (deadlines for giving notice, for example) and it make the contract easier to read as headings are usually either bold or underlined which breaks up the monotony of a standard type.
Second, headings may help the enforceability of a provision. In a recent blog post, we wrote about a subcontract which contained a Signature Provision which attempted to make the signatory to the contract personally liable for its performance. The Georgia Court of Appeals, when rationalizing the terms enforceability stated that the contract included the heading “Signing Individual” in boldface type which further enhanced the term’s clarity and the parties’ intention. Thus, the court continued, that the President of the company “must be charged with knowledge of the Signature Provision, even if he did not read it, and he is therefore bound, individually, to the terms of the Agreement.”
Third, in the event that a contract terms because an issue in a trial, your attorney may consider enlarging the term on a large board as a trial exhibit for the judge or jury to read. Without a heading, this exhibit may be nothing more than a large poster with long sentences filled with legal-ease. A pertinent heading (e.g., “Individual Indemnification”) might resonate more easily with the judge or jury and they may be more easily persuaded to interpret the contract as you intended.
5. Spaces! Just like this article, we tend to suggest that contracts use double-spaces between paragraphs. The other day we were asked to review a contract which did not separate the paragraphs. Page-after-page of unending contract terms quickly became very difficult to read much less make sense of. Thus, it took much-longer to read (time is money), and it required greater concentration. If your contracts look like that one, change them today and save yourself some headaches!
6. Check Your References. When someone cobbles together a contract from different sources, it is important to pay close attendtion that you don’t lose your references. Thus, if your contract says, “then parties shall agree to be bound by arbitration as provided in Article 10. . .” please make certain that Article 10 of your hodged-podged contract is the section dealing with arbitration. Otherwise, it may to used against you if the need arises to interpret the provision.
7. Eliminate Useless Provisions. Longer is not always better–don’t have extraneous provisions. If your contract includes a terms which doesn’t make sense to you; then, it probably doesn’t make sense to the other party and it will likely not make sense to a jury or a judge. You may want to ask your construction contracting lawyer to explain it, but if no one understands it, then it should probably be omitted.
8. Grammar and Spelling Count. You run a success business, and you know proper grammar and how to spell. When a contract is created over time, sentences get cut-and-pasted and letters get cuts off or added accidentally. Unfortunately, a substantive mistake can invalidate the terms of your contract so read it carefully often and correct as necessary. One example we see particularly often is a paragraph that is supposed to end with list of items but fails to include the list. Thus, the paragraph ends, “All subcontractors will adhere to the following policy on all jobsites:” and the policy is not expressed (and, at a minimum) not a part of the contract. Those missing policies are certainly not enforceable and may limit your rights including a right to terminate.
As we stated above, using the same template or form for your Georgia construction project is dangerous; instead, use them as a starting point for negotiations. Having a qualified construction attorney help you draft your “master” documents and assist you with specific provisions as each contract is negotiated may be vital to having a clear, understandable contract. In fact, we encourage our clients to review their master contract at least once a year. Laws changes, courts write decisions, and policies need amendment. If you are looking for a construction contracting attorney to help you review and improve your contracts, please feel free to contact us today!
by Mark A. Cobb
The Court of Appeals of Georgia recently issued their holding in Progressive Electrical Services, Inc. v. Task Force Construction, Inc., and this case interprets some construction contract terms which impact Georgia subcontractors. Specifically, this case gives subcontractors a reason to be concerned about every contract into which they enter unless they have taken the time to thoroughly read and understand every contract provision; in addition, this decision gives general contractors the ability to enforce some contract provisions which may, otherwise, seem onerous to others.
Background and Facts: The basic facts of this case present the all-too-common scenario of a subcontractor not paying its supplier, and, then, a general contractor seeking payment from the subcontractor of the amounts it had to spend resolving the supplier’s claim. Specifically, Task Force Construction was hired as a general contractor to build a public works project in Swainsboro, Georgia; Task Force, in turn, subcontracted the electrical portion of the project to Progressive Electrical. Progressive Electrical purchased their electrical supplies from a supply company. Because this was a public works project, the general contractor posted a payment bond which, essentially, promised that subcontractors and suppliers would receive payment. Unfortunately, Progressive Electrical did not pay its supplier; thus, the supplier made a timely claim for payment under the project’s payment bond. The surety which issued the bond settled the supplier’s claim for over $118,000. The surety, then sought indemnification from the general contractor which, the GC paid. After the general contractor reimbursed the surety, it sought to recover the amount which it paid to surety from its subcontractor, Progressive Electrical.
Although the background and facts may be similar to many other cases, specific provisions in the subcontract executed between the GC and subcontractor resulted in some disastrous consequences for the subcontractor and, probably more importantly, its principal.
Important Legal Issues Addressed by the Georgia Court of Appeals: Although much of the Court’s holding is significant for Georgia’s construction lawyer, today’s blog post, however, will discuss two particular contract terms addressed in Progressive v. Task Force; specifically, we’ll look at how the case addresses the difference between a guaranty and an indemnification and we’ll look at some contract language which, according to the court, binds an owner, officer (or perhaps, an employee) of a company to be personally liable for the company’s performance under the construction contract. Taken together, these two provisions make the officer of the subcontractor personally liable for reimbursing the GC.
CONTRACT PROVISION NUMBER 1:
(Making the Signatory of the Contract Jointly and Severally Liable)
Personal Liability Under the Contract: None of the parties denied that Progressive Electrical had executed its subcontract agreement with Task Force; however, Task Force attempted to recover under its indemnification from Progressive Electrical and its owner. Task Force made this attempt based upon a particular term in the contract between Task Force and Progressive Electrical:
Signing Individual. Each and every individual who signs this [agreement] or any Attachment or exhibit thereto on behalf of [Progressive Electrical] hereby warrants and agrees that such individual is duly authorized 1) to act on behalf of [Progressive Electrical]; 2) to enter this [agreement] on behalf of [Progressive Electrical]; and 3) to bind [Progressive Electrical] to the terms of [the Agreement]. Each and every individual signing on behalf of [Progressive Electrical] also further agrees that, notwithstanding anything contained herein or on any signature line to the contrary, each such individual signing on behalf of [Progressive Electrical], in addition to signing in a representative capacity, is also signing [the agreement] in his or her personal and individual capacity and each such individual signing on behalf of [Progressive Electrical], by signing below, hereby individually and personally agrees to be bound by all of the obligations of [Progressive Electrical] in [the agreement] (including, but not limited to, the Attachments hereto). (Emphasis Supplied in Court’s Decision)
Contract Term Enforceable Against Principal of Subcontractor: When the Court of Appeals read the Signature Provision which purported to bind the signatory individually, the Court held that it was a clear and easily understood contract term. Thus, when the President of Progressive Electrical signed the subcontract agreement, he agreed to be bound by this provision; and, consequently, he personally assumed liability for his company’s obligations under the subcontract.
The Court’s Rational: Neither party disputed the established law in Georgia which holds that, “an agent who, acting within the scope of his authority, enters into contractual relations for a disclosed principal does not bind himself, in the absence of an express agreement to do so.” (Citation and punctuation omitted.) Instead, the Court looked at the Signature Provision, and acknowledged that it contains such an express agreement to bind the subcontractor’s principal individually; thus, when the President executed the agreement, he was signing on behalf of Progressive Electrical and also “individually and personally” he agreed “to be bound by all of the obligations of [Progressive Electrical]” under the parties’ contract, “notwithstanding anything contained [in the agreement] or any signature line to the contrary.” Accordingly, the Court found the language of the Signature Provision to be unambiguous language, and, therefore, the president’s single signature bound him in his individual capacity, along with Progressive Electrical, under the Agreement.
Isn’t This Too Extreme? Both Progressive Electrical and its president argued to the Court that enforcement of this contract term was too extreme. They argued that such a Signature Provision created a trap which allows “unbridled liability to be unleashed on unsuspecting victims.” Unfortunately for the subcontractor and its officer, the Court disagreed with this argument, pointing out the following:
a party to a contract has the duty to read a contract before signing it and by signing, the party is bound by its terms “unless [he] can show that an emergency existed at the time of signing that would excuse [his] failure to read it, or that the opposite party misled [him] by an artifice or device which prevented [him] from reading it, or that a fiduciary or confidential relationship existed between the parties upon which [he] relied in not reading the contract.
Furthermore, the Court pointed out that the Signature Provision included the heading “Signing Individual” in boldface type which further enhanced the term’s clarity and the parties’ intention. Thus, the court continued, that the President of the company “must be charged with knowledge of the Signature Provision, even if he did not read it, and he is therefore bound, individually, to the terms of the Agreement.” (Emphasis supplied.)
CONTRACT PROVISION NUMBER 2:
(Personal Guaranty v. Indemnification)
Indemnification Under the Subcontract: Since the general contractor paid out money to settle the dispute with the unpaid material supplier, the GC sought reimbursement from its subcontractor. The subcontract agreement which Progressive Electrical entered into with Task Force contained the following indemnification provision which was the subject to the court’s interpretation:
[Progressive Electrical agrees in indemnify Task Force] from all claims, losses, fines, penalties, assessments and damages (including but not limited to reasonable attorney’s fees) arising out of [inter alia, Progressive Electrical’s] breach of any term [of the agreement], including costs, investigation expenses, expert expenses and attorney’s fees incurred by [Task Force] in the investigation and defense of such claims or allegations.
Georgia Statutes: An “Indemnity Contract” is defined as an agreement between two parties, whereby the one party, the indemnitor, either agrees to indemnify and save harmless the other party, the indemnitee, from loss or damage, or binds the indemnitor to do some particular act or thing, or to protect the indemnitee against liability to, or the claim of, a third party. “Indemnity” means reimbursement, restitution, or compensation. National Bank v. Wright, 77 Ga. App. 272, 48 S.E.2d 306 (1948); in Progressive v. Task Force, the Court of Appeals reminds us that O.C.G.A.§ 10-7-1 states the following:
The contract of suretyship or guaranty is one whereby a person obligates himself to pay the debt of another in consideration of a benefit flowing to the surety or in consideration of credit or indulgence or other benefit given to his principal, the principal in either instance remaining bound therefore. Sureties, including those formerly called guarantors, are jointly and severally liable with their principal unless the contract provides otherwise. There shall be no distinction between contracts of suretyship and guaranty.
Consequently, the Court affirmed that, “An indemnity contract differs from a guaranty in that the former is an original rather than a collateral undertaking and generally undertakes to make good the promisee’s loss resulting from his liability to another rather than from another’s liability to him.” (Citations and punctuation omitted.) Thus, the court held that the subcontract agreement’s indemnity provision was enforceable.
Since this ruling just came down, the parties may be able to appeal the decision; if they do, we will do our best to update this blog article; in the meantime, the holding in Progressive v. Task Force is a stern reminder that before signing any contract, and in particular any construction contract, (i) read the contract thoroughly and (ii) understand the terms–and the potential consequences–of the contract. Otherwise, you might find yourself individually liable for a debt you are not willing to undertake.
After two years of hard work, we are pleased to announce that Construction Subcontracting: A Comprehensive Practical and Legal Guide has been published by the American Bar Association (“ABA”), and Mark Cobb is pleased to have been one of the contributors to this amazing new resource (and the only participating attorney from Georgia!)
Although this publication could be useful to many people including construction and credit professionals, it is a book written by subcontractor law attorneys primarily for other attorneys who need to know more about the subject. In some ways, it is intended to begin codifying and identifying those issues unique to specialty trade subcontractors and material suppliers as the new concept of SUBCONTRACTOR LAW becomes more and more recognized by legal professionals, educators, and construction industry professionals.
Construction Subcontracting: A Comprehensive Practical and Legal Guide was the brain-child of Division 9 of the ABA’s Forum on the Construction Industry. Founded in 1976, the Forum has grown to become the largest organization of construction lawyers in the world. It fulfills its mission of “Building the Best Construction Lawyers” and Forum members represent all segments of the industry, including owners, design professionals, contractors, construction managers, integrated design-builders, subcontractors, suppliers, insurers, and sureties. Division 9 is a sub-group of Forum member attorneys who represent and focus on the unique needs of specialty trade contractors and suppliers. The attorneys who are active in Division 9 recognized the lack of a national publication and guide in this burgeoning area of practice. This book remedies this in fulfilling its mission to be “comprehensive”, “practical” and “legal”. The three editors, each of whom are at the top of their profession, chose to divided the text into the following six parts:
- The Subcontract Document
- Subcontract Performance
- Insurance, Bonding, and Licensure
- Special Project Issues
- Other Contracting Arrangements
As you can imagine with a book of this caliber, each section is filled with multiple chapters dedicated to explaining the fundamentals of Subcontractor Law including contractual rights and obligations, Federal and state statutory provisions impacting subcontractors as well as common law issues and remedies affecting construction professionals.
Part One of the book discusses “The Subcontract Document” which includes an examination into subcontract terms commonly used in standard contract templates (such as AIA contracts, ConsensusDocs and others frequently used construction forms) as well as their advantages and disadvantages; this section tears apart the common subcontract terms including flow-down provisions, change orders, insurance, warranties, terminations, and lien waivers. In addition to these (and other) express contract provisions, the section also discusses implied subcontract terms such as covenant of good faith and fair dealing. This important section also addresses the formation of subcontracts from the bid process through final negotiations and includes topics such as Bid Shopping, Bid Padding, Promissory Estoppel Doctrine, Negotiation Strategies and Preparing Fall-Back Provisions.
Part Two discusses “Subcontract Performance” which looks at such diverse subjects as construction scheduling, excusable and non-excusable delays, acceleration and damages as well as tips regarding calculation of damages. This section of the book also includes chapters on payment issues, mechanics and construction liens, change orders and extras as well as issues related to differing site claims, asserting and proving the claims of subcontractors, as well as contract terminations. This lengthy section of the book concludes with the topics of Warranties in Construction Subcontracts (expressed and implied), an analysis of the Spearin Doctrine (i.e., the owner’s implied warranty), Indemnity and Federal Prevailing Wage Law and Project Labor Agreements including the Davis-Bacon Act, Contract Work Hours and Safety Standards Act, and The Copeland Anti-Kickback Act. (Stay tuned for a future blog post in which Mark will provide a detailed summary regarding his contributions to the chapter on Subcontractor payments.)
Part Three addresses the vital topic of “Insurance, Bonding, and Licensure” and includes a detailed analysis of the different types of insurance generally required of subcontractors including General Liability Insurance, Professional Liability Insurance, Builders Risk Insurance, Workers’ Compensation Insurance, Automobile Coverage as well as related issues such as waivers, endorsements and subrogation. This section also provides chapters on surety bond issues, Miller Act and “Little Miller Act”, payment bonds, performance bonds, and mechanics lien discharge bonds. Regarding subcontractor licensure, the book discusses the need for a licenses, the various governing boards and non-compliance with licensure requirements as well as the payment rights for unlicensed subcontractors.
Part Four attacks the difficult topic of “Disputes” including an analysis of typical subcontract provisions such as the Duty to Continue Work Pending a Dispute, Direct Discussion and Escalation; this part also looks at litigation pass-through claims discussing such vital topics as case management, discovery and joint defense agreements; in addition, it looks at alternate dispute resolution methods including mediation, arbitration and dispute avoidance.
Part Five’s “Special Project Issues” takes a look into several interesting and often-overlooked subjects including an analysis of Federal, State and Local Contracting (including discussion on competitive bidding, preference and incentive programs and bid protects); Alternative Project Delivery (such as design-build, Tri-Party Agreements, and Public-Private Partnerships); Green Building issues (including the LEEDS rating systems as well as others rating systems such as Earth Advantage, The Living Building Challenge, DGNB and others as well as the additional project risks associated with green building techniques); finally, this section addresses Globalization and International Projects whether led by foreign contractors working on projects in the United States or US contractors working abroad.
Section Six, the final section, addresses the cutting-edge topic of “Other Contracting Arrangements”, and it includes discussion on “newer” arrangements such as Subconsulting Design Contracts, Design Issues, Supply Contracts and Equipment Leases (including equipment rentals on construction projects), Teaming Arrangements such as joint-venture agreements along with their management, advantages and disadvantages including their role in the federal procurement context.
As you can see, this comprehensive publication is a long-overdue resource for those of us practicing in the field of subcontractor law. It is an amazing “first-step” as this new legal field is accepted and defined by the legal profession, legal educators and construction professionals. Mark Cobb was honoured and thrilled to have been a part of this seminal text in his field, and he greatly enjoyed the ability to work with some of the leading subcontractor law practitioners in the country.
If you are interested in more information regarding this subject or if you would like to obtain your own copy of Construction Subcontracting: A Comprehensive Practical and Legal Guide, then please contact us today. If you would like to purchase your own copy of this useful tool directly from the publisher, please click here > >
by Mark A. Cobb
Last week, the Georgia Court of Appeals decided Western Surety Company v. Department of Transportation holding that a construction contract’s claim notice provisions were enforceable which, in turn, invalidated the prime contractor’s request for additional funds due to increased material costs. This holding underscores every contractor and subcontractor’s need to be aware of their contractual deadlines for providing notices on construction projects.
Background and Facts: This construction contract dispute involved the Georgia Department of Transportation (“DOT”), a government contractor, and two sureties. The DOT contracted with the GC to make road improvements in Georgia, and as a part of the contract the Sureties issued a payment bond and a performance bond to the DOT, as obligee. After the project was started, the GC experienced increased material costs (for the asphalt and other petroleum-related products) and suffered financial difficulties. The GC advised the Surety that it could not continue to perform under the contract and planned to voluntarily abandon the project. Consequently, the surety stepped in to complete the project pursuant to the terms of the performance bond.
The Issue: The surety ended up suing the DOT for, among other things, the additional material costs. The sureties, however, acknowledge that neither the original GC nor the Sureties themselves “strictly followed the claim notice requirements set forth under the contract.”
What Did the Contract Provision Require for Notice? The construction contract in dispute required written notice of any potential claims; it further specified that failure to provide timely notice was a waiver of the claim. Thus, if notice was not properly given, then the claim would automatically be denied. Specifically, the contract’s provision stated as follows:
NOTICE OF POTENTIAL CLAIM: In any case in which the Contractor believes that it will be entitled to additional compensation, the Contractor shall notify the Engineer in writing of its intent to claim such additional compensation. Such notice shall be given in order that the [DOT] can assess the situation, make an initial determination as to who is responsible, and institute appropriate changes or procedures to resolve the matter.
a. Claims for Delay — The [DOT] shall have no liability for any delay which occurred more than one week prior to the filing of such written notice. Failure of the Contractor to give such written notice in a timely fashion will be grounds for denial of the claim.
b. All Other Claims Except Acceleration and Delay — If the Contractor does not file such written notice before beginning the work out of which such claim arises, then the Contractor hereby agrees that it shall have waived any additional compensation for that work and the Contractor shall have no claim thereto.
The Sureties Argument: The Sureties claimed that the claim notice requirements were not applicable to the specific case because, among other things, the DOT waived strict compliance with the notice requirements, the GC and the Sureties substantially complied with the notice and claim procedures, and the DOT had actual notice of the claim.
The Holding: As the court pointed out, the parties had agreed (in their construction contract) that any additional material costs would require specific notice from the GC or Surety under the Contract and that compliance of this requirement would be “an essential condition precedent to any recovery of damages by the Contractor.” The Georgia Court further reminded the parties that “As a rule, ‘”[a]ny notice requirement must be reasonably construed.’ And substantial compliance with a notice provision may present an issue for the jury if ‘[t]he evidence … appears to be ‘in the spirit’ of the contract provision.’ [citations omitted]. Then, as the Court applies the facts in the trial court record, it concluded that none of the communications by the GC or the Sureties reasonably or substantially complied with the requirement that timely notice of a claim be given to the DOT. Thus, the Georgia Court of Appeals ruled that deadlines and notice provisions on construction contracts may be enforceable and, if proper notice isn’t given, it may preclude a party from seeking (much less recovering) additional money for its damages including increased material costs.
Practical Lesson: Regardless whether you are a prime contractor, specialty subcontractor or a sub-subcontractor working in Georgia, it is vital that you understand each term of your contract. When we review construction contracts for our clients, we create a list of deadlines and notice requirements and suggest that the client post it conspicuously on the project file, the project manager’s desk or other pertinent place as a reminder to strictly comply with the notice obligations; failure to meet each and every deadline may result in the loss of your claim, the inability to file a materialmen’s lien, or to seek additional compensation.
by Mark A. Cobb
In its December 3, 2013 ruling, the U.S. Supreme Court took a very important stand in favor of subcontractors! For those of us watching Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, et al. closely, we were delighted to see that the Supreme Court upheld the laws of twenty-four states (which impacts every state) to limit the uses of forum-selection clauses in construction contracts.
What is a Forum Selection Clause? Forum selection clauses are very common in all types of contracts as they establish the jurisdiction where a dispute related to the contract will occur. In other words, for example, a California general contractor and a subcontractor from Alabama working on a project in Georgia might agree in their subcontract agreement that any and all disputes related to their contract will be resolved in Georgia as that is the project’s location. This makes sense as both parties were working in Georgia, the building in dispute is in Georgia, many of the witnesses were or are in Georgia, and it involves Georgia real estate.
Do Forum Selection Clauses in Construction Contracts Differ from Forum Selection Contracts in Other Business Agreements? Yes, and that’s the impact of this case. In the most general terms, forum selection clauses in commercial contracts tend to be enforceable. Construction contracts, however, have very significant public policy consideration as well as issues related to state and federal laws. Specifically, many states have enacted statutes which either void or make voidable forum selection clauses in construction contract. States have singled out construction contracts due to public policy related to the situs of the project among other reasons.
Why do Some States Limit the Terms of Forum Selection Clauses? Imagine in the example above regarding the California general contractor, that the contract selected California as the proper jurisdiction for all disputes. It might not be as fair for many reasons including California’s natural tendency to favor its citizens (in the case the general contractor); frequently, the general contractor has deeper pockets than the specialty subcontractor so to require the Alabama subcontractor to enforce its rights in California could be very expensive, the costs to fly witnesses located in the project’s location (Georgia) is time-consuming and expensive, and, frequently, subcontractors have limited opportunity to negotiate the terms of their contracts. Furthermore, and perhaps most importantly, the dispute would involve a construction site or building located in Georgia. Thus, many state legislatures have put limits onto the use of forum selection clauses in construction contracts.
What Happened in the Recent Case Decided by the Supreme Court? In Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas, a Virginia-based general contractor, Atlantic Marine, hired a subcontractor named J-Crew Management, Inc, a Texas corporation, to build a child care facility in Fort Hood, Texas. And, the subcontract between Atlantic Marine and J-Crew contained a forum-selection clause requiring that all disputes “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.”
J-Crew, in turn, subcontracted some of its work to sub-subcontractors who were located in or near Fort Hood, Texas (very close to the project). All of J-Crew’s work was performed in Texas, and all of the sub-subcontractors work was performed in Texas. At the close of the project, however, J-Crew was owed almost $160,000 even though it had timely completed its work. In order to recover the amount due, J-Crew brought suit against the general contractor in Texas (in the federal district where the project was located). The general contractor, Atlantic Marine, citing the forum-selection clause contained in the construction subcontract, moved to dismiss or transfer J-Crew’s case to federal court in Virginia.
The Trial Court’s Decision: Because the project occurred solely in Texas, the claim arose in Texas, all of the participants had been in Texas, and most of the evidence concerning the claim was located in Texas, the trial court agreed with J-Crew and refused to transfer venue to Virginia. Furthermore, the Texas legislature had enacted a statute which states that construction contracts for improvements to real property located in Texas are “voidable by the party obligated by the contract to perform the construction” if the contract requires litigation in another state.
Federal Appeals Court Upholds State Law: In response to the trial court’s ruling, Atlantic Marine appealed to the Federal Court of Appeals to seek enforcement of the forum-selection clause, but the appeals court agreed with the trial court. Finally, Atlantic Marine appealed to the U.S. Supreme Court, which granted review. The Supreme Court heard oral arguments in the case in October and handed down their ruling this week.
Why The U.S. Supreme Court Upheld the Trial Court’s Decision: The Supreme Court recognized states rights in not overruling the Court of Appeals Decision. And, in fact, the Supreme Court’s holding states that when a federal court considers the forum for a case, “the court should not consider the parties’ private interests aside from those embodied in the forum-selection clause; it may consider only public interests.” By authorizing public policy as a part of a court’s decision to transfer or dismiss a case, the Supreme Court recognized state sovereignty as well as the need for public interest to enforce states laws.
Important Lessons for Subcontractors and Suppliers: Although Atlantic Marine did not render all forum selection clauses in construction contracts unenforceable, it does permit a balance between parties’ rights to contract and public policy. In addition, Atlantic Marine is a great reminder of the importance that even a seemingly insignificant subcontract term can hold in a construction contract. Frequently, forum-selection provisions are buried deep within the “boiler plate” terms of the construction contract; parties entering into contract must pay attention to each of these terms including the forum selection clauses.
By Mark Cobb
One of the great things about being a construction lawyer is the terrific network of colleagues and contacts we have across the country. Organizations such as the American Bar Association (ABA)’s Forum on the Construction Industry, the Associated General Contractors (AGC) and the American Subcontractor’s Association (ASA) help us meet and regularly interact with our counterparts in other parts of the county; social media outlets such as FaceBook, LinkedIn and Twitter connect us with even more professionals. Today, I read a great blog article written by William D. Goren, an attorney focusing and consulting on the American with Disabilities Act (ADA).
The lawsuit discussed in Mr. Goren’s article involves a hotel construction project in which the finished project failed to comply with the ADA. Consequently, the project owner sued the general contractor under an indemnification provision contained in the original construction contract. Please check out the article to see if you agree with the holding or learn how to better shore up your construction contracts. To read the article by Mr. Goren, please click here > >
Risk Allocation in Joint Venture Agreement in Georgia is a significant component of the construction contract drafting process. Thus, part four of our series on Joint Construction Ventures in Georgia, focuses on this important area. If you missed our earlier installments of this five-part series, then please click the links below:
- Part I–Advantages and Disadvantages of Joint Venture Agreements in Georgia
- Part II–Key Operational Aspects of a good Joint Venture
- Part III–Internal Management of the Joint Venture
- Part V – Default and Remedies for Breach of JV Agreements
Risk Allocation on construction projects is one of the most important aspects of every joint venture agreement; basically, risk allocation divides the responsibilities of the joint venturers in the event that any problems occur or defects are claimed. In typical construction contracts, for example, a party who fails to perform the contract’s requirements is liable to the non-breaching party for the non-breaching party’s damages. In a joint venture situation, however, there are at least two parties who have come together to perform one contract; thus, if one of the two ventures breaches the terms of the contract, then both of the joint parties are usually jointly and severally liable to the owner of the project. Needless to say, participants in a joint venture need to address their ability to shift liability through the use of a properly negotiated joint venture agreement.
In Georgia, there are three vehicles which are commonly used to allocate risk on a construction project:
- Performance and Payment Bonds
Using Indemnities to Shift the Allocation of Risk: As mentioned above, the general rule is that parties in a joint venture share liability; so if one party breaches the contract–either due to mistake or negligence–both parties share the liability. Furthermore, this “default” risk allocation may be equal liability (both joint venturers share equally) or it may be limited to their pro rata share of interest in the joint venture. Using a properly negotiated contract, however, it is possible to (i) utilize line-item exceptions to this general rule, (ii) limit the liability to one party for the other party’s wrongful actions such as fraud, bad faith, willful misconduct (e.g., stealing).
Thus far in this article, we have implied that our discussion has referenced the JV’s liability to the project owner, but there are other types of liability which must be addressed. For example, employees of one of the joint venture participants may have claims against the JV; thus, it is wise for the parties to require mutual indemnifications to protect the joint venture and its participants from employee claims.
Using Insurance to Shift the Allocation of Risk: Owners, builders, and subcontractors generally understand and appreciate insurance as a means of limiting their exposure to risk. In joint venture agreements, when your company has joined with another company to complete a project which your company alone would have difficulty obtaining or performing by itself, insurance plays an even greater role. You may be wiling to assume a risk of which you, as owner, know about; however, are you willing to assume unknown risks deemed acceptable by your c0-joint venturer? Typical insurance needed by the JV or its participants include workers’ comp insurance, expanded CGL insurance to cover the Joint Venture and the joint venturers, Builder’s Risk Insurance, E&O , employer liability coverage, automobile liability insurance, as well as other pertinent coverages as may be determined by each unique construction project.
In addition to having the joint venture contract spell out the specific insurance, the parties need to make sure that all of the proper endorsements have been made. For example, each joint venturer should probably be named as an additional insured, and you may need waivers of subrogation against the joint venture and each participant to the JV.
Using Bonds to Shift the Allocation of Risk: Typically, joint venturers share their responsibility for bonding (in an amount equal to their percentage interests in the venture); sometimes, however, only one party has the credit to obtain the necessary bonding. If this is the case, it should be covered in the contract as, typically, each joint venturer is jointly and severally liable to the surety without limits to its percentage interests.
Utilizing a well-drafted joint venture agreement is vital to a company’s success in the current construction market. Failure to address key issues such as liability and risk allocation can irreparably harm the participants due to foreseeable and unforeseeable risks. If you are considering joining with another entity to participate in any construction project in Georgia, please contact an experienced construction lawyer to help you navigate these difficult waters and draft a contract that will help your business goals to be met.
Please leave your comments below!
by Mark A. Cobb
Wow, what a wonderful conference! How often can you say that you have heard that? Last week, I had the privilege of attending the American Bar Association (ABA) Forum on Construction Law Mid-Winter meeting in Naples, Florida. The Forum meetings always exceed my expectations, the continuing legal education hours enrich my practice, and there are many opportunities to meet with construction attorneys from all 50 states.
This year’s conference was entitled “Making Dollars and Sense of Construction Damages”, and, needless to say, the seminars and panel discussions were largely disscussions and presentations about construction damages. We explored current trends in drafting damage provisions in construction contracts, what construction professions can do to minimize their exposure after damages occur, how to calculate damages from the perspectives of the owner/project developer, the prime contractor, the subcontractor and the material suppliers. In addition, there were presentations on how to present damages to arbitration and mediation panels, judges and juries as well as innovative technological aids that make these complex numbers more easily digestible. Other topics which we tackled included the following:
- When to use Total Cost Claims calculation
- When to use Modified Total Cost Claims calculation
- Cumulative Impact Claims
- Change Orders and their impact
- Liquidated Damages and whether or not they are enforceable
- Diminished Bonding Capacity and whether or not these damages are recoverable
- Home Office Expenses and whether or not they are recoverable
- Field Office Expenses and whether or not they are recoverable
- Leased construction equipment vs. owned construction equipment
- Waivers and limitations of construction damages
- Limitation of Liability
- Direct Damages
- Consequential Damages
- No Damages for Delay provisions
- Expert Witness testimony (for proving damages)
- Demonstrative evidence, source data, input date, reliability of hardware, the process and reliability of the method used to calculate construction damages
- Termination for Convenience contract terms (and how they vary between the AIA, EJCDC and ConsensusDOCS)
- Damages resulting from Termination for Convenience
- Demobilization costs
- Insurance premiums rebates and surety bond rebates (after contract is terminated)
These topics (and many more!) help the Cobb Law Group to build an arsenal of knowledge that benefits all of our clients whether they are project owners, developers, general contractors, specialty trade subcontractors, or material suppliers. In particular, our statewide practice of filing Georgia Materialmen’s Liens inevitably requires proving of damages whether they be based upon invoices, contract costs, changes orders, or something else.
In addition to the formal presentations, a Construction Law Forum luncheon included a talk on the Federal Miller Act and various states’ Little Miller Acts. It is easy to forget that meeting the requirements to file a payment bond claim vary on federal projects and state projects, and this was an excellent reminder of some of the differences between the different types of public construction projects as well as an opportunity to learn from my colleagues how their states handle specific issues (differently than we do in Georgia!) In Georgia, for example, state construction projects and muncipal construction projects are subject to different state statutes.
Despite a very busy schedule, we managed to mingle with construction industry consultants and colleagues during the breaks and during the organized social events. One such event was a dinner hosted by a mediation group who shared with us stories about their successful mediation of construction disputes and how we can maximize our clients’ litigation dollar through mediation and arbitration.
For our clients, these ABA’s Forum on Construction Law provide us the a national network of experienced construction attorneys and consultants through out the country; for us, the seminars provide great education benefits and interaction among colleagues as well as a look into current construction law, lien law and surety bond law trends throughout the country. In case you can’t tell, I look forward to our next meeting!
by Mark Cobb
By statute and by discipline, every good lawyer must participate in continuing legal education. Recently, I participated in a very useful seminar which focused on joint venture contracting, and in the next few weeks, you can read about some of the great information we learned for those Georgia contractors who want to use joint venture contracts in Georgia.
What is a Joint Venture?
A Joint Venture (commonly referred to as a “JV”) is used to refer to two or more businesses which enter into a cooperative endeavor usually for a finite period or specific project (for example, to construct a particular building). It is possible for the parties in a joint venture to create a new, separate corporation, limited liability company, or partnership. But, it is also possible that the participants retain their individuality and operate collectively pursuant to a “joint venture agreement”. In either case, the parties in the JV share in the management, profits (and losses) and risks in accordance with the terms of their joint venture agreement or joint venture contract.
Why Georgia Contractors Should Consider Creating a Joint Venture:
There are many, many reasons why contractors may decide to join together in a short-term partnership in order to bid and build on Georgia construction projects. Some of the popular reasons for joint ventures include the following:
- The two business entities are in a better position to exploit potential opportunities under various federal set-aside programs;
- By themselves, a participant in a joint venture contract may lack the necessary resources to complete the project; however, by combining financial, physical and human resources in order to meet the challenges of a particular project, they may be able to successfully bid and perform under a construction contract;
- Joint Venture Agreements spread the associated risks between/among the JV participants; and
- Joint Ventures can be a useful vehicle for employing specific project delivery methods.
Naturally, there are advantages as well as disadvantages for creating joint venture contracting, such as:
Advantages of Joint Venture Contracting in Georgia:
- Joint Ventures are fairly easy and simple to implement; they are straightforward and a cost-effective means to combine resources;
- Because they are based upon Georgia partnership law principals, they are predictable;
- Joint Ventures and their governing documents allow a great deal of flexibility based upon the needs of the individual participants and the precise scope of the construction project;
- The limited scope–joint ventures are usually appropriate only on one construction project at a time; and
- Joint Ventures are a widely accepted vehicle on construction projects.
Disadvantages of Joint Venture Contracting in Georgia:
- Because Georgia partnership law applies, the participants have joint and several liability;
- Some participants are concerned about the sharing of trade secrets and processes;
- Joint Ventures add an additional layer of liability;
- Professional relationships with down-stream contractors as well as up-stream developers, architects and engineers must be managed; and
- There is a risk of potential philosophical differences or personality conflicts between the co-venturers.
Thankfully, a carefully crafted joint venture agreement can assuage many of these concerns; it is vital, however, that each of the parties to a JV Agreement and their attorney weigh all the risks and management issues in order to carefully draft the documents which will govern the joint venture during each phase of the project, from bidding to completion. In our next installment on Georgia joint venture contracting, we will stress the need for a quality, written contract between parties as well as the key issues that should be addressed in every joint venture agreement including the operational aspects, the internal management, risk allocation, and defaults and remedies available to the participants.
Please feel free to contact the construction lawyers at the Cobb Law Group if you are contemplating participating in a joint venture anywhere in the state of Georgia; we welcome comments from our readers regarding their experiences with joint venture projects.
To read Joint Venture Contracting in Georgia (Part II), click here.
To read Joint Venture Contracting in Georgia (Part III), click here.
To read Joint Venture Contracting in Georgia (Part IV), click here.
To read Joint Venture Contractingin Georgian (Part V), click here.