Rediscovering the Importance of Order of Precedence Clauses

In Florida, pay-if-paid clauses are enforceable, subject to the standard limitations imposed by most states that will enforce such clauses (clause must be clear that payment is contingent, etc.). In International Engineering Services, Inc. v. Scherer Const. & Engineering of Cent. Florida, LLC, 74 So.3d 531 (Fla. 5th DCA 2011), the court considered a subcontract that contained a clear and enforceable pay-if-paid clause. However, the subcontract also contained another standard clause incorporating the terms of the prime contract. The prime contract provided that the owner was not obligated to make final payment to the prime contractor until the prime contractor had fully paid all subcontractors. The Florida Court of Appeal held that this tension (subcontractors are not entitled to be paid until the GC is paid, but the GC is not entitled to be paid until the subcontractors are paid) created an ambiguity that was sufficient to render the pay-if-paid clause unenforceable.

It is fair to consider this opinion as another manifestation of judicial hostility towards pay-if-paid clauses. Certainly, a GC can expect the courts to look for any way to invalidate such clauses, even in states like Florida that are relatively generous with "freedom of contract" considerations. And the opinion also demonstrates the importance of adapting subcontract language where necessary to conform with the prime contract. Clearly, no one at the GC sat down with a copy of the prime contract and noted its payment procedures before they fired away a series of "standard form" subcontracts, and as a result, they set up a Catch-22 that, ultimately, they got caught in.

But this opinion also highlights the importance of order of precedence clauses in subcontracts. While this case presents an extreme example, it is an open question whether the Florida Court of Appeal would have reached the same conclusion if the subcontract had contained a clause that simply stated "Whenever the terms of this Subcontract are inconsistent with any term of the Prime Contract, the terms of this Subcontract shall prevail and take precedence over the terms of the Prime Contract." In such a circumstance, the Florida Court of Appeal would have had to think long and hard about how to use a term from the prime contract to make the subcontract ambiguous.

Poland: $3 Billion in PPP roads last year--$3+ Billion this year.

Poland spent more than $3 billion in 2011 building new roads with public private partnership delivery.  105 miles of road.  Another 125 miles are planned to be tendered for PPP construction this year.  With a 2011 expense budget of $110 billion, and a budget deficit of more than eight billion, coming up with $3 billion for new roads is not easy.  Although lenders are wary of financing toll roads with uncertain revenue streams,  with the government stepping in to guaranty the revenue stream these deals are getting done.

Myth Exposed? Public Agency Staff Cutbacks with Design Build

In February, during our monthly telephone conference, we continued our Division 4 Literature Review, with  “The Impacts of Design-Build on the Public Workforce,” authored by Douglas R. Gransberg and Keith Molenaar.  The article examined the validity of concerns raised in California that using Design-Build (“DB”) to deliver public infrastructure projects might result in staff cutbacks and erosion of capabilities within the California Department of Transportation.

The article analyzed the use of DB on public infrastructure projects in other jurisdictions to conclude that DB would not result in staff cutbacks within the California Department of Transportation.  The article determined that wider use of DB on California public infrastructure projects would result in the saving of millions of dollars by eliminating a second procurement process, and also result in increased certainty of project costs because of the likely reduction in change orders.

The article then analyzed some of the concerns commonly raised against using DB and determined that those concerns were not justified.  Specifically, the article determined that using DB on public projects does not compromise the quality of design, does not result in poor construction management practices, and does not result in the loss of skills and expertise needed by the public agency to carry out their essential in-house functions.

The article suggests that DB should be used as a delivery model for infrastructure projects. The article reached the following specific conclusions:

(1)        DB is a proven project delivery tool that promises faster project delivery, increased cost certainty and comparable quality;

(2)        The concern that DB will eliminate jobs for public engineers appears unfounded (just the opposite);

(3)        Implementing DB does not mean DOT’s will stop using the traditional design bid build method;

(4)        DB requires a well qualified public staff and requires them to exercise even more engineering judgment; and

(5)        The use of DB does not reduce the work load of public staff, but may result in a change of their role.

Perceptions die hard and it will be interesting to determine how much DB will be used on public infrastructure projects in California and other states over the coming years.

Joel Rhiner