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

Hammer:Anvil::Contract Retainage Provision:Statutory Bond Deadline

I recently had occasion to become acquainted with Florida's statutory scheme governing payment bond claims, and found that Florida's legislature had inserted some clever, common-sense language to resolve a problem commonly found in statutory payment bond schemes nationwide. The problem is best illustrated with a common example:

You are the lawyer for the rough grading subcontractor. Your client finished its work two weeks ago, and submitted its application for final payment. The general contractor paid, but withheld the traditional ten percent retainage. In a phone call following up on what they regarded as a short-pay, your client was told that their subcontract allows the GC to withhold retainage from all subs until the end of the project, and the GC intends to do so. Your review of the subcontract confirms this interpretation. The project will be completed in approximately 13 months. Your client has told you they are very concerned with the stability of the GC, and want to file a payment bond claim if at all possible.

In many states, the sub's lawyer will find himself or herself in a bit of a pickle. State statutory rules governing payment bond claims typically require such claims to be submitted within 90 or 120 days after the last day work or materials were provided. But if your client completes its work early in the project, the statutory deadline may come and go before your client is ever contractually entitled to receive the retainage payment. What do you do? Do you allow the deadline to run and forfeit the bond claim? Do you submit a certified claim under oath (as most sureties require) that says the sub is owed money when you know that, contractually, they are not owed money yet?

Florida's statute governing payment bond claims resolves this issue in the simplest and most straight-forward manner: by creating an exemption for retainage payments. Florida's statute provides: "The failure of a lienor to receive retainage sums not in excess of 10 percent of the value of labor, services, or materials furnished by the lienor is not considered a nonpayment requiring the service of the notice provided under this paragraph." [Fla.Stat. 713.23(d).] Thus, the failure to receive retention does not trigger the deadline for filing a notice of claim, and the parties can wait until the end of the project for their retainage (as they are contractually required to do).

Some states have resolved this issue through case law, some (like Florida) through legislation, but not every state has addressed the problem. Why not?

A Turn in Texas

For its mid-winter meeting this year the Forum was in Houston, Texas.   The presentations focused on mega-projects.  If you were unable to attend, look for the excellent program materials soon available on the Forum’s knowledgebase.  Of particular interest, Carl Popovsky and Carl Roberts presented on design control and delegation in BIM; Lauren McLaughlin and Mike Murphy surveyed financing vehicles for public projects; Bob Meynardie and Al Nagorazanski delved into the details of cost-plus accounting;  Robert D’Onofrio and Anthony Meagher cut through the welter of competing schedule analyses with a clear check-list of what really matters;  Trey Moye, Bennett Lee, and Danielle Cole shared helpful insights on ethical issues posed in the representation of joint ventures. 

Division 4 had a successful dinner on Thursday night, with 20 attendees.   The highlight, after suitable quantities of liquid refreshments were consumed, was Patrick Greene (Peckar Abramson) and Julie Muller (Wyatt Tarrant Combs) riffing duets on Elvis and Jazz standards.  They have promised a full blown floor-show for the Las Vegas conference!  Leon Meade promised to bring his guitar.  The joint breakfast with Division 2 featured Joe Cleves and Will Lichtig reporting fresh from their meeting on formulating the second edition of ConsensusDocs 300 collaborative form of project agreement.  Brian Pearlberg who heads up the ConsensusDocs effort was also in attendance.  Good news, I understand that ConsensusDocs will soon be available in a new Word compatible format.  This will make a big difference and should make ConsensusDocs much more user friendly. 

A visit to Houston was long overdue.  Houston, at 2.1 million inhabitants, is the fourth largest city in the U.S. by population.  With 601 square miles in area it is 12 times larger than San Francisco.   The city was founded in 1836, the year Sam Houston defeated Santa Anna’s Mexican forces in the decisive battle of the Texas revolution.   A decade later (1845) Texas joined the Union as a slave state.  In 1902 President Theodore Roosevelt authorized a $1 million public works project to continue to deepen the Houston shipping channel.   Today, Houston is the largest port in the United States by seagoing tonnage.   Shipbuilding during WWII, as well as the space boom and location of the NASA space center in Houston in 1961 have helped spur economic growth. 

Oil was discovered under Spindeltop Hill in East Texas in 1901.  Unlike California’s goldrush, which, in hindsight, was a mere catalyst to economic growth, the Texas oil boom is still going strong more than one hundred years later.  Today, Houston is home to Exxon Mobile, Penzoil,  BP, Unocal 76, Conoco Phillips, and other oil concerns.  Houston is also home to many oil industry support services companies.  Halliburton is based in Houston.   Hewlett Packard maintains a large presence there, as do Imperial Sugar and Minute Maid; 22 Fortune 500 companies in all.   The GSP of Texas, at $1.2 trillion annually, is second only to California’s.   

Meanwhile, Houston is the only major U.S. city with no zoning laws.   The result brings to mind the cantina scene from Star Wars.  Jogging  towards downtown along the busy Westheimer artery from our west loop location there are plenty of pot-holes, oily puddles, and cracked curbs.   Street lights and power lines are strung haphazardly.  There are car lots and single family homes next to tacquerias, new multi-story office buildings, funeral homes,  gas stations.  Permeating it all is the vague smell of oil.  Sidewalks are ad hoc and end abruptly.   Locals going about their business, invariably in cars, have no patience for foot bound disrupters of traffic.

On River Oaks I turned left into a residential area and suddenly found myself in the dominion of Houston’s one percent.   Houses there are styled after French chateaus, antebellum colonials, Victorian, and Craftsman.  They grace spacious tree-lined streets.  Some show off Miro and Moore sculptures in landscaped gardens.  This upscale neighborhood is separated from less affluent neighborhoods to the east by another main artery full of traffic.  With no sidewalk and no crossing-lights, the separation is every bit as effective as a moat. 

Downtown Houston on a rainy afternoon, after too many hours of construction law lectures, made me think of the opening scenes from Wall-E.  The post-apocalyptic feel is reinforced by the seven miles of underground tunnels full of fast food joints, barber shops, card shops, and Starbucks.  People working in tall buildings navigate this underground maze with practiced steps, from their office towers to lunch, to coffee, to their cars.  Things looked up in the theater district.  Nothing like a good lunch followed by a double bill of Pina3D at the Sundance Theater and The Rape of Lucretia at the Houston Grand Opera to lift your spirits.  I’m glad to be back in San Francisco, but Houston is a place I’ll keep an eye on. 

New Commentary on AIA A295 for Structural Engineers

Mark Menghini (Greensfelder, Hemker & Gale in St. Louis) has alerted us to a new commentary on the use of AIA Document A295 for structural engineers of record (SER).  The commentary is available at the ACEC* bookstore.  It's pricey for a 3 pages-and-a-little-bit document, $30 for members and $60 for non-members, but if you find yourself negotiating an AIA form integrated agreement on behalf of an SER it may be worth a look.  The Commentary is also reviewed in the October 2011 edition of CASE, the ACEC Newsletter.

The AIA A295 form contains the general conditions for the AIA's integrated form of agreement.  You will also want to consult the AIA's "Integrated Project Delivery: a Guide."

The SER Commentary has specific tips that you will want to take into account, and points out where the AIA C401 document (Architect Consultant Agreement) may not be sufficient without modifiction. 

Many thanks to Mark,

Roland Nikles

*ACEC refers to American Council of Engineering Companies. 

Integrated Project Delivery and the Cost Curve

Integrated project delivery is touted by many as a better mousetrap, a way to use less cheese and catch more mice.  Hard data is not yet in to back up some of the more exhuberant claims of increased efficiency, and this may be one reason owners are reticent to grab these new types of agreement.  Another reason, posed by my article that appeared in the December Hill Newsletter, may be that integrated project delivery shifts the cost curve to earlier in the project, and this goes against the grain of most developers.