5 Ways Construction Contracts Can Inadvertently Release Claim Rights

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If a contract doesn’t protect you when a project goes south, what’s it even there for?

Join this live webinar to hear the most tricky contract provisions contractors commonly overlook with construction lawyer Mary Salamone of Procopio.

Register for the live discussion and Q&A to find out:

  • 5 confusingly worded contract provisions to watch out for
  • Contractual requirements for notification letters
  • Change order language that can release rights

Transcript

Kathryn Barona (00:33):
All right, we’ll go ahead and get started. Thanks for joining us for this webinar with level-set and Procopio his attorney, Mary Salamone. She’s going to present about preservation of construction claims, and I will let Mary introduce herself. And if you have any questions regarding the material or topic, um, just type them in the chat box or the Q and a panel, either of those is fine. And we’ll be sure to get to your questions, or we can also have some time at the end where we’ll answer those questions and this is being recorded and it will be shared with you and I’m about a day or so you’ll receive their recording via email. So I’ll let Mary get started. Thanks.

Mary Salamone (01:53):
Thank you, Kathryn. And thank you for everyone, uh, to everyone for participating in today’s webinar. Um, as Kathryn mentioned, and as you can see on the PowerPoint slide, my name is Mary Salamone and I’m a partner with the Coveo law firm. Uh, just by way of a very brief self-introduction, I’ve been practicing exclusively in the area of construction law. Now for roughly 34 years, I’ve had the privilege to represent virtually every participant in the construction industry, ranging from owners, both public and private general contractors, subcontractors, design professionals, construction managers, and material suppliers. So I’ve seen projects from various vantage points, um, and then often assist me in trying to, uh, trying to find some resolution of a dispute, but far too often over my career, uh, I’ve encountered situations where clients have neglected to thoroughly review contracts that they have signed to find out, uh, that when I’m later retained his counsel and consulted that they have a problem in their contract documents themselves and their execution of the requirements in those contract documents.

Mary Salamone (03:13):
So the purpose of today’s webinar is to alert you to some of these contractual provisions that potentially cause problems by hampering or restricting in some way, your rights of recovery for whether they be scheduled delays or for additional work, you may have performed on the project. So let’s start by reviewing just a quick agenda. I had prepared of the topics that we’re going to cover in the next 30 minutes. So one of the first things I want to talk about is notice requirements, because this is really a driver, uh, for, for your ability to perfect claim rights. Um, the next subject are, I want to highlight for you certain contract clauses, uh, that have the effect of limiting, uh, potential recovery for claims. Third, I want to talk to you about, um, some change order issues and some inadvertent releases you may be giving through the change order process that you are probably not even cognizant of.

Mary Salamone (04:19):
And then the last thing I, I always have to stress the importance of, uh, essential record keeping because without this kind of fundamental information, uh, you’re going to have a hard time going into court and proving up your claim as the claimant. You bear that burden of proof or burden of persuasion with any trier of fact. And so that record keeping is essential. Um, I had a client once that said, when he met with his project team, he would refer to this as the rock pile. Um, all these records, constituted rocks, uh, in the rock pile. And he would tell his people, you always want your rock pile to be bigger than the rock pile of whether it be the owner or the general contractor, depending on what your role is on the project. Um, and, and so that’s how he thought of it and communicated it to people, but it’s an often overlooked issue.

Mary Salamone (05:13):
Um, and it’s critical because the old school way of building projects that, you know, I don’t want to get involved in this paperwork, just get out of my way and the crusty old superintendent saying, let me just get this job built. That’s not going to work today. That’s just not going to fly. So let’s jump in and talk about notice requirements to start. Uh, I cannot emphasize enough again, you have to read your contract in this regard and, and you shouldn’t just read the contract with this aspect in mind. At the time you’re looking at it, hopefully to decide what provisions you want to add or remove. You need to make sure when that handoff is done to whoever’s going to run that project for that they’re reading that contract and they know the timelines, they have theirs. I don’t think I’ve ever seen a contract that doesn’t have some type of notice requirement in it.

Mary Salamone (06:11):
Um, and whether it be the, the general has to provide notice to the owner or the sub has to provide owners notice to the general, uh, through some flow down provision, there’s always some type of a notice provision. And many contracts require an initial notification has to then be followed by supporting schedule analysis. That may be something like what we call a frag net or a time impact analysis, detailed costs and supporting documentation. So you want to implement strict compliance guidelines for each project. And that includes not only the timing of the notice given, but adhering to the method of delivery of that notice. Cause these contracts specify that as well, quite often. Now, what are the types of notices that could be given? Well, typically if you’re encountering some type of a differing site condition, you’re going to have to give notice Arizona missions in the plans and specifications, trigger, notice requirements changed or extra work, and then schedule delays and impacts that, that you may encounter out there.

Mary Salamone (07:16):
So I always tell people, you have to make sure you’re adhering to this. You can not assume that, uh, you know, the owner or the general contractor or a court is going to take a relaxed view of notice while I’m located in California. Uh, I had been invited that other jurisdictions on the East coast taken incredibly stringent view of notice. So basically that’s kind of, if you will, the ticket to enter the theater without that notice of, court’s not going to let you file that complaint. California is a little more relaxed about that. Um, California, here’s two more what I’ll call like a substantial compliance requirement, but you know, the courts are not going to turn and look the other way if there’s absolutely no notice given whatsoever. And, and there’s a rationale for giving the notice, the purposes, the owner has the ability to conduct an investigation and to actively participate in a resolution such that they could potentially mitigate damages.

Mary Salamone (08:17):
So there’s a reason for it. It’s not just done, you know, to torment you all. Um, that that’s just one of the rationales for it now to help everybody understand when they look at a contract, what is it a notice provision I’ve extracted from the AIA a two Oh one, 2017 edition of the general conditions in AIA, the American Institute of architects. This is a commonly used form contract used nationwide. Um, and under this type of contract, you’ll see, there’s a section titled it’s section 15.1 0.3 notice of claims. And it says claims by either the owner or the contractor when the condition giving rise to the claim is first discovered shall be initiated by notice to the other party claims by either party under this section shall be initiated within 21 days after the occurrence of the event, giving rise to such claim or within 21 days after the claimant first recognizes the condition giving rise to the claim, whichever is later. So these are types of, these are the types of notice provisions. You have to be very aware of and make sure that your project team is aware of, and that they’re adhering to them.

Mary Salamone (09:41):
This, uh, in the backdrop of this next slide, uh, is a contract that I’ve actually had to work with. Uh, regrettably, I received this contract after it was executed. Um, and there are just some landmines in this agreement. Um, and, and so I’m, I’m, I called out a few of their provisions here with regard to notice because they are incredibly harsh. Um, and, and this is the type of verbiage you want to be on the alert for when you’re reviewing a contract under this particular section 8.3, this dealt with requests for extensions of time. Um, the contractor was required within seven days of the discovery of the circumstances, constituting, a basis for contract adjustment, uh, to submit to the owner, uh, a complete or preliminary draft of that change order request. If the preliminary draft is submitted, uh, chill, then be followed within 21 days with a complete request for extension. That includes more detailed information. That’s kind of what are referred to in an earlier slide. Uh, this is just an example of what that language would look like. So this particular contract had a very short timeframe of seven days.

Mary Salamone (10:56):
The, the contract got worse though, because it provided that failure by the contractor to provide a timely incomplete request for extension in accordance with that section 8.3 shall constitute a waiver by the contractor of the right to a contract adjustment on account of such circumstances. So this had a very clear waiver provision in the event of non-compliance. It got worse in this agreement. Uh, the contract says contractor recognizes and acknowledges the timely submission of a complete request for extension is not a mere formality, but is of crucial importance to the ability of the owner to promptly identify, prioritize, evaluate, and mitigate the potential effects of changes. So in other words, the attorney that drafted this is articulating that this is just not a formality. There is a significance to this. So in other words, court or jury, um, I, I’m not requesting this just to be difficult and onerous.

Mary Salamone (12:07):
There’s a reason behind it. It goes on to say though, any forms of informal notice, whether verbal or, or written that included things like, uh, notations in meeting minutes, daily logs, uh, updated construction narratives, or look ahead schedules often you’ll see narratives accompany those, uh, this contract deemed those notations of impact is not being in compliance with the formal notice requirements of this contract. Uh, those are types of provisions. You either want to strike through when you’re reviewing these contracts, or you want to make sure that your project team is acutely aware of the fact that there has to be a discreet, separate written notice given either through an email or some kind of a formal letter, and you cannot rely on notifications given through meeting minutes, uh, schedule update narratives and the light, you know, daily logs. Uh, even if those logs are delivered to the owner, it will not be deemed effective for compliance here.

Mary Salamone (13:07):
Now I’m going to share with you quickly our case here in California, because it, it, it really kind of drives home. Some of these issues about noticing and how the courts will tend to treat them, uh, under this Gregory Penske versus city of Oakdale case. These are just some of the facts of that case in that particular case, the contract required a written change order for all modifications to price or time. And the contractor was required to submit a request for time extension within 30 days of any triggering event. And went on to say that no time extension would be valid unless it was made in accordance with the contract. Well, the contractor completed the work late under this particular project and the city assessed lit liquidated damages. That’s what L stands for for those of you that may not be familiar with that terminology just very quickly.

Mary Salamone (13:58):
Liquidated damages are, are typically a provision in contracts routinely seen in public works contracts. They may also be in private works contracts, but it provides a daily rate of damages. The owner will be damaged by an event. The project is delivered late. So in this particular case, the contractor argued that it was excused from giving any notice because their argument was that the city had caused all the delay on the project. Well, what was the holding of that case? The court basically blessed the fact that the contract could require certain procedures that the parties had to adhere to if they were requesting time extensions. So the court said, you know, that is perfectly acceptable, that those procedures could be outlined in the contract. So the court was not willing to negate those, um, and, and found that the contractors failure to give notice of a delay claim in accordance with the requirements of the contract, barred, any defense based on the city’s alleged fault.

Mary Salamone (15:02):
So basically the court refused to consider any evidence that the contractor wanted to offer that perhaps timely performance was rendered impossible by the city and through the city’s actions or inactions, and the court upheld the assessment of liquidated damages. So this kind of drives home. The point of how critical notice can be in these contracts. These are just a few tips for drafting a delay letter. I’m not going to go over all of them. I’m just going to highlight a few, but you want to make sure that you have the proper recipient of any notice that often is not the person on the job site that you may be dealing with day to day. And you may see reference in the contract that formal notice of any kind of schedule impact or, um, you know, additional compensation request should be directed to, for instance, the director of public works, um, or the contracting officer or the officer in charge words to that effect.

Mary Salamone (15:59):
You want to provide an introductory sentence or paragraph telling them what you’re going to tell them that that’s kind of always the rule when you write anything, um, tell people what you’re going to tell them, tell them then, and then summarize what you just got done, telling them. Uh, you want to highlight, you know, the date, you encountered a change condition, any pertinent information. You have to make sure you’re drafting these things as if you’re explaining them to a third party with no knowledge whatsoever. Uh, and you can see I’ve listed here. Some of the other requirements such as making sure you’re providing detailed backup of photos, emails, RFI, references, things in the light. Next, I’m going to transition now to talking about some contract clauses that limit recovery, and the first one I’ve put up here as a no damages for delay clause. What are those?

Mary Salamone (16:49):
Well, this is an example of some of the language that you would see that we would call a no damages for delay clause. It basically says not withstanding any other provision of this contract, the contractor will not be entitled to any, I’m sorry to claim any liabilities resulting from any delay or disruption and a claim for an extension of time will be the contractors. I’m sorry, that should be sold in that role. So an exclusive remedy in respect of any delay or disruption and the contractor will not be entitled to make any other claims. So in other words, the order can give you a time extension, but that’s your sole remedy. And I’ve seen these provisions in subcontracts as well. So I don’t want you to think just because I’ve shown this particular example that it’s exclusive to a contract between an owner and a general, it is not.

Mary Salamone (17:40):
So this is an incredibly harmful clause. Uh, if you’re on the receiving end of it, if you’re an owner, you’re going to love it. If you’re a general, um, forcing it on a sub, you’re going to love it. Um, but if you’re on the receiving end of it, these are types of clauses. You want to make sure you strike through, uh, depending on the nature of the delay in the jurisdiction where the project is located, uh, the contractual prohibition against delay damages may very well be enforceable. Uh, there’s very limited exceptions. Typically they have to be things like bad faith. You have to show fraud, gross negligence, active interference, or abandonment of the contract. And, and what do we mean by abandonment of the contract? Well, basically the parties, both of the parties failed to follow the change order process. And there are significant changes that were being made to the project drawings. So you have to show both of those things now in California, for instance, these types of causes are not allowed in public works contracts, but as far as private works are concerned, these are, these are fair game.

Mary Salamone (18:49):
Next I’m going to move to discussing per diem clauses. What do I mean by that? Well, again, here’s an exemplar clause that you may see it says contractor shall be reimbursed for general conditions in general requirements costs at the sum of $10,000 per day for such compensable delay that occurs over the entirety of the contractor’s performance of the work. Now, sometimes in the industry, these have also been referred to as reverse liquidated damages clauses. So under the liquidated damage clause, I explained earlier that an owner will ask a contractor, uh, that this is the amount of damages you’re going to OMI in the event, you delay the project. This says in the event, the owner delays the project, what the contractor is going to be entitled to receive, and what you have to make extremely careful of is that you’re, you’re looking at that contract language very carefully to make sure it’s not scooping up, not just your costs as the general contractor, but sometimes this verbiage can include subcontractor costs.

Mary Salamone (19:51):
And I had a case where the general contractor did not carefully read this verbiage. They were asked to submit a rate, a per diem rate, uh, as part of, um, a formal bidding process. They did not understand that the contract was asking not only for the general contractors damages in the event of delay, but was also in to include the subcontractors. They inadvertently just included enough money to cover their costs. So that’s why these types of provisions, uh, you need to carefully review them. And if, if you’re required to provide some kind of a per diem, you have to make sure what the scope of it.

Speaker 2 (20:29):
Yes.

Mary Salamone (20:33):
Now, um, I’m, I’m wanting to discuss, uh, another issue about some potential, uh, contract clauses that limit recovery. This is again a, an extra from that, uh, very draconian contract, uh, that, that I’m dealing with for another client. Uh, and I’ve kind of, uh, put this under the header of requirements after claim denial and under this particular section, which is titled owner’s decision. It talks about the fact that the owner is going to make a good faith determination within 30 days after the owner receives a completed claim. But it goes on to say that if there is no good faith determination that’s issued by the owner within that time period, the claim will be deemed denied. Um, and project staff, I don’t believe understood that they just couldn’t wait and wait and wait for the owner to respond because the owner in this case never responded to anything.

Mary Salamone (21:35):
Um, because of this verbiage, that that claim would therefore be deemed denied because then if the claim is deemed denied, it triggered some other obligations to the contractor. In this case, it says if, if the contractor disputes the good faith determination or deemed denial, then it shall personally deliver to owner a written protest within 30 days. And then it says if the contractor fails to do so, the good faith determination or deemed denial of the claim will without, for further notice become final and binding upon contractor. So you have to make sure that you are not only reading notice requirements, but you’re reading requirements that may be embedded in a claims process that you may see either under headers, such as request for time extension or change order administration.

Speaker 2 (22:34):
Okay.

Mary Salamone (22:35):
This is a, a clause I took, uh, from a completely different project. And in this case, uh, I was representing a subcontractor who had millions of dollars of, uh, claims for change orders. And there was verbiage, uh, in the contract that attempted to oppose a limitation on change order recovery. And it said payment on account of pending changes made by owner shall be made only if contractor and here it was referring to the general contractor. We received a change order from the owner for subcontractors change work, and then contractors liability to subcontractor shall be limited to the amount of the owners change order allocable to subcontractors changed work. In this case, the general contractor was mounting a defense that we never received a change order, uh, from the owner for this, it was unclear to the subcontractor why that occurred, frankly, it could have been as a result of actions or inactions by the general contractor failure to give by the general contractor failure to meet deadlines that the contract imposed on the general contractor. But, you know, for those subcontractors listening to today’s webinar, this is the type of language you’re probably going to want to strike through, uh, because if you’re in a jurisdiction where this is enforced, you’re at the mercy of the general contractor who may not have necessarily adhere to the contract and protected your interests accordingly, uh, and under some verbiage like this, you would, you would potentially bear the burden.

Speaker 2 (24:18):
Yeah.

Mary Salamone (24:21):
Now let’s move to another contract clause. This one, uh, falls under the nomenclature of waiver of consequential damages. Well, probably many of you have had this in your contract. You may have not necessarily understood entirely what it is. It’s very common, uh, in contracts to see what we call a mutual waiver of consequential damages and consequential damages are typically damages that flow from some type of a breach that are not, you know, added general conditions, cost, or lost labor productivity, things of that nature. Um, in this case, uh, it defined those consequential damages for the contractor. It as, uh, damages incurred by the contractor for the principal office expenses, including the compensation of personnel station there, uh, for home office overhead for impairment of balmy capacity, for losses of financing, business and reputation, and for loss of profit. So, uh, if there’s some breach that you feel is caused you to be on that project longer, this provision says, you know, we’re not going to compensate you for personnel that may be stationed at the home office for, you know, for those overheads, for the fact that, you know, you couldn’t go out and bid on other projects, um, things of that nature, they would fall under the description of consequential damages.

Mary Salamone (25:57):
Uh, and you would not be able to seek recovery for that,

Mary Salamone (26:04):
Moving to change orders. Uh, I want to start with just a few words of caution. I, I have many, but I had limited time. So these are more of the highlights. You always want to avoid taking verbal orders to perform extra work. These typically are not going to be binding on public agencies. So whether you’re a general or whether you’re a subcontractor, you really don’t want to be taking verbal orders from anybody, uh, to perform extra work. You want to get that in writing. Um, if you were directed to perform extra work, you should be tracking labor and material costs on a daily basis. And you’re going to want, you know, if you’re dealing with the owner and you’re the, you’re going to want the owner, uh, to sign off on tickets, if you’re a sub, you’re going to want the general to sign off on your tickets.

Mary Salamone (26:49):
If the parties can’t agree that it is actually, um, added scope, at least get a sign-off verifying your, the crew size out there, the equipment, the hours work that then minimizes the debate that may ensue later on. Um, you know, once you give maybe a ruling on me and the entitlement, then at least the quantification is there and it’s not hopefully debatable. And, and you don’t want to have, um, people out there on your site just randomly signing anything that’s put in front of them. I was representing a general contractor and he had a superintendent out there that basically signed whatever was put in front of him. Um, and as a result of that, you know, there was an allegation that we were bound to pay those tickets. Um, he later then had me amend his contract wisely to state. Only the project manager had the ability to sign up on tickets and any signature from any individual on the site under that designation would not be binding. And you do not want to be signing change orders with zero days filled in. Um, if you feel that you have a time impact, that’s when the acronym TBD, um, is critical to be determined.

Mary Salamone (27:59):
Now I’m going to show you a sample change order because sometimes in the language, you’ll see, there’s this very fine print at the bottom of this change order as an attorney, my eyes instantly focused on the small print, a lay-person doesn’t focus on the small print like I would. Um, and, and in that small print is embedded some very dangerous language that you would probably not recognize is such in reading it. Um, I’ve highlighted it in red print. Um, and I’m going to explain to you why that language has such significance in the legal world. It says by signing this change order, the contractor acknowledges and agrees that the stipulated compensation includes payment for all work contained in the change order. Plus all payment for the interruption of schedules, extended overhead costs, delay, and all impact ripple effect or cumulative impact on all other work under the contract.

Mary Salamone (28:56):
What that means is if you have a project where you have dozens of changes and they may be rather small in and of themselves, but when you aggregate them, you get to what we call the death by a thousand cuts. And now you’re hemorrhaging on this project because everywhere you turn, there’s a change signing change orders that have that verbiage on it, release that claim. Um, we had a client that did this, or they didn’t understand the language. Of course, the ownership argued, Oh, no, you sign these release. These claims you have to be mindful. These words have impact, and they may not only be in your change orders. If, as I noted here in the box to the left, um, you got to review your contract because your contract may have a provision in it that States that as well. I did want to talk about essential record keeping that’s a subject.

Mary Salamone (29:49):
I, I can’t, uh, you know, give a webinar without at least talking to, to some degree. Um, you have to make sure you’re keeping certain documents to bear your burden of proof. For starters, that would mean an estimate and all your bid documents, your takeoff, uh, worksheets, any management costs, et cetera. I represented a very large international contractor once they lost their bid on a contract when you lose your bid, uh, it becomes a real problem for me, uh, trying to prove up your damages in terms of demonstrating what you thought at the time you bid the project about, you know, production rates, et cetera. Uh, another very key document daily progress reports. And these have to be filled out in detail in California. What I tell clients is don’t tell me it’s sunny and 75. It’s that every day you need to give more meaningful detail, um, photographs and videos that goes to the old adage of a picture speaks a thousand words.

Mary Salamone (30:47):
It’s true, meeting minutes, uh, maintaining your baseline schedule and monthly updates and critical is your detailed job cost report. Because from that is what we measure, what the harm was. So I always tell you, you have to remember that written documents are given more weight by a trier of fact than any person’s memory is going to, uh, if it wasn’t written it wasn’t said a trier of fact is going to rely more heavily on what the documents are saying than what people are testifying based on memory occurred, you know, often three years ago from when they’re taking the stand or sitting in a deposition. So at this point, we’re right at 1130, I’m happy to address any questions if we can. And unless our, our, our time is up, uh, Kathryn, I would defer to you on that.

Kathryn Barona (31:39):
That was perfect timing, Mary great presentation. Thank you so much. And I do have a question, um, while we wait to see if anyone else does about, um, which of the provisions you’ve talked about affect the right to file a mechanic’s lien or do any of them,

Mary Salamone (31:59):
Um, I would tell you a mechanic’s liens are, are, are a very statutory intensive animal that are somewhat outside the scope of this presentation. Um, I would, I would tell you to be mindful of what jurisdiction you’re in, in terms of what you’re going to put in your mechanics lien, for instance, in the state of California, if you were found to have willfully overstated, the amount of VAT lien, the court will render that lien, null and void. Now, I think a court or a trier of fact may be hard pressed to find that, um, you put in amounts that you believe you’ve adequately satisfied. The notice requirements for is constituting willful overstatement, but there are a whole slew of other statutory requirements California would have to adhere to in order to enforce mechanics lien.

Kathryn Barona (32:52):
Thank you. Great answer. Um, anyone out there don’t be shy. Please ask your questions about anything that Mary covered here. And if you have other questions about construction, payment, lien, rights management, um, anything related to getting paid as a contractor, you can go to level-set dot com and just at the top there, it says, ask a question and you just go right there. And we have a whole community of construction attorneys across the country,

Mary Salamone (33:25):
And I’ve also included in this last slide, my email information, um, anyone on the call, you can feel free to reach out to me if you’re too bashful to ask a question during the webinar or something else is cropped up since the webinar feel free to send me an email and ask me a question.

Kathryn Barona (33:43):
Wonderful. Thank you, Mary. We really appreciate sharing all your knowledge and insight and all your experience that you have with,

Mary Salamone (33:54):
You know.

Kathryn Barona (33:55):
Yeah. Um, yes, you’ll get a copy of the slides with the recording tomorrow. And if that’s all less colon questions here,

Speaker 2 (34:12):
SI,

Kathryn Barona (34:17):
I think, uh, we have a question from Greg. Can I cause me at it about if a code, Oh, he’s typing. You see that? I can see it.

Speaker 2 (34:29):
Okay.

Mary Salamone (34:41):
I think I’ve got to tell Greg, he may want to email me this, uh, directly, cause it sounds like it’s a very specific question to a project he is working on, um, that, uh, looks like from waste types, such as far as, uh, as far as going to be outside the scope of this particular webinar. But I’m happy to answer your question, Greg, if you want to email me at that email address up on the screen,

Kathryn Barona (35:06):
And we did get a couple of comments that this was a very informative presentation and thank you so much. So I think we will conclude now and thanks everyone. Have a great day. Thank you again, Mary.

Mary Salamone (35:21):
Thank you everyone. Bye bye.