Price Structuring in Construction Contracts: Advantages and Pitfalls of GMP, Cost-Plus, and Fixed Cost Contracts Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1. THURSDAY, APRIL 30, 2020 Presenting a live 90-minute webinar with interactive Q&A Gary L. Brown, Partner, Kelley Kronenberg, Ft. Lauderdale, Fla. Ray Garcia, Sr. Attorney, Law Office of Ray Garcia, Miami
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
THURSDAY, APRIL 30, 2020
Presenting a live 90-minute webinar with interactive Q&A
Gary L. Brown, Partner, Kelley Kronenberg, Ft. Lauderdale, Fla.
Ray Garcia, Sr. Attorney, Law Office of Ray Garcia, Miami
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Gary L. Brown, Esq.
Construction Defect Litigation
Complex Commercial Litigation
General Business Litigation
PRICE STRUCTURING IN
CONSTRUCTION CONTRACTSAdvantages and Pitfalls of GMP,
Cost-Plus, & Fixed Cost Contracts
Strafford
6
Construction projects present many challenges. From the time of contracting
through project completion (and beyond), these challenges often
jeopardize finishing a project on time and within budget,
and can result in significant losses to those involved.
In this seminar, we will discuss the benefits and drawbacks of GMP and Fix-Priced
construction contracts, including typical insurance and indemnity provisions, as well
as provisions addressing project changes and delays, and finally,
dispute resolution and termination.
*Portions of these written materials are reprinted with the permission of the copyright holder and publisher from Florida Construction Defect Litigation by Gary
L. Brown, copyrighted by ALM Media Properties, Inc. and published by Daily Business Review Books, a division of ALM Media, LLC. All rights reserved.
Copies of the complete work may be ordered online at www.lawcatalog.com or http://www.lawcatalog.com/productdetail/18108/florida-construction-defect-
▪ Fla. Prac., Constr. Law Manual § 7:18 (2014-2015 ed.
(“In the case of concurrent delays, the burden is on the
party claiming the liquidated damages to show clear
evidence of apportionment.”).
17
Insurance and
Indemnification
18
A Broad Form Agreement is Most Expansive • Covers Indemnification for All Damages Arising Out of Performance of the Contract, Even Where the Damage Was Caused in
Whole or in Part By the Indemnitee
• Shifts the Entire Risk of Loss From the Indemnitee to the Indemnitor
• “All Damage Arising Out of Indemnitor’s Performance of the Contract, Whether or Not Caused in Whole or in Part By
Indemnitee’s Acts or Omissions”
• Negotiate More Money for the Additional Risk or Seek Less Onerous Form of Indemnity Such as “Intermediate” or “Limited”
Most Favorable for Owners or Contractors Vis-à-vis Subcontractors
19
An Intermediate Form Agreement is The Middle Ground Between Broad and Limited Indemnity
• Protects the Indemnitee From All Liability, Unless the Indemnitee is 100% at Fault• “Caused in Whole or in Part by Indemnitor, Regardless of Whether or Not Caused in Part by a Party Indemnified
Hereunder.”
• An Improvement Over the Broad Form, But Still Shifts the Risk of the Entire Loss to the Indemnitor Unless the Indemnitee is Solely at Fault
Still Favorable to Owners or Contractors
20
A Limited Form Agreement Limits an Indemnitor’s Obligation to Damages Caused by the Indemnitor’s Negligence, Avoiding an Obligation to Indemnify for Damages Caused in Whole or in Part by the Indemnitee
• “Claims, Losses, Damages and Expenses, But Only to the Extent Caused in Whole or in Part by the Negligent
Acts or Omissions of Indemnitor”
• Indemnitor Only Responsible to the Extent of its Own Liability, on a Comparative Basis of Fault; Even Where the Indemnitee is Partially at Fault
• AIA A201 and ConsensusDocs 200 Appear to Follow This Form of Indemnity
Most Favorable to Indemnitor
21
Without limited form indemnity, an at fault party would not be entitled to indemnification at common law.
• Common law indemnity transfers the entire loss from one party to another only where the indemnitee is without fault and the liability is vicarious:
• A weighing of the relative fault of tortfeasors has no place in the concept of common law indemnity: (1) the
indemnitee must be faultless and (2) the indemnitee's liability must be solely vicarious for the wrongdoing of another.
• Zieger Crane Rentals v. Double A Ind., Inc.,16 So.3d 907, 911 (Fla. 4th DCA 2009).
22
§3.18indemnification
To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect,
Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or
death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly
employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity which would otherwise exist as
to a party or person described in this Section 3.18. (Emphasis added.)
23
mutual
indemnification
provisions
The following provisions appear in ConsensusDocs 200-2017, Standard Agreement and General Conditions Between Owner and Construction:
10.1 INDEMNITY
10.1.1 - To the fullest extent permitted by law, Constructor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members,
consultants, agents and employees, the Design Professional, and Others (the Indemnitees) from all claims for bodily injury and property damage, other than
to the Work itself and other property insured, including reasonable attorney’s
fees, costs and expenses, that may arise from the performance of the Work, but only to the extent caused by the negligent or intentionally wrongful acts or
omissions of Constructor, Subcontractors, Suppliers, Sub-subcontractors, or anyone employed directly or indirectly by any of them or by anyone for whose
acts any of them may be liable. Constructor shall be entitled to reimbursement
of any defense costs paid above Constructor's percentage of liability for the underlying claim to the extent provided for by § 10.1.2
24
mutual
indemnification
provisions
10.1.2To the fullest extent permitted by law, Owner shall indemnify and hold
harmless Constructor, its officers, directors, members, consultants, agents, and employees, Subcontractors, Suppliers, or anyone employed directly or
indirectly by any of them or anyone for whose acts any of them may be liable
from all claims for bodily injury and property damage, other than property insured, including reasonable attorneys' fees, costs, and expenses, that may
arise from the performance of work by Owner, Design Professional, or Others, but only to the extent caused by the negligent or intentionally wrongful acts or
omissions of Owner, Design Professional, or Others. Owner shall be entitled to
reimbursement of any defense costs paid above Owner's percentage of liability for the underlying claim to the extent provided for by §10.1.1.
25
mutual indemnityprovisions
The ConsensusDocs indemnity provisions are different than the ones in the AIA A201, with the
primary difference being the ConsensusDocs have a “mutual” indemnity provision.
Under the ConsensusDocs, either party can recover its defense costs to the extent these costs
exceed a party’s respective percentage of liability.
26
`[t]he general rule of indemnification is that an indemnitor who has notice of the
limited formagreement
The foregoing provisions are examples of a limited form agreement.
• Provides an owner with the least scope of indemnification since it only covers damage “to the extent caused
by” the contractor (or anyone working under the contractor).
• Where both parties are at fault for the loss, the contractor is only obligated to compensate the owner for the contractor’s share of the loss.
In order to be enforceable, broad and intermediate forms of agreement
must comply with certain statutory requirements.
• Because these indemnity provisions seek to “charge the (indemnitor)…to answer for the … default or
miscarriage of (the indemnitee)”, they must be “in writing and signed by the party to be charged therewith or by some other person by him or her thereunto lawfully authorized.” Fla. Stat. § 725.01 (2016).
27
limiting indemnity to insurable damages
While not advisable from the prospective of the
owner (or contractor vis-à-vis a subcontractor),
indemnification can be limited to the extent of
insurance coverage. A provision accomplishing
this might read:
“The parties mutually acknowledge that the amount of
indemnity provided for herein shall not exceed the limits of aggregate General Liability and Umbrella insurance provided by the Contractor (Subcontractor).”
28
limiting indemnity to insurable damages
Typically, the liability coverage offered by a contractor or
subcontractor is $1,000,000 per occurrence, with $2,000,000
aggregate; and umbrella policies are typically in the range
of $5,000,000 or $10,000,000.
While most construction projects likely would not involve claims
for property damage exceeding the above limits, it is conceivable that projects, such as high-rise condominiums or other large commercial projects, could. Regardless of property
damage, a catastrophic injury claim resulting from a building collapse could likely result in claims exceeding these limits.
29
construingindemnity provisions
Florida courts disfavor contracts wherein a party seeks to indemnify itself from
its own negligent or wrongful acts and impose express requirements on such
provisions.
• Zieger Crane Rentals v. Double A Ind., Inc., 16 So.3d 907, 911 (Fla. 4th DCA 2009).
Indemnity provisions must express “an intent to indemnify against the
indemnitee's own wrongful acts in clear and unequivocal terms.”
• Cox Cable Corp. v. Gulf Power Co., 591 So.2d 627, 628 (Fla. 1992).
30
What are
the rules
again?
All indemnity contracts are subject to the general rules of contract
construction, and when unambiguous are typically a matter of law for the courts to resolve.• Dade Cnty. Sch. Bd. v. Radio Station WQBA, 731 So.2d 638, 643 (Fla. 1999).
• Improved Benev. and Protected Order of Elks of World, Inc. v. Delano, 308 So.2d 615, 617 (Fla.
3d DCA 1975).
If found to be ambiguous, courts will construe the agreement against the party
who drafted it, and will admit extrinsic evidence to assist the court in its interpretation of the ambiguous agreement.• Hurt v. Leatherby Ins. Co., 380 So.2d 432, 434 (Fla. 1980).
• C R Mall, Inc. v. Sears, Robuck and Co., 667 So.2d 1017, 1018 (Fla. 5th DCA 1996).
• Stamm, 660 So.2d at 1080.
• Westinghouse Elec. Corp. v. Prudential Ins. Co. of Amer., 547 So.2d 721, 722 (Fla. 1st DCA
1989).
Furthermore, courts strictly construe indemnity provisions in favor of the
indemnitor.• Bodon Industries, Inc. v. Brown, 645 So.2d 33, 36(Fla. 5th DCA 1994).
• Sol Walker & Co. v. Seaboard Coastline R. Co., 362 So.2d 45, 49 (Fla. 2d DCA 1978).
31
`[t]he general rule of indemnification is that an indemnitor who has notice of the
“vouching in” rule
Where an indemnity provision satisfies the foregoing
requirements, a contactor that fails or refuses to comply with its
indemnity obligations may be bound by an adverse outcome
against the owner:
• [t]he general rule of indemnification is that an indemnitor who has notice of the
suit filed against the indemnitee by the injured party and who is afforded an
opportunity to appear and defend it is bound by a judgment rendered against
the indemnitee as to all material questions determined by the judgment...Florida
courts often refer to the effect of this rule as `vouching in’ the indemnitor.’
• Ashtead Group PLC v. Rentokil Initial PLC, 7 So.3d 606, 609 (Fla. 2d DCA 2009).
32
What are the
rules again?
Judgment rendered in the underlying action is binding for the purpose of
enforcing the indemnity agreement against the indemnitor with regard to
the material facts litigated in the main action.• Ashtead Group 7 So.3d at 609
Where indemnitor or liability insurer has notice of proceeding against its
indemnitee or insured and is afforded an opportunity to appear and
defend, a judgment rendered against indemnitee or insured, in the
absence of fraud or collusion, is conclusive against the indemnitor or
insurer as to all material matters determined therein.• Gallagher v. Dupont,918 So.2d 342, 348 (Fla. 5th DCA 2005).
33
`[t]he general rule of indemnification is that an indemnitor who has notice of the
anti-indemnitystatutes
Must comply with Fla. Stat. § 725.06(1) (2018):
“Any portion of any agreement or contract… (which) promises to indemnify or hold harmless the other party to the agreement,
contract… for damages … caused in whole or in part by any act, omission, or default of the indemnitee arising from the contract or
its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the
indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid
documents, if any…”
The statute further provides that:
• “…such indemnification shall not include claims of, or damages resulting from, gross negligence, or willful, wanton or intentional
misconduct of the indemnitee or its officers, directors, agents or employees, or for statutory violation or punitive damages
except and to the extent the statutory violation or punitive damages are caused by or result from the acts or omissions of the
indemnitor or any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their
respective employees.
34
`[t]he general rule of indemnification is that an indemnitor who has notice of the
void
As reflected in the emphasized language, whenever a party seeks indemnity for its own fault (even partially) to
be valid, the provision must be limited in amount, be part of the project specifications or bid documents, and cannot (except to the extent caused by the indemnitor) include claims resulting from the indemnitee’s gross negligence, willful, wanton or intentional misconduct, statutory violations or punitive damages.
Any portion of the provision that does not comply with the statute will be rendered void, but the remaining
portions are enforceable.• Bradfield v. Mid-Continent Cas. Co., 143 F. Supp. 3d 1215, 1240 (M.D. Fla. 2015).• Linpro Florida Inc. v. Almandinger, 603 So.2d 666, 667, fn 1 (Fla. 4th DCA 1992).
35
hold harmlessprovisions
Whereas indemnification provisions relate to third party claims against an owner arising from the contractor's work, hold harmless provisions protect the owner against first party claims of the contractor.
A hold harmless agreement is a contractual arrangement whereby one party assumes the liability inherent in a situation, thereby relieving the other party of responsibility.
Florida courts consider a hold-harmless clause to be an exculpatory clause, which releases one party from his own error (first-party liability).
A “hold harmless” agreement can release a wrongdoing indemnitee where an indemnity agreement would not have the same effect. Van Tuyn v. Zurich Amer. Inc. Co., 447 So.2d 318 (Fla. 4th DCA 1984).
36
hold harmlessprovisions
While indemnity provisions address third-party liability, and hold-harmless provisions are exculpatory and address first-party liability, Florida courts often interpret both provisions using the same set of case law, with the same limitations on liability.
As one court explained:
“Although there is a distinction in definition between an exculpatory clause and an indemnity clause in a contract, they bothattempt to shift ultimate responsibility for negligent injury, and so are generally construed by the same principles of law. An exculpatory clause purports to deny an injured party the right to recover damages from the person negligently causing his injury. An indemnification clause attempts to shift the responsibility for the payment of damages to someone other than the negligent party (sometimes back to the injured party, thus producing the same result as an exculpatory provision)".
- Kitchens of the Oceans, Inc. v. McGladrey & Pullen LLP, 832 So.2d 270, 272 (Fla. 4th DCA 2002).
37
additional insuredprovisions
The AIA’s additional insured provisions appear in the A201-2017 Document (General Conditions of the Contract):
§ 11.1.1. The Owner, Architect, and Architect’s consultants shall be named as additional insureds under the Contractor’s commercial general liability policy or as otherwise described in the Contract Documents.
38
additional insuredprovisions
With respect to additional insured coverage, the ConsensusDocs 200-2017 provide as follows:
10.4 Additional General Liability Coverage Owner - The Owner shall/shall not require Constructor to purchase and maintain additional liability coverage.
10.4.2 OCP Constructor shall provide an Owners' and Contractors' Protective Liability Insurance (“OCP”) policy with limits equal to the limits on CGL specified, or limits as otherwise required by Owner.
Any documented additional cost in the form of a surcharge associated with procuring the additional general liability coverage in accordance with this subsection shall be paid by Owner directly or the costs may be reimbursed by Owner to Constructor by increasing the Contract Price to correspond to the actual cost required to purchase and maintain the coverage. Before commencing the Work, Constructor shall provide either a copy of the OCP policy, or a certificate and endorsement evidencing that Owner has been named as an additional insured, as applicable.
39
additional insuredprovisions
Under the ConsensusDocs, unlike the AIA agreement, there is no default duty to provide any additional insurance coverage to any party.
Instead, the parties elect whether the contractor will be required to provide additional insurance coverage by checking designated boxes.
If the parties elect to require the contractor to provide additional insurance coverage, the owner is responsible for paying any additional costs incurred in obtaining the coverage.
40
additional insuredprovisions
Construction contracts often require that a contractor provide commercial general liability and other insurance coverages, naming the owner as an additional insured. (See e.g., AIA and Consensus Docs)
The failure to obtain such insurance is a breach of contract which can subject the breaching party to liability for claims which otherwise would have been covered by insurance:
• Cone Bros. Contracting v. Ashland-Warren, Inc., 458 So.2d 851 (Fla. 2d DCA 1984)(finding subcontractor in breach of subcontract for failure to procure insurance naming general contractor as additional insured and liable for amounts general contractor had to pay to personal injury plaintiffs in actions that arose out of construction).
• Capitol Envtl. Svcs., Inc. v. Earth Tech, Inc., 25 So.3d 593 (Fla. 5th DCA 2010)(subcontractor’s contractual breach for failure to name contractor as additional Insured rendered subcontractor liable for all damages causally related to the breach including contractor’s costs of defense and settlement payment for injured motorist claim, as well as attorney’s fees and costs incurred in declaratory judgment action against subcontractor’s liability carrier seeking coverage for the claim).
• Rouse-Miami LLC v. Bentley’s Luggage Corp., 948 So.2d 928 (Fla. 3d DCA 2007)(finding breach of lease agreement where tenant obtained insurance with substantial deductible despite lease requirement to secure “non-deductible” liability insurance).
41
the additionalinsured language
Watch out for language of the “additional insured” definition or endorsement in the insurance policy.
Blanket vs. Specific Endorsement
The language will dictate whether the policy will cover the additional insured only in vicarious liability situation (for the fault of the named insured only), or instead even when only the additional insured is at fault.
• Container Corp. of Am. v. Md. Cas. Co., 707 So. 2d 733, 735 (Fla. 1998)(language of endorsement is controlling)
• Florida Power & Light Co. v. Penn Am. Ins. Co., 654 So. 2d 276 (Fla. 4th DCA 1995)(no vicarious liability needed for AI coverage)
• Garcia v. Fed. Ins. Co., 969 So. 2d 288 (Fla. 2007)(covering only vicarious liability of named insured).
42
proof of
insurance
Common practice is to show proof of insurance (including additional insured
status) in the form of a Certificate of Insurance.
• Does not itself create coverage
• Includes disclaimers • Does not alter terms of the underlying policy
• Does not create coverage if none otherwise exists
An additional insured should always obtain the required endorsements
instead of relying solely on certificates of insurance.
• Additional insured status is typically conferred by endorsement• A review of the endorsement or other policy language is critical to verifying
compliance with contractual requirements for AI coverage
• Insurer’s obligation to additional insured is governed by insurance policy or endorsement
• Not what named insured agreed to do in its construction contract
43
the dutyto defend
Construction contracts that require indemnification and
hold harmless provisions often include an obligation to
defend the claims brought by third parties:
“Contractor shall indemnify, defend, and hold harmless
Owner …”)
44
duty
to defend
The duty to defend has no roots in common law; it is purely a statutory or contractual duty, and does not exist in the absence of an express statutory or contractual duty to defend.
• Keenan Hopkins Schmidt & Stowell Contractors, Inc. v. Continental Cas. Co., 653 F. Supp. 2d 1255 (M.D. Fla. 2009)
• Allstate Ins. Co. v. RJT Enters., Inc., 692 So. 2d 142, 144 (Fla. 1997)• Rad Source Tech., Inc. v. Essex Ins. Co., 902 So. 2d 264 (Fla. 4th DCA
2005)
The obligation to defend is governed solely by the allegations of the
complaint against an insured, regardless of the allegations’ merits.• National Union Fire In. Co. v. Lenox Liquors, Inc., 358 So. 2d 533 (Fla.
1978)
45
duty
to defend
Where a contractor agrees to defend the owner from such claims and names
the owner as an additional insured under its liability insurance policy, the contractor's insurer must afford the owner a defense under the policy.
If the complaint against an insured party contains facts which create potential coverage under the policy (even if such facts are untrue), the duty to defend is
triggered.• Wackenhut Svcs., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.,15 F.
Supp. 2d 1314, 1321 (S.D. Fla. 1998).
Once the duty to defend arises for an insurer, it continues throughout the case
unless the pleadings are amended to eliminate the claims giving rise to coverage. If an insurance company breaches its contractual duty to defend, the insured (additional insured) can take control of the case, settle it, and then
sue the insurance company for the damages it incurred in settling the action.• McCreary v. Fla. Residential Prop. & Cas. Jt. Underwriting Assoc., 758 So.
2d 692, 695 (Fla. 4th DCA 2000).
46
duty
to defend
The settlement will be binding on the insurer if the damages are covered by
the policy, the insurer wrongfully refused to defend, and the settlement is reasonable and made in good faith. • U.S. Fire Ins. Co. V. Hayden Bonded Storage Co., 930 So. 2d 686, 690-91 (Fla. 4th DCA 2006).
• Gallagher V. Dupont, 918 So. 2d 342, 348 (Fla. 5th DCA 2005) (where insurer wrongfully refuses to defend,
insurer’s liability may be established by its insured’s settlement of the claim, and the insurer may not later relitigate
the issue), citing Ahern V. Odyssey Re (London) Ltd., 788 So. 2d 369, 372 (Fla. 4th DCA 2001).
• In Re Estate of Arroyo v. Infinity Indem. Ins. Co., 211 So. 3d 240, 246 (Fla. 3d DCA 2017) (holding that insurer was
precluded from raising defenses in probate matter that could have been raised in underlying negligence suit against
its insured prior to Coblentz agreement).
However, “an unjustified failure to defend does not require the insurer to pay a settlement where no coverage exists.” • Mccreary V. Fla. Residential Prop. & Cas. Jt. Underwriting Assoc., 758 So. 2d 692, 695 (Fla. 4th DCA 2000),
quoting Keller Indus. Inc. V. Employers Mut. Liab. Ins. Co. Of Wis., 429 So. 2d 779, 780 (Fla. 3d DCA 1983).
• Bradfield V. Mid Continent Cas. Co.,143 F. Supp. 3d 1215, 1240 (M.D. Fla. 2015) (“`Indeed, the mere entry of a
consent judgment does not establish coverage and an insurer’s unjustifiable failure to defend the underlying action
does not estop the insurer from raising coverage issues in a subsequent suit to satisfy a consent judgment entered
pursuant to a Coblentz agreement.’”) (internal citation omitted).
47
butwhy?
Because the duty to defend is broader than the duty to indemnify and this usually occurs when:
• During discovery or at trial the insured was found not to be at fault for the allegations that were covered under the insurance policy but liable for damages that are not covered by it.
• Because an insurer’s duty to indemnify is dependent on the outcome of a case, any declaration as to the duty to indemnify is premature unless there has been a resolution in the case.
• It is well settled law in Florida, where there is no duty to defend, there is no duty to indemnify.
• Allstate Ins. Co. v. Safer, 317 F. Supp. 2d 1345, 1358 (M.D. Fla. 2004); Essex Ins. Co. v. Zota, 607 F. Supp. 2d 1340, 1358 (S.D. Fla. 2009); Trailer Bridge, Inc. v. Illinois Nat’l Ins. Co., 657 F.3d 1135, 1146 (11th Cir. 2011)(quoting Philadelphia Indem. Ins. Co. v. Yachtsman’s Inn Condo. Ass’n, Inc., 595 F. Supp. 2d 1319, 1322 (S.D. Fla. 2009)(“[A] court’s determination that the insurer has no duty to defend requires a finding that there is no duty to indemnify.”)); Fun Spree Vacations, Inc. v. Orion Ins. Co., 659 So. 2d 419, 422 (Fla. 3d DCA 1995)
