COMMON SENSE CONTRACTING

VOLUME 26, NUMBER 1

INSIDE THIS ISSUE

702 Subcontractor termination on designbuild projects: Beware: the process can be far
more complicated than a termination on a traditional project.
703 Florida: Pay-if-paid provision negated:
Enforceable pay-if-paid clause effectively negated
by a seemingly routine incorporation by reference
provision.
704 Miller Act coverage: When, if ever, does
an architect/engineer receive the benefit of this
payment bond protection on a design-build federal
project?
705 Eichleay overhead recovery: Does a
four-year suspension of work on a federal project entitle the contractor to payment of extended
overhead? The answer could well be No!
706 Can a contractor manage its risk by
delegating (subcontracting) its duties to an
independent contractor? In Tennessee, at
least, certain implied duties are not delegable.
707 Terminations: If the contract stipulates
a condition precedent to the right to terminate a
contractor (subcontractor) for default, failure to
satisfy that condition precedent may negate an
otherwise valid termination for cause.
708 Late proposals on federal projects:
With increasingly strict access requirements to
federal facilities, many contractors elect to submit
proposals or bids via e-mail. Unfortunately, hitting
the Send Button does not end the risk of late
receipt by the contracting officer. When does the
contractors risk end?
709 Contractual indemnity provisions are
often strictly interpreted: More importantly,
these contract provisions need to be evaluated in
light of applicable state laws which may bar their
enforcement.

SPRING 2012

Subcontractor Terminations
on Design-Build Projects
Owners like design-build constrution because it
places more risk on the design-builder, which
accepts the responsibility for both design and construction. Design-builders have success when they understand these risks, assemble a knowledgeable team, and
stick to projects in their comfort zone. Contractors run
into trouble in design-build when they chase unfamiliar
work, team up with unfamiliar designers, or use unproven subcontractors.

702

While design-build may reduce the number of owner

disputes, disputes between design-builders and its team
members can be as common as subcontractor disputes
on a traditional design-bid-build project. However,
disputes among design-build team members can be
more difficult to manage and resolve because risks and
expectations may not be properly evaluated on the front
end and responsibilities and relationships are not correctly defined and allocated in the contract documents.
Terminating a Design-Build Subcontract
The decision in BMAR Associates, Inc. v. Midwest
Mechanical Group, 2010 U.S. Dist. Lexis 40183 (D.
Md., April 23, 2010), illustrates that problems that may
seem straightforward on a traditional project can be
extremely complex in design-build. For example, if a
subcontractor defaults on a design-bid-build project the
general contractor generally has the right to terminate
the subcontractor and hire a replacement. The new
subcontractor takes over where the defaulted sub left
off, and the subcontract termination clause provides the
basis for determining the liability of the defaulting subcontractor. However, a subcontractor default in designbuild can be far more complicated when the terminated
subcontractor had design responsibilities. Terminating a
member of the design team creates far different problems than terminating a worksite subcontractor.
In BMAR, a design-builder doing medical renovations
subcontracted out the design and construction of the
boiler work to a mechanical subcontractor. The subcon-

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Atlanta, GA Charlotte, NC Ft. Lauderdale, FL Las Vegas, NV Los Angeles, CA San Francisco, CA Tallahassee, FL Washington, DC

tract divided the boiler package into two design phases

and a separate construction phase. The subcontract
required the subcontractor to provide payment and performance bonds covering its construction responsibilities.
Because the subcontractor anticipated self-performing the installation work, it did not prepare the construction documents to the same level of detail that
an independent designer might have provided. The
subcontractor intended that any design issues arising
during construction would be addressed and resolved
by its field forces. The design-builder left the technical
details of the boiler design to the subcontractor.
When field work was ready to commence, the subcontractor could not provide surety bonds. In response
to this bonding problem, the design-builder sought out
a substitute subcontractor to do the field work. The
design-builder was aware of the added complexity created by the first subcontractors design responsibilities
and understood it could not simply terminate this sub.
Rather, the design-builder began negotiating a transition of the full boiler package to a second subcontractor.
In addition, the design-builder instructed the original
subcontractor to complete the boiler design.
Substituted Subcontractor for Field Work
The design-builder held extensive discussions with a
proposed substitute subcontractor about the transition
but no overall agreement was ever reached. During
this same time the original subcontractor was trying to
convince the design-builder to allow it to perform the
field work without the required bonds, or be excused
from all further project involvement.
The time required for these negotiations increased
scheduling pressures to get the field work started.
These scheduling pressures ultimately caused the
design-builders project manager to issue the replacement subcontractor a lump sum subcontract for the
field work. The new subcontract incorporated the
boiler design developed by the first subcontractor but
failed to place any specific design responsibilities on the
new subcontractor. The replacement subcontractor immediately went to work.
The design-builder wanted a single source of responsibility for the boiler work and intended to continue
negotiations that would result in the replacement subcontractor accepting the transition of all boiler design
obligations. However, once the installation subcontract
was issued, the new subcontractor stopped all discussions about design. The design-builder argued that
the new subcontractor knew that an essential term of
the arrangement was for the new subcontractor to take
over all responsibilities (including the design). According
to the design-builder, the new subcontract was intended
only to allow field work to commence as the parties

continued to work out the details of their relationship.

Responsibility for Design Issues
The second subcontractor not only refused to accept design
responsibilities, it raised numerous complaints about the poor
design. A major dispute arose when that subcontractor asserted construction claims for design errors and omissions.
The design problems led the replacement subcontractor to
stop work, and litigation ensued.
The design-builder argued that both parties understood
that the design responsibility would transition to the new
subcontractor. E-mails between the parties certainly
showed that the design-builder was seeking a transition
of both aspects of the boiler work. However, no agreement on design was reached before a subcontract was executed on the field work. This new subcontract contained
an integration clause providing that all prior negotiations were merged into the written agreement. Once the
subcontractor signed that new subcontract, the document
controlled over all prior discussions. Contractually, the
only agreement was for the field work based on the design documents developed by the first subcontractor.
Once this subcontract was issued, the new subcontractor had no reason or desire to accept any design
responsibilities. The problem the design-builder ran into
could not be blamed on the new subcontractor taking
advantage of a misstep at the time the new subcontract
was issued. The negotiations over design had never
produced an agreement because the replacement sub did
not want to accept design responsibilities. The designbuilder failed to appreciate the new subcontractors position and assumed that everything could be worked out.
Most importantly, the design-builder failed to understand
that properly addressing the design issue was crucial to
any resolution.
Were There Alternatives?
The design-builder failed to fully evaluate the issues
when it considered replacing the first subcontractor
due to its bonding problem. Questions that should have
been raised by the design-builder were never properly
considered. Why didnt the design-builder require the
original subcontractor to post the surety bonds at the
beginning of performance? Was a better alternative
waiving the bonding requirement and allowing the original subcontractor to do the field installation? Should the
design-builder have demanded the first subcontractor
remain as the designer of record and take responsibility for any design problems that may arise? Was there
any contract vehicle available to the design-builder that
would have allowed field work to commence yet keeping
pressure on the new subcontractor to accept a transition
of design responsibilities?
On a design-build project, changing any member of
the design team raises challenges that need to be care-

fully evaluated. Plowing ahead due to scheduling concerns can backfire as it did for the design-builder on this
Maryland case when it failed to understand the different
risks and responsibilities created by the design-build elements of the project. Without fully understanding these
differences a design-builder can make significant errors
when any change in team members must be made.

Joseph C. Staak
(404) 582-8026
jcstaak@smithcurrie.com
Member of the State Bars of Georgia, Florida,
Alabama and the District of Columbia

Florida:
Pay-If-Paid Provision Negated
It is the sign of the times, contractors routinely
try to avoid solely bearing the burden of non
payment. Today, a paid-if-paid clause is a standard
subcontract provision. Pay-if-paid clauses are enforceable in a majority of states so long as the conditions are
clearly and unambiguously expressed. The burden of
clear expression falls squarely on the contractor. However, it may not be enough just to craft a seemingly enforceable paid-if-paid provision. A contractor wishing
to use a paid-if-paid provision should carefully review
the other contract provisions to ensure consistency. A
general rule of contract interpretation is that a contract
must be read as a whole and each provision given its
full meaning. Therefore all payment clauses, including
those that are incorporated by reference, must be in
harmony. A recent Florida case illustrates how an incorporation by reference clause, which incorporates the
terms of the prime contract into the subcontract, can
negate an otherwise enforceable pay if paid provision.

703

Background
In International Engineering Services, Inc. v. Scherer
Construction & Engineering of Central Florida, LLC, 74
So.3d 531 (Fla. 5th DCA 2011), International Engineering Services, Inc. (IES) entered into a subcontract
agreement with Scherer Construction & Engineering
of Central Florida, LLC (Scherer) for structural steel
work. IES performed all the work under the subcontract but did not receive payment from Scherer. IES
filed suit for breach of the subcontract and Scherer
asserted a single affirmative defense: that the subcontract contained a pay-if-paid clause, which provided that
payment by the owner was a condition precedent to
Scherers obligation to pay IES.
The Pay-if-Paid Provision
The subcontract contained two payment provisions
found in Article 6 and Article 7. The relevant part of
Article 6 read:

upon and subject to Owners acceptance of Subcontractors work and upon Contractors receipt
of payment from Owner. Subcontractor agrees
to accept the risk of non-payment if Contractor is
not paid progress payments and/or final payment
from Owner, for any reason. Subcontractor further
agrees that Owners payment to Contractor of all
progress payments and final payment for any work
performed by Subcontractor, other Subcontractors and Contractor shall be an express condition
precedent to any obligation of Contractor to make
any progress payment, retainages, or final payment
to Subcontractor, and Subcontractor hereby waives
all right to commence litigation or arbitration until
payment is made to Contractor.
Article 7 provided:
Final Payment shall be due when the work described in this Subcontract is fully completed and
performed in accordance with the Contract Documents, is satisfactory to the Owner and Architect
and Final Payment has been made by the Owner to
Contractor.
The court held that Article 6 was a clear expression
that the parties intended for IES to assume the risk of
nonpayment. The court also found that if read in isolation, Article 7 would be ambiguous and unenforceable.
However, the court ruled: when Article 6 and 7 are
read together, it is apparent that the parties expressly
and unambiguously intended to shift the risk of nonpayment to IES for progress payments and final payments.
Prime Contract Incorporation Creates an Ambiguity
The courts inquiry did not stop at the two subcontract payment clauses. The court also looked at Article
2, an incorporation by reference clause that provided:
The Contract Documents for this Subcontract
consist of this Agreement, the terms, conditions
or instructions contained in the transmittal letter
from the Contractor to the Subcontractor delivering this subcontract for execution by the Subcontractor, any exhibits attached hereto, the Agreement between the Owner and Contractor dated
(prime contract), the conditions of the Architect,
all approved drawings and architectural plans and
specifications, all modifications issued prior to execution of the Agreement between the Owner and
Contractor, and all modifications issued subsequent
thereto.
The prime contract contained the following provision
relating to payment by the Owner to Scherer:
Neither final payment nor any remaining retained
percentage shall become due until the Contractor submits to the Architect (1) an affidavit that
payrolls, bills for materials and equipment, and
other indebtedness connected with the Work for
which the Owner or the Owners property might be

Subcontractor agrees that all progress payments

and final payment to Subcontractor are contingent

responsible or encumbered (less amounts withheld

by Owner) have been paid or otherwise satisfied.

tion. Unlike subcontractors, however, for whom the

Miller Act was created to protect against non-payment
by the prime contractor, a design firm faced with the
risk of non-payment may only rely upon the protection
of the Miller Act for compensation in limited circumstances. The key to determining which circumstances
may provide that protection lies in the nature of the
services provided. Federal courts have consistently
held that design professionals that do not perform onsite supervisory or inspection-related services cannot
recover under the Miller Act. For those firms that do
perform such services, a recovery is still likely to be
very limited.

The prime contract provided that the owner was

not obligated to pay Scherer until Scherer paid all of
its subcontractors. The court found the pay-if-paid
provision ambiguous because the prime contract was
incorporated by reference into the subcontract, requiring Scherer to pay IES before the owner paid Scherer.
The prime contracts payment provision conflicted with
the subcontracts pay if paid clause; therefore the
pay if paid clause was unenforceable.
Practical Tip
This case illustrates the importance of thoroughly reviewing all the terms of the contract for consistency. If
a general contractor incorporates a prime contract into
a subcontract by reference, it should read the terms of
the prime contract thoroughly. Incorporation by reference or other type of flow down clauses are routinely
used in construction; therefore careful attention must
be paid when drafting such provision as to avoid the
unintended consequences illustrated in this case.

Subcontractor Miller Act Rights

Under well-established federal law, no firm supplying materials or labor has lien rights against federal
property, rights which would typically exist in the
context of private construction. The U.S. Supreme
Court has stated that [n]othing is more clear than
that laborers and materialmen do not have enforceable
rights against the United States for their compensation. They cannot acquire a lien on public buildings.
U.S. v. Munsey Trust Co. of Washington, D.C., 332 U.S.
234 (1947). The Miller Act thus provides protection for
subcontractors and others whose labor and materials
go into federal construction projects. MacEvoy Co. v.
United States, 322 U.S. 102, 107. This is protection
that would otherwise exist via lien rights. To provide
similar protection, the Miller Act requires the prime
contractor on a federal project to post performance and
payment bonds in the amount of the contract for the
protection of all persons supplying labor and material
on the project. 40 U.S.C. 3131(b)(2). The Miller Act
provides that any person who has furnished labor or
material in the prosecution of work provided for in a
contract with the government may bring suit against
the payment bond for unpaid amounts, provided that
the person or entity bringing suit has a direct contractual relationship with either the prime contractor or
another subcontractor. 40 U.S.C. 3133.

Y. Lisa Coln Heron

(954) 761-8700
lcheron@smithcurrie.com
Member of the State Bar of Florida

Miller Act Coverage

for Architects and Engineers
Yes or No?
Introduction
Over the last two decades, federal agencies
have elected to utilize project delivery systems other
than the traditional design-bid-build method. The most
frequently employed alternative has been the designbuild method, which involves the integration of design
and construction services within a single contract, and
places the responsibility for both the project design
and construction on the prime contractor. Although the
government may retain some design responsibility, the
primary beneficial effect of this project delivery system
(from the governments perspective, of course) is that
it shifts many of the risks associated with the design
from the government to the prime contractor. Prime
contractors that do not have in-house design capability
must contract with a design firm to perform the necessary design work. Unlike the design-bid-build context,
in which the government contracts separately with a
design firm, in the design-build context the designer is
removed from a direct contractual relationship with the
government, and is instead placed in much the same
position as any subcontractor providing materials or
construction services to the prime contractor.

704

Designer/Architect Coverage under Miller Act

Notwithstanding the inclusive language in the Act
concerning the broad range of contractors who qualify
for its protections, a design firm providing professional
services to a prime contractor on a federal project will
not have rights under the Miller Act to make a claim
against the prime contractors payment bond. This
is true universally on federal projects, with one very
limited exception when the designer performs on-site
supervision or inspection duties in addition to (or in lieu
of) typical design services such as the preparation of
plans, details and specifications. Federal courts have
long and consistently ruled that a contractor providing
professional services does not fall within the Miller Acts
definition of labor unless the professional services in
question are supervisory in nature.

Without the protection of contracting directly with

the government for payment, the designer must depend entirely on the prime contractor for compensa-

The court in American Surety Co. of New York v.

United States ex rel. Barrow-Agee Labs., 76 F.2d 67

(5th Cir. 1935) addressed the question of what constitutes labor under the Heard Act (the precursor to the
Miller Act) in the context of work performed to inspect
and analyze loads of gravel being placed for the construction of roads in Louisiana. After noting that the
work in question involved considerable physical labor
and some experience and skill, the court concluded
that [a]n ordinary workman could do it after being
shown and having some practice. While such a task
hardly qualifies as a professional service as that phrase
is typically employed to describe the scope of work
performed by design professionals on todays projects,
it served as the basis for the courts discussion of the
limited circumstance in which a design professionals
services would constitute labor under the Act. It
may be true that the term labor in this statute, as
generally in statutes relating to mechanics liens, refers
to physical labor rather than technical and professional
skill and judgment, but an architect or other skilled
man who actually superintends the work as it is being
done is by the weight of authority furnishing labor.

States Fidelity & Guaranty Co., 19 F.3d 1431, 1994

WL 108502 (4th Cir. 1994) (unpublished opinion), an
engineer employed by a subcontractor who went out
of business during the project sought compensation
directly from the Miller Act surety for work preparing
drawings and other non-supervisory work performed
for the defunct subcontractor. The court, citing the
Butt & Head opinion, ruled that the tasks performed
by the engineer did not fall within the accepted definition of labor in the Miller Act, and re-iterated that a
design professional can only recover under the Act to
the extent that its services included on-site supervision
or inspection. The subcontractor therefore could not be
compensated under the payment bond for the off-site
design services of its engineer.
United States ex rel. Gulf Insurance Co., 313
F.Supp.2d 593 (E.D.Va. 2004) is an example of a
court emphasizing the type of service performed over
the location of performance. In that case, a project
management subcontractor who was retained by the
prime contractor specifically to provide on-site project management, supervision, administrative and
oversight services sought payment for those services
under the Miller Act. After taking care to acknowledge
that on-site services performed by a professional can
qualify for Miller Act coverage, the court ruled that in
the circumstances presented, the on-site supervisory
duties actually performed were not sufficiently hands
on to qualify. Specifically, the court held that paying
invoices, reviewing proposals, and supervising hiring were clerical or administrative tasks which, even if
performed at the job site, did not involve the physical
toil or manual work necessary to bring them within the
scope of the Miller Act.

More recently, in United States ex rel. Thayer v.

Metro Construction Corp., 330 F. Supp. 386 (E.D.Va.
1971), the court ruled that an engineer who prepared
designs, drawings and specifications was not protected
by the Miller Act and could not make a claim on the
prime contractors payment bond. In Thayer, the plaintiff sued to recover payment for providing engineering
services. The plaintiffs sole duties were to prepare
the design, drawings and specifications for the project.
The court ruled against the plaintiff because he was not
a consulting engineer, did not have any supervisory role
on the project and had no obligation to see that the
contract was completed.

Conclusion: A Pyrrhic Victory?

Design firms performing purely off-site design related services, as opposed to supervisory services or
conducting investigations on-site, are not protected by
the Miller Act. Federal courts have consistently ruled
that professional services do not qualify for payment
bond coverage unless there is a supervisory element
to those services. Even for firms that perform some
on-site supervisory work that is covered by the Miller
Act, the recovery available is very likely to be limited
to the value of the on-site work. In most situations,
this is likely to be a small portion of the overall value
of a design services contract, leading to the conclusion
that even a successful claim may not be worth the cost
required to pursue it.
Charles E. Rogers
(404) 582-8032
cerogers@smithcurrie.com
Member of the State Bar of Georgia

Later cases have continued the reasoning of Thayer

by focusing on the nature of the services; subsequent
decisions have emphasized that those services must be
not only supervisory, but also performed on-site, in order to qualify for Miller Act protection. In United States
ex re. Naberhaus-Burke, Inc., v. Butt & Head, Inc., 535
F.Supp. 1155 (S.D. Ohio 1982), an engineer who was
a second tier subcontractor was employed to furnish
calculations and certain specified shop drawings for the
project. The court first noted that the term labor as
used in the Miller Act has been construed to include
physical toil, but not work by a professional, such as
an architect or engineer. Nonetheless, the court then
found that the engineer could recover under the Miller
Act, but only for the performance of on-site services
that included actual superintending, supervision, or
inspection of the project. The court in United States
ex rel. Olson v. W.H. Cates Construction Co., Inc., 972
F.2d 987 (8th Cir. 1992) adopted this line of reasoning
as well, finding that only certain professional supervisory work is covered by the Miller Act, namely, skilled
professional work which involves actual superintending,
supervision, or inspection at the job site.

Stephen J. Kelleher
(202) 452-2140
sjkelleher@smithcurrie.com
Member of the State Bars of Georgia,
District of Columbia, and Virginia

In United States ex rel. Barber-Colman Co. v. United

Multi-Year Suspension
But No Eichleay Recovery
Introduction
The Eichleay formula is the exclusive method
of calculating unabsorbed home office overhead costs
when the federal government, by direction or constructively, causes a delay in the completion of a construction contract. Unabsorbed overhead costs are indirect
costs which would have been absorbed by the contract
but for the delay. Home office overhead is a recoverable item of delay damages because the contractor
does not realize direct billings during the period when
the project is delayed. When the government suspends
the contract work, the other contracts held by a contractor have to absorb additional indirect costs, but a
contractor cannot recover these increased costs under
the other fixed price contracts.

705

A recent decision from the U. S. Court of Federal

Claims, The Redland Co., Inc. v. United States, 97
Fed. Cl. 736 (2011), illustrates that the application of
Eichleay for recovery of damages is not automatic.
Rather, Eichleay is applied in situations in which contract performance has begun and the contractor was
put on standby. Redland illustrates the difficulty in
meeting the standby requirement.

tor was not entitled to Eichleay damages for the claim

of unabsorbed home office overhead damages for the
four years of suspension because it had not started
performance at the time the suspension order was issued. The court rejected Redlands argument that the
issuance of the notice to proceed triggered the start of
performance. Work actually began on October 18, 2004
after the Air Force issued a second notice to proceed.
Nevertheless, the court analyzed whether Redland satisfied the conditions of being put on standby during
the four year suspension.
Three elements must be established to establish
recovery under the Eichleay formula. First, the contractor must prove a government-caused delay or suspension of uncertain duration. Second, the contractor
must prove that the delay extended the original time
for performance of the contract; and third, the contractor must prove that the government required that
it remain on standby during the period of delay or
suspension.
Although Redland satisfied the first two elements,
the contractor failed to demonstrate that the government required that it was on standby during the
suspension period, waiting to work immediately or on
short notice. Indeed, the delay was of indefinite duration and it affected all of the work; however, there
were no facts that the contractor started performance
before receiving the suspension order, or any indirect
evidence that it was on standby. To do so, a contractor must show that: (1) the period of suspension was
not only substantial but was of an indefinite duration;
(2) plaintiff was required to be ready to resume work
on the contract, at full speed as well as immediately;
and (3) there was effective suspension of much, if not
all, of the work on the contract, citing P.J. Dick, Inc. v.
Principi, 324 F.3d 1364, 1370 (Fed.Cir. 2003).

Requirement Not Documented

In Redland, the contractor (Redland) which had
received a notice to proceed from the Air Force to
remove and repave an aircraft parking area at Homestead Air Reserve Base (HARB), Florida, was not
entitled to recover any unabsorbed home office overhead damages incurred during a subsequent four-year
suspension because the suspension order was issued
before performance started and Redland failed to establish that it was on standby.

Redland did not have any equipment or personnel

at any location waiting idly for work at HARB or doing
work that could be immediately stopped. Redland was
asked to detail what resources it had available during
the period of suspension, and the vice president could
not identify any specific resources, but merely claimed
that it would have used either in-house equipment
or rental equipment. These were not signs that they
were ready to commence work at HARB immediately.
It stated that [t]hese are signs of a fully employed
construction company that would increase its resources
to perform additional work, not one that was waiting
on standby with its existing resources constantly at the
ready. The court was not persuaded by the conclusory
statements made by Redland employees that it was
on standby. Additionally, the arguments that the
contractor had personnel and equipment available to
perform immediately and at full speed were unavailing because it had not yet even entered into a contract

On December 1, 2000, Redland received both the

notice to proceed and a second order to suspend its
work for an indefinite period of time. Four years later,
the suspension was lifted but substantial delays ensued. Ultimately, the 61 day contract was delayed by
387 days. Believing that Redland was not responsible
for any of the delays in completion, the contracting officer granted the contractor a time extension until the
day that the work was accepted on January 11, 2006,
and did not assess any liquidated damages.
After completion, Redland sought damages in the
amount of $698,939.16 and alleged nine claims. The
lions share of the claim in the amount of $429,478.53
consisted of unabsorbed home office overhead incurred
during the four year suspension of work. The remaining
amounts related to the delay and additional work during the period of performance.
The Court of Federal Claims held that the contrac-

location methods where contract performance has not

yet begun. In Nicon, Inc. v. United States, 33 F.3d 878
(Fed. Cir. 2003), the Federal Circuit declared that [w]
hen contract performance has not begun, but all of the
other strict requirements for entitlement to home office overhead are met, there is no bar to the award of
home office overhead in a termination for convenience
settlement, provided a reasonable method of allocation is available on the particular facts of the case.
Here, Redland could not establish that it could meet the
Eichleay requirements for entitlement to home office
overhead; thus, it could not collect damages under a
modified formula.
Evangelin Lee
702/228-9400
elee@smithcurrie.com
Member of the State Bar of Nevada

with one of the primary subcontractors who performed

nearly the entirety of the repaving work. The courts
decision failed to discuss the effect of the suspension
on the contractors bonding capacity.
The court rejected Redlands assertion that when
the government extends the period of contract performance, that a rebuttable presumption exists that the
government was at fault for the delay because the
mere grant by the government of a contract extension does not indicate that the government is at fault;
rather, one of a number of other events external to the
government could be responsible. citing England v.
Sherman R. Smoot Corp., 388 F.3d 844, 857 (Fed. Cir.
2004).
What Does Standby Mean?
The Redland decision discusses the strict limitations imposed by the standby requirement. Without
express language in the suspension or other order
putting a contractor on standby, the contractor bears
the burden of proving standby by demonstrating that it
was required to resume work at full speed, as well as
immediately or on short notice.

Tennessee: A Contractors
Implied Non-Delegable Duty
A recent Tennessee Supreme Court case, Federal Insurance Co. v. Winters, 354 S.W. 3d 287
(Tenn. 2011), addressing two previously unresolved
issues in Tennessee, concluded that a contractor has
an implied duty to perform work in a careful, skillful,
and workmanlike manner and that, absent the owners
consent, this duty is not delegable to subcontractors.

706

The court noted that a contractor is not on standby

if it is given a reasonable amount of time to gather together its equipment and personnel after a suspension
is lifted. If the government requires immediate resumption of the work, but only with a reduced work force
that allows the contractor to gradually increase its work
force, the contractor is not on standby.

One Sentence Takeaway

In Tennessee, contractors face liability for breach of
contract based on an independent subcontractors failure to perform work in a careful, skillful, diligent, and
workmanlike manner.

In order to be on standby, the contractor must

be required to keep at least some of its workers and
necessary equipment at the site, even if idle, ready
to resume work on the contract, i.e., doing nothing or
working on something elsewhere that allows them to
get back to the contract site on short notice. However,
when a contractor makes extensive use of subcontractors and cannot guarantee the availability of those
subcontractors, or in this case, does not enter into a
contract with one of the primary subcontractors until
the time of performance, a contractor does not have
personnel and equipment available on the worksite to
perform immediately and at full speed as required for
a claim to recover unabsorbed overhead.

Background
Martin Winters, a contractor, entered into an oral
contract to replace the roof of a home owned by the
Emersons. Winters was incapable of replacing the
entire roof, so, without informing the Emersons, he
subcontracted out the work. Within a few months of
the works completion, the roof began to leak. When
notified of the problem, Winters agreed to repair the
roof and hired a different subcontractor, Bruce Jacobs,
to remedy the problem.

Comment
Without express language putting a contractor on
standby in a written suspension order, a contractor faces enormous hurdles meeting the standby
requirements to recover unabsorbed overhead. Redland confirms the additional limitations imposed on
Eichleay damages because it is only available in situations where contract performance has begun, and the
Eichleay formula is the exclusive method for calculating
unabsorbed overhead in those situations.

Winters and Jacobs entered into a written subcontract providing in part that any and all work will be
the responsibility of Bruce Jacobs and [a]ny and all
leaks/damages caused by work performedwill be
[his] responsibility to repair or replace. While performing the repairs, Jacobs used a propane torch on
the roof. Shortly after Jacobs completed his work, a
fire occurred, causing over $800,000 in damages to
the house. Winters was not present while Jacobs was
performing the repairs. A fire investigator found that
Jacobs use of the propane torch caused the fire. Nei-

This decision still leaves open the possibility of

recovering home office overhead under alternate al-

resolve many potential issues between the parties.

If Winters and the Emersons had entered into a wellwritten contract then their dispute may have been
avoided.

ther Winters nor Jacobs had liability insurance coverage

when the fire occurred.
Procedural History
The Emersons insurance company, Federal Insurance Company, covered the damages to the house and
then filed suit against Winters, asserting that Winters
had an implied duty to perform the roofing work skillfully, carefully, diligently, and in a workmanlike manner. Furthermore, Federal argued that this implied duty
was non-delegable, making Winters liable for Jacobs
negligence in burning down the house. The trial court
granted Winters motion for summary judgment, finding that Jacobs, not Winters, was liable, and that no
implied non-delegable duty existed that would make
Winters liable for Jacobs work. The Tennessee Court
of Appeals reversed, finding that Winters did have an
implied duty and that the duty was not delegable, thus
making Winters liable for Jacobs work. The Tennessee Supreme Court agreed, based on the existence of
a non-delegable implied duty, which Winters breached
when Jacobs actions caused the house to catch fire.

Understand Independent Contractor Status: While

a contractor is not liable under tort theories for the
acts of an independent contractor, the contractor
may be liable under a breach of contract theory if
the contract is not performed in a skillful, careful,
diligent, and workmanlike manner. Under Winters,
contractors face liability for subcontractors negligent
construction, and other tort centered claims, under
breach of contract theories.
Insurance is Irrelevant: Wright exposes contractors
to liability for breach of contract based on an implied
duty, not tort claims based on negligence. Because
insurance policies frequently exclude breach of contract damages from coverage, contractors ultimately
face liability for damages not covered by insurance.
From an insurance standpoint, contractors would be
better off if courts allowed recovery in tort instead of
contract because the tort claims would be covered
by existing insurance policies.

Tennessee Supreme Courts Decision

The court based its decision on two primary factors.
First, the court concluded that construction contracts
are service contracts and that service contracts carry
an implied duty to perform the service skillfully, carefully, diligently, and in a workmanlike manner. Thus,
any construction contract contains the implied duty
to perform the work in a skillful, careful, diligent, and
workmanlike manner. Second, the court ruled that a
contractor could not avoid this implied duty by delegating the work to a subcontractor. Therefore, contractors
remain liable under the contract for work performed by
subcontractors.

Contractors, Obtain a Release: Contractors should

attempt to obtain a release from the owner whenever possible. The release should relieve the contractor from liability to the owner for a subcontractors actions. This is especially important on larger
projects where a contractor faces liability for work
performed by a large number of subcontractors, subsubcontractors and so on. Under Wright, a contractor potentially faces liability for breach of contract for
work performed by any person on the project that
is not performed in a skillful, careful, diligent, and
workmanlike manner.

Although at first glance this decision seems to expose the contractor to inescapable liability, the decision
contains two caveats. First, it has no effect on tort liability. A contractor remains protected from tort liability
for a subcontractors actions, assuming the subcontractor is an independent contractor. Second, the owner
and contractor can agree to release the contractor from
liability for a subcontractors actions and negligence.
Therefore, while the contractor may not delegate the
duty to perform services skillfully, carefully, diligently,
and in a workmanlike manner on its own, the contractor may still avoid liability for subcontractors work by
obtaining a release from the owner for work performed
by independent subcontractors.

Conclusion
Wright has the potential to have widespread ramifications on the construction industry. At minimum,
the court, by creating a non-delegable implied duty to
perform work in a careful, skillful, and workmanlike
manner, exposes contractors to liability that often falls
outside of existing insurance policies coverage.
Lochlin B. Samples
(404) 582-8116
lbsamples@smithcurrie.com
Member of the State Bars of Georgia and Tennessee

Satisfying
Termination Conditions

Practical Implications
Put It In Writing: Oral contracts are cheap and easy,
until a dispute arises. Once a dispute arises, the
cost savings quickly become negligible in light of lost
productivity and litigation costs. Put the deals terms
in writing. A well-drafted contract can address and

The power to terminate a construction contractor for cause is a powerful tool for an owner.
It enables the owner to eliminate the source of delays

707

requirement that the owner receive a pre-termination

certification from the architect as required by the
contract. The court ruled in Padens favor and found
that the e-mail communication was not an architects
certification because the sender did not claim that he
was an architect nor did he claim that he was rendering
an architects certification; rather, he was merely expressing his agreement with the termination of Paden.

and sub-standard work. When a termination is executed properly, a project can get back on track before
things spiral out of control. However, if careful attention is not given to the contractual conditions such as
an architects certification of cause for a termination,
the result may be claims of wrongful termination which
serve to complicate and protract what was already a
less-than-desirable situation. One of the pitfalls that
can lead to an ineffective termination is the failure
to perform a condition precedent, or a prerequisite,
required by the contract. As a recent Indiana court illustrates, if the owner does not strictly comply with the
prerequisite for the architects certification, the termination may not be valid.

Obtain a Proper Architect Certification

Termination conditions are not new and are not going away, so it would be wise to understand how these
conditions can be satisfied. The Indiana appellate
courts, as early as 1903, ruled that a condition precedent must be strictly complied with in order to justify
the drastic action contemplated. White v. Mitchell,
65 N.E. 1061, 1062 (1903). The prevalence of issues
involving termination conditions is guaranteed to continue into the foreseeable future. Termination conditions are included in the AIA Document A201 2007
in section 14.2.2 of the general conditions: the owner,
upon certification by the [Architect] that sufficient
cause exists to justify such action, may terminate
employment of the Contractor.

Required Strict Compliance

In July 2002, the Town of Plainfield (Plainfield)
entered into a standard AIA contract with Paden Engineering (Paden) to provide a steel package for a
recreation/aquatic center. The contract provided several reasons for which Plainfield could terminate Paden
and provided that, before termination, Plainfield was
obligated to obtain the architects certification that
sufficient cause exists to justify termination. In other
words, Plainfield could only terminate a contractor after the architect certified that sufficient cause existed
to justify the termination.

Therefore, if an effective termination is going to

take place under the standard AIA contracts, the
owner must obtain a certification by the architect on
the project that sufficient causes exists to justify
termination. The architects certification will become
an important document and the likely subject of great
scrutiny by a contractor that has been terminated.
Therefore, the certification must be carefully crafted to
withstand a challenge.

The project did not run smoothly, and Plainfield

and Paden each contended that the other was causing
delays. In September 2003, Steve Craney, a project
coordinator with the projects architectural firm, sent
the following e-mail to a Plainfield representative:
This individual [Padens project manager] and his
company continue to multiply the challenges with
completion of the project. We need to seriously
consider having a meeting with our team and the
attorneys in order to reach agreement on what
is to be done. The additional months that have
been added to the schedule, as a result of the
lack of performance on the part of Paden, is causing or possibly will be causing addition[al] money
to cover the many hours that were not budgeted!
Is this the point where we agree to call an end
to this situation? I feel we really need to talk!
Thanks!

Often, the reason the owner desires to terminate a

contractor is due to a series of events that have caused
the owner to lose confidence and trust in the contractors abilities. The underlying cause of the soured relationship could relate to a personality clash between the
owner and contractor that continually sours as stressors related to a fast-paced project build up. While a
myriad of compelling reasons may justify removal of a
contractor, an architects certificate cannot depend on
those reasons. Instead, as specified in 14.2 of the
A201, the certificate must be based on the existence
and knowledge that one of the four following conditions
exists:

Plainfield issued a Notice of Termination to Paden in

October 2003.

(1) Contractor repeatedly refuses or fails to supply

enough properly skilled workers or proper materials;

During the subsequent litigation, Paden argued that

the termination was invalid because Plainfield failed to
establish a condition precedent to the termination. An
Indiana appeals court analyzed whether the necessary
pre-condition to termination was met in the case styled
as Town of Plainfield v. Paden Engineering Co., Inc.,
943 N.E.2d 904 (Ind. Ct. App. 2011).

(2) Contractor fails to make payment to Subcontractors for materials or labor;

(3) Contractor repeatedly disregards applicable laws
or codes;

At issue was whether the e-mail from the architects

project coordinator was close enough to meet the

(4) Contractor is guilty of a substantial breach of a

contract provision.

The dissatisfied owner should require the architect

to review all of the relevant documents and conditions
to make a determination of whether the alleged shortcomings can be sustained. If so, the architect may
then carefully craft a certification.

e-mail server was inundated by e-mails at that particular time. The resulting e-mail storm slowed the COEs
servers to a crawl delaying the delivery of all e-mails.
Although the end result was that the contractors
proposal was ultimately found to be timely, that did not
happen until more than one year later and only after
Watterson Construction incurred significant expenses
working to overturn the rejection decision. But why did
the COE reject the proposal even after realizing that
the delayed delivery was not Wattersons fault and that
it had actually sent the proposal almost an hour early?
Simply put because the COE strictly interpreted the
Federal Acquisition Regulation (FAR) governing the
submittal of proposals to federal agencies as meaning
that Wattersons proposal had not reached or been
received by the designated government office (in this
case the e-mail in-box) before the deadline.

The architects certificate should be dated on or near

the date that the termination notice is served on the
contractor and should clearly set forth concrete examples of the contractors failure. A prudent owner will
assure that the architect ties the certification to relevant project records that support the assertions.
Conclusion
A owner needs to be keenly aware of the contractual
conditions to termination for cause. With the proper
amount of caution, an owner may be able to ensure
that an informed architect issues a carefully-crafted
certificate to effectively eliminate a troublesome contractor. However, a haphazard termination without a
robust architects certificate may lead to an increasingly
costly and complicated litigation following termination
of the contractor.

Fortunately, Watterson Construction clarifies how the

rules governing electronic proposal submissions should
be handled by the federal government. The rule that
was unclear before this case states that the proposal
must reach or be received by the designated government office before the deadline. Watterson argued that
the designated government office was the COEs server,
not the actual designated e-mail in-box. Watterson also
argued that, even if their proposal was late, the Government Control exception should be applied such that
it should be considered because the proposal had been
received at the government installation designated for
receipt of offers and was under the governments control prior to the time set for receipt of offers.

Patrick V. Douglas
954/769-5325
pvdouglas@smithcurrie.com
Member of the State Bar of Florida

Late Bids/Proposals
Proposing or bidding on federal government
contracts requires that a contractor strictly
comply with multiple regulations, as well as the requirements stated in the agencys solicitation (RFP or
IFB). If a contractor fails to do so, the likely result is
that the expensive and time consuming proposal effort
is wasted because the submission is rejected as nonresponsive. Although a proposal can be rejected as
non-responsive for numerous reasons, one of the more
easily avoided grounds for rejection is because it was
submitted late. The recent decision, Watterson Construction Co. v. United States, 98 Fed. Cl. 84 (2011),
illustrates an agencys literal application of the rule that
a proposal must be submitted on time. Fortunately, in
that case the contractors proposal was eventually accepted, albeit one year later. However, it still presents
a very serious lesson regarding the timely submittal of
proposals or bids.

708

In the end, the court concluded that the proposal

should be accepted because the Government Control
exception for late submittals applied and the designated government office was the COE server. The
Watterson Construction opinion contains a much more
detailed analysis of a number of other applicable rules
but this is a key point. But the lesson to be learned is
that government agencies strictly interpret the rules
governing the submittal of proposals.
Although Watterson was eventually able to have its
proposal considered, the lesson here is that the earlier
contractors submit their offers the better. Some might
say that goes without saying. However, it all too often
happens that proposals are submitted at the very last
minute due to the nature of compiling sub-contractors
proposals and finalization of the proposal. It is imperative that a contractor plan for last minute contingencies
when compiling and submitting a proposal in response
to a RFP on an IFB.

In Watterson Construction the offerors were allowed

to submit proposals to the Corps of Engineers (COE)
by hand delivery, regular mail, or e-mail. The proposals were due on or before 12:00 p.m. on March 16,
2010. Watterson Construction sent the e-mail containing its proposal at approximately 11:01 a.m. on that
date. The proposal did not arrive at the relevant COE
e-mail in-box until 12:04 p.m. and it was rejected as
late.

So, what can a contractor do to ensure the timely

submittal and acceptance of a proposal?
Closely review the solicitation and confirm (then
reconfirm) the due date and time, the location to
which it must be delivered, and the form in which it
must be delivered;

Unbeknownst to Watterson Construction, the COEs

10

 Ensure that all sub-contractors proposals are received as far in advance of the proposal deadline as
possible;

which makes certain indemnity agreements unenforceable if they meet two requirements. The provision
must relate in some way to a contract for construction,
alteration, repair, or maintenance of certain property
and promises to indemnify a party for damages arising from that partys sole negligence. The first part
has been interpreted broadly, including real property
leases, design contracts, contracts with subcontractors,
commercial and residential leases, in addition to traditional construction contracts.

Plan for the technology being used to submit the

final proposal may break down or not be available.
Redundancy is the key here. For example, have a
back-up copier, computer, fax machine, and/or printer, make sure all the relevant individuals cell phones
are charged, save multiple copies of the proposal on
various media such as a hard drive and a memory
stick;

The Georgia Supreme Court found that the agreement satisfied the first part of the test and also satisfied the second part in that the agreement provided
that the homeowners association will indemnify and
hold harmless Kennedy as to any or all claims,
no matter the origin of the claim or who is at fault.
Therefore, the agreement satisfied both conditions for
application of the anti-indemnity statute and the provision was therefore invalid.

If hand delivering the proposal, ensure that there

are multiple ways of getting to the delivery point in
case there is a traffic or security access delay; and
Last, but not least, as a general rule of thumb, assume that what can go wrong, will go wrong.
Jay R. Houghton
(800) 832-6946
jrhoughton@smithcurrie.com
Member of the State Bar of California

The teaching point here is that an indemnity provision may not be enforceable if it relates to the expansive view of construction, alteration, repair, or maintenance of property set forth in the Kennedy decision and
if it purports to indemnify against the indemnitees sole
negligence.
Indemnity Enforced
The Georgia Court of Appeals in JNJ Foundation Specialists, Inc. v. D.R. Horton, Inc., 717 S.E. 2d 219 (Ga.
App. 2011) found a contractor liable to the owner for
damages claimed by a person injured in an automobile
wreck. The injured person claimed that traffic control
at the project was inadequate. The contract between
the owner and the general contractor had a provision
with language similar to that in the Kennedy case. It
required Horton to indemnify and defend the owner as
indemnitee for any claims arising out of or connected
with the construction work. This indemnity agreement
did not limit the contractors liability to claims for which
it or its subcontractors had been at fault. The Court
of Appeals found that the indemnitor contractor had a
duty to defend and hold harmless regardless of fault or
causation.

Georgia:
Contractual Indemnity
Two recent decisions by Georgia appellate
courts have addressed the issue of contractual
indemnity. The Supreme Court of Georgia in the Kennedy Dev. Co., Inc. v. Camp, 290 Ga. 257 (2011)
found that an indemnity provision in an assignment and
assumption agreement was unenforceable. Kennedy,
the developer of an upstream subdivision, assigned
all of its rights and responsibilities to the upstream
subdivisions homeowners association. The previous
owner of the land of the subdivision had entered into
agreements with a downstream subdivision and its
homeowners association to permit the future upstream
subdivision to use the lake on the downstream subdivision as its detention pond in exchange for a promise
to make certain repairs and improvements to the pond
and to maintain the pond. Camp owned some property
adjacent to the downstream subdivision and alleged
that the excess storm water from the upstream subdivision significantly increased the amount and velocity
of the runoff from the downstream subdivisions lake
which drained into a creek on Camps property, resulting in erosion, tree loss, and other damage.

709

Since the contractors CGL insurance policy covers

harm caused by negligent acts but not the breach of
a contractual duty, there may be no insurance coverage where the contractors actions or inaction did not
contribute to the harm. When such a broad indemnity
provision is included in a contract, legal counsel should
be consulted before executing the contract to modify
the indemnification provision to provide that some act
of the contractor must have contributed to the harm.

Georgias Anti-Indemnity Statute Interpreted

The assignment agreement by Kennedy to the upstream subdivisions homeowners association included
a provision providing that the homeowners association
would hold Kennedy harmless from any debts, claims,
actions, damages, judgments, or costs which arose
prior to and after the agreement and are related to the
construction, maintenance, repair, or operation of the
subdivision. Georgia has a anti-indemnity statute

Hubert J. Bell, Jr.

(404) 582-8027
hjbell@smithcurrie.com
Member of the State Bars of Georgia,
District of Columbia, and Florida

11

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