Tag: Subcontractor

Right of Set-off on Unrelated Projects

By Lynda

The following is an excerpt for the most recent ProNet Guest Essay by Frank L. Pohl, Esq. and James C. Washburn, Esq.:

“Frequently, general contractors will work with the same subcontractor or supplier on two separate, unrelated projects. When that happens, the situation may arise that on the first project (Project A), the subcontractor defaults on its contract, resulting in a back-charge that exceeds the subcontractor’s contract balance, i.e. the subcontractor owes the general contractor money. On the second project (Project B), the subcontractor satisfactorily completed its work and is due money from the general contractor. It may seem obvious that the general contractor would have a right of set-off, allowing the general contractor to deduct the amount due from the subcontractor on Project A from the amount that the general contractor otherwise owes the subcontractor on Project B. Seemingly, the general contractor should only have to pay the net difference or be able to avoid paying the subcontractor anything if the back-charge on Project A exceeds the amount due on Project B. However, as outlined in this article, that seemingly straight-forward right to “net out” the competing claims might not always be available.

“There are several different factors that can frustrate the general contractor’s right of set-off. In some jurisdictions, state statutes may prohibit the general contractor from withholding from the subcontractor the amounts received from the owner for the subcontractor’s work, such statutes holding that those funds are held in trust for the benefit of the subcontractor. Some states might even find the withholding of funds received by the owner for the subcontractor’s work to be statutorily criminal. On projects covered by a payment bond, courts in some jurisdictions have held that even if the general contractor has a contractual right to set-off, the Surety may not. As a result, in those jurisdictions, notwithstanding the contractor’s contractual right of set-off, the subcontractor may be entitled to recover the full amount on Project B (from our scenario above) from the Surety without any deduction of the amounts the subcontractor owes on Project A. Given that the general contractor must almost always indemnify the Surety, such a result has the practical effect of eliminating the contractual benefit of a right of set-off. Additionally, in certain circumstances, by the discretion afforded to judges under the rules of civil procedure, courts have required the two competing claims to be handled by separate lawsuits independently and without regard to the general contractor’s claim of set-off. This article discusses these scenarios and others that impact the right of set-off.”

To continue reading, download a the full PDF version of this article at our website.

About the Authors:

Frank L. Pohl, Esq. and James C. Washburn, Esq. are partners in the law firm of Pohl & Short, P.A. in Winter Park, Florida.  Pohl & Short, P.A. is a business boutique law firm concentrating in four main areas of business law: commercial litigation, real estate law, corporate law and trusts and estates.  Mr. Pohl has been advising clients involved in all aspects of real estate development for over 30 years.  Mr. Washburn practices construction law and is Board Certified in Construction Law by The Florida Bar.

This article is intended for general discussion of the subject, and should not be mistaken for legal advice. Readers are cautioned to consult appropriate advisors for advice applicable to their individual circumstances.

FAQ Arising out of Contract Negotiations

By Lynda

Contract negotiations can be tough, and this is especially true for Architects and Engineers (A/Es). When an A/E is hired by an Owner who lacks prior experience with the nuances of a design professional’s insurance policies, or when an A/E is hired by a contractor (rather than by another design professional), misconceptions and poorly worded Insurance Requirements can fuel adversity in the negotiation process.

The easiest way to avoid deadlock is for the A/E to ask questions of their insurance brokers in advance, thus preparing themselves to educate the other interested parties about the realities of an A/Es insurance coverage. Some frequently asked questions which arise in these negotiations are:

The Owner/Contractor wants to be added to my Professional Liability policy as an Additional Insured. Why can’t I add Additional Insureds to my Professional Liability (E&O) policy?

“A common misunderstanding about E&O insurance involves a client’s desire to be added as an additional insured and to gain a defense through the E&O policy. A/Es cannot add additional insureds on their E&O policies because the other entities are not providing services on behalf of the firm. E&O insurers will not provide this coverage, thus a contractual obligation to do so becomes an impossible situation for the A/E. E&O policies typically also have an ‘insured versus insured’ exclusion in which there is no coverage for claims between insureds. If a client became an insured under the E&O policy, the A/E would not be covered for the client’s claim.”

What does indemnification mean?

“To ‘indemnify’ does not mean that a claimant can profit from the A/E’s errors or negligence – it means that the claimant should be restored to the position they were in prior to the loss; they should be ‘made whole.’ As an example, if an A/E failed to specify interior doors on a new office building, the owner/client would not get ‘free’ doors as damages, but would instead be indemnified for additional expenses caused by adding the doors after the bidding process (e.g. additional shipping, extra installation charges, increased cost of the materials ordered at the later date, etc.).”

The Owner doesn’t want there to be a Contractual Liability Exclusion in my Professional Liability policy. What is a Contractual Liability Exclusion and does my policy have one? 

“Yes, E&O policies also contain a ‘contractual liability’ exclusion which will not cover liability assumed by contract unless liability would exist absent the contractual undertaking.This exclusion is meant to protect the A/E from overextending themselves in an effort to protect a client.

“It is worth noting here that an Architect or Engineer does not have corporate protection (no ‘corporate veil’) from personal liability arising out of the performance of professional services. When considering the severe risks they may be assuming when providing design services, it is no wonder that the Architects and Engineers take contract negotiation and insurance coverages very seriously.”

Portions of these answers have been excerpted from one of our ProNet Guest Essays, this one titled Architects’ and Engineers’ Insurance — What does it cover? The essay, authored by a/e ProNet Member Diane Hoskins of Wortham Insurance & Risk Management, goes on to answer several other FAQs. Download the full PDF version here.

The Cost of Perfection

By Lynda

Nobody’s perfect, yet perfection is always desirable, especially on a design project. Just for a second, let’s imagine that perfect world:

Deadlines met. Costs at or under budget. Environmentally-friendly materials preferred by all parties. Nobody injured, no property damaged. Zero miscommunication.

Sounds, well, perfect, doesn’t it?

Unfortunately, there is a downside to trying to attain a perfect project. As it turns out, perfection is unrealistic enough to guarantee disappointment, which will almost inevitably cause rifts between members of the design team. An architect or engineer can better prepare to avoid this scenario by managing the project owner’s expectations early on, refocusing the energy of the team on achieving success rather than perfection.

The following is an excerpt from our ProNet Practice Note entitled The Cost of Perfection: A Design Professional’s Perspective:

Owners that involve themselves in a collaborative and cooperative team approach with the design professional (and construction contractors when identified) are most likely to accomplish successful projects. This team approach involves the honest exchange of ideas, information and problem solving efforts that minimize costs and improve results. However, there is a trend with some owners to define a successful project as one without any risk to the owner. This “risk free” approach is anything but risk free; in fact it may be just the opposite.

Each project is different, but the experienced design professionals on a given project have been through the basic process many times. The architect knows her role as designer. The engineer understands which skill set he brings to the table. This is not necessarily true of the project owner; he or she may come to the same table with some weighty misconceptions. Ironically, these misconceptions may be fueled by the owner’s knowledge that the design professionals have successfully completed so many projects before.

The nature of the design process is such that each project is unique – the first and only one exactly like it. This can be contrasted to a manufactured product that is perfected over time. Consumers buy products expecting perfection or make a trade-off to a lower priced option. Take, for example, a new car, which will be reproduced thousands of times. If you find a defect, you take it back to be corrected under warranty. This is because a manufactured product can be “perfected” through product testing, design improvements and manufacturing process improvements during the life of the production line for that particular model and its predecessors. While the engineering, design and construction community continues to improve its methodologies and learn from the past each project is different with its own unique challenges.

This Practice Note goes on to point out that thinking of the engineering and design process as a product has lead to some common misconceptions:

  • Contract documents are 100% complete, free of any defects and contain everything needed for the construction contractor to do the job.
  • No change orders are to be expected.
  • No contingency budgets are necessary.
  • Any construction change order probably stems from a design fault.
  • Once there is a construction contract, the owner only has to pay for changes in the work that the owner initiates.
  • All extra costs are damages regardless of their origin (e.g. project improvements or changes at the request of the owner should be borne by the owner).
  • Design professionals are responsible to see that the construction contractor builds it right.
  • Professional liability insurance is a no-fault policy.
  • Design documents or construction contract documents are “guaranteed” or come with a “warranty” to be free from defects and fit for the intended use.

To read more and pick up some real-life risk management strategies to aid in this tricky process, please visit our website. The free, full-length PDF version of this Practice Note is available.