Category Archives: Contracts

Can a designer limit his liability to his fees for service?

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Architects and engineers (and the owners/contractors with whom they contract) often wonder whether limiting liability language is enforceable.  The answer, as in much of construction law, is very much dependent on what state’s court will be interpreting the contract.  Some states allow such limiting language, and others do not.  Josh Glazov’s Construction Law Today blog recently tackled the enforceability of such provisions in the context of a recent Illinois case, in which the Illinois court found such limitations perfectly acceptable, so long as they (1) are not “unconscionable” and (2) do not violate public policy.

sign: proceed at own risk
 

North Carolina takes a very similar approach to such limitations of liability.  Here, so long as the limitation of liability is not also an agreement to be liable for the other party’s negligence (which is barred as against public policy), such a limitation of liability is enforceable.  A case discussing this issue from the engineering perspective is Blaylock Grading Co., LLP v. Smith et al, 189 N.C. App. 508, 658 S.E.2d 680 (2008).  In that case, a surveying engineer limited his liability, via contract, to $50,000.  The Court, citing an earlier state Supreme Court decision, ruled that the limitation was valid and enforceable:

People should be entitled to contract on their own terms without the indulgence of paternalism by courts in the alleviation of one side or another from the effects of a bad bargain.  Also, they should be permitted to enter into contracts that actually may be unreasonable or which may lead to hardship on one side.  It is only where it turns out that one side or the other is to be penalized by the enforcement of the terms of a contract so unconscionable that no decent, fairminded person would view the ensuing result without being possessed of a profound sense of injustice, that equity will deny the use of its good offices in the enforcement of such unconscionability.  Id. at 511, 658 S.E.2d at 682.

Is this rule absolute?  Clearly not, as the above quote indicates.  Unconscionable limitations will not be enforced.  Moreover, a third party, not subject to the contractual terms, is free to sue in negligence.  But as between the contracting parties, such a limitation on damages can be a powerful tool to minimize exposure to risk.

Questions about limitations on liability?  Comment below or drop me a line.  And be sure to sign up for email delivery of blog posts directly to your inbox.

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Photo:  “Proceed at own risk” by Dave Nicoll via Flickr/Creative Commons license 

Tues Tip: Check out the new AIA Bond forms

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Have you seen the 2010 AIA 312 Payment Bond Form?  If you regularly deal with AIA bonds, be Payment Officer looking at demolitionsure to check out this blog post, entitled “What changes you need to know about in the new AIA A 312 Payment Bond” from the New York Construction Law Update Blog.

  Of particular note:

There is a new section (7.3) that expressly states the surety’s failure to respond within sixty (60) days does not constitute a waiver of any potential defenses.  However, the new AIA A312 also states that if the surety fails to respond and if the claimant has to bring an action to recover under the bond, and is successful, then the surety will be responsible for attorneys’ fees incurred by the claimant. 

The new Section 16.1 provides certain minimum requirements that must be in the notice of claim to constitute a valid claim under the bond.  Previous versions of the AIA A312 did not contain such minimum requirements and a claimant in a rush could potentially submit a simple letter identifying the project and setting forth the amount of its claim to try and squeeze in before the deadline to submit a claim. 

While it is tempting and easy to skip reading standard form contract documents, that is not a good practice.  The new requirements involved in making a bond claim, for example, are something that would be easy to overlook if you have previous experience making bond claims– and it could be a very expensive lesson.  Moral of the story, as always, is to read your contracts, preferably with your attorney and insurance carrier at hand.

Do you use the AIA 312 Payment Bond form?  Thoughts about the new Form versus the old Form? Bonding questions in general?  Drop me a line or comment below.

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Photo copyright of U.S. Air Force and made available via Creative Commons license. 

Unlicensed Contractor & his partnership take a hit (Law Note)

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man banging head against wallImagine being told that you will not be paid for a house you constructed pursuant to a contract with homeowners.  And imagine that the reason for not getting paid had to do with whether or not you signed a contract “on behalf of” your partnership or whether you simply signed your individual name.  This is the exact case that Ron Medlin, partner in Ron Medlin Construction, is facing thanks to a recent North Carolina Supreme Court case, Ron Medlin Construction v. Raymond A. Harris, __ N.C. __, (December 20, 2010).

Ron Medlin entered into a contract with the Harris’ for the construction of a home not to exceed $604,800.  Of note, Medlin did not have a licensed general contractor’s license, as is required.  However, Ron Medlin Construction, a partnership, was appropriately licensed as a general contractor, and the partnership performed the work relating to the construction of the residence.

When litigation arose over cost overruns, the Harris’ claimed they did not need to honor the contract because it was with an unlicensed contractor.  Under North Carolina law, any person who performs work in excess of $30,000 needs to be appropriately licensed or he cannot recover for his work in the Courts.  (See Brady v. Fulghum, 309 N.C. 580, 586, 308 S.E.2d 327, 331 (1983)).  The partnership argued that it did not have a contract with the Harris’, yet it performed work in constructing the residence and, therefore, was entitled to recover a just amount under a theory called quantum meruit.  The Court held that the partnership ratified Ron Medlin’s individual acts, and as such the partnership was bound by the (unenforceable) contract and could not recover. 

The Court held, as a matter of law, that:

a contract for the construction of a home or building executed by a partner in a licensed partnership engaged in the construction business is the contract of the partnership unless the remaining partners can show that the partner was not authorized to act on behalf of the partnership and, if not so authorized, the partnership did not ratify the contract.

Moral of the story?  It is important that you follow the rules in signing and performing under construction contracts, as well as in maintaining your proper corporate formalities.  It might even be worth having your attorney review your construction contract before you sign it.    Unless, that is, you don’t mind that chance that you may end up performing some of your work for free.

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Photo:  “361/365 days -it feels good to stop” by badjonni via Flickr/Creative Commons license.

Pay when Paid & Pay if Paid

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pay here signRecently I was contacted by several readers asking questions about “Pay when Paid” clauses.  For those of you who may have missed it, I’ve previously addressed Pay When Paid issues in my April 29, 2010 post, Pay When Paid Clauses in the NC Construction Contract.

For a good discussion of the application of N.C. Gen. Stat. 22C-2, the Court of Appeals opinion American Nat. Elec. Corp. v. Poythress Commercial Contractors, Inc., 167 N.C.App. 97, 101, 604 S.E.2d 315, 317 (2004) is worth a read.

In that case, the electrical subcontractor sued the general contractor for delay claims. The contract provided that the contractor would only be liable to the subcontractor for delays if the contractor was compensated for such delays by the owner.  While such a term is clearly a “pay if paid” provision, the Court called the provision a “pay when paid,” and declared it unenforceable in North Carolina.  It seems likely, therefore, that the Court would find that both provisions have the same legal effect in North Carolina– that is, both are unenforceable.

One time when a “pay if/when paid” provision could be enforceable?  Residential construction of fewer than 12 units.

As always, consult your local attorney because such clauses very widely in their enforceability from state to state.

Questions or comments on “pay when paid” or “pay if paid”?  Drop me a line in the comments section, below.

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Photo: “Pay Here” via Freefoto.com / Creative Commons License. 

 

State Construction Project Terms (Guest Post)

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Eileen Youens

Eileen Youens

Today’s Guest Post is from Eileen R. Youens.  Eileen is  Assistant Professor of Public Law and Government at the UNC School of Government, where her areas of interest include public contract law, including purchase contracts, construction contracts, conflicts of interest, and disposal of property.

 The ABCs of IFBs, ITBs, RFPs, RFOs, and RFIs

What’s the difference between an IFB, and RFP, and an RFQ, and what are they anyway?  As I’ll explain in more detail in this post, what name you give a solicitation document—the document you use to solicit bids or proposals—is not as important as the process you use to award the contract.  And the North Carolina General Statutes usually dictate which process you’re required to use.

The Four Types of Documents

There are four main types of solicitation documents: (1) those used for bidding, where price is the primary factor; (2) those used to request proposals focusing on factors other than price; (3) those used to ask for someone’s qualifications; and (4) those used to gather information from potential bidders or proposers before starting the bid or proposal process.  I’ll explain below when local governments can use each of these four types of documents.

The First Type: Bids

Under North Carolina law, local governments are required to bid out purchases of “apparatus, supplies, materials, and equipment” (what I like to refer to as “stuff”) costing $30,000 or more, and contracts for construction or repair costing $30,000 or more.  (Local policies may require bidding on other types of contracts or for contracts costing less than $30,000.)  The bidding statutes, G.S. 143-129 (formal bidding) and G.S. 143-131 (informal bidding), require that these contracts be awarded to the lowest responsive, responsible bidder.  This “award standard” is what distinguishes bidding from other contracting methods.  To solicit bids, public entities usually use Invitations to Bid (ITBs) or Invitations for Bids (IFBs). For informal bids or for purchases or construction costing less than $30,000, local governments may also use a request for quotes (“RFQ” – not to be confused with another RFQ: the request for qualifications, discussed below).

The Second Type: Requests for Proposals

North Carolina local governments have the option of using a request for proposal process for the purchase of information technology goods and services (G.S. 143-129.8).  This process allows local governments to establish their own evaluation criteria (i.e., evaluating vendors based on how well their product meets your entity’s needs, rather than focusing primarily on price), and award the contract to the vendor “that submits the best overall proposal.”  I say that this is an option because if you’re purchasing IT “stuff” that costs $30,000 or more, you can either (1) bid it out (formally or informally, depending on the cost), or (2) use the request for proposal process described in G.S. 143-129.8.  On the other hand, if you’re contracting for IT services, those services don’t fall under the bidding laws, so you can either (1) use the request for proposal process described in G.S. 143-129.8, or (2) use any process you want to use, or no process at all (simply selecting the firm you’d like to work with), unless your local policy requires a specific process for the procurement of services.  Note that if you’re using grant funding, you must comply with the terms of the grant.  (For example, if the grant requires you to bid out IT goods instead of using a request for proposal process, then you have to comply with the grant.)

The North Carolina statutes refer to requests for proposals in two other situations.  First, G.S. 143-64.17A requires that all public entities in North Carolina use a request for proposal process for the procurement of guaranteed energy savings contracts (GESCs).  The statutes governing GESCs (G.S. 143-64.17 through G.S. 143-64.17K [scroll down to “Part 2. Guaranteed Energy Savings Contracts for Governmental Units”]) set out a specific request-for-proposal process and specific evaluation criteria that must be used for these types of contracts.  Second, the statutes allow North Carolina local governments to use a request for proposal process for contracts for the construction, design, operation, and maintenance of solid waste management facilities and sludge management facilities.  The statute governing these contracts is G.S. 143-129.2.

As I mentioned above, local governments are not required to bid out services (aside from design services—discussed below).  In fact, the General Assembly has decided to let local governments choose how to procure services.  Many local governments use requests for proposals to procure services, as a way of seeking competition while considering factors in addition to price.  When a local government uses a request for proposals to procure services, the local government decides how the proposals are evaluated, what the timeline is, whether to advertise or not, and whether to open proposals in public or not.  In other words, when procuring services, it’s up to each government to decide what process will best balance its needs for (1) good quality services, (2) value, (3) transparency, (4) efficiency, and (5) fairness.  (As I mentioned above, if you’re using grant funding, you’ll need to comply with the terms of the grant; if the grant requires a competitive process for awarding contracts for services, you’ll have to comply with those terms.)

So the term “request for proposals” (RFP) covers a range of solicitation documents.

The Third Type: Qualifications-Based Selection

G.S. 143-64.31 (sometimes referred to as the “Mini-Brooks Act” because it’s based on a federal law called the “Brooks Act”) requires local governments to procure architectural, engineering, surveying, or construction-management-at-risk services—regardless of the contract amount—by focusing on qualifications rather than price.  (Note that local governments can exempt themselves from this process.) So when people solicit these services, they often use a “request for qualifications” (RFQ).

You can also use qualifications-based solicitation (or some variation thereof) for other types of services.  Again, since the general statutes don’t require the use of a specific process (or any process) for procuring services, the process you use is up to you (as long as you comply with your local policies or grant terms, if you’re using grant funding).

The Fourth Type: Information Requests

Another acronym you may see is RFI—a “request for information.”  RFIs are not used to procure goods or services directly, but instead are used to solicit information about purchases or projects you’re planning to procure in the future.  For example, if you know you’re going to have to buy some new police cars next year, and it’s been a while since you’ve bid out police cars, you could send out RFIs to several car dealers or manufacturers to find out what new features are available and what models might best meet your needs.

The Bottom Line

William Shakespeare really said it best:

“What’s in a name? That which we call a rose

By any other name would smell as sweet.”

In other words, the substance of the document is more important than what it’s called.  If you’re soliciting firms to perform architectural services, your solicitation document must ask for qualifications instead of price, even if you call it an IFB.  And if you’re bidding out a $1.2 million construction project, you have to award the contract to the lowest responsive, responsible bidder, even if you call your solicitation document a rose an RFP.

Eileen and I welcome your thoughts and questions in the comments section, below.

[hat tip to Mike Purdy, of Mike Purdy’s Public Contracting Blog, for bringing Eileen’s post to my attention]