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General Contractors and Subcontractors: Navigating Liability in Construction Claims

Posted in Legal Alerts on July 5, 2022

In Florida all construction claims must comply with the pre suit requirements of Florida Statute Section 558. The property owner is obligated to follow a legal process under Fla. Stat. § 558 that requires them to first notify all applicable contractors and subcontractors about the defect before taking any additional legal action. If a contractor believes one of its subcontractors was at fault for the defect, the contractor will forward the § 558 notice to them. Both the contractor and subcontractor may be present at a walkthrough of the property to see what the property owner claims is a defect. Under the statute the contractor must provide a response within a specific time period. The benefit of the process, is it allows the contractor in early to review the project and potentially make an offer of repair or resolution without litigation. It also benefits the contractor to put on notice all responsible subcontractors for risk transfer obligations to either defend, indemnify or both for their work on the project.

Indemnification in a Contractor-Subcontractor Relationship

There are two types of indemnities:

• A common law duty of indemnity when one party is constructively or vicariously liable for the actions of another party.
• A contractual right of indemnity when the parties to an agreement include it as a clause.

A contractor remains liable to the property owner when one of its subcontractors fails to use due care in their work on the job. The contractor may be indemnified by the subcontractor and reimbursed for the damages the contractor had to pay if the damages resulted from the subcontractor’s lack of care and the subcontractor is legally obligated to indemnify the contractor.

A contractor’s right to seek indemnification from a subcontractor is subject to the following limitations:

• The contractor must be entirely without fault.
• The contractor must have an obligation to pay someone else because of some type of derivative or vicarious liability for the actions of the subcontractor.

How Indemnity Clauses Work in Practice

In many cases, a contractor and subcontractor will point their fingers at each other. From a subcontractor’s perspective, they may be relieved of liability if they can show the contractor was to blame. The subcontractor will likely try to argue the contractor was aware of the construction defect or defects being blamed on the subcontractor. If the contractor is aware of the defects and does not take action, the contractor may be actively negligent themselves, leaving them likely unable to seek indemnification. These disputes will be heavily factual, often involving issues of who knew what and when.

Usually, contractors have bargaining power when they hire a subcontractor because the contracts contain an indemnification clause which may include a:

• Hold harmless clause : The contractor requires the subcontractor to hold them harmless from any liability for all work executed by the subcontractor during the construction project.
• Duty to defend clause : The contractor will usually insist the subcontractor pay any legal costs the contractor incurs for defending itself if there is a lawsuit that relates to work performed by the subcontractor.

Contractors must be careful not to overreach if they include an indemnification clause in a contract. If the contractor is seeking indemnification even for their own acts of negligence, the clause must comply with Florida Statute 725.06 and make sure their provision states that damages they try to collect must bear a reasonable commercial relationship to the contract, and there must be a monetary limitation on damages listed in the contract. In other words, a contractor cannot seek to profit by way of an indemnification clause; otherwise, they risk losing the right to indemnity. A review of the construction contracts is essential in determining risk transfer opportunities and obligations of the parties involved.

How to Handle Disputes Between Contractors and Subcontractors

In general, there are four ways to address a liability dispute between a contractor and subcontractor:

1. Negotiation : The best way to handle a dispute between a contractor and subcontractor is through direct negotiation, where each party can state its position and make compromises.
2. Mediation : If the parties need help resolving a dispute, a neutral third-party mediator can facilitate discussions between them, stressing areas of common agreement and helping to bridge gaps.
3. Arbitration : If a dispute still cannot be resolved, the parties can agree to allow a neutral third-party arbitrator to issue a binding decision. This is determined by the contract which selects arbitration process. A party cannot be compelled to arbitration without an agreement or contract provision.
4. Litigation : If the parties cannot resolve their dispute, they will need to go to court. When construction disputes end up in litigation, you can expect a number of claims and counterclaims to be filed by all parties. The process is lengthy and expensive

Tips for Handling Contractor/Subcontractor Disputes

Below please find concrete tips for both contractors and subcontractors regarding how to best prevent and/or approach construction liability disputes:

• Make sure the contract is as detailed as possible to reduce uncertainty.
• Review the terms of the contract closely to know what you are signing.
• Maintain extensive documentation on the issue, taking pictures and preserving all relevant evidence throughout the original construction and or any inspections.
• Hire an experienced construction attorney well before your disagreement heads into litigation so you can prepare for the possibility of litigation and or to manage compliance with Florida Statute and selection of experts.
• Keep detailed records of insurance coverage;
• Hire an expert to attend inspection on complex construction issues to document the conditions.

A dispute between a contractor and a subcontractor over construction defects and other construction-related issues can be expensive and threaten builders reputation. Bringing on an attorney could be one of the most important steps a contractor or subcontractor takes, as it can make the difference between a prompt resolution and lengthy battle that drags on for months or even years.

Contact Jayne Pittman, managing partner in Orlando and chair of the firm's construction practice group, on how she can assist you with construction related claims or if you have any questions.