Looking Forward: A workman’s view of the construction business and the practice of construction law.

A few weeks back my colleague, mentor and friend Greg Faulkner wrote a post here that looked back on his 25 years as a construction lawyer.  It was a very thoughtful piece and frankly I think it was one of the best legal blog posts I have read.  You an access it here: https://www.constructionlawzone.com/2016/07/twenty-five-years-in-the-construction-industry-weve-come-a-long-way-baby-or-have-we/

As you might expect, more than a few things that Greg alluded to got me thinking about the construction business and how it’s intertwined with the practice of construction law.  As a construction lawyer who sits “in the trenches”, and has for some time, I feel that I can also offer a valuable perspective.

One of the things that never ceases to amaze me is how often construction professionals and even other lawyers are unaware that “construction law” is a practice focus.  Even though some feel that lawyers run the industry (http://www.enr.com/articles/8303-viewpoint-lawyer-as-constructor) (let me assure you we do not) you’d be surprised at how much of the industry misconstrues the nature of our practice and our role in delivering and helping to keep a project on the rails and out of the halls of justice.

Probably the biggest misconception I find is that a construction stakeholder needs to call their lawyer only when a project starts to move sideways (off the schedule or over the budget) or when an impasse is reached on a claim.  In fact, I feel that the opposite is true.  A construction lawyer wears two distinct but related hats.  We are certainly dispute resolution lawyers – it is a large part of who we are and what we do.  We help our clients identify and prosecute or defend claims.  We mediate, we arbitrate and we try cases to a judge or jury.  But, we are also very much transactional lawyers – we write, negotiate and facilitate the timely and appropriately timed execution of design professional, project/program manager and contractor/construction manager contracts.  Our dual role as “litigators” and “transactional lawyers” allows us a somewhat unique perspective.  Each of us has helped clients deal with a project that has gone all the way down the tubes and ended up in front of a judge or arbitrator.  We have battled claims and, as Sonny Coreleone once said, we have “gone to the mattresses”.   I feel that these experiences help us be more effective on the front end of a project.  Meaning, because we have seen things go wrong, we can better identify project risks before they arise so that when things do go wrong our client is prepared.  With that in mind, we can advise our clients, based on practical experience, how best to manage, allocate and mitigate risk.

In the ideal scenario we are one of the first stops on the project continuum.  We hope that our clients, who include owners, developers, PMs, designers, construction managers, trade contractors or other construction professionals, come to us as soon as they become involved in a project.  As any construction practitioner will tell you, a well written, clear, concise and fairly balanced contract is the first step in delivering a successful project.

Over the last few years I have witnessed a distinct shift in the industry where stakeholders have increased their focus on up-front risk identification and allocation.  Greg alluded to this in a couple of sections in his piece (re: partnering and teaming and the industry’s evolving view of dispute resolution).  That leads me to where I see things today and where I hope things go in the future . . .

I tend to work mostly with developers, owners and to a lesser, but still significant degree, with contractors/construction managers.  Over the last five to eight years or so my experience has been that developers, owners and construction professionals have been increasingly and more sharply focused on teaming, collaboration, risk sharing and collective goal setting.

Today I often see our owner clients involving a construction professional before design commences in earnest to identify and discuss construction/project feasibility and budget with real-world reference points.  Likewise, I see our construction professional asking for access to the design as soon as possible.  I continually see owners discussing the process and facilitating the collaboration of their design and construction professionals so that they can eliminate confusion, lack of clarity or constructability issues arising from a design and turn “assumptions and qualifications” into tight drawings, specs and reliable budget line items.  I also see a distinct focus on open lines of communication, asking for honest and dependable information and recognizing the collective goal that all parties are in the game to make a profit – hopefully something very close to the profit that they anticipate at the project’s outset.  I also regularly see, while discussing contract terms in concept, our clients concerned with fair and balanced risk allocation in light of developing a continuing relationship with the party with whom they are negotiating.  In short, it seems to me that more often than not stakeholders are looking to develop relationships of trust based on open and honest communications.

Now, with all of that said, I and the rest of our group spend a large part of our time helping our clients prosecute and defend claims, navigate disputes during the project and, as a last resort, resolving disputes before an arbitrator or judge.  But, one of the things that has become quite apparent is that all stakeholders have recognized the very significant costs associated with engaging counsel for the long trip from assertion of a claim to judgment.  Rightfully so, stakeholders tend to see every dollar they spend on dispute related legal fees as a diminution in the project profit they have worked so hard to protect. As such, and in keeping with the seemingly growing atmosphere of teaming, I have seen parties adapt their contract clauses to fit this philosophy.  Specifically, contracts now often contain mandatory mediation, as a condition prior to arbitration or litigation.  Stakeholders are also asking for a contractually mandated meeting between principals to attempt to reach a good faith resolution of a dispute even before moving to mediation.  Of course, not all disputes result in settlement prior to litigation or arbitration, but taking into account the cost of legal fees and the potential for delays, many see the time and effort prior to counsel’s involvement as well spent.

Twenty-Five Years in the Construction Industry—We’ve Come a Long Way Baby, or Have We?

Pearl Jam CoverIn November 1989, I was a second year law student interviewing with firms in Connecticut and New York for a summer associate position.  During the Thanksgiving Holiday, I scheduled an interview with a small firm in New Haven.  The firm’s primary area of practice was construction litigation. I had no idea what “construction litigation” entailed, and I knew even less about the construction industry itself.  My grandfather was a mason, but he had died long before I was born.  Nonetheless, maybe it was a sign.  The interview went well and I was sufficiently intrigued to take the offer to serve as a summer associate in the Summer of 1990.

My Summer went well and I accepted a full time position with that firm in 1991—25 years ago.  The legal profession and the construction industry have changed quite a bit over the past 25 years.  Has it all been for the better?  My silver anniversary as a construction lawyer gave me the opportunity to look back on how the industry has evolved over the past several years.

A Pop Culture Frame of Reference

Big Dig Signs PhotoFirst, I tend to use pop culture and sports to provide context, so I’ll digress a bit to give a frame of reference for how the world looked in 1991.  The first Persian Gulf War began and ended.  The best-selling book that year was The Firm, by John Grisham; appropriate, I suppose, for a first year lawyer.  Silence of the Lambs was the major hit movie, and the top 3 albums were three of my all-time favorites—Nevermind by Nirvana, Ten from Pearl Jam and Achtung Baby from U2.  Nolan Ryan had just thrown his seventh career no hitter, and Michael Jordan won his first NBA Championship.  Law & Order was in its first season.  OJ Simpson was an NFL sideline reporter for NBC.  It would be another three years before the nation was captivated by the infamous white Bronco chase.

Chunnel

In the construction industry, the Big Dig in Boston began construction, and the Chunnel construction was well under way, ironically connecting England to the rest of Europe.  It would be completed three years later.  I think the Big Dig is still under construction.

 

Practicing Law in 1991

On my first day of work, I was handed a Dictaphone, a box of pens and notepads.  I would not receive my first computer desktop until a year or two later.  It would be a few more years before I was connected to the internet, right around the same time that I picked up my first cell phone.  It was physically attached to the dashboard of my car and it would not fit in my back pocket.  If a pleading had to be filed in court or sent to the opposing party on the same day, a retired gentlemen named Sam hopped in his wagon to make the hand delivery, unless we were cutting it close, in which case those of us who tended to drive a little faster would take care of the delivery ourselves.  Document inspections were performed at job trailers, rather than on SharePoint sites.

The Construction Industry Turns to Partnering and Project Teaming

In the construction industry, the traditional design-bid-build method was still being used on most projects.  The architect created the design, the owner sent the design out to bid, and the construction team built the project based on what everyone hoped was a complete design for a fixed price.  Nonetheless, the industry was starting to turn toward more collaboration among the parties, and the concept of “partnering,” a method of improving communications by setting common goals and monitoring achievement of those goals, was adopted by the Associated General Contractors and the Army Corps of Engineers in 1991.  The idea of “partnering” would continue to evolve over the next 25 years, as the construction team became involved earlier in the process, especially in the analysis of constructability and estimating, leading to what we now recognize today as “Integrated Project Delivery.”

Industry Forms in 1991

The industry was just weaning itself off of the 1976 AIA forms, and adopting the 1987 version.  Making edits to the AIA forms in 1991 was a much more time consuming task, so construction professionals and their attorneys held on to their 1976 templates as long as possible.  Major changes were to come to the AIA documents and all industry forms, in response to an evolution of the case law and in dispute resolution, but those changes were still a few years away.  The 1987 AIA forms required mandatory arbitration (no check boxes for alternative dispute forums).  They did not contemplate any waivers or limitations in damages.  The parties did not contractually waive subrogation rights on behalf of their insurers, thus providing insurers an opportunity to recover proceeds paid from those whom the carrier believed to be responsible.  The AIA Architect Agreements contained no reference to insurance, leaving owners without any ability to confirm what coverages their architects had in place.

Court Decisions Impact the Industry

During the 1990s, a series of court decisions and industry developments led to an evolution in design and construction contracts, and the introduction of legislation throughout the country aimed at increasing protections for the construction industry.  As contractors and subcontractors complained that they were not getting paid in a timely manner, legislators started listening, and states enacted prompt pay laws. The penalties imposed on parties for failing to pay pursuant to these prompt pay laws varies a great deal from state to state, and thus the question remains as to how successful these prompt pay statutes have been in reducing the time that contractors and subcontractors must await payment.  Retainage on construction projects was also addressed.  In the early 1990s, it was typical for owners to hold 10% retainage as security until the very end of the project.  States began enacting laws that would reduce retainage to as little as 5% or less, even on private projects.

Design and construction contracts are complex commercial transactions.  In the early 1990s, most in the construction industry probably did not appreciate the effort required to negotiate the agreements fairly, until certain court decisions changed that perspective.  Throughout the course of the 1990s, courts enforced clauses that limited or completely eliminated recovery for delay related damages.  Lien waivers executed prospectively (in many cases before work even began) were upheld.  Courts assessed massive consequential damages and lost profits against delinquent contractors, in some cases leading to bankruptcy or dissolution of the contractor.

The Industry’s Response

In response to these decisions, the industry modified its contract forms to limit certain exposures, and construction and design professionals more aggressively negotiated contractual provisions that otherwise may have gone unnoticed.  For instance, the AIA added a sweeping waiver of consequential damages clause to its forms, limiting the construction team’s exposure to owner claims for lost revenues and delay related damages.  State legislatures also responded by enacting statutes voiding certain contractual clauses , such as prospective waivers of lien on work for which a contractor or design professional had not been paid.

More recently, the industry has become creative in its efforts to resolve disputes more efficiently.  It is rare to find a contract that does not require non-binding mediation as a precondition to arbitration or litigation.  Many contracts also require principals to meet in an effort to resolve disputes before calling in third parties.  On particularly large projects, pre-appointed “dispute review boards” may decide disputes as they arise on the project, rather than allowing claims to fester for the duration of the project or longer.

How Far Have We Come?

So, are we better off now than we were in 1991?  Musically, I would argue not.  My downloads rarely include songs written after 1991.  But as I look back on my 25 (or more) years in the construction industry, it’s hard to argue against the positive developments overall.  Contracts tend to be more thoughtful and fair.  Massive defaults, while still a part of what remains a risky business, are less prevalent.  Parties are more engaged in seeking to prevent disputes before they arise; and when they do, finding solutions to disputes, rather than engaging in costly and contentious court or arbitration proceedings that can harm long term relationships.  My practice, which was at one time almost exclusively based in litigation, is now more devoted to selection of project delivery, procurement, contractual negotiations and risk management, to avoid such disputes.

Are contractual negotiations sometimes more tortured than they need to be?  Probably.  Has the industry become a bit too risk sensitive?  Arguably, parties should be more willing to accept responsibility for their actions.  But overall, I think we are in a better place.

Let’s see what the next 25 years bring!  Unless I win the lottery, I anticipate being around for most of it!

Pearl Jam cover photography by ijclark, some rights reserved. Big Dig photography by Nantaskart, some rights reserved. Chunnel photography by Sam Churchill, some rights reserved.

Contractual Waiver of Subrogation Applied to Owner’s Non-Work Property

After an insurer pays for a covered loss by an owner under a property policy the insurer generally has the right, whether under the common law, statute or the policy itself, to seek recovery of the payment from the responsible party.  This is known as the right of subrogation, or if based on the common-law right, equitable subrogation.  Under the doctrine of subrogation, the insurer “stands in the shoes” of the insured owner and exercises its right to subrogation by enforcing the owner’s rights against the responsible party.  However, the insurer is not only limited to enforcing whatever rights the owner may have, but is also subject to any applicable defenses against the owner.

Nevertheless, construction contracts, and in particular those that incorporate the AIA form A201 General Conditions, often include so-called “waiver of subrogation” provisions, which operate to bar claims by the owner or its insurer for property damage caused by the contractor (and often the subcontractors, suppliers, and architect), to the extent that the property damage was covered by the owner’s property insurance.  Such insurance is often a builder’s risk policy that the owner was contractually required to purchase, which typically covers damage to the contractor’s “work,” i.e., the actual construction performed by the contractor under the contract, and does not extend to cover other areas of the owner’s property, i.e., the “non-work” property.  Under these circumstances the contractor’s general liability policy is expected to provide coverage for accidental damage to the “non-work” property.  This allocation of liability is intended to place the responsibility to pay for accidental damage to the owner’s property during construction on the insurers, rather than the parties themselves, and avoid disputes and disruptions on the project over who is responsible.

Article 11 of the more recent versions of the AIA A201 General Conditions (1987, 1997 and 2007) allows the owner the option of relying on an existing property policy that covers the contractor’s “work,” rather than purchasing a builder’s risk policy.  Such property policies typically cover damage caused by the contractor to both “work” and “non-work” property, and are likely to apply when the project involves improvement, renovation or expansion of the owner’s existing property.  When the project involves new construction, the owner will more likely purchase a builder’s risk policy for the duration of the construction, and the entire project is usually considered to be the contractor’s “work.”

Considerable litigation has arisen as to whether the waiver of subrogation provision applies to bar an insurer’s subrogation claim against a contractor to the extent the insurer covered damage to the owner’s “non-work” property under the owner’s existing property policy.  The majority of jurisdictions have held that the waiver of subrogation provision in the construction contract applies to bar subrogation claims where the owner’s property policy covers the damage to “non-work” property.  This is the rule in Massachusetts.  See Haemonetics Corp. v. Brophy & Phillips Co., 23 Mass. App. Ct. 254, 501 N.E.2d 524 (1986).  However, the New York Court of Appeals sides with the minority view that a waiver of subrogation provision only applies to covered damage to the contractor’s work itself.  See S.S.D.W. Co. v. Brisk Water Proofing Co., 76 N.Y.2d 228, 229, 556 N.E.2d 1097, 557 N.Y.S.2d 290 (N.Y. 1990).

No appellate-level court has yet ruled on this issue in Connecticut.  However, a recent decision by the Connecticut Superior Court, Conn. Interlocal Risk Mgmt. Agency v. Silktown Roofing, Inc., 2016 Conn. Super. LEXIS 593 (March 22, 2016) (hereinafter, “CIRMA”), agrees with the majority rule.  In CIRMA, the plaintiff insurer had paid under the owner’s existing property policy to cover damage caused when fireproofing material became dislodged and fell during a high school roofing project.  The insurer then sought to recoup that payment by way of a subrogation action against the roofing contractor.  The contractor moved for summary judgment based on the waiver of subrogation provision in its contract with the owner.  The insurer argued that the waiver of subrogation provision applied only to the contractor’s “work,” which did not include the fireproofing material or interior areas where it fell.  The court disagreed, adopting the majority view that a waiver of subrogation provision of the type contained in the AIA A201 General Conditions applies to bar a subrogation claim where the owner’s property policy covered both “work” and “non-work” property.  Based on this reasoning, the court granted the contractor’s motion for summary judgment, and this result was not appealed.

Arbitrators Have Inherent Authority To Award Punitive Damages

In RV V Lockworks, LLC v. Five Yale & Towne, LLC, 2016 Conn. Super. LEXIS 563 (Conn. Super. Ct. Mar. 16, 2016) an arbitrator awarded punitive damages to the purchaser of a newly-constructed 300-unit apartment complex when it was discovered that the seller had intentionally concealed knowledge of the fact that all 300 balconies attached to the complex were constructed in violation of Connecticut’s state fire and building codes.

In this recent Superior Court decision, Judge Heller held that an arbitrator has the inherent authority to award punitive damages in the absence of an express provision in the arbitration submission to the contrary. The court confirmed an arbitration award where the arbitrator awarded punitive damages based on the defendant’s concealment of construction defects and code violations. This case should serve as a reminder that arbitration is not a safe haven from punitive damages.

In performing its due diligence in connection with the purchase of the complex, Lockworks identified multiple defects and problems with the construction. Five Yale, the seller, agreed to remediate these issues by the closing date, but failed to do so. The parties entered into a holdback escrow agreement to secure the cost of the remaining repairs as well as Five Yale’s representations and warranties under the purchase agreement. This purchase agreement provided for arbitration in the event of a dispute concerning the distribution of the escrowed funds.

Nearly six months later, Lockworks was notified by the Fire Marshal that all of the balconies attached to the complex failed to meet Connecticut state fire code and the state building code because they were constructed with Trex decking, a material not designed as non-combustible. Lockworks was advised that it would either need to install sprinkler coverage for the balconies or replace the decking with a code compliant material. Five Yale informed Lockworks that it was not previously aware of any of the noted code violations, and the purchase agreement contained a statement by Five Yale that it had no knowledge of code violations or defects.

Lockworks demanded arbitration alleging, among other things, that Five Yale had breached its representations and warranties with respect to code violations. The parties engaged in discovery pertaining to all claims and allegations, and Lockworks specifically requested documentation relating to the construction of the balconies and related inspections. After several days of arbitration, Lockworks received documents from a third party that demonstrated Five Yale knew for quite some time that the balconies may not be code compliant. The concealment of this information came out during the questioning of Five Yale’s chief estimator. Thereafter, Lockworks sought leave to amend its arbitration demand to assert a claim for punitive damages.

The arbitrator awarded Lockworks punitive damages in the amount of $210,923.41 after determining that Five Yale sold the complex with knowledge that all 300 balconies were in violation of  the state fire and building codes. The arbitrator found that Five Yale engaged in a conspiracy to conceal that was both egregious and recklessly indifferent to the rights of Lockworks and future tenants of the complex.

Lockworks sought to have the court confirm the arbitration award, and Five Yale objected and moved to partially vacate or modify the award. The Court confirmed the arbitrator’s decision to award punitive damages. The decision noted that arbitration is a creature of contract, and that the parties submission to the arbitrator defines and limits the issues to be decided.  Since the parties did not restrict the arbitration clause in the escrow agreement in any way, the court found that the arbitrator did not exceed his authority in awarding punitive damages. In so finding, the court stated that “in the absence of an express provision in the submission precluding an award of punitive damages, an arbitrator has the inherent authority to award punitive damages where the evidence supports such an award under applicable law.” Citing Med Val USA Health Programs, Inc. v. Member Works, Inc., 273 Conn. 634, 872 A.2d 423 (2005) (arbitration panel found defendant had engaged in unfair and deceptive acts in violation of CUTPA and awarded punitive damages under provision in CUTPA providing for such award).

Ready . . . Set. . . Stop — Travel Crawls Along During I-84 Interchange Construction

With Memorial Day weekend upon us, I am looking forward to a trip to New Hampshire to enjoy warm sunshine, cold beverages and a little R&R sitting on the front porch and looking at the mountain view.  But before I get there, I will be one of the 38 million Americans expected to travel.  This will be what AAA projects will be the second-highest travel volume on record and the most since 2005.  Spurred by the lowest gas prices in more than a decade, about 700,000 more people will travel this year compared to last. Memorial Day is the kick off to summer and the kick off to traffic, traffic, traffic.  Add a little highway construction to summer travel plans and you have a perfect storm for the frustrated “wish I was on vacation” worker.

Travel through Hartford this summer will not make the trip up North much easier, as the Route 2/I-84 Interchange Bridge Rehabilitation Project gets underway.  According to the Department of Transportation we can expect long-term ramp closures, detours and land closures as the reconstruction of four bridge structures within the Route 2/I-84 Interchange in East Hartford commences.

Despite the frustration this will undeniably cause commuters and vacationers alike, this is a much needed construction project.  The I-84 corridor is less than 2 miles long, yet contains approximately 4.3 miles of mainline and ramp bridges.  It has a total elevated deck area of 1.1 million sq. ft. which equated to nearly 25 acres.  These structures were designed to sustain a 50-year life span.  But since they were built in the 1960s, that time has come.  In fact, many of the bridges within the I-84 corridor have a rating of 4 or 5 which the Connecticut Department of Transportation describes as “fair to poor.”  Despite the $58 million already expended to maintain the bridges, and an additional $45 million allocated for repairs through 2017, the maintenance, repairs and money will not perpetuate the longevity of the bridges indefinitely.  Bridge replacement is necessary.

But as with many construction deficiency projects, repair and rebuild presents an opportunity for redesign and improvement.  In the case of the I-84 interchange project, modifications to the current interchange design presents an opportunity to reduce accidents and improve the flow of traffic.  From 2009 through 2011, approximately 1,850 motor vehicle accidents were reported within the corridor.  When the corridor was originally built it was designed to accommodate 50,000 vehicle per day.  Today there are more than 175,000 vehicles using this 2 mile corridor.  Redesign of the confusing, closely spaced interchanges may help to reduce accidents.  The design of the I-84 interchange is not finalized, and is guided by a federally-regulated program which requires developing alternatives, obtaining stakeholder input and performing environmental assessment impacts — a process that involves many players and many years.  As such, the final project, currently in the environmental phase, is likely to require approximately ten years to complete.

So, rather than canceling your vacation plans because of planned closures, add a little more extra time to your drive and while you wait in the holiday traffic, think about how happy you are about to feel when your bare feet are in the grass, the sand, the lake or wherever your travels take you this Memorial Day weekend.

Subcontractor Not Entitled to Payment After Refusal to Perform Disputed Extra Work

In the hustle and bustle of completing a construction project it can be easy to overlook the importance of the contract.  However, when a dispute arises the contract generally dictates the outcome of that dispute.  A recent unpublished Massachusetts Appeals Court decision serves as a reminder of the importance of the contract.

In ACME Abatement Contractor, Inc. v. S&R Corp., 88 Mass. App. Ct. 1102 (2015), the plaintiff subcontractor entered into a contract to perform asbestos removal for a contractor on a public project.  During the course of the project, the contractor directed the subcontractor to remove paint at the project.  The subcontractor refused to perform the work claiming that because the paint did not contain asbestos it did not have an obligation to perform the extra work.  The contractor ultimately hired another contractor to perform the work and refused to pay the subcontractor the balance of its contract price.  As a result, the subcontractor filed suit against the contractor seeking payment for its unpaid contract balance.  In response the contractor filed a summary judgment motion seeking to dismiss the claim.  The contractor argued that the subcontractor’s refusal to perform the work constituted a material breach of the contract precluding the subcontractor’s recovery of its contract balance.  The appeals court agreed and affirmed the trial court’s decision dismissing the subcontractor’s claim.

In support of its decision, the court relied solely upon the terms of the contract.  Specifically, the court noted that the contract required the subcontractor to proceed with work or extra work even in the event of a dispute.  The contract further provided that the failure of the subcontractor to perform such work “shall constitute a material breach of [the] agreement…”  As a result, the court held that the subcontractor’s failure to perform the disputed extra work constituted a material breach of the contract precluding recovery of its contract balance.  The court further held that the subcontractor’s failure to perform the extra work also precluded its recovery under the equitable theory of quantum meruit.  In support of its conclusion the court noted that in order to recover under quantum meruit, the subcontractor must demonstrate that “there is an honest intention to go by the contract, and a substantive execution of it…”

The language contained in the subcontract in this case is not uncommon.  In fact, paragraph 15.1.3 of the AIA A201 contains a similar requirement for the contractor to continue with performance of the work pending resolution of a claim.  Notably the AIA A201 does not state that failure to comply with the provision is a material breach of the contract, however this decision could be seen as persuasive authority to reach a similar conclusion involving a project using the AIA A201 contract form.  Therefore, when a dispute arises during the course of a project it is critical that each party review the terms of the contract to ensure compliance with its terms and avoid taking action that could ultimately preclude recovery under the contract and law.

Recipe for a Project Bankruptcy: The Owner in Bankruptcy Through The Lens of the Construction Manager

Industry leaders agree that the economy has turned the corner and private construction projects are on the uptick.  Banks have eased lending requirements and there is more private equity money on the streets.  Inexperienced developers are entering the arena and experienced developers are less guarded and taking on more risk.  On the flip side, small general contractors are growing into large construction managers and those guys who worked from their pickup trucks a few years back are now “reputable” trade contractors bidding on multi-million dollar subcontracts.  All of these ingredients are a recipe for a project bankruptcy.

This article is the first in a series that will examine the implications of a bankruptcy filing by an owner, a construction manager and subcontractor from the perspective of both a construction manager and then an owner.  This article addresses the owner’s filing for bankruptcy during the construction phase of a project from the construction manager’s perspective.

As a construction manager, the starting point for protecting your company from an owner bankruptcy is the construction contract itself.  Many states including New York, Massachusetts and Connecticut have significant statutory schemes protecting a contractor’s right to payments and providing for lien rights and maximum retainage withholding on most large private construction projects, among other protections.

Prudent construction managers will negotiate the most favorable payment terms possible; and once the work commences they won’t get too far ahead of the payments.  Payment terms should be no more than thirty days and many states have statutes mandating the timing of payments.  Construction managers should seek the right to suspend work for non-payment and the ability to collect interest on late payments.  Retainage should be limited to the statutory minimum but in no case greater than 10%.  Provisions that provide for the early release of retainage, including payment of retainage upon completion for those large subcontractors who perform and complete their work early (e.g. site work, concrete etc.) will reduce the amount of earned contract proceeds at risk should a bankruptcy be filed.  The standard AIA clause providing the construction manager with the right to reasonable evidence of the owner’s financial ability provides added security if warning signs of financial trouble appear.  Construction managers should carefully review lien waivers ensuring proper carve-outs for change orders and other claims.  Finally, a strong form subcontract with “paid if paid”, and trust fund language will protect your company against subcontractor claims in the event of an owner bankruptcy.

If an owner bankruptcy is in fact filed the construction manager should immediately determine its lien rights and to the extent permitted under state law file or perfect a mechanic’s lien against the property.  If the owner leases the building or land an investigation should be made to determine what extent a lien can be filed against the fee simple owner in addition to the project owner’s leasehold interest.  In most states like New York and Connecticut, if it can be established that the fee simple owner consented to the performance of the work a lien can be filed against the fee simple owner who is not in bankruptcy and will probably be quite motivated to obtain a release of that lien.  Once liens are filed most states require their perfection which typically requires a bankruptcy court notice or bankruptcy court intervention.  To foreclose upon a lien, a construction manager would need to obtain relief from the automatic stay.

Next, track down the retainage.  Remember, retainage monies are earned contract proceeds which arguably are not the property of the owner or its bankruptcy estate.  To the extent these funds were segregated a good basis might exist to obtain the release of these monies from the estate.  Several states including New York have strong trust fund statutes that provide added protection for earned contract proceeds and strengthen the construction manager’s ability to recover these funds including retainage in bankruptcy.

Although most subcontracts contain some form of a “paid if paid” or “paid when paid” provision, the enforceability of which is questionable depending upon where the project is located, contact subcontractors and attempt to negotiate liquidating agreements.  Such an agreement recognizes the costs associated with pursuing an owner for contract funds and retainage and allocates the associated costs and risks up front.  Most of these agreements provide the subcontractor with a right to participate in the process and a seat at the table for any mediation or settlement discussions.  Importantly, to be effective, a liquidating agreement should limit the construction manager’s liability to the amount actually recovered from the owner for the subcontractor’s work less costs and fees.

Other bankruptcy considerations for construction managers include considering whether a 503(b)(9) claim can be asserted, which can provide payment for materials furnished to the project in the twenty days leading up to the bankruptcy filing at a priority payment above that of general unsecured creditors.  Also investigate the possibility of finishing any uncompleted project under a new or existing agreement.  The construction manager of record brings to the table knowledge of the work in place, budget, subcontractor relationships and other points of leverage.  These might be used to negotiate full or partial payment for the work in place in exchange for an agreement to finish the project.

While most bankruptcies are unexpected at the start of a project, the ingredients tend to appear like warning signs as the work progresses.  Take notice and react accordingly.  Note that while this article sets out general observations, the actual circumstances encountered will dictate what actions or strategies should be employed and a construction manager should always consult their attorney before taking any action.

Nuisance Claim Against Architect Dismissed

“Use the right tool for the job” is also a good bit of advice in litigation, as underscored by a recent decision out of the Connecticut Appellate Court. The case is Fisk v. Redding, AC 37537 (April 19, 2016).

At the center of the case was a block retaining wall constructed as part of a streetscape improvement in Redding.  Although unquestionably an upgrade (see links to the before and after street views), the construction was beset by two separate accidents in which pedestrians fell from the wall and were injured.  The resulting lawsuit named the architect, contractor and Town of Redding as defendants, seeking recovery on a theory of public nuisance.  Nuisance claims are often made against towns, less frequently against contractors, and rarely asserted against architects. This case demonstrates why.  It also provides a refresher on nuisance claims.

As a fundamental distinction, nuisance claims focus on existing physical conditions, rather than (as with negligence) on the acts or omissions that brought them about.  For someone who is not the actual owner of a nuisance-causing property, nuisance liability often turns on whether the their “use” of the property amounted to an exercise of “control.”  In this case, an architect provided general design services, approved the retaining wall design submittal, and made occasional inspections.  As would be expected, the architect did not own the land, or perform construction work, or assume responsibility for site safety.  The plaintiff claimed, unsuccessfully, that the design and inspection duties amounted to “control” over the project site.  The court disagreed, reasoning that the design was constrained by DOT specifications and town approvals, and the inspection responsibilities were not only limited in time, but also were subject to the contractor’s control of the site.  The Court concluded that there was no evidence that the architect had controlling authority over the retaining wall at the time of the accident.

A nuisance claim was the wrong legal theory to use here against the architect, and would probably be the wrong theory against architects in most cases.  When faulty architectural services are alleged, professional negligence will be the primary legal theory to pursue.  The right tool for the job.

Yet Another Trap for the Unwary : Forum Selection – Don’t Get Dragged Across the Country

Recently I came across an article that led me to a case that dealt with the seemingly innocuous and often perfunctory forum selection clause.  In the case (Liddell Bros. v. Impact Recovery Sys., 2016 U.S. Dist. LEXIS 36258 (D. Mass. Mar. 21, 2016)) a highway Massachusetts contractor’s lawsuit (arising out of a Massachusetts project) against a Texas vendor was governed by a Massachusetts forum selection clause forcing the Texas company to go to Massachusetts to resolve its dispute.

A forum selection clause allows parties to “agree” upon a particular locale for the resolution of disputes arising from the contract.  One could see how, in this world of transnational and international business, a contracting party would prefer not to travel to a far flung destination, removed from its home base, to resolve a dispute arising out of a transaction that in essence lives close to home.  So, that’s where the forum selection clause may assist.  Companies can choose a convenient forum and include a related forum selection clause in their contract forms.  These types of “standard” clauses are often afterthoughts in the contract drafting process.  Often, the commercial and other clauses describing the business deal are the focus of negotiations and the mechanical contract clauses can be overlooked or undervalued.

The Liddell case, represents an important reminder that all contract clauses can have a significant impact on one’s business . . .

In Liddell, there was a contract dispute between a general contractor and a manufacturer of traffic control products. The Plaintiff, Liddell Brothers, Inc., a Massachusetts highway contractor, filed suit in Massachusetts Federal Court against a Texas company named Impact Recovery Systems, Inc.  Before Liddell filed suit in Massachusetts, Impact filed two suits against Liddell in Texas.  Impact then moved to have the Massachusetts action transferred to Texas.

In evaluating Impact’s Motion to Transfer Venue, the Massachusetts Court examined the forms.  The back and forth started when Liddell sent some project plans and specifications to Impact and, in response, Impact emailed Liddell a series price quotes for certain products.  The price quotes contained a section titled “quote acceptance” with a signature line.  Liddell then sent Impact a purchase order.

Critically however, Liddell’s PO included product codes that were different from those in Impact’s quote and appended “terms and conditions” one of which stated that Impact’s performance would expressly confirm its acceptance of all terms in Liddell’s PO and that any additional or different terms would have no effect.  Liddell’s terms and conditions contained a forum selection clause selecting Massachusetts as dispute resolution venue and space to Impact to “accept” the PO by signature.

Impact’s president signed and returned the PO, and began shipping products to Liddell.  Liddell sent Impact two other POs with the same terms and conditions, which Impact also “accepted” by signature.

Impact claimed that its quote form was an offer, Liddel’s PO was an acceptance of that offer, and as such, Impact’s form governed – negating Liddell’s forum selection clause.  The Massachusetts District Court disagreed.

First, the Court concluded that Liddell’s August PO was not an acceptance or confirmation of Impact’s price quote because it contained a merger clause that stated “[v]endor’s performance under this purchase order expressly confirms its assent and acceptance of all terms and conditions as set forth in this purchase order form and any additional or different terms and conditions proposed by vendor are expressly rejected and shall have no binding effect on buyer whatsoever.”  The Court also noted that, Liddell’s purchase order listed different product codes  and contained other different terms (e.g. indemnity and choice-of-law provisions).

Further, the Court found that Impact expressly accepted PO’s various terms by its signature. Critically, Liddell never signed Impact’s price quote.  Instead, Liddell sent a counteroffer (its PO) which Impact accepted.  So, Liddell’s form ruled the day, formed the basis of the contract between Liddell and Impact, and the Massachusetts forum-selection clause controlled.

This case turned on the merger clause and Impact’s acceptance (however mechanical) of Liddell’s terms.  Business is done like this every day all over the country.  Contract forms and their terms can be treated as afterthoughts that are simply filled out and sent to other parties as part of day-to-day business operations.  The language in these forms, in such cases, only becomes “important” when things fall apart and folks have to rely on the forms to try and claw back a victory from a loss.  We suggest that the terms are always important.  The purpose of a contract is to clearly identify the parties’ rights, remedies and obligations.  Administration and use of the forms that contain the terms are likewise critical.  It’s where the proverbial rubber hits the road.  The Liddell case is a clear reminder that even seemingly innocuous or “standard” contract clauses have real life consequences.

Limitations of Liability – Scenario 3: Pay if Paid and Flow Through Clauses

I suppose that it is apropos that I have been delayed in writing this  final piece in the four-part Limitations of Liability series, relating to subcontract pay if paid and flow through clauses.  Being more than one step removed from a project’s funding source, subcontractors are used to being dealt with last, and only after a lag in the schedule, whether foreseeable or not.  Subcontractors will tell you that “it” tends to flow downhill, and financial issues and project glitches tend not to improve by the time they make their way to the subcontractor, whether the issues or glitches are tied to the subcontractor or not.

Their concerns regarding delays in payment appear to be justified.  In a recent ENR survey, thirty percent (30%) of payments from contractors to subcontractors were late, by an average of 36.4 days.  Eighty-Three of the subcontractors surveyed reported that more than 6 in 10 payments were past due.  Although most states now have prompt pay laws, with varying degrees of penalties, the survey reflects that these laws seem to have minimal impact on the timing of payments.  Perhaps these timing issues relate to project owners holding funds as long as possible to earn additional interest, but with interest rates so low, that seems unlikely.  Maybe project owners are being cautious and remain as far ahead of their contractors and subcontractors as possible in the funding of the project.  More likely, subcontractors are reluctant to harm their business relationship with contractors, or simply don’t wish to incur added costs in pushing the timing of payments. Continue Reading

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