Does Your Construction Contract Protect You? Presented by Sean C. Gay

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Does Your Construction Contract Protect You?

Wednesday, December 9, 2015

D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Agenda • • • •

Standard Form Contracts Scope of Work/Services Important Legal Provisions Quiz 2

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Standard Form Contracts • Your Point of View Matters – Owner – Contractor – Designer • Form Contracts (AIA, ConsensusDOCS, etc.) – Biased in favor of drafters – All must be altered to some degree – Industry-standard “trap” Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

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Scope of Work/Services • Some of the most important provisions • Describe “what” of contract • Fertile area for disputes • Construction contracts –drawings and specifications 4

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Scope of Work/Services Tips • Attempt to avoid contracting based on incomplete documents • Include language that refers to scope and all work “reasonably inferable” • Beware of contractor scope documents – Clarifications, exclusions, proposals, etc. 5

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Time Limits on Notice of Claims • Be Wary of Time Limits on Notice of Claims: Reasons to Eliminate time periods relative to the Owner: – Owner not privy to all “occurrences of an event” during construction – Conditions giving rise to a claim can take time to develop and recognize • Latent defects post-construction – Water damage – Structural issues

• Generally, the law is on your side – To varying degrees, provides for time to identify the defect, causation, and resultant damage, unless contractually limited 6

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Time Limits on Notice of Claims (con’t) • Reasons to keep the time limits on the Contractors: 1) Contractor is on the ground, in the trenches throughout construction, keeping daily logs, noticing different conditions or ambiguities/errors in plans and specs 2) Contractor is main point of contact with subcontractors, suppliers, and other project personnel 3) Contractor keeps the schedule, should keep it updated, first-hand knowledge of any delays 4) Costs, costs, costs… 7

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Indemnity Provisions – Non-lawyers: Think “Pay” – Often negotiated – Contractors want to limit to “Insured Risks” • Bodily Injury and Property Damage – Owners want broad coverage – Subject to limitations 8

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Termination Provisions • Without them, there is no termination right • For “Convenience” – Any reason, so long as terminated in good faith

• For “Cause” – Breach of contract • By Contractor • By Owner

• Issue: Lost profits in the event of termination? 9

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Changes Provisions • • • •

Without them, there is no right to change scope Change orders = mutual agreement Change directives = owner Direction Contractor may want to limit owner’s right to make changes

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Dispute Resolution Provisions • Set out a process for resolving disputes • Mediation • Forum: – Arbitration or Litigation? – Federal/Tribal/State Courts?

• Joinder/consolidation issues 11

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Differing Site Conditions • Rationale for the clause – Type 1: Contract – Type 2: Ordinarily encountered and inherent in the type of work

• Tension with due diligence clauses • Provision of “non-contractual” reports by owner Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

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Important Legal Provisions Owner Review / Approvals • Submittals, work in progress, etc. • Jury Argument: Approval = Responsibility • Solution: Add a contract provision, so approval: – Does not vary contract requirements – Does not shift responsibility for contractor’s means and methods – Is not an excuse for failure to comply with contract documents 13

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Limitations of Liability (LoL) • Factors Courts Use – Is the LoL clear and unequivocal? – Does the LoL violate public policy? – Was there disparity in bargaining power? – Was the clause conspicuous? 14

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Waiver of Consequential Damages (CDs) • Direct vs. consequential damages • If “reasonably foreseeable” or contemplated by parties, CDs are recoverable • Courts generally enforce these provisions but apply LoL standard 15

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Waiver of CDs con’t • Perini Case (1992) prompted AIA to include • Purport to be “mutual” (this is a stretch) • Favors contractor – Limits liability – Shifts risk – Related to delay damages

• Drafting Tip: List types of damages waived 16

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions Liquidated Damages (LDs) • Purpose: To “liquidate” damages • Advantages for both parties • Courts historically disapproved • Enforceability Test: – Must be reasonable estimate of actuals – Actual damages must be difficult to prove 17

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Important Legal Provisions LDs con’t Additional factors courts consider • Any estimate? • Relative bargaining power • Was the clause “specifically negotiated” LDs Unenforceable = Actual Damages • But beware waiver of CDs provision Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

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Important Legal Provisions LD’s con’t • Drafting Tips – Substantial Completion trigger – Milestone triggers – Narrow scope of provision/permit recovery of actual damages (and don’t forget CD waiver) – Owners Beware: LDs limit damages – Engage in formalities Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

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C&D Quiz – Question #1 • True or False: Standard AIA design and construction contracts are fair and can be signed by construction project owners without any significant alteration.

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #1 • Answer: False. Standard AIA contracts contain many terms that are unfavorable to owners.

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #2 • True or False: A “mutual waiver of consequential damages” between the owner and the contractor is not truly “mutual” and does not favor the owner.

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #2 • Answer: True. A waiver of consequential damages disproportionately affects the project owner. For an owner, the primary goal of a construction project is obviously to use the building (i.e., processing, production, storage, distribution). “Consequential damages” includes lost profits and other damages from loss of use. In contrast, a waiver of consequential damages has no effect on whether an architect or contractor is paid in full. 23

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #3 • True or False: If litigation arises, an owner would prefer to fight separately with the architect and contractor in two different forums rather than one consolidated forum.

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #3 • Answer: False Litigating in multiple forums is much more expensive and could produce disparate results, leaving the owner with no remedy (for example, the arbitrator in an arbitration against the architect rules a defect is the contractor’s fault, and the jury in a court case against the contractor rules it’s the architect’s fault). 25

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #4 • True or False: Standard form contracts allow the prevailing party in any construction dispute to collect attorney fees.

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #4 • Answer: False AIA contracts don’t include a prevailing party clause. In the absence of a prevailing party clause, the prevailing party likely won’t be able to recover attorney fees. But many contractors file suits for nonpayment, and often these suits are filed under the applicable jurisdiction’s mechanics’ lien statutes. These statutes give prevailing party attorney fees to the winner who, in the case of lien claims, is usually the contractor (to one extent or another). Thus, having no attorney fee clauses favors contractors, who can be awarded fees when they file lien claims but not be exposed to fees when owners file claims, such as for construction defects. 27

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #5 • True or False: Contractor insurance policies will pay for the contractor’s defective work even if the defective work does not cause physical property damage.

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Question #5 • Answer: False Liability policies are triggered by personal injury or property damage. Without injury or “property damage” (which is physical tangible damage typically degradation of some kind) there is no coverage. “Defective” construction that does not cause “property damage” is not insured (such as windows installed upside down which have not yet leaked and caused damage). 29 Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Bonus Question • True or False: Contractor insurance policies are generally all the same and cannot be negotiated.

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

C&D Quiz – Bonus Question • Answer: False Terms in the main body of contractor insurance policies are often very similar but the endorsements (which are little amendments usually on stand-alone pages) vary widely and can be negotiated. For example, policies often are amended by endorsements which limit or deny coverage for mold problems, underground/subsurface problems and certain construction materials (such as exterior foam board). These endorsements can be avoided by paying careful attention to the list of endorsements or actual endorsements that come with the draft policy at the time of purchase. In some cases, our clients must pay extra to avoid troublesome endorsements. In other cases, endorsements can add coverage that the main body of the policy excludes (such as contractual indemnity). 31

Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m

Thank You – Questions?

Construction & Design Section: The Development Law Group

Sean C. Gay [email protected] Tel: 503-294-9239 Fax: 503-220-2480 www.stoel.com

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Does Your Construction Contract Protect You? D e c e mb e r 9 , 2 0 1 5 – N A I H C L e g a l S ym p o s i u m