Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

You don't need to go any further than this Washington Post article to read about a delayed construction project where the parties are passing blame back and forth.  The Silver Spring Transit Center is reported to be two years behind schedule and suffering from significant cost increases. No doubt the dispute will be resolved in litigation.

When contractors seek additional compensation for changes, design impacts, differing site conditions or other delays, they must convince the court or arbitrator of the amount they are entitled to be paid. Whenever these types of events occur on larger construction projects, there is usually a substantial loss of productivity. Yet, contractors are frequently unable to prove the appropriate amount.

The Measured Mile. One way to determine lost productivity on a project is by determining what is known as the measured mile—comparing the cost of “impacted” work with the cost incurred to perform the same or similar “unimpacted” work. Because the measured-mile calculation is based on comparing the impacted productivity and unimpacted productivity on the same project, it tends to be a more accepted approach.

Steps that Contractors Need to Take. Applying the measured-mile method is straightforward if the contractor has kept productivity records by location, type of work and crews.

• Identify and define impacted work, including the unit of measurement for the work. For example, certain aggregates designated by the agency as suitable for use in the concrete may not be suitable if the soils contain large lumps of clay. Under this first step, you need to identify and define the impacted work.
• Identify the impacted and unimpacted time periods and project locations for the analysis. Selecting the unimpacted (measured-mile) period and location for the project is crucial. Most common tasks on projects are constructed in different phases, at different times of the year and in different locations. In the above example, the contractor may be able to achieve a higher production after identifying and approving a different aggregate source.
• Carefully evaluate the difference between the two periods and select a representative unimpacted period. Remember that a potential challenge to this approach is the argument that the unimpacted selection is not representative of the project. This is because the measured-mile method assumes all work on the project would have been performed at the same rate as the unimpacted segment.
• Locate and assemble job-cost records, identifying man-hours, equipment and material used. Record keeping is critical to calculate and support any lost productivity claim. On highway construction projects, contractors must break the work down by location, activity and event. Review records for all unimpacted work periods. Field personnel need to maintain the records in generally the same manner for the impacted and unimpacted sections.
• Determine whether you will base the analysis on hours or dollars. Then develop an unimpacted benchmark productivity measurement. An hourly approach is based on the total crew hours required to complete a work task, such as yards of concrete paved. A dollar approach is based on the total cost to complete a task, including labor costs, equipment rental, operating costs and consumables that vary with time. Once you have developed the productivity factors and crew costs, simply apply these to the impacted work quantities.

A measured mile analysis is generally acceptable if based on reasonably similar work to the impacted work. The impacted and unimpacted work activities should draw on labor from the same labor pool, and both activities should involve similar skill level and effort. Identify and evaluate possible other causes for the claimed impact. Be prepared to explain why these do not apply.

Image: thisisbossi

• Email This
• Print
• Comments

"There is an undeniable need for logical, factually supportable and credible evidence to assist in calculating delay, time extensions, concurrency and compensability as well as liquidated damages and actual damages."  Don Gavin & Robert D'Onofrio (Oct 2012)

It almost goes without saying that if you have to pursue or defend a delay claim, you are going to need some evidence (whether by expert or otherwise) to establish or to challenge entitlement to the damages sought.  And we all know that there can be different routes to the same goal.  However, the different methods of schedule analysis can lead to varying results.  So, which method is correct?

In a great Construction Law International article by my friends Don and Rob, the authors suggest a series of best practices that should improve on the reliability of schedule analysis and increase its acceptability in the industry.  According to the article, there are eight guidelines that any schedule delay analysis comply with, including:

1. Compare the planned work before and after each delay. Practically, this means that you should compare the plan to perform the remaining work before each delay and the plan to perform the remaining work after that delay, which will require a review of the schedule updates during the project.  This will also involve looking at the estimated impact, as well as the actual impact, of the delay.
2. Identify the critical delays. Generally, the delay must affect the critical path of the work to be compensable.  If the delay absorbs the "float" in the schedule, then it is not compensable.  According to the authors, "If an activity does not have any float, by definition it is critical as it would impact the required contract completion date."
3. Evaluate the delays in both a chronological order and a cumulative manner.  If you do not look at the delays in sequence, it can "mask" what actually occurred on the project. 
4. Adjust the completion date to reflect excusable delay as it occurs.  This will assist in finding the actual float values and determining which activities are actually critical at any point during the project timeline.
5. Include accurate as-built information.  Again, it is important analyze the actual progress of construction, which can best be achieved through accurate as-built data.
6. Minimize projected future delays.  If you include projected future delays in the schedule, they should be minimized because projected delays can alter float calculations and possibly change which activities are critical. 
7. Correct any logic flaws.  If you correct any logic flaws found in the schedule, make sure to document and explain the changes at the time they are made.  Understand that judges and arbitrators can be skeptical when substantial changes are made after construction is complete.
8. Tie causation to each delay.  Ultimately, you will have to show whether the delay is non-excusable, excusable/compensable, or excusable/non-compensable. 

Using these guidelines, any contractor can begin to evaluate and prepare a potential delay claim as the conditions on project causing the delay occur.  If the claim turns to a dispute, you will have done a significant amount of preliminary work that an attorney and/or consultant will need to assist you in the claim. 

Question: What other best practices can you identify for putting together a delay claim?

• Email This
• Print
• Comments

Over my legal career, I have handled a significant amount of workers' compensation disputes, representing injured employees, defending employers and insurance carriers, and even a few years working for an appellate judge that addressed workers' compensation appeals. Recently I was discussing the process for determining an employers' experience rating, and I was surprised to learn about some dramatic cost increases that will likely occur in 2013.

The National Council on Compensation Insurance, Inc. is a group that performs national insurance ratings based upon data collection, particularly in the area of worker's compensation. NCCI has been operating as not-for-profit since 1922, performing the following:

• engaging studies on workplace injuries and other national and state factors impacting workers compensation
• provide analysis of industry trends
• prepare workers compensation insurance rate and loss costs recommendations
• determine the cost of proposed legislation, and
• provide a variety of data products to over 900 insurance companies and nearly 40 state governments.

What is the increase? According to a fact sheet from NCCI, the experience rating split point will increase to $10,000 on January 1, 2013.  While I have a basic understanding of the rating methodology, I am not an expert.  You will really benefit by reading the fact sheet and talking with your insurance agent. 

Why the increase?  The last split point update occurred two decades ago and the average cost of a worker's compensation claim has tripled since that time.  The result is that the rating plan is given less weight to each employer's actual experience.  With the new proposal, the split point will be increased to $10,000 in 2013; to $13,500 in 2014; and to $15,000 in 2015. 

How will the point change affect employers?  It will depend on how many claims the employer has that exceed $5,000. If no claims exceed this amount, then the employer will see a decrease in their experience rating modification.  However, in an industry like construction, where more significant type of injuries tend to occur, it is likely the number of claims exceeding $5,000 will increase the experience rating modification.  Additionally, the change also requires re-scoring for 2009-2011, which means that the increased penalty could also result in a readjustment of past assessments. 

What to do with this information?  As an employer, you need to understand that this is going to be a significant change over how the rating system has been handled for the past 30 years.  You and your risk department need to be more diligent in the workers' compensation claim process and you should have a return-to-work program.  As you work closely with your insurance agent, you need to understand the difference between medical only claims versus indemnity claims.  You could be assessed a huge penalty if a claim is turned into an indemnity status because the claimant has not returned to work after a certain time period, depending upon your state.

Hat tip to Chris Smith and Gary Sanders of Brown & Brown of Tennessee for some of this information.

• Email This
• Print
• Comments

While I generally limit my guest posts to my fellow law partners, I simply could not resist sharing with you today's post from my friend and construction attorney, Scott Wolfe, Jr.  He is the founder of Zlien.com, a national mechanics lien filing and compliance management service. Scott writes the Construction Lien Blog, which analyzes construction lien laws and regulations across the nation.

Now the disclaimer part: I have not used or test-driven any of the services offered by Zlien.com and this post here is not an endorsement of the product.  I can say, however, that Scott is one bright guy and has a lot of good information about lien filings throughout the states.  I hope you enjoy.

+ + + + + + + + + + + + 

Through the years of consulting with folks in the construction industry about mechanics lien and bond claims, I’ve unearthed a set of principles to help navigate the very complicated world of liens. These principles form a set of “best practices” for the company interested in preserving its lien rights on every construction, and ultimately therefore, avoiding bad debt.
 

Understand What Type of “Lien” Is Available.  The term “mechanics lien” is overused in the construction industry, with companies presuming they can file a mechanics lien on any type of project. That’s part true, and part untrue.

The truth in this statement is that there is a lien-like remedy available on every construction project. The untrue part of the statement is that it’s not always a “mechanics lien” per se, it could be, for example, a state bond claim or a miller act claim.

This can get confusing to the contractor or supplier who considers them all one in the same. The other day, for example, I had an equipment rental company ask me whether they could file a mechanics lien on a state project in Florida. I referred them to some Florida attorneys who answered the question, but those attorneys got hung up on the terminology and not the goal of the client.

Rather than answering the equipment rental company by saying “yes, you can encumber the project” by filing a bond claim, they emphatically told the company that they couldn’t file a mechanics lien claim. They barely even mentioned that they could file a bond claim, and that this is commonly even referred to as a lien.

The long and short of this discussion is that the industry uses the term “lien” pretty loosely. But, if you’re on a state project, you’re likely filing a bond claim; on a federal project you’re filing a miller act claim; and on a private project you’re filing a traditional mechanics lien. They work differently, there are different rules, but they are all fundamentally the same.

The first best practice is to understand what lien remedy is available to you, because it will help you get that type of lien document filed when the time comes.

Know All Relevant Project Information.  If you’re furnishing labor or materials to a construction project, you should know all the critical data about that project. This includes:

● The address where your furnishing
● The name of the property owner
● The name of the general contractor
● The name of the bonding company (if any)
● The name of the lender (if any)

You’d be surprised how often I’m approached to help someone file a lien claim without this basic project information. This information is critical to not only filing an accurate mechanics lien claim, but also to sending out the required preliminary notices. If you don’t have this information, figure out a way to get it.

Most of the time you can politely request the data, and get it without much effort. Other times, you may need to send in a formal request. On state and federal projects, the identity of the bonding company and the general contractor is public information, and you can typically request this directly from the contracting department.

If you’re in Tennessee, a great place to start is with Matthew DeVries’ checklist, originally published on this Best Practices Construction Law Blog: Information Needed To Prepare A Lien.

The second best practice is to have good information about your construction projects.

Understand Preliminary Notice Requirements and Lien Deadlines.  In most states, filing a mechanics lien or bond claim is a discipline, and not something you can do impulsively. That’s because many states require you take actions right at the beginning of furnishing to preserve your right to file a mechanics lien or bond claim. It’s very important that you understand these requirements.

If you furnish in one state only, it should be fairly simple for you to get educated about that state’s notice requirements. Take the time to learn this information and follow it diligently. If you furnish to multiple states, organizing and understanding the information may be a bit more complex, and you may need to consult with a mechanics lien service or attorney to help you comply with the varying notice requirements. Remember, these mechanics lien laws and nuances will vary not only between states, but also between projects.

The third best practice, therefore, is to understand the requirements applicable to your project to preserve your lien claim rights, and then to follow those requirements.

Conclusion.  While most companies don’t want to file lien claims lightly, it is a very effective way to get paid on a construction project, and therefore, a remedy you always want available. If your customer doesn’t pay its debt, if money gets misappropriated on a job, or if your customer files for bankruptcy, you’re going to wish that you had preserved and enforced your lien or bond claim rights.

It’s very difficult to comply with lien and bond claim requirements on every project, because there are so many layers of complexity. However, these best practices will help your company wade through those requirements and set itself up to successfully protect its lien rights...and, hopefully, always get paid.

• Email This
• Print
• Comments

As a construction contractor, your work can be delayed for reasons beyond your control.  If this happens, you want to know that you can recover your losses for additional labor, extended overhead, and other monetary damages.  Would it surprise you to learn that you may have waived that right in your contract?

In the recent case of Plato General Construction v. Dormitory Authority of State of New York, appellate court enforced a no-damages-for delay clause against a contractor, rejecting a $10m delay claim.  The contractor sought delay damages resulting from the alleged poor planning by the project owner and interferences by other contractors on the site.  The trial court found in favor of the contractor, finding, among other, the following causes of delay:

• the owner failed to properly schedule and coordinate the work
• there was not an HVAC contractor on board at the time construction began
• the owner failed to coordinate the relocation of books from the library, which caused delays to the contractor's work
• there were many design changes that were not communicated to other contractors, which caused delays

The appellate court reversed the trial court's judgment because the parties' contract contained a no-damages-for-delay clause, which provided:

“No claims for increased costs, charges, expenses or damages of any kind shall be made by the Contractor against the Owner for any delays or hindrances from any cause whatsoever; provided that the Owner, in the Owner's discretion, may compensate the Contractor for any said delays by extending the time for completion of the Work as specified in the Contract.”

 * * * * * *

“Should the Contractor sustain any damage through any act or omission of any other contractor having a contract with the Owner or through any act or omission of any Subcontractor of said other contractor, the Contractor shall have no claim against the Owner for said damage.”

Although the contractor in Plato General Construction had contributed to some of the delays, this fact was irrelevant given the waiver of these types of claims in the contract above.  The court concluded: "The contract specifically provided that [the contractor] could not sue the owner for damages resulting from the acts or omissions of other contractors. Further, since the contract provided for change orders, extra work, and acts or omissions by other contractors, such delays were, on their face, contemplated by the parties at the time they entered into the contract."

What it means?  While there are some exceptions to the enforceability of such provisions depending on your jurisdiction, a standard no-damages-for-delay clause generally waives claims for additional compensation for delays on a project.  You may be entitled to additional time, as specified by the contract, but the clause can absolutely prohibit claims for additional compensation.

What can you do? The real lesson is to make sure to review your contract for these types of provisions and try to negotiate the terms.  For example, the AIA A201 expressly provides that the owner and contractor may seek damages from each other in the event of a delay caused by the other party.  There will be certain notice and substantiation requirements, but it is common to allow a party to seek damages for delay.  If an owner is unwilling to remove a no-damages-for-delay clause in your contract, then you should try to limit its application to certain delays such as delays caused by others, leaving the owner liable for its own delays.

• Email This
• Print
• Comments

Last month, I wrote a post about using daily reports to support a construction claim.  The more I think about that post, the more I am reminded that the primary goal in construction disputes is to tell the "story" about what occurred on the project site that resulted in the need for additional labor, changed materials, redesign, impacts to the schedule, increased costs, etc. 

The importance of "story" was part of a speech I heard last year by the Honorable Steven Reed, a former judge of the Armed Services Board of Contract Appeals who is now in private practice.  Judge Reed's talk focused on the alternative dispute resolution process and, more specifically, "... the practical side of developing the contractor’s story in support of a claim."   Some of Judge Reed's best tips:

• The big picture: Contractors must anticipate the possibility (if not the probability) of disputed matters. Prevention and preparation are essential to a favorable outcome.
• Documentation: "Daily reports are generally required under Federal contract."  They "should contain facts ... not feelings or emotions." (Don't call the project manager a "jerk" in the project documents, even if he is one.)  Rather, use the daily report as an "opportunity to create a comprehensive record of performance." 
• Claim proof:  "Your contractor client will absolutely need its bid papers for evidence in a claim against Government."  It's a no-brainer, but you need a good document management process in place.  
• Dispute forum:  Picking a forum for resolving your dispute is strategic.  For example, a decision from the Board of Contract Appeals will be "predictable" and the process is more "stable" while the Court of Federal Claims will be more "rule bound."  The forum is also important because the Court has certain jurisdiction over fraud claims, while the Boards do not.

Judge Reed concluded his written presentation with sound advice: "Contractors need to be educated, prepared, aware, and well-represented."

Question: What tips do you have for improving the story?

• Email This
• Print
• Comments

One of the basic, yet most important, aspects of project documentation includes effective use of an on-going and detailed set of daily reports. Too often, daily reports are submitted to the contractor’s office merely noting the date, the weather, a broad description of the work being performed, and sometimes, a listing of employees and equipment present. This type of report will usually prove insufficient to support a request for additional compensation or change order claim.

Even on a perfect day, when no problems arise and production is favorable, effective project management principles require more detailed reporting.  Here are some tips when training your project team about daily reports:

• Report the normal and the abnormal. Construction personnel are often–erroneously–led to believe that daily reports should be long and detailed only on those days when owner-caused problems are encountered. Admittedly, contractors can claim success when they devise a system that provides detailed reporting on days problems occur. But frequently, daily progress reports are used as a means of proving what happens on the project when things are normal. For example, suppose a utility crew’s daily progress is adversely affected by an unexpected obstruction, the risk of which you did not contractually assume. To prove the obstruction slowed the crew’s production, you may present: (a) your original estimate showing anticipated production; (b) notes on each daily report estimating how much additional production could have been achieved for the day but for the obstruction; or (c) daily reports indicating actual production for the same work when it was free from interruption.
• Other projects may be relevant.  Being able to produce daily reports detailing other projects with similar conditions and degrees of difficulty will place the contractor in a better position than merely presenting the project estimate. At the very least, the daily reports from another project will add legitimacy to the estimate and remove some of the owner’s skepticism of paying out claims based on the total cost approach.
• Include work categories and/or cost codes.  Daily reports should include the hours each employee and piece of equipment worked on the project by work category or cost code. In addition, the locations where the work was performed should be recorded. For larger companies with payroll or personnel departments, the daily report should be a multi-copy form so it is not tied up routing through various departments. If the project is large, or if work is being performed by crews, each crew should complete a separate daily report. Reports should be designed to operate as checklists. The checklist format prompts supervisors in every category of information desired.

Finally, contractors should demand that daily reports remain just that: daily! Allowing supervisors to fill reports out at the end of the week leaves too much to memory and is certain to result in inaccurate and brief reports. When supervisors are allowed to fill out reports from personal diaries, the mental prompting so important to accurate reporting is lost. In addition, after-the-fact reporting may result in a court refusing to admit such reports as evidence.

Image: Dan Moyle

• Email This
• Print
• Comments

As the kids were making Valentine's cards this week, a smaller one disappeared from the pack. Then came silence.  You see, in my house, silence is a bad thing.  This particular silence turned out to be too funny:

The hand writing on the wall is a sign of doom or misfortune. Now, the phrase has become a popular idiom for something bad is about to happen.  When something goes bad on a construction project, you have many choices.  Best practices tells us to find a solution first and point the finger later.  

What happens when there is a contaminated spill on site?  What if a busted piece of heavy machinery or equipment is delaying the schedule?  Or perhaps the most common ... what happens when you discover unsuitable soils? 

Although the parties must work to find a common solution to any of these problems so that the contractor can complete its work, legal responsibility for the delays still needed to be determined. Ultimately, when disputes like this arise, a court or arbitrator will have to resolve many legal questions, including:

• Were there any subsurface reports performed prior to the start of the work?
• Did the owner have any contractual responsibility for unanticipated conditions?
• Is the vendor or supplier have an obligation to timely service, repair or replace leased equipment? 
• Did the owner/architect have any ongoing supervisory or inspection duties during performance of the work?
• Were the machines properly mobilized and operated during construction or were they defective in any way?
• Were there any other concurrent delays affecting the work?

For all players in construction industry, unexpected events on a construction project require a multi-phased approach to the problem. Your situation may dictate that you quickly assess the extent of the damage, determine a workable and cost effective solution and fix the problem first ... and leave leave the finger-pointing to later. So long as the parties reserve their rights in accordance with the notice provisions of the contract, the project completion will be better served in this approach.

Contractors should pay particular attention to the contract provisions relating to time, changes, force majeure and differing site conditions. When your work is delayed for reasons beyond your reasonable control, there may be contractual and legal defenses to an owner’s assessment of liquidated damages. Of course, the immediate goal will be to get the project back on schedule—but remember the best approach is to take steps during construction to avoid the writing on the wall.

• Email This
• Print
• Comments (1)

When contractors seek additional compensation for changes, differing site conditions or other delays, they must convince the DOT or court of the amount they are entitled to be paid.  Whenever these types of events occur on larger highway or infrastructure construction projects, there is usually a substantial loss of productivity. Yet, contractors are frequently unable to prove the appropriate amount.

The Measured Mile. One way to determine lost productivity on a project is by determining what is known as the measured mile—comparing the cost of “impacted” work with the cost incurred to perform the same or similar “unimpacted” work.  Because the measured-mile calculation is based on comparing the impacted productivity and unimpacted productivity on the same project, it tends to be a more accepted approach.

Steps that Contractors Need to Take.   Applying the measured-mile method is straightforward if the contractor has kept productivity records by location, type of work and crews.

• Identify and define impacted work, including the unit of measurement for the work. For example, certain aggregates designated by the agency as suitable for use in the concrete may not be suitable if the soils contain large lumps of clay.  Under this first step, you need to identify and define the impacted work.
• Identify the impacted and unimpacted time periods and project locations for the analysis. Selecting the unimpacted (measured-mile) period and location for the project is crucial. Most common tasks on projects are constructed in different phases, at different times of the year and in different locations. In the above example, the contractor may be able to achieve a higher production after identifying and approving a different aggregate source.
• Carefully evaluate the difference between the two periods and select a representative unimpacted period. Remember that a potential challenge to this approach is the argument that the unimpacted selection is not representative of the project. This is because the measured-mile method assumes all work on the project would have been performed at the same rate as the unimpacted segment.
• Locate and assemble job-cost records, identifying man-hours, equipment and material used. Record keeping is critical to calculate and support any lost productivity claim. On highway construction projects, contractors must break the work down by location, activity and event. Review records for all unimpacted work periods. Field personnel need to maintain the records in generally the same manner for the impacted and unimpacted sections.
• Determine whether you will base the analysis on hours or dollars. Then develop an unimpacted benchmark productivity measurement. An hourly approach is based on the total crew hours required to complete a work task, such as yards of concrete paved. A dollar approach is based on the total cost to complete a task, including labor costs, equipment rental, operating costs and consumables that vary with time. Once you have developed the productivity factors and crew costs, simply apply these to the impacted work quantities.

A measured mile analysis is generally acceptable if based on reasonably similar work to the impacted work. The impacted and unimpacted work activities should draw on labor from the same labor pool, and both activities should involve similar skill level and effort. Identify and evaluate possible other causes for the claimed impact. Be prepared to explain why these do not apply.

As highway contractors, you will face lost productivity when there are changes, differing site conditions or delays. How well are you prepared to show the DOT or court the amount of your lost productivity?

Image: rsgreen89

• Email This
• Print
• Comments

I received an alert from my friends at KraftCPAs yesterday with the following subject line: "How long should your keep you tax records?"

The post by Morganne Keel contains some very basic, succinct and easy-to-implement ideas for document retention of tax records, including the following:

_________________________________________________________________

Individual taxpayers

Keep at least three years, but six year may be better.  The following records are commonly used to substantiate a taxpayer’s income and expense items:

• Form(s) W-2
  
• Form(s) 1099
  
• Form(s) K-1
  
• Bank and brokerage statements
  
• Canceled checks or other proof of payment of deductible expenses

At a minimum, the above tax records should be kept for a three-year period following the date that you file your return (or its due date, if later). However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, yet no fraud was discovered, is six years. Therefore, retain the above documents for at least six years to better protect yourself in the event of an audit.

Pass-through business entities

If you are an owner in a subchapter S corporation, LLC, LLP, or a limited partnership, you should retain a copy of the annual Form K-1 for as long as you own an interest in the entity plus seven additional years. Also, keep any paperwork related to the sale or other disposition of your interest for at least seven years after the disposition.

Corporate income tax returns

It is highly advisable that you retain copies of all corporate tax returns indefinitely.

_________________________________________________________________

For construction companies, I think Morganne is right on track for retention of tax records, particularly in this day and age of electronic storage.  It is not too difficult to maintain these types of documents indefinitely in the event of an audit.

In the construction industry, the next question becomes: How long do you keep project records?  Project documents, including the contract, change orders, correspondence, drawings, specifications, daily logs, field notes, monthly reports, schedules, etc., should be kept and stored for at least as long as the applicable statute of limitations or repose period for the state in which your project is located.  Here is a good explanation of a statutes of limitations and repose for construction defect claims and how it applies to disputes.  In short, if your particular jurisdiction has a 10-year statute of repose, then you should keep you records maintained for at least 11 years. 

Image: agrilifetoday

• Email This
• Print
• Comments (1)

Last week was crazy for me!  Not only did I have more meetings than one could fit in the work week, but we had to find alternative overnight plans for our six children for an out-of-town law firm event.  Just like a construction project, we had to deal with the "ripple effect" of many changes to our plans.

Attorney coach and former construction lawyer Cordell Parvin wrote about the "ripple effect" of change orders many years ago.  Changes, differing site conditions and delays frequently occur on complex highway and bridge construction projects.  Whether the owner is a federal agency, state government or local municipality, contractors are regularly asked to perform the "additional work" or "remedy the differing site condition" during the construction project.  If there is not enough time for the contractor to prepare a change order with proposed costs, the contractor may be required to perform the work on a force-account basis.

The "ripple effect" or "cumulative impact" of changes in the work, delays, and differing site conditions require the contractor to document work activities, as well as money spent for the additional work.  In this instance, the contractor should also be focused on recovering compensation for the "impact" that the change, delay or differing site condition had on the original scope of work. 

In the California case discussed in Cordell's article, State v. Guy F. Atkinson, the Owner DOT contracted with the Contractor to build 1.6 mile long section of Highway 101. Various problems arose during the project relating to wet soil conditions, which ultimately prohibited construction as specified under the bid plans. Over the course of the project, state engineers ordered numerous changes.

The Contractor initially signed the change orders, which allowed for additional compensation on a unit price basis.  The Contractor later refused to sign the proposed change orders because its entire project schedule was disrupted and delayed.  Ultimately, the Contractor submitted a claim for $1.5 million in additional compensation for the cumulative impact of the changes. 

The dispute was subject to mandatory arbitration, which resulted in a decision in favor of the Contractor.  The Arbitrator awarded the Contractor 65% of its claimed damages, finding that "[t]here were cumulative effects of all of the ordered changes. It is not feasible or possible to separately identify or measure those costs which were incurred by Atkinson as a result of the actions by the state." 

The award was confirmed at the trial court level, as well as on appeal.  The appellate court noted that the changes ordered by the State were major, ongoing and seriously impacted the entire project in terms of efficient use of labor, machinery and planning ability. The appellate court held:

The entire operation was disrupted by the ongoing piecemeal changes ordered by the state. The suggestion that only a small amount of the total embankment fill was actually replaced by other materials fails to recognize these massive '"ripple effects.'"

As noted by the court, in most complex cases it is "humanly impossible to trace, find and specify in detail, and quantify in effect the numerous circumstances [that] cause or contribute to financial consequences."

Just like a weekend away from six children requires advanced scheduling and back-up contingency plans, the best way for contractors to deal with changes, delays and differing site conditions is to prepare for the "ripple effect" or "cumulative impact."   Consider the time and productivity impacts of changes on the unchanged work when pricing changes.  With proper planning and scheduling, the impact can be estimated and predicted. This can minimize the uncertainty of change.

Image: Robert Hurzek

• Email This
• Print
• Comments

I recently read a BNA article on commercial arbitration entitled Achieving the Perceived Cost Savings and Expedience of Commercial Arbitration (pdf).  In the article, Chicago attorney William O'Neil identifies six essential terms you should include in your arbitration clauses.

While I agree with most of the essential terms, the recommendations really depend on the type and size of the dispute.  Here are O'Neil's recommendations to include in your arbitration provision, along with some of my thoughts for construction disputes in particular:

1. Insist on a Single Arbitrator.  Three member panels are, indeed, expensive.  While the average case cannot support the arbitration fees for a full arbitration panel, some construction disputes are of such a magnitude that a panel is necessary.  In other words, do you want one arbitrator deciding your $10 million claim?  There are ways to structure your dispute provision to have a single arbitrator for claims under $1 million and a three-member panel for claims over $1 million.
2. Limit the Time to the Hearing, the Length of the Hearing, and Time to Decision.   I wholeheartedly agree with this recommendation, as arbitration should achieve two of its primary intended purposes ... cheaper and quicker.  The problem is that parties rarely (if ever) spell out these deadlines in the contract and wait until the dispute arises to then argue about the time and length issues.
3. Adopt a Notice Pleading Standard for the Notice of Arbitration.  Most arbitration disputes begin with a Demand for Arbitration, which is usually no more than a one-page form that provides the name of the parties, the nature of the dispute and the amount in controversy.  As a construction attorney, I generally will include a multi-page complaint attached to the demand for arbitration. (Side bar: I include a similar complaint with contractor claims against the State of Tennessee even though the initial form does not require it.)  By requiring a "notice pleading" standard in your dispute provision, you are required to describe the basis of your claims or you have more information to review the claim, depending on whether you are the party seeking or defending arbitration.
4. Limit Discovery.  Again, depending on the nature and size of dispute, you may want full discovery just as you would have in the litigation process.  The point here is to decide the extent of discovery the parties want at the "contracting stage" as opposed to waiting for the dispute to arise and then be subject to either an arbitration rule of AAA or JAMS or no rule at all.
5. Authorize Arbitral Sanctions.  I agree that the decision-maker should have authority to resolve preliminary disputes, grant interim relief, and award sanctions.  Again, the key is to include this power in the dispute resolution provisions.
6. Ease the Confirmation Process.  Since arbitration is a creature of contract, the parties can contractually agree on its binding nature.  As O'Neil points out, arbitration is "wasted if there is a delay in confirming and enforcing a favorable judgment."  The problem is remedied by simply including a clause in your arbitration provision that vests jurisdiction in every district court in the United States to confirm and enforce the award.

Again, O'Neil makes some great points ... but some of these may require tweeking depending on the nature and extent of the dispute.  Make sure you check out the Model Arbitration Clause in the article for some sample language.

• Email This
• Print
• Comments (1)

There is a lot of hot air in Albuquerque, New Mexico this week. And it’s not because I was in town … it’s because of the Albuquerque International Hot Air Balloon Fiesta. It truly is a beautiful sight!

Okay, some of the hot air may have been coming from me, as I was training about 30 project managers, engineers, accountants, and tribal attorneys from the Navajo Nation in Window Rock, Arizona. In the day-long seminar on Monday, we talked about:

• basic construction law principles;
• tribal immunity issues;
• the ten most common tensions on a project;
• various project delivery systems;
• project management and documentation best practices; and
• lessons learned from projects gone wild.

The last hour of the day was spent answering questions about some of the day-to-day issues faced by the tribal nation. Based upon that dialogue, I came to a few realizations about my time in New Mexico and Arizona.  Whether you are sovereign tribe like the Navajo Nation, a local public authority like a school board, or a private developer, the following project tips may be helpful:

1. Identify your available resources and make a plan for success. A successful project has the right people in place, working with clearly defined job descriptions, to achieve a well articulated goal. If you determine that your resources are limited such that you cannot hire full-time employees to manage a particular project, then perhaps you should consider staff augmentation from an experienced group that provides the right project support. They can be hired for any number of reasons—to train your staff, provide support on a temporary basis, or even provide full-time support. Likewise, legal training from a contract administration point of view is better spent money than legal assistance to pursue or defend claims in litigation.
2. Start where you are now and begin to make incremental changes. Even the most successful owner-developer can identify areas of improvement in management of their projects. And whether you are the public owner of a multi-million dollar health care facility or a new K-12 school, you can improve your current project management skills by: (1) purposeful assessment of your needs; (2) common sense planning; and (3) incremental implementation of change. If contract management is an issue, invest some time and money in getting a workable contract for your projects. If document management is the issue, draft a document management plan that will be incorporated in all your in-house training sessions and in all project manuals. The key is to start somewhere now.
3. Finally, you should understand that your greatest stumbling block may simply be an institutional acceptance of the status quo. What do I mean by that? Many times, contract administration and project management is performed with the following mentality: “Well, we have always done it this way.”  By talking with others in the industry and seeking out advice from those with similar practical experience, you begin to identify those things you are doing right and those things require change.

If you can identify areas of improvement in your project management protocols, plan to make incremental changes, and accept that there may be new ways to perform your work, the sky’s the limit on your project successes.

Question: What other tips do you have to help create change to the long-standing approaches you've used in the past?

• Email This
• Print
• Comments

On Saturday, it rained ... and rained ... and rained.

On Sunday, it flooded.

On Monday, I took off from work to help stage a shelter at my local church for a number of Nashville flood victims.

On Tuesday, I spent part of the day with displaced residents whose homes were completely demolished.  I spent the rest of the day dealing with email problems.

On Wednesday, I started fielding calls from clients and other flood victims about what they needed to do following flood losses to their businesses and homes.

Today, I hope to outline some steps about what residents and businesses in Nashville should do about all the chaos, including lost property (personal and business), FEMA claims, insurance claims, and the daunting process of remediation and repair of your home or business. 

1. For both homeowners and businesses, locate your insurance policies.  There are a lot of rumors about flood coverages (what is required, whether you can get flood insurance, whether the loss covers contents or the building).  The only way to get to the truth is to review your policy.  If the actual written document was destroyed, then call your agent for a copy of the policy ... even if they tell you that you do not have coverage for floods.
2. If you don't have any insurance, or you do not have coverage for flood losses, then identify what resources are available to you.  As of today, Cheatham, Davidson, Dyer, Hickman, McNairy, Montgomery, Perry, Shelby, Tipton and Williamson counties have all now been granted Federal disaster designation by the President.  That means, you may qualify for assistance through FEMA.  You can apply for assistance online or by telephone.  FEMA requires that losses be submitted with 60 days.
3. Document your losses.  This may be difficult given your conditions, but it will require making a list of the damaged property, as well as taking pictures and videos. While it may be a no-brainer, separate the good from the bad ... what is recoverable and usable from what is completely destroyed.
4. Contact your advisers, including your insurance agent and attorney.  The process of filing a claim begins with giving "notice" to your insurance carrier.  Even if you are not sure about your coverage, make sure to provide the required notice.  If you are denied for any reason, then an attorney will be able to advise you about your rights. (Remember, though, you need your policy!)
5. Carefully walk through the remediation and repair process.  Whether or not you have insurance, you will want to work remediation and repair contractors who have experience with these types of losses.  As with any disaster, there will be those individuals who want to take advantage of the situation to offer their services at what may seem to be a discount.  You should check whether the company is registered with the Nashville Better Business Bureau.  To verify whether a repair contractor is properly licensed through the State of Tennessee, please use please use http://verify.tn.gov or http://licsrch.state.tn.us/
6. For businesses, evaluate whether you have "business interruption" coverage.  Again, this will depend on the actual policy.  Business interruption coverage is generally not sold as a separate policy, but is added or included in a policy package.  It usually covers: profits, operating expenses, and sometimes temporary relocation expenses. 

There is certainly a lot of advice on the Internet ... some good ... some bad.  There are going to be significant claims in the coming months resulting from the floods in Nashville and it is important that you find reliable information to help you through the process.

• Email This
• Print
• Comments

Earlier this week, I was talking with fellow attorney who does not practice construction law.  At one point in our conversation, he threw out a goocher of a question: "I know this is a hard question, but what do you think causes most of the disputes on a construction project?  I am sure there could be plenty of reasons for lawsuits, but are there some more to blame than others?"

Wow!  That is a hard one ... particularly because there could be so many different reasons for disputes on a construction project.  Here were my top three reaspons for disputes: 

1. Problems with the contract.  The written (or unwritten) contract is what guides the parties' expectations as to payment and performance.  The contract must clearly identify the rights and obligations of each player in the process, from developer, to designer, to contractor, to subcontractor and supplier.  More problems occur because an incomplete, vague or ambiguous "Scope of Work" in the agreement. A well-written contract that properly analyzes and allocates the risk on the project will often save heartache at the time of completion.
2. Problems with the people.  It is no secret that successful companies are driven by successful people.  The opposite is true as well: failing companies suffer from poor management and leadership.  When "people" are responsible for building "things,"  you have to realize that those "people" can cause problems during the construction process, whether you are talking about a loan officer, a design team, a project manager or supply deliveryman.
3. Problems with the unknown.  This is what I would call the "catch-all" category, as disputes often arise from events beyond one or more of the parties' control.  This woud include anything from unusually severe weather, to labor strikes, to differeing site conditions.  These "causes" often involve requests by the contractor for more time and/or money.

If you had to answer my colleague's question, what would you say?

• Email This
• Print
• Comments (3)

As you may be aware, one of the greatest risks on a construction project involves the payment process. Particularly in these economic hard times, a contractor and its subcontractors and suppliers expect to be paid on a timely basis once the work has been performed.

Contractors have a means of shifting the risk of non-payment by the owner to the subcontractor by including a “pay when paid” or “pay if paid” provision in their subcontract.The enforceability of these types of clauses may be limited by your particular state or jurisdiction.

In Universal Concrete Products Corp. v. Turner Construction Company (pdf), the U.S. Court of Appeals for the 4th Circuit concluded that a “pay if paid” clause in a subcontract was not ambiguous and, therefore, enforceable against the subcontractor.  The work involved the construction of the Granby Tower Project in Norfolk, Virginia. The subcontract between the general contractor and the concrete subcontractor contained the following clause: 

“The obligation of contractor to make payment under this agreement, whether a progress or final payment, or for extra or change orders or delays to the work, is subject to the express condition precedent of payment therefore by the owner.”

The owner ultimately lost its construction financing on the project and abandoned the development. Since the contractor had not been paid for its work, it refused to pay the subcontractor's work.  In a payment dispute between the subcontractor and contractor, the contractor argued that the “pay if paid” clause provided an absolute defense to payment. (Again, it should be noted that some states limit the enforceability of these clauses by either statute or case law. However, in Virginia, these types of clauses are enforceable so long as they are clear and unambiguous.)

The subcontractor argued that the prime contract between the owner and the contractor defined the cost of work to include “payments made” to subcontractors. Accordingly, the subcontractor argued that the contractor would, under the normal scenario, be paying its subcontractors and submitting the invoice to the owner as a “payment made” by the contractor. Both the trial court and the Court of Appeals disagreed, finding that payment from the owner was a condition precedent to payment from the contractor to the subcontractor.

 Courts across the country vary in their treatment of these issues. For example, in the Universal Concrete Products case, the 4th Circuit reasoned that Virginia courts favor the freedom to contract and that parties are freely able to negotiate and draft these types of provisions. However, in Thomas J. Dyer v. Bishop International Engineering, the 6th Circuit refused to enforce a “pay when paid” clause because the court determined that the clause was sufficiently ambiguous. In that case, the contract stated that “no part of payment shall be due until 5 days after the owner shall have paid the contractor.”  Other jurisdictions, such as California, New York and Nevada, have expressly ruled that the “pay as paid” clauses are unenforceable as a violation of state public policy.

So, what should your contracts provide?  What should you do to determine the enforceability of a “pay if paid” clause in your state?

• Contact an attorney within your jurisdiction to determine whether there are any limitations of the enforcement of these type of clauses.  Since each state differs dramatically, it is in your best interest to determine the applicable standard in your state or the applicable law where the project is located or the governing law of the contract to determine this information.
• Determine as between the parties who should bear the risk of non-payment. If you are a general contractor, you should make sure that your subcontracts include clear and unambiguous language placing the risk of loss for non-payment on the subcontractor. In addition to putting a timing mechanism on payment of funds to the subcontractor following a certain number of days after payment by the owner, it is also advisable to include a clause that “payment by the owner to the contractor is a condition precedent to payment by the contractor to the subcontractor”. In addition, you can make your subcontracts explicitly clear by stating that “the subcontractor assumes the risk of non-payment by the owner due to insolvency or other inability to pay”.

For the contractors out there, Universal Concrete Products is a good reminder of the importance of drafting clear and unambiguous contact terms between the parties.  It is worth the effort to seek legal advice on these issues prior to drafting and executing contracts with other parties.

For the legal practitioner, Universal Concrete Products again reminds us of the importance of legal research in our profession.  It is imperative that we, as a legal advisor, stay up to date on the case law within in our jurisdiction, as well as check other jurisdictions to help guide our clients through legal risks.

• Email This
• Print
• Comments (4)

"Pay me less before the dispute erupts ... or pay me more after the dispute erupts ..." is a phrase that many construction litigators have said to their clients.  What that means, practically, is that if you invest the time and money to have your attorney review construction contracts before the job starts, you will save time, money and effort later when the dispute begins (and perhaps you may even fend it off). Despite the warnings, there are many out there who want to "go it alone" ... and that's okay.  This post is for you.

The American Bar Journal posted an article two weeks ago about a federal bankruptcy judge who was fed up with "superfluous words and too much capitalization."   The judge took a stand against legalese and issued some guidelines (pdf) to the practicing bankruptcy attorney.  Some of my favorites include:

• Lawyers apparently disfavor articles, both definite and indefinite. Use the
  articles “the,” “a,” and “an” as appropriate. Write the way you would speak.
• Never use and/or.
• Eliminate superfluous words. They serve no purpose other than to make the
  document sound more legal ... Examples of such words are: “hereby,” “herein,”
  “in and for,” “subject,” “that certain,” “now,” “that,” “undersigned,”
  “immediately,” “heretofore entered in this case,” “be, and hereby is”–the list
  goes on and on.
• Keep plurals and possessives straight and consistent. Know when to use
  debtors (plural), debtor’s (singular possessive), and debtors’ (plural
  possessive). Make sure the verb matches the subject of the sentence.

You can tell by the terse language in the judge's guidelines that he likes clarity and he wants litigants (and particularly their attorneys) to follow those guidelines.  If I were a construction litigator ... which I am ... I wonder what my suggested guidelines would be for construction contracts.  Here are a few:

• Keep the names consistent.  I know this will take some searching and replacing in your form contracts, but it is important to track the parties' names correctly.  Many times, I have found a "subcontractor" listed as "contractor" in one section and "subcontractor" in another section.
• Identify the "contract documents" for the parties.  Too many disputes arise because someone thinks the proposal or purchase order is part of the parties' agreement only to learn later that it has not been incorporated as part of the contract documents.  Many form contracts have an "order of precedence" clause that ranks the precedential value of the documents in the event of a dispute.  Make sure to expressly include every document that you want into the contract documents.
• Evaluate and clarify the "dispute" provisions.  Again, I have seen a number of lawsuits between parties spend too much time on the procedural issues such as litigation, arbitration, mediation (because the contract was not clearly written), rather than getting to the heart of the matter.  Make sure your contracts clearly identify your method of dispute resolution.

Do you have any other guidelines for your construction contracts?

Photo: Flckr - LucasTheExperience

• Email This
• Print
• Comments

I have my Google reader set to search various blogs, news sites, and Twitter feeds to help me keep current with the latest trends in the construction industry.  There remains one major problem: the words we use have different meanings for everyone.  

Take, for example, my search of Twitter feeds (above) for Building Information Modeling (BIM).  If you were to do the same search during a weekday morning, the majority of results would return various individuals involved in some aspect of the construction industry either praising or criticizing BIM. Now, if you were to do the same search on any given Friday or Saturday night, you might be surprised to get a varied assortment of results (and photographs) of individuals out for a night of partying.  You see, BIM is also slang for "bimbo" or ... how do I say this ... a "lady with questionable morals"? 

What's the lesson here?  Did you click on this article because you thought it related to LEED or Green Buildings?  It kinda does.  It kinda doesn't.  The lesson is that we live and work in a world where information spreads quickly.  In addition, we have become informal in our communications through the use of email, texting and Twitter.  (And in our personal lives, there may not be anything wrong with informality in our communications.)

However, the construction project is built on expectations and performance.  Where those expectations are accurately and correctly reduced to a writing, the parties have a written contract.  Where the parties use words that have different meanings (and both interpretations are reasonable), we now have an ambiguity.  A judge or arbitrator will then be asked to interpret that ambiguity based upon any number of legal tools (i.e., parties' words and conduct, other writings outside the four cornings of the contract, industry norms, etc.).  As the construction industry begins to employ new technologies, such as BIM, or new performance based goals, such as energy performance from a LEED certified building, then it becomes even more important that we use words that do not lead to miscommunication.

• Email This
• Print
• Comments

The "before" picture often magnifies the significance of the "after" picture.  In other words, if you had only seen the "after" picture below, then you may think, Wow! How did that crane find its way into that nice pool of water? Perhaps it somehow fell into the water?

Now check out the "before" pictures ... which tell you exactly what happened.

Did you know photographs like the ones above are essential to the construction project management process?  The term project management includes: (1) establishing procedures to manage, monitor and document work and progress; (2) ensuring regular flow of information for project control and coordination; and (3) creating contemporaneous, accurate and complete record of job conditions and problems including their impact to the project.

But why are proper records so essential for claims and disputes?

• To establish causal connection between the event and the damages
• To establish reservation of rights or non-waiver of your claim
• To properly identify actual costs and delays incurred

As a construction litigator, most of the claims that I handle involve breach of contract disputes.  The majority of them involved one of the above three issues, which must be established by some type of proof (i.e., testimony or letter or written change order or photograph).  Good record keeping will either prevent claims or preserve your rights. 

• Email This
• Print
• Comments (1)

When my kids break something in the house, they immediately begin pointing the finger at the "alleged" responsible actor.  In the construction world, many times you will need to fix the problem first and then point the finger later. 

I read an article today by Jack Broom in the Seattle Times that illustrates this point.  The incident involved two massive tunneling machines that were damaged and awaiting costly repairs ... 300 feet below ground!  The 17.5 foot diameter machines are supposed to be boring a 13-mile tunnel to take waste water to Puget Sound.  Rather than the five-feet-per-hour pace that these machines should be boring through compacted wet dirt, they are dead stopped awaiting repairs.  According to the article, more than 120 workers have been laid off until the machines are fixed and each day of delay adds to the owner's more than $1.8 billion in escalating costs.  It may take another month or two before the machines can be fixed and start boring again.

This story represents what should be happening on the construction project gone wild scenario: 

For now, [according to the owner's project manager], the county, the contractor and the machines' manufacturer are working together on "getting the fix in place and getting these tunnel-boring machines moving again ... It's in everybody's interest to complete this job as quickly as possible."

Although the parties are reportedly working to find a common solution to repair the two machines so that the contractor can complete the work, legal responsibility for the delays will need to be determined.  Including the legal questions highlighted in Broom's article, a court may be asked to resolve the following:

• Were there any subsurface reports performed prior to the start of the work?
• Did the owner have any contractual responsibility for subsurface conditions?
• Did the contractor have any contractual responsibility for its own inspection of subsurface conditions?
• Did the owner/architect have any ongoing supervisory or inspection duties during performance of the work?
• Were the machines properly mobilized and operated during construction?
• Were the machines defective in any way?
• Were there any other concurrent delays affecting the work?

For owners/developers, this incident is an example of how unexpected events on a construction project require a multi-phased approach to the problem.  Your situation may dictate that you quickly assess the extent of the damage, determine a workable and cost effective solution and fix the problem first ... and leave leave the finger-pointing to later.  So long as you reserve your rights in accordance with the notice provisions of your contract, the project completion will be better served in this approach.

Contractors should take heed that when your work is delayed for reasons beyond your reasonable control, there may be contractual and legal defenses to an owner's assessment of liquidated damages.  Of course, the immediate goal will be to get the project back on schedule ... but remember the finger may be pointed at you sometime down the road.

• Email This
• Print
• Comments (3)

I realize that the title to this post may scrunch some “What you talkin’ about, Willis?” eyebrows to the many LEED AP-construction-green-building-attorneys out there. However, the title really conveys the first words that ran through my mind as I read Gary Cole’s post on The Real Green Goblin – Emerging Legal Liability for Green Design Professionals and Contractors on his blog LAW/ARK.

I must admit that I jumped to various conclusions prior to reading Cole’s entire post. Instead, I focused on the following statements:

The bad news is that attorneys, especially those already practicing in construction law, will soon realize that aside from green design and construction’s sometimes specialized and occasionally ill-defined vernacular, there’s no real novelty in the types of claims that might arise.

No new frontiers of jurisprudence need be explored–a leaky green roof is still a leaky roof–whether it also requires regular mowing and landscape maintenance changes little from a legal perspective.

As I continued reading the post, however, I realized that Cole was marching in the right direction, particularly with the following statement: “In non-legal terms, most legal liability associated with green design and construction will arise from one issue–though it’s an issue with many faces–unfulfilled expectations.” Cole even makes a call out to the “fellow attorneys” reading the post with a disclaimer that this is an oversimplified analysis of the legal claims available.

When discussing green building claims, perhaps the best point made by Cole is understanding the balance between a project’s “green marketing claims” (or its “form”) and its “real performance (or its “substance”). I view that so-called "balance" at the heart of the issue. While it can be said that green building disputes will arise primarily from parties’ unfulfilled expectations–as do most commercial contract disputes–the form and substance will be an inherent part of any claim, whether pursued in contract, tort or otherwise.

Cole may be right that there is no novelty to the traditional types of claims (contract, tort, statutory, etc.) that may arise in green construction disputes. However, the novelty in the green building industry is the new set of standards that will inevitably become part of the legal dispute. In other words, while “a leaky green roof is still a leaky roof” … there will be new risks to be allocated, different types of damages lost, additional players involved, varied proof required and, yes, perhaps a novel cause of action alleged because that leaky green roof system failed.  Given the relatively uncharted territory, I cannot say that "green building for attorneys is merely hoopla" ( ... my words ... not Cole's ...)

• Email This
• Print
• Comments

You don’t always say what you mean. And you don’t always mean what you say. 

In construction contracts, parties attempt to use plain and ordinary words to describe their respective obligations. For example, when the parties use the word “shall” in their agreement, they generally understand that the obligation specified is mandatory. Or when parties use the word “may” in their contract, performance is permissive or optional given the plain meaning of the word. Consider the following construction contract provisions:

“If the Owner fails to make payment for a period of 30 days, the Contractor may, after seven days written notice, terminate the Contract and recover from the Owner payment for Work performed.”

“The Work may be suspended by the Owner as provided in Article 14 of the General Conditions.”

“Payments may be withheld on account of (1) defective Work not remedied, (2) claims filed by third parties, or (3) failure to carry out the Work in accordance with the Contract Documents.”

In all of theses examples, it seems clear that the parties agreed to allow—but not require—the specified performance. The word “may” was permissive in nature.

According to some courts, however, this traditional line of reasoning is no longer the trend in the context of arbitration provision in construction contracts. For example, in TM Delmarva Power v. NCP of Virginia, the Supreme Court of Virginia held that the parties’ use of the word “may” in the dispute resolution provisions of their construction contract required mandatory participation in arbitration at the election of one of the parties. The arbitration agreement provided:

“If any material dispute, disagreement or controversy concerning this Agreement is not settled in accordance with the procedures set for in [previous section] . . . then either Party may commence arbitration hereunder by delivering to the other Party a notice of arbitration.”

The court held that the above provision was mandatory at the election of one of the parties: “The word ‘may’ . . . means that either party may invoke the dispute resolution procedures, but neither party is compelled to invoke the procedures. . . . [But] once a party invokes the arbitration provision, the other party is bound to arbitrate.”  The Delmarva court reasoned that the disputes provision would be “rendered meaningless” if the word "may" was interpreted as permissive because parties to a commercial contract can always choose to submit their disputes to arbitration.  The Fourth Circuit reached the same dcision in United States v. Bankers Ins. Co.

Given the trend that the courts have interpreted the term “may” as “shall” in the context of arbitration agreements, parties to a construction contract must be careful in understanding both the plain, ordinary meaning and the legal meaning of the particular words used. In the above examples, if the parties wanted arbitration of disputes to be permissive and non-mandatory, they could have clarified their contract by including more explicit language (i.e., "any and all disputes, upon mutual agreement, may be arbitrated" or "with the consent of the other party, either party may commence arbitration").  It is important in contract drafting that you say what you mean and you mean what you say.

• Email This
• Print
• Comments