AGC's Guide to Construction FinancingTwo months ago I reported about a new "just holding hands" partnership between Associated General Contractors (AGC) and the Associated Builders and Contractors (ABC) in Tennessee.  Although not a partnership, AGC established a task force in early 1999 with members from AGC,  the American Subcontractors Association (ASA) and the Associated Specialty Contractors (ASC).  Last week, the powerhouse group released its updated Guide to Construction Financing: Second Edition (pdf).

The 26-page publication explains the construction financing process while addressing both the opportunities and pitfalls for the contractor.  According to the AGC, it is "intended to serve as a reference to get contractors thinking about the risks associated with project financing."  

How does the contractor get involved in construction financing?  Easy.  It is not unreasonable to come across the contractor who, looking to expand its business, agrees to reduce its fee for an interest in the project.  Nor is it unreasonable to find the developer who goes into default and the bank takes over the project, ordering the contractor back to work.  Or what about the contractor who decides to change the project delivery method to Construction Management At-Risk and consequently helps the owner get financing?  In each of these examples, the contractor becomes entangled in the construction financing process.

The Guide is a must-read for contractors.  Some of the best practices for contractors include:

  • Know your owner-developer and the structure of their organization
  • Review the "pay when paid" or "pay if paid" laws in the states you are conducting business.  (For a fee, there is a AGC State Law Matrix that outlines this information.)
  • Be aware of "creative financing" practices
  • Be cautious of an owner’s request for upfront deposits or "investments" in the the project
  • Know and understand the default terms of the loan documents
  • Perform title and lien searches at the onset and periodically throughout the project

Finally, some of the red flags that you should be worried about include: incomplete plans and specifications; owner caused delays at the front end; payment slow-down or defaults; inexperienced owners; change in lender involvement; and abnormal invoicing requests.

Although I am out of town this week preparing for a trial, I promised a few attendees that I would share with them my webinar presentation last month.  If nothing else, the first slides are entertaining.  Let me know if you have any questions and I will chat with you on the other side.

Best Practices: Project Documentation and Construction Management http://static.slidesharecdn.com/swf/ssplayer2.swf?doc=cdocumentsandsettingsmdevriesmydocumentsmattdevries-documentationandmanagement-091029143859-phpapp01&rel=0&stripped_title=best-practices-project-documentation-and-construction-management

The U.S. Environmental Protection Agency yesterday issued a final rule in an effort to reduce water pollution on construction sites. The rule, which is set to take effect in February 2010 over a four-year period, is targeted to improve the quality of water nationwide.  According to a press release by the EPA, the impact is significant: 

Construction activities like clearing, excavating and grading significantly disturb soil and sediment. If that soil is not managed properly it can easily be washed off of the construction site during storms and pollute nearby water bodies.

EPA Rules on Construction SitesThe final rule requires construction site owners and operators that disturb one or more acres to use best management practices to ensure that soil disturbed during construction activity does not pollute nearby water bodies.

In addition, owners and operators of sites that impact 10 or more acres of land at one time will be required to monitor discharges and ensure they comply with specific limits on discharges to minimize the impact on nearby water bodies. This is the first time that EPA has imposed national monitoring requirements and enforceable numeric limitations on construction site stormwater discharges.

Soil and sediment runoff is one of the leading causes of water quality problems nationwide. Soil runoff from construction has also reduced the depth of small streams, lakes and reservoirs, leading to the need for dredging.

The pre-publication rules (pdf), as well as the EPA’s Fact Sheet on the final rule (pdf) are available online.  While it is too early to comment on the draft rule (…primarily because I have not had a chance to digest it all…), it is interesting to note that adoption of the rule came in response to a court order in a lawsuit alleging that the EPA failed to issue certain regulations under the Clean Water Act.  According to the Wall Street Journal, the court requried the EPA to issue the rule no later than December 1, 2009.

Illigal Immigrant Grounds for Breach of Contract?Last week Scott Judy, Editor-in-Chief of Southeast Construction magazine, sent me a tweet about a courthouse project in Jacksonsville, Florida where a large number of fake IDs surfaced on the site.   As reported in the article, Federal officials discovered about 100 fake documents after looking at the paperwork collected by the city.  The mayor was expected to forward the list of 100 illegal workers to the contractor, Turner Construction, last week and demand that the badges badges be revoked for those workers.  

Scott then raised an interesting question: Can the owner use the issue of job-site fake IDs to consider the builder in breach of contract?  I hate to be trumpeting the same tune, but again the answer to this problem is, “It depends.” Here is why:

  • As you might expect, the parties’ contract will largely dictate the rights and obligations of each party, whether it relates to payment, building specifications, delays, insurance requirements, and even compliance with federal, state and local law. So whether an owner has a cause of action for breach of contract for the presence and employment of undocumented workers on the site will largely depend on the exact terms of the parties’ contract.
  • The applicable laws and regulations will often dictate additional obligations or provisions that must be included in the parties’ contract. For example, in 2007 Tennessee enacted a new requirement that "no person may enter into a contract to supply goods or services to the state or other state entities without first attesting in writing that the person will not knowingly utiluze the services of illegal immigrants in the performance of the work…." Tenn. Code 12-4-124.  Practically speaking, this means the contractor working on a public job is required to certify in writing that it will not use undocumented workers.  It must also require that its subcontractor sign the same type of attestation clause.  These statutory obligations are written into the parties’ contract.
  • Even if there is not a contractual requirement, there may be some statute or regulation that gives rise to liability for a contractors use and employment of undocumented workers. For instance, the same Tennessee statute cited above carries a penalty of debarment (i.e., prohibited from submitted a bid on any public project for period of one year) for any knowing violation of the law.  This statute applies ever wheter the requirement is not written into the parties’ contract.

One way for a contractor to protect itself in these types of circumstances is to include a blended attestation-indemnification clause, such as:

The subcontractor, identified above, does hereby attest, certify, warrant, and assure that the subcontractor shall not knowingly utilize the services of an illegal immigrant in the performance of the Work and shall not knowingly utilize the services of any sub-subcontractor who will utilize the services of an illegal immigrant in the performance of the Work.  Subcontractor further agrees to indemnify and hold harmless the contractor for any violation of this provision.

Applying these principals to the situation in Florida, it will be interesting to watch how the contractor responds to the allegations raised. It appears from the article that "the city’s contract with Turner prohibits knowingly hiring undocumented workers and Turner’s agreements with subcontractors contain the same language."  Whether there is a breach of those contracts will depend largely on; (a) the express language of agreement, (b) the "intent" requirement of the statute, (c) the knowledge of the parties involved, and (d) the immigration status of the workers.

I recently read in the Nashville Bar Journal about a new change to the hearsay rules.  This is what immediately came to mind.  On any given day, I receive a call from my lovely wife about one of my five children who has been put on the witness stand for interrogation by my wife. Who is the defendant?The defendant child has either taken something that did not belong to them, invaded some other child’s personal space, or spewed out some dirty word.  Inevitably, when I get home from work I am called in as the judge to determine the guilt or innocence of the defendant child.  In many instances, I will interrogate some of the other witness children about what occurred.  Can you tell me which one is the traditional defendant? (Hint: bottom right.)

Under the former version of the Tennessee Rules of Evidence, prior inconsistent statements of my witness children could only be used to impeach the witness child. However, effective July 1, 2009, Tennessee adopted Rule 803(26), a new exception to the hearsay rules. The Rule provides for the admission as substantive evidence the prior inconsistent statements of any non-party witnesses if certain reliability requirements are met.  This goes further than the Federal Rule of Evidence 801(d)(1)(a) and allows an additional way to admit inconsistent statements for their substantive value. In my own child criminal court, that means that the prior inconsistent statements of my six year old son can be used as substantive proof against the four year old defendant. You know momma is going to be happy with a conviction.

While this is not the majority rule among the jurisdictions, Tennessee is now among a number of jurisdictions that have adopted this modern approach.  Again, Tennessee now allows for substantive proof the use of statements made in preliminary hearings, depositions, police investigations, or other recorded statements and interviews.

How does this affect your construction dispute?  As with many other legal questions, the answer is: "It depends."   It depends on your jurisdiction, the type of trial (judge or jury), and the type of construction dispute. 

  • If you are in a jurisdiction that has adopted the modern approach, which includes Tennessee, Colorado, Hawaii, Wisconsin, New Jersey, Illinois, California or Montana, then prior inconsistent statements can be used substantively. 
  • A judge should be able to truly appreciate the difference between prior inconsistent statements used for impeachment versus used for substantive evidence. 
  • Finally, in a fact-driven construction disputes (as opposed to simple breach of contract matters or cases involving a battle of experts), this new evidence rule may come into play.

The real lesson to be learned from this rule change is to preserve pre-trial statements by all witnesses.  For example, it is important to take witness statements immediately following a construction accident, failure of the installed work, or other significant event during project performance.  In the event of litigation, the recorded statement can be used during trial as substantive proof.

As reported by the Tennessee Bar Association, the 2010 Tennessee State High School Mock Trial Competition got underway yesterday with the release and publication of the mock problem. Tennessee Bar AssociationThe case involves a dispute over the design and construction of a 400,000 square foot distribution center featuring a concrete slab-on-grade floor. The primary issue in dispute is whether the work performed by the contractor constituted a breach of contract or professional negligence. A copy of the problem may be downloaded on the TBA’s website.

The case materials for this year’s problem were developed in large part by the Tennessee Association of Construction Counsel, which is an association of about 100 attorneys from across the state with practices serving contractors, building material and equipment suppliers, architects, engineers, and building owners and developers.

Marisa Lee Combs, the Chair of the Tennessee State Mock Trial Committee and a construction attorney at Lewis King in Nashville, is a product of the mock trial competition. In response to an inquiry, Marisa said, " If not for that experience, I am not sure I would have chosen a career in the law. Other classmates of mine were interested in drama, so they loved playing witness roles. To me, it is a great way to show the students how complicated and fun the law can be."  

To me, it is exciting to see a future generation of thinkers, problem solvers and litigators at such an early age in their education. I am also excited to see that this year’s problem focuses on a construction dispute that will provide for some very interesting trial arguments. (Since I am a construction lawyer who regularly litigates these types of disputes, I will refrain from providing any more commentary on this issue.)

Kudos to the Tennessee Bar Association and the Tennessee State High School Mock Competition for their extraordinary efforts in creating and supporting this great program. And a hearty good luck to all the young participants!

Heads up Westlaw, LEXIS, FindLaw and all you other law-related databases.  There is another giant in the field of legal research.  Last night, Google launched a new feature on Google Scholar that makes 80+ years of US federal caselaw and 50+ years of US state caselaw searchable and readable. Here’s what you may find: 

  • The entire opinions are indexed and available
  • Every citation is hyperlinked to the full text of the opinion cited
  • Every opinion includes a "How cited" tab showing how the current opinion was cited by the referring opinion
  • All opinions include their official citation and include page breaks and page numbers

Let’s take this scholar on a test drive. Years ago I worked on a case involving the construction of a power generation facility owned by an entity named Choctaw Generation Limited Partnership.  When I GoogleScholar-ed the name of the owner, my search immediately returned the Second Circuit decision.  That’s it!  The hyperlinks to the footnotes and other citations … check.  The page numbers … check.  So far, so good.

What’s happened to the Choctaw case over the past eight years?  All you have to do is click on the HOW CITED tab and you will find a wealth of information, including the cases that have cited the decision, as well as snippets of the quoted material:

Google Scholar Enters the Legal Market

Here are some early insights about Google Scholar as a research tool and how business should approach its use:

  • This is a great offering from Google.  Ask any associate attorney in my office where I suggest that they start a research assignment and the answer will be: Google.  Is that the only legal research an attorney should do?  Absolutely not!  But it is the best place to start.  And Google Scholar just opened a wealth of additional data for these preliminary searches.
  • One of the enhanced features of Google Scholar is the Advanced Scholar Search that allows you to search by name, jurisdiction, and subject area.  Again, I believe this enhances the preliminary searches that are performed.
  • Before relying on Google Scholar exclusively (…which would probably be years before doing so … ), I would want the public to fully test the scope of the database.  It will be important to watch how timely case law is collected and stored.  

Despite the benefit that Google Scholar results from provide public access to case law, the question remains: will this benefit the practice of law and resolution of disputes in general?  Some of my clients are empowered by their ability to do research and to assist in the trial preparation, while others would simply prefer to show up for the final judgment.  I think for the former group, Google Scholar opens up a pool of available research.  The later group would not bother.

If I had to limit my comments to one sentence, it would be: Great new tool for preliminary research!

Following on my earlier post … nevermind.  Leadership of the Tennessee House and Senate recently reached a bipartisan agreement to immediately introduce legislation in January 2010 to suspend the effective date of Public Chapter 1041 from January 1, 2010 to February 28, 2011.  As reported last week, the new law was enacted to require a sole proprietor to carry workers’ compensation insurance on himself.  The effect of the new ruling was addressed in Tennessee Attorney General Opinion 09-173 (pdf). 

In a statement, Representative Judd Matheny, Chairman of the House Consumer and Employee Affairs Committee alluded that timing was an issue:

 “Although there are merits in this legislation which need to be addressed, its effective date could not come at a worse time for the portions of the industry affected or the already fragile economy.”

Matheny is sponsoring HB 1839 along with Representative Joe Pitts to immediately suspend the effective date of PC 1041 until February 28, 2011.

According to House and Senate Leadership, a suspension of PC 1041’s implementation until February 28, 2011 is the first of two steps in reconsidering the issue of the sole proprietor and workers’ compensation in the construction industry. The second step would be considering alternative ways to address gaps in coverage for workers in companies of all sizes in the various construction fields. Recommendations for alternatives have been collected from consumers and affected industries and are being looked at closely. No action on implementing any alternatives is expected until February 28, 2011 at the earliest.

This action should assist sole proprietorships for the time being.  However, unless the move is taken immediately at the start of the January 2010 session, there will still be some period where the new law will be in effect which requires workers’ compensation coverage.

College football in the Midwest.  No further comment needed.  So it should come as no surprise to see that a construction project in Mishawaka, Indiana was "postponed" as the local football team advanced to the state playoffs.

Football Excusable Delay?

Although the school’s request to hold off the work crews affected construction for only a few days—and there was no indication that the postponement significantly delayed the completion of the work—it does raise some questions about excusable delays.  

Generally, the parties’ contract will determine whether a delay is excusable or non-excusable. Some typical examples of excusable delay include:

  • Design problems
  • Differing site conditions
  • Changes in the work
  • Force majeure (i.e., Acts of God, unusually severe weather, riots, war, labor disputes)  

In some instances, the contract will contain an exhaustive list of those events or circumstances where a delay to the contractor’s work will be excused.  In other instances, the contract may simply define an excusable delay as "any delay to the work that is beyond the contractor’s control and without the fault or negligence of the contractor." 

On the other hand, non-excusable delays are traditionally the responsibility of the contractor. Examples of non-excusable delay may include:

  • Non-conforming or defective work
  • Failure to adequately plan or schedule the work
  • Inadequate manpower
  • Any other delay within the contractor’s control

In these instances, the contractor is generally not entitled to a time extension, is not entitled to additional compensation for the extra time on the project or work performed, and may even be responsible for liquidated damages.

When there is a delay to the work, what should you do?  Although you may have different options depending on whether you are the owner, contractor or supplier … or depending on whether the project is public or private … here are some tips:

  1. Review the delay provisions of the agreement.  Because these provisions vary from contract to contract, it is critical to understand what will be considered excusable.  The real issue here is to determine what will be the litmus test in determine whether the non-performance or delay in the work should be excused for some reason beyond the performing party’s control.  
  2. Determine whether a time extension is warranted.  As you review the delay provisions, the next step is to determine what relief will be given if the delay is determined to be excusable.  For example, the contract may allow for a contract time extension, additional compensation, and relief from liquidated damages when the delay is found to be excusable or beyond the performing party’s control.
  3. Consider whether the delay is concurrent.  Many times the contractor’s work may be delayed by more that one cause—one that is excusable and one that is non-excusable.  In this instance, depending on the applicable law, the court may either: (a) deny any recovery whatsoever because the delays were caused, in part, by the contractor; or (b) apportion the delay damages between the responsible parties.

For some additional thoughts on delay claims, see Tim Hughes‘ articles (part 1, part 2) on his former law firm website. 

As much as possible, I like to highlight various forms of construction contract documents.  In most of my green building presentations over the past few months, I have talked about the "soon to be released" Green Building Addendum from ConsensusDOCS.  Well, that day has finally come!

New ConsensusDOCS Green Building Addendum

Based upon my preliminary review of the 310 Green Building Addendum, I am confident to say that the blogosphere of architects, engineers, owners, contractors, LEED AP-ers, and attorneys is going to be jumping.  There are a lot of new terms, such as Elected Physical Green Measures and Elected Green Status; there is a new contractual party, called the Green Building Facilitator (or "GBF"); and there is a meaty "Risk Allocation" section in the document. 

The first seven sections of the 310 Green Building Addendum include the following:

  1. General Principles, including an acknowledgment that Green Measures are being incorporated into the project that affect the roles and responsibilities of the parties.
  2. Definitions, which introduce and define all the new players, roles and responsibilities.
  3. Green Requirements and Procedures, which are elected by the owner.
  4. Green Building Facilitator, which addresses who this person will be and what his role will be.
  5. Green Status, which sets the targeted status (i.e., LEED Certified Silver).
  6. Green Measures, which outlines the steps to achieve the Green Status.
  7. Plans and Specifications, which helps incorporate the green measures into the underlying contract documents.

Section 8 addresses risk allocation, which is where I will probably spend a couple of days digesting.  In this section, you will find issues such as:

  • The role of the contractor during the process, as well as a provision that limits the contractor’s responsibility for performing certain services. 
  • A waiver of consequential damages, which is the provision that every green attorney will want to take a look at first.
  • A general limitation of liability provision that addresses the failure to attain the targeted status, as well as, the failure to receive any intended benefits to the environment.

One cursory review … and I did not find anything absolutely surprising.  I was interested to see that the contract document was not LEED-driven, meaning that the drafters wrote the green measure provisions and the green status provisions broad enough to include all existing and any future green building programs.