Archive for the ‘Arbitration & ADR’ Category

Litigation Topics for Prime / Subcontractor Contracts

On November 2, 2011 Author By Seth Smiley

I had a speaking engagement today here in Kenner, Louisiana (a suburb of New Orleans) whereby I had the pleasure of speaking to a group of contractors and architects regarding construction contracts. The bulk of the discussion focused on the most contested provisions within construction contracts.

The information is very helpful to contractors and can be used a resource when a contractor begins the contracting phase of a construction project to help get a better understanding of what is going on within the contract documents.

Prime/Subcontractors Contracts

Contracts between prime/general contractors and their subcontractors make up a vital link in the construction project chain. Here both parties need to negotiate terms to better protect when a dispute arises. A well crafted contract can better protect a prime and/or a sub when default arises. Typically subcontractors are at the mercy of the prime. A good subcontractor will have his attorney review any agreement to make sure that the deal is an even one.

AIA – American Institute of Architects is the most common standard form contracts in the construction industry. AIA contracts are a good starting point and offer contracts for Prime/sub relationships, Architect/owner, Owner/Prime, and any other design professional/contractor relationship that may exist.

• Commonly litigated subcontract provisions

There are a number of provisions which could be contained in a prime/subcontractor contract that need to raise a red flag when present and should be negotiated by either party so as to keep the contract from becoming one-sided.

1. Incorporation by Reference Clauses: (flow-up & flow-down provisions)

  • a Flow-down provision in a prime/sub contract will incorporate by reference terms and provisions of the owner/prime contract;
  • conversely, a Flow-up provision incorporates the duties owed by the owner to the prime into the prime/sub contract;
  • Many times parties enter into these agreements with out ever seeing the referenced document making them susceptible to unknown provisions;
  • Enforcement depends on the reciprocality of the provisions and lack of ambiguity

2. Scope of Work Provisions

  • Prime contractors want a broad scope of work provision with subs so that they can pin other work to them later on if needed;
  • Subs should demand very specific scope of work provisions so as to know exactly what work is expected and what exactly they have bid on;
  • This provision can incorporate other documents such as plans and specifications;
  • Provision needed for extra work or change order if work called for is outside of the scope;

3. Change Order and Extra Work Provisions

  • Very popular area for dispute in construction contracts – changes are always happening
  • There should be a clear provision in the contract outlining the process whereby CO’s are made and approved;
  • Define change order – modification to work already contemplated by the agreement; (ie different materials)
  • Define extra – item of work beyond the original scope of work that is added during construction;
  • MAKE SURE change orders and/or extras are in writing;

4. Notice Provisions

  • Found in various places within a prime/sub contract
  • Very important risk-shifiting devices – can determine a win or loss regarding a claim

5. Indemnity Clauses

  • Typically these trickle down the line Owner -> Prime -> Sub
  • These are generally enforceable, Subs should be careful and not allow indemnity for negligence of another party
  • Insurance can be purchased by prime or sub to cover the indemnity obligation

6. No Damages for Delay Clauses

  • Owners and Primes try to insert “no damage for delay” provisions in contracts for protection against unforeseen delays
  • Parties want to check all referencing documents to see if this provision is in there

7. LD’s – Liquidated Damages Provisions

  • Very helpful provisions because the pre-determine delay damages, usually on a per day basis;
  • Enforceable unless determined to be a penalty or if they are a “one- size fits all” provision;
  • LD’s are a good way to measure delay damage but can enhance the need for Contractor/Sub to accelerate work to avoid further damage, leading to defects and workmanship issues;
  • For LD’s to apply the contractors work must be a substantial factor in the delay;

8. Lien Waivers

  • reduce the chance for encumbrances to be placed on the title of the property;
  • Usually not enforceable if lien waiver required before work performed;
  • A good tool for Prime and Owner to reduce exposure;
  • Can be used in an incremental fashion as payments are distributed

9. “Pay-when-paid” v. “Pay-if-paid”

  • Pay-if-paid is defined as a subcontractor gets paid by the general contractor only if the owner pays the general contractor for that subcontractor’s work.” Requires a condition precedent.
  • Pay-when-paid in contrast to the pay-if-paid; a pay-when-paid clause does not establish a condition precedent, but merely creates a timing mechanism for the general contractor’s payment to the subcontractor.

10. Retainage

  • Typically 5%-10% of each payment will be withheld by the Owner/Prime until a later date, such as substantial completion
  • Its purpose is to keep a pool of money to remedy any defects in workmanship by that sub

11. Termination provisions

  • Termination for Cause
  • Usually nonpayment, excessive delay, insolvency, or convenience are reasons to terminate the contract

12. ADR Clause (Arbitration/Mediation clauses)

  • Arbitration (most popular) – binding way to avoid litigation;
  • Mediation – non-binding way to avoid litigation;
  • Both can be effective, typically arbitration can be more intimidating due to its binding and no (very limited) ability to appeal

13. Attorney fee provisions

  • Very popular as no one likes to pay an attorney!
  • Many provisions will say that the unsuccessful party must pay attorney fees but others to be careful will put the burden on one party
  • Primes and subs should include an attorney fee provision in all contracts
  • Good to be specific on the provision and include for litigation and ADR

14. Forum selection & choice of law

  • If working out of state, make sure you know which venue a dispute will be held in;
  • This can be a very costly provision

(list partially obtained from the ABA’s Fundamentals of Construction Law)

 

Posted in:     Arbitration & ADR, Change Orders, Construction Contracts, Construction News, Damages, Delays, Dispute A Lien, Disputes, Insurance, Litigation, Louisiana, Mechanics Lien  /  Tags: , , , , ,   /   1 Comment

Arbitration Review May Be Limited…But It Can’t Be Waived in Washington

On January 25, 2011 Author By Scott Wolfe Jr

The Washington Supreme Court wrote an opinion interpreting the Washington Arbitration Act last week in Optimer Int’l, Inc. v. RP Bellevue, LLC.

In this case, a landlord and tenant submitted themselves to an arbitration proceeding pursuant to their contract, and the loser at arbitration wasn’t satisfied with the award. They sought judicial review of the holding in superior court, and were denied this review at the trial and appellate level because of a clause within the contract’s arbitration provisions that “waived” the right to appeal any arbitration award.

The appellant and Supreme Court ruled that the “waiver” did not – and can not  – waive the right to seek judicial review of an arbitration award as statutorily allowed by the Washington Arbitration Act.

To the extent this ruling contradicts a previous appellant case, Harvey v. University of Washington, 118 Wn. App. 315, 76 P.3d, the Washington Supreme Court said that this case is overruled.

The limitations of the ruling in Optimer Int’l is important.

  1. The case construes the Washington Arbitration Act, because that is the law in place when the arbitration took place. However, this has been replaced with the Revised Uniform Arbitration Act (RUAA), which the Supreme Court indicated they need not consider.
  2. The review allowed by the Washington Arbitration Act is very limited, allowing review for only specific errors with the award (fraud, bias, etc.).

While this case does not address the RUAA, I would think we’d get a similar result under the new statutory scheme.

Posted in:     Arbitration & ADR, Washington  /  Tags: , , , , ,   /   Leave a comment

Litigation Sucks!! Get Out Of It

On November 8, 2010 Author By Scott Wolfe Jr

As a lawyer (and a client), the legal system has caused me significant frustration.   Why?   Because judges can make terrible decisions, opposing parties and attorneys can abuse the process, the costs can be enormous, and at the end of the day the case comes down to a decision-maker who can decide against you.

One thing I frequently tell clients is this:   The litigation process is designed to keep people out of it.  I wrote about this issue in the past here:  Why Compromise Is Sometimes Better Than A Construction Dispute.

Our friend Alan Haley recently published two blog posts related to this topic on this Louisiana Construction Law Blog.  I discuss them both here:

The 20% Rule
What is the 20% Rule?   It is the principal that you can have bulletproof evidence, the best argument and facts, and a “perfect case,” but still face at least a 20% risk of losing.   How?   Check out the quote from John Watkins who explains the rule in his article about the same:

Why is the twenty percent rule true? Because unforeseeable things happen in litigation. Star witnesses blow up in depositions or on the witness stand, even if they are well prepared. There may be a document or email out there that you (and your lawyer) did not know about when the case was filed.

But, most importantly, cases are resolved by judges and juries. Judges and juries are human beings, and, given that fact, may not see things your way. Judges and juries may seize upon facts and issues that you know are irrelevant to the dispute, but which become highly relevant, because they get to decide the case, not you.

Judges and juries may simply like the other side better than you. Maybe your confidence will be perceived as arrogance. Maybe the other side has an explanation that resonates.

Mediation As Dispute Resolution Mechanism in Construction Industry
If litigation is so unpredictable, what do you do with your disputes?   Just walk away from them?   The answer to that, of course, is usually no.   A separate post from Alan discusses the possibility of mediation taking a larger role in construction disputes.

When mediation works, it’s great.   After all, it takes away absolutely all of the risk and leaves the result of the dispute in the parties’ complete control.    It’s why Alan predicts that mediation will become more and more popular as time goes on:

Probably because of the problems currently plaguing arbitration (see what folks have to say about that here, here, here, here, and here).  Finally, mediation is a more pure alternative dispute resolution mechanism because the participants share in deciding the outcome as opposed to dealing with a decision or award.  Further, mediation is usually cheaper and faster than arbitration.

Check out both of Alan’s posts, as they’re great for folks who might be neck-deep in litigation and thinking….this sucks.

Also, after writing this blog post, I stumbled on another post out there from Melissa Brumback.   Posted on her Construction Law in North Carolina Blog, Melissa updated her “Should I Stay or Should I Go Now? (Court v. Arbitration)” post.   Another good read on the topic.

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Posted in:     Arbitration & ADR, Litigation  /  Tags: , ,   /   3 Comments

How To Make Arbitration “Worth It” Again

On September 3, 2010 Author By Scott Wolfe Jr

Arbitration has been the talk of the town amongst the legal community this week, and really, it should be.

One could say that arbitration is at a crossroads these days.   Over the years, the expenses and delays associated with arbitration have rivaled litigation.   From a personal level, I can tell you that arbitration is simply feeling more and more like ordinary litigation.   In recent arbitrations, the parties have engaged in a substantial amount of discovery, and the proceeding itself felt wrapped in a court-like formality with objections to evidence made left and right.

And let’s not even mention the costs associated with an arbitration.   I recently filed for arbitration with the American Arbitration Association paying a $4,500 filing fee, and then, just a few months later being asked to pay another $4,000 for our share of the arbitrator’s fee.   Even the AAA knows their fees are out of hand, as I’ve recently gotten a survey phone call from them where it seems the AAA’s administrative nightmare is looking for answers.

After all of this, you may think I’m opposed to alternative dispute resolution?   Well, I’m not .   Not yet.

Similar to the online discussion about arbitration this week, I believe there is a way to make arbitration worth it for the parties (despite the natural slippery slope tendency of things).   It requires some extra front end work and legal jargon, and yes, counsel from an attorney to predict which type of ADR situation will work best for your matter.

Part One:   Conversations on What’s Wrong (or Right) with Arbitration

There’s no shortage of complaints about arbitration (we’ve even done it!)   Just this week, the WallStreet Journal published this on its Law Blog:  Has Arbitration Become More Burdensome than Litigation? It starts with this revealing statement:

Arbitration was once known as a faster, cheaper, better way to settle disputes.

But has the process become as bogged down as conventional litigation?

And look at some of the comments to this article; scathing lawyers, of course:  “Of course Arbitration has become hugely expensive;” and “Arbitration is extremely more expensive than litigation;” and, my favorite, “So lawyers complicate arbitration and make it way more expensive.  Is this news?”

Are the criticisms true?   The National Arbitration Forum would argue they are not, and they even have a website dedicated to the issue:   Arbitration-Truth.com.   Pointing to surveys and empirical studies like one performed by John Chalk, Sr. of for the Texas Bar ADR Section, these anti-critics argue the “empirical studies do no support the current criticisms of arbitration.”

Whose right?   Well, both the critics (like me) and the anti-critics are probably part right, and that’s exactly why folks should look at their options in making arbitration work for them, and “worth it” again.

Part Two:  Tips to Make Arbitration Worth It

So, what can you do to make the arbitration process actually work as intended?    Here’s the good news – since the rules of arbitration are left to the parties, you can do a heck of a lot.   And where do you start setting these rules?   Your contract.

Take a look at the recent article by our friend Alan Haley on the Louisiana Construction Law Blog at Blogspot:  Should Arbitration be a Standard Clause in Construction contracts? Alan comments that he advises clients to “tailor arbitration clauses…to their specific desires and the needs of the parties.”   Want more specific instructions on how to tailor the contract – check out the related post here.

Another blog post this week helpful to those looking to make arbitration right again with better contracting comes from one of my favorite blogs, Adams Drafting (we’ve talked about this blog previously here).    Interestingly, Ken Adams refers to an article on law.com and not the one on the WSJ, but it’s just a different shade of gray.

Ken highlights the importance of making the ADR clause work specifically for you with the following:

Whatever arbitration clause you use….commentators on arbitration generally recommend that you supplement it.

Part Three:  Choose Your ADR Company After Thinking About It

I’ll make this point very quickly.   Do not choose the American Arbitration Association just because it’s the company you’re heard of.   The AAA has plenty of competition, and in most cases, the competition will be cheaper and offer a more pleasant ADR experience.    In fact, the AAA uses many of the same arbitrators as these other companies.

Look around and ask your lawyer about their positive and negative experiences with these companies, and select one that works.  It might be the most important thing you can do to make the arbitration process worth it.

Posted in:     Arbitration & ADR, Construction Contracts  /  Tags: , , , ,   /   6 Comments

The Project in Las Vegas A Large-Scale Example of Typical Construction Dispute

On May 26, 2010 Author By Scott Wolfe Jr

A mega-project in Las Vegas is having real problems; mega-problems.   But when you look past the large numbers, all that is left is a simple construction dispute that is played out everyday across the nation between contractors, subcontractors and owners.   The dispute – reported recently by the Wall Street Journal – serves as a good, large-scale example of how things can go wrong in a construction project.

Here are three key components of this dispute:

  • The general contractor claims the owner hasn’t paid according to the payment schedule, and the owner claims it is owed money because of construction defects.
  • Failure to pay the prime trickled down to the subs, and they have filed liens.
  • The owner further refuses to pay the prime because (i) they have a contractual duty to keep the project lien-free; and (ii) The liens are causing the owner damages in that it is more difficult to sell the condominium units.

Sound familiar?   Of course it sounds familiar, this is a summary of nearly every owner / prime contractor dispute across the country.

As your construction project approaches completion, keep these issues in mind.   Owners very frequently get tighter on the final payments because they’re afraid the prime contractor will bail before work is 100% complete.   But the budget squeeze results in subcontractor liens, animosity, catch-22s and the spark of a litigation war.

We usually recommend two ways to handle these frequent problems.

First, handle it in the contract.    Think about these issues before you sign anything, and make the contract clear about how the contract will reach final completion.

Second, set up a way to resolve the dispute out of court (mediations, initial decision makers, and the like).

What do you guys think?   Any other recommendations?

Posted in:     Arbitration & ADR, Construction News, Litigation  /  Tags: , , ,   /   4 Comments
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