Great Tips from the ABA Forum on Construction Law

The Cover of the brochure for the ABAs Construction Law Forum discussing subcontractor and suppliers issues

Last week, two of our construction attorneys, Mark Cobb and Stephanie Dougherty, attended the Mid-Winter Meeting of the ABA’s Forum on Construction Law. During the three day conference, they attended substantive seminars related to construction law, meet other construction lawyers, and saw old friends from past meetings.

This years Construction Forum was particularly useful to the Cobb Law Group’s construction practice as the educational seminars concentrated on issues related to material suppliers, specialty subcontractors, and subconsultants. The various classes ran the gamut from damages and default to arbitration and indemnifications. This was Stephanie’s second Forum participation, but Mark has been participating for many years, and he is always manages to learn something new related to construction law and its industry or gain a new perspective from the various roles on a typical large construction project. The following are some of the highlights which Mark noted throughout the Forum:

1. The first class discussed the varying degrees that subcontractors and subconsultants can be involved in project design. More pointedly, the presenters discussed the project teams’s duties and potential liabilities with respect to design delegation. Some points which stood out include the following:

• There is no standard definition of “Delegated Design” within construction law
• Engineers who are up-stream often claim to look only at “general conformance” when reviewing a subcontractor or subconsultant’s work
• There are 55 different licensing jurisdictions in the United States
• Subcontractors/Subconsultants need professional liability insurance

2. The second session discussed the differences between Subcontractor Default Insurance (SDI insurance) and bonding (payment bonds and performance bonds). It addressed the current state of the market for SDI as well as the risks, rewards and due diligence that general contractors need to know before jumping into SDI insurance plands. In addition, the panel discussed alternate ways to protect against subcontractor default by utilizing such methods as letters of credit, parent guarantees, “monitoring” programs, joint check agreements, lien waivers and releases. Some pertinent points included the following:

• SDI insurance may allow a part of the premium to be returned to the general contractor if there are not any claims against the policy (this encourages the GC to run a more professional construction project)
• SDI deductibles runs the gamut from $250K to $1M
• Travellers Insurance, one of the larger bonding companies, has begun offering a rider known as an EDR Bond or Early Dispute Resolution; this purports to be a quicker mechanism for resolution as there is a 30-day period in which an arbitrator will enter a biding decision (this decision can usually be appealed AFTER the project is completed)

3. The third session presented a panel which showed negotiation techniques for payment provisions; they also discussed the enforceability of pay-when-paid provisions and paid-if-paid clauses. This session also included prompt payment acts, trust fund statutes and equitable liens as a part of their conversation. Finally, this session covered lien and claim rights in the context of lien waivers and change orders that include claim waiver language from the perspective of project owners, general contractors, subcontractors, subconsultants, and suppliers and explored why owners should care about subcontract payment provisions and retainage.

4. After lunch which included a lecture by Patrick Jephson, former private secretary to HRH, Diana, The Princess of Wales, session four discussed Flow-Down provisions, Delay & Liquidated Damage provisions in construction contracts and subcontracts. It dealt with the current trends in the no-damages-for-delay clauses and their enforceability, subcontractor options and obligations regarding the schedule, and why fast-track projects are claim-ridden. The presenters discussed how contractors, subcontractors and subconsultants view the flow-down of liquidated and consequential damages as well as how to track the flow-down of prime contract terms and conditions to subcontractors and material suppliers. A few points of note are as follows:

• There are two general types of flow-down provisions: (i) flow-down of scope and (ii) flow-down of scope and commercial terms
• Liquidated damages are generally not allowed if (i) they are a penalty, (ii) the party claiming the damage is not actually damaged, or (iii) the owner caused some of the delay
• If the liquidated damages provision is challenged, then any waiver of consequential damages may not be enforceable

5. The fifth plenary discussed the ins and outs of traditional pass-through agreements included in typical subcontracts and liquidating agreements (which are subsequently executed by the parties when claims arise). They also discussed owner defenses to pass-through claims, mistakes to avoid in negotiating and implementing these agreements including failing to preserve defenses, reserve rights or prevent associated legal fees from undermining any meaningful savings by the contractor or recovery by the subcontractor. It also talked about certifying subcontractor pass-through claims on public projects, potential pitfalls, and how to avoid liability under the U.S. False Claims Act. The following points were of particular interest:

• Joint Defense Agreement can preserve attorney-client privilege
• Common interest agreements are not enforceable in every jurisdiction
• The Severin Doctrine is not dead (although it may be mortally wounded)

6. Session Six addressed the very important topic of indemnities and third party insurance. It focused on how owners, contractors, and subcontracts approach indemnities and additional insured coverage. It included a presentation on the scope of indemnity provisions in subcontracts, the pros and cons of broad form indemnity provisions, arguments to use when negotiating contractual indemnity, and how contractual indemnity provision come into play after litigation is filed. Finally, the presenters discussed how third-party insurance can cover such indemnities and practical tips for securing payment from insurers. A couple of interesting points include:

• Additional insured can be a work-around from anti-indemnity statutes (except in three states) so that a party who is negligent has coverage under a policy

7. During breakfast during the second day, there was a presentation on how to distinguish between consequential damages and actual damages. The presenters gave us several examples of a claimant’s potential damages and then discussed how different jurisdictions treated them differently (whether they were actual or consequential). A salient point is following:

• When determining the amount of liquidated damages in a contract for a contractor’s failure to timely complete the project, consequential damages may be included in the calculation (for example, lost profits for a failure to open a business on time)

8. The next session addressed Litigation and ADR (alternate dispute resolution) and included topics such as the pros and cons of utilizing litigation versus arbitration as a means of resolving disputes among all project team members as well as key considerations in drafting contractual requirements governing arbitration. In addition, the speakers discussed the challenges faced in multi-tiered litigation, bringing subcontractors or subconsultants into dispute proceedings between the contractor and owner and whether “sole discretion” arbitration clauses are enforceable against non-parties.

9. A fascinating session dealt with warranties, guarantees, decennial liability and statutes of limitation and statement of repose. More specifically, attendees learn about traditional subcontractor-provided warranties and guarantees and how they affect ongoing obligations or future liability. It talked about pass-through of warranties and guaranties from subcontractors to contractor to owner and whether the contractor is absolved of further liability for the work to which the warranty or guarantee applies. Finally, this panel discussed statutes of of limitation and repose asking the question”Do these statutes have teeth or does the judicial application of these statutes tell a different story – one where the subcontractor remains liable in near perpetuity due to contractual indemnity obligations, or through nullum tempu laws exempting claims by certain governmental entities in those jurisdiction from statutes of limitation or repose”.

10. Often ethical topics at seminars seem far-fetched or not applicable, however, Plenary 10 provided a great deal of pertinent material. It discussed the ethical obligations of contractors and subcontractors and why the obligations are important to owners. The panel took the perspective from the broad reach of the life cycle of a construction project–in bid preparation and submissions, in contracting and subcontracting, and reporting to governmental or quasi-governmental entities , meeting job-specific diversity goals, proper use of MBEs/WBEs/DBEs and the dangers of false or fraudulent claims.

Truly, the days at the Forum on Construction’s Mid-Winter Meeting was very educational and informative. Mark and Stephanie cannot wait until the Annual Meeting of the forum in April!