Part I: Key Provisions of School Facility Construction & Design Contracts

David R. Cook | School Construction News | April 25, 2018

We all expect our school construction projects will go smoothly, on time and under budget. But despite our best efforts, some projects will encounter speed bumps, detours or outright roadblocks. While there are many precautions a school facility manager may take, one of the best precautions is to have solid construction and design contracts.

A good contract will account for the known risks and specify an outcome in favor of the school authority. School construction risks can be categorized into a few categories: performance risk, time risk, cost risk and political risk. Some risks are typical to all construction projects, while others are peculiar to the unique needs of school authorities.

At the outset, it should be noted that contracts provide protection only when they are enforceable. As a result, school facility managers must ensure proper formalities are followed for bidding, procurement and contracting. Failure to follow these requirements could render the contract unenforceable, and the school authority may be unable to recover from the other party or its surety.

In Part I of this article, we will discuss the performance risk and time risk categories, and in Part II, we will cover cost risk and political risk.

Performance Risks

Performance risk arises from a contractor or designer’s failure to properly perform their obligations. These risks can include:

  • The designer’s failure to create plans and specifications that incorporate the facility manager’s project concept
  • Faulty, incomplete, uncoordinated or inadequate plans and specifications
  • The designer’s failure to incorporate mandatory requirements of laws, regulations and building codes, including particularly any state or federal administrative requirements for funding and disability laws
  • The designer’s failure to inspect the work for defects
  • The contractor’s failure to follow plans and specifications
  • The contractor’s faulty or negligent work

Certain provisions of construction and design contracts can minimize performance risks. For example, the design contract should clearly express the school authority’s wishes for conceptual design, offer the facility manager multiple opportunities for reviewing the design, expressly require the designer to incorporate all legal requirements and clearly designate the designer’s responsibility for inspecting the work. Due to the importance of these obligations for project success, the design contract should not unduly limit the designer’s liability.

The construction contract should require strict compliance with the plans and specifications and should grant the facility manager and others the right to observe the work at any time. The contract should include a warranty that the work will be performed with good workmanship and compliant materials. (However, this warranty should expressly not be the school authority’s sole remedy for defective or non-compliant work.) If defects are suspected, the facility manager should have the authority to suspend the work for further observation. If defects are discovered, the contractor should be required to remedy them without additional compensation. If it fails to do so, the contract should permit the school authority to terminate the contract for cause, direct the performance bond surety to perform and remedy all defaults, and enforce other remedies.

In the event of a faulty design, the contractor may seek additional compensation based on a theory that the school authority implicitly warranted that the design was adequate (known as the Spearin Doctrine). To counteract such a claim, the construction contract should expressly disclaim any warranty concerning the design. Though, it should be noted that some states are reluctant to enforce such clauses, so the design contract should require the designer to indemnify the authority for Spearin claims.

Time Risk

Another important risk is delay in project completion. Because schools must adhere to a pre-set school calendar and they typically have limited alternate space, delays are particularly disruptive. As a result, contracts should expressly set the time for completion and could establish interim milestone deadlines. They should require the contractor to provide an initial schedule with periodic updates, both of which should be based on sound scheduling logic. These updates, if accurate, will alert the school authority of delayed completion and the need to secure alternative facilities.

To encourage timely completion, contracts could impose liquidated damages for delays and provide an incentive payment for early completion. They should address time extensions, but ultimately give the school authority the right to accelerate the work to ensure timely completion before summer ends. Lastly, if the contractor believes it has encountered a delay for any reason, the contract should require timely notice to the school authority so it can address the underlying problem and limit delays.

Part II: Key Provisions of School Facility Construction & Design Contracts

David R. Cook | School Construction News | June 13, 2018

In Part I of this article, published in late April, we discussed the performance risk and time risk involved with construction and design contracts, and in Part II, we will cover cost risk and political risk.

Cost Risk

School budgets are limited for many reasons, and the construction budget is no exception. As a result, contracts should guard against unwarranted cost increases and claims. In the absence of a written change order signed by the appropriate officer, the contract should absolutely prohibit additional compensation for changes in the work. It should forbid claims for all events except those within the school authority’s sole control. Even for permitted claims, the contractor must provide written notice so that the authority might alleviate the problem and control its costs. To encourage the contractor to limit costs and claims, the contract could include a shared-savings clause, which grants an incentive payment for completion within the budget.

Political Risks

School authorities generally are political bodies that must respond to the wishes of voters and taxpayers. So they ignore political risks at their peril. While in all cases, the authority must follow any competitive-solicitation requirements, there are some instances in which they can or must give preference to local bidders. To the extent local bidders are awarded a contract, the bid or proposal and final contract should require affirmative representation that the contractor or designer qualifies for any such preference and will, to the extent permitted or required, use local goods and services.

Constituents also prefer designers and contractors that are good corporate citizens. As such, solicitation documents and contracts could include affirmative representations that they will pay all taxes, comply with all laws, and satisfy all applicable DBE requirements. In some parts of the county, political risk includes the use of undocumented workers on the project. Some public works projects have been doomed by bad press when undocumented workers are discovered working on the site. When applicable, the contract could include provisions regarding undocumented workers, including E-Verify requirements.

Many authorities are able to generate goodwill with their constituents by engaging in energy savings performance contracting (EPSC), which is a method of procurement that is paid for by energy savings or revenue enhancements resulting from the project. These savings and enhancements are guaranteed by the contractor. Constituents appreciate the budget-neutral and environmentally friendly aspect of ESPCs.

Lastly, since there is no way to predict when politics will negatively impact a project, the school authority should have an off ramp — a termination-for-convenience clause. When permitted by law, this clause allows the authority to terminate a contract for any reason or no reason.

Experienced facilities managers know that problems will arise on a construction project. They also know that one of the best defenses is a good contract. But a good contract is not one pulled off the shelf; it is crafted and fine-tuned by experience and a deep understanding of the authority’s goals and its constituents’ wishes. It incorporates all constitutional, statutory, and regulatory mandates applicable to school authorities. It balances the one-sided provisions of many industry form contracts and those proffered by designers and contractors. Finally, it provides just the right amount of incentives and deterrents to promote a timely, cost-efficient and high-quality project.

Enforcing a Mechanic’s Lien in California? Don’t Waive Your Right to Arbitrate the Dispute

Jeff Brown | Thompson Coburn LLP | June 12, 2018

On June 6, 2018, the California Court of Appeal held that a contractor waived its right to arbitrate disputes because it recorded a mechanic’s lien and then didn’t follow California Code of Civil Procedure Section 1281.5 in its subsequent lawsuit to foreclose on the lien. In Von Becelaere Ventures, LLC v. Zenovic, the parties entered into a construction contract for a single-family residence in Laguna Beach, California. The contract had an arbitration provision as follows:

If any dispute arises concerning this Contract or the interpretation thereof, or concerning construction of the Improvements, or the Limited Warranty, customer service, defects, damages, or obligations therewith (a “Construction Dispute”), such Construction Dispute will be settled by binding arbitration.

After a dispute arose, Zenovic, the contractor, recorded a mechanic’s lien in the amount of almost $450,000, and Von Becelaere Ventures, the owner, filed a construction defect lawsuit, alleging that Zenovic breached the construction contract by

“(a) failing to properly perform and construct the Work;

(b) failing to hire properly licensed and insured subcontractors;

(c) failing to comply with proper license and insurance requirements;

(d) failing to obtain written subcontract agreements;

(e) failing to properly supervise the Work;

(f) failing to maintain and provide upon request proper accounting records;

(g) failing to properly manage expenses and allowing gross overages;

(h) failing to comply with requirements regarding change orders, improperly billing for extra work and improperly categorizing work as extra work which should have been covered under the contract as included work; and

(i) improperly filing and asserting an untimely mechanics lien and threatening to file suit to foreclose on the improper lien.”

Shortly after being served with the Von Becelaere Ventures lawsuit, Zenovic filed his own lawsuit, asserting causes of action for breach of contract, reasonable value, account stated, open book account, abuse of process, breach of the covenant of good faith and fair dealing, and foreclosure on mechanic’s lien.

Not long after, Zenovic filed a motion seeking to compel arbitration under the arbitration provision of the construction contract. The trial court denied that motion. On appeal, the Court of Appeal affirmed the trial court’s decision that Zenovic waived his right to compel arbitration because he didn’t comply with Section 1281.5, which provides:

Any person who proceeds to record and enforce a claim of lien by commencement of an action pursuant to Chapter 4 (commencing with Section 8400) of Title 2 of Part 6 of Division 4 of the Civil Code, does not thereby waive any right of arbitration the person may have pursuant to a written agreement to arbitrate, if, in filing an action to enforce the claim of lien, the claimant does either of the following: (1) Includes an allegation in the complaint that the claimant does not intend to waive any right of arbitration, and intends to move the court, within 30 days after service of the summons and complaint, for an order to stay further proceedings in the action. (2) At the same time that the complaint is filed, the claimant files an application that the action be stayed pending the arbitration of any issue, question, or dispute that is claimed to be arbitrable under the agreement and that is relevant to the action to enforce the claim of lien.

Here, Zenovic “neither included an allegation in the complaint filed in the [mechanics lien] action stating he did not intend to waive any right of arbitration and intended to seek a stay of the [mechanics lien] action (§ 1281.5, subd. (a)(1)), nor filed an application for stay at the time he filed the complaint in the [mechanics lien] action (§ 1281.5, subd. (a)(2)).” As a result, the Court of Appeal held that he waived his right to compel arbitration of the owner’s construction defect claims. The Court held that Section 1281.5 “means what it says,” and that Zenovic’s failure to comply “waived the right to arbitrate construction disputes under the terms of the construction contract.”

Contract Ambiguity Affected Accrual of Claim, and Statute of Limitations Analysis

Stan Martin | Commonsense Construction Law LLC | June 2, 2018

A seemingly minor ambiguity in contract terms, probably unnoticed at the time, has affected the timeliness of a claim for construction defects.

The contract was signed in 2008, after the 2007 updates to the AIA contract forms had been published. The contract form, in what the court described as a “boilerplate” clause, stated that the contract documents included the “current edition of AIA Document A201.” That would have been the 2007 edition. A list of contract documents, though, specifically identified the 1997 edition of the A201 as the general conditions for the contract.

The 1997 edition of the A201 stated: “any applicable statute of limitations shall commence to run and any alleged cause of action shall be deemed to have accrued in any and all events no later than such date of Substantial Completion.” In contrast, the 2007 edition of the A201 stated that claims should be asserted “within the time period specified by applicable law, but in any case not more than 10 years after the Substantial Completion of the Work.”

The project was substantially complete in April 2009, and a three-year statute of limitations applied. The owner discovered problems in September 2013, and filed a lawsuit soon after. Thus, if the 1997 edition of the A201 was the pertinent version, the statute of limitations expired in April 2012. And if the 2007 edition was in the contract, the lawsuit was timely.

Applying “well-settled rules of contract construction,” the court held that the typed reference to the 1997 edition took priority over the boilerplate reference to the “current edition.” (Many readers are aware that this is a normal principle of construing contracts, as specially-drafted or modified terms will take priority over conflicting terms contained within standard or standardized forms.) Applying the language of the 1997 edition to the three-year statute of limitations, the court held that the owner’s claim was untimely. All arising from an ambiguity that may only have been discovered once the claim arose.

The case is Black Diamond Hope House, Inc. v. U & I Invs., LLC, 2018 Del. Super. LEXIS 2 (May 22, 2018) (LEXIS subscription required).

Keep It Simple Stupid: Remembering The Basics In A Construction Defect Indemnity Case To Minimize Surprises Down The Road

John Gregory and Michael Ludwig | Jones, Skelton & Hochuli PLC | May 17, 2018

There is an old saying: familiarity breeds contempt. Admittedly, residential construction defect cases can be repetitive. They usually involve the same Plaintiffs’ attorneys, the same alleged defects, and resolve in the same fashion for the same per-home amount. As a result, there is a dangerous tendency to view new construction defect (“CD”) lawsuits as homogenous. So what happens when the courts in which we practice throw us a curveball? It turns out, as illustrated by recent developments in the authors’ home jurisdiction of Arizona, a curveball can be a blessing in disguise by providing defense counsel a chance to get back to basics.

The Amberwood Case

Arizona CD law was thrown for a loop recently when the Arizona Court of Appeals — the state intermediate appellate court — decided a case interpreting an indemnity provision in a construction contract between a builder and a subcontractor. In an unpublished opinion, the court decided that a subcontractor can be forced to indemnify a contractor for mere defect allegations, even those alleged defects which are neither attributable to any subpar workmanship on the part of the subcontractor nor otherwise actually caused by the subcontractor, unless the contract specifically required a finding of fault by the subcontractor. Amberwood Dev., Inc. v. Swann’s Grading, Inc., 2017 Ariz.App. LEXIS 207, 2017WL 712269 (Ariz. App. 2017)(unpublished opinion), review denied 2017 Ariz. LEXIS 242 (2017). While this may not be a major development in several states, it was the first time that an Arizona court addressed the issue. And defense counsel should consider whether such a development has arisen or may arise in your jurisdiction(s).

Amberwood Development, a general contractor, arbitrated a construction defect complaint brought by numerous homeowners that alleged, among other things, defects attributable to soils movement. The rough and finish grader, Swann’s Grading, provided a defense in the arbitration, but did not otherwise participate in the arbitration. Ultimately, Swann’s Grading did not agree to indemnify Amberwood for any part of the $1.75 million award to the plaintiff homeowners or the additional $723,000 paid in settlement to another group of homeowners. Id. Amberwood, therefore, brought an action for indemnity against Swann’s Grading, relying on the parties’ subcontract. The indemnity provisions of this contract required Swann’s Grading to defend and indemnify Amberwood “from claims, demands, costs, or attorney fees, causes of action and liabilities of every kind whatsoever arising out of or in connection with Subcontractor’s work performed for Contractor….” Id. At *2.

At a bench trial, Amberwood presented expert testimony establishing that 70.6% of the litigation settlement and 72.7% of the arbitration award were attributable, at least in part, to issues that “arose out of” Swann’s Grading’s work. Swann’s Grading’s expert denied causation for the alleged defects, but apparently did not rebut the arguments that the alleged defects themselves arose out of Swann’s Grading’s work. Id. This makes a measure of sense analytically: How can a defective condition arise from or relate to a subcontractor’s work if the defective condition was not caused by a defect in the subcontractor’s work? This has been the common position of subcontractors in litigation for years, and most contractors would likely tell you that they never thought they would have to pay for defect claims unless it was proven that their work was bad. Worse still, defense counsel for Swann’s Grading was not provided the expert’s report and allocation until the day of oral argument, was not granted a stay to analyze or respond to the newly disclosed report, and the report was admitted into evidence over defense counsel’s objection. The trial court ultimately rejected the subcontractor’s position, and the Court of Appeals affirmed the lower court’s decision finding Swann’s Grading responsible for $1.3 million (which included the allotted portion of arbitration award and settlement costs, plus a portion of Amberwood’s attorney’s fees and costs). Id.

The Court of Appeals’ decision in Amberwood is something of a departure from the approach undertaken by the CD defense community. The last Arizona case that had addressed the issue directly provided implicit support for Swann’s Grading’s position. In MT Builders, LLC v. Fisher Roofing, Inc., 219 Ariz. 297, 197 P.3d 758 (App. 2008), the same Court that decided Amberwood was faced with a similar argument: a builder who argued that fault was not a necessary prerequisite to recover indemnity from a subcontractor. The MT Builders case, however, involved a contract that limited the subcontractor’s indemnity to the contractor for claims “arising out of or resulting from the performance or non-performance [sic] of the Subcontractor’s Work under this Subcontract … to the extent caused in whole or in part by any negligent act or omission of the Subcontractor….” MT Builders, 219 Ariz. at 303, 197 P.3d at 764 (emphasis added). Under the plain language of the contract, the Court decided that a finding of fault was required for the general contractor to receive indemnity. In addition to citing to outside authority (a treatise and cases from nine other jurisdictions across the country), the MT BuildersCourt made reference to the well-settled rule of contract construction that an ambiguous provision be construed against the drafter. Id. The overall tone of the MT Builders opinion and ultimate result left the “subcontractor bar” feeling emboldened, believing that the same line of argument and reasoning would be applied to other subcontracts as well.

While there is ample room for disagreement with and criticism of the Amberwood Court’s decision, its immediate impact was drastic. The arbitration decision, though only a memorandum, was the first case to address this broader indemnity provision. Its persuasive value was likely high at the outset, and it has now been upheld by a respected trial court judge. A subcontractor’s potential exposure in a CD case has dramatically increased. The pendulum swung drastically in the developers’ direction, and developers immediately took advantage of the shift by taking aggressive positions in settlement negotiations and litigation.

Faced with this drastic swing, the Arizona CD defense bar was forced to re-evaluate its usual strategy for litigating a CD case. But, upon further review, it appears not much has really changed in terms of how CD cases involving indemnification issues should be handled, as long as practitioners remember to stick to the “basics.” So it is helpful to look back at some of the “basic” concepts that are far too often ignored, even by very good CD attorneys.

Ascertain Whether An Indemnity Provision Falls Into A Legal Gap

The Amberwood case surprised Arizona CD counsel because, before Amberwood, there had not been any case that defined the breadth of the type of indemnity provision in question. Absent case law directly on point, defense counsel chose to take for granted that the inevitable interpretation of a broader indemnity provision would be favorable to their clients. That was a mistake.

Most indemnity provisions have been sharpened over time to require little or no showing of fault on the part of the indemnitor to allow recovery. As the Amberwood case illustrated, broad indemnification provisions can be used to recover virtually all of the fees and costs incurred by a general contractor or indemnitee in defending claims made by a third party. See also Continental Heller Corp. v. Amtech Mechanical Services, Inc., 61 Cal.Rptr.2d 668 (Cal.Ct.App. 1997). Express indemnity is the strongest cause of action in almost every case between a general contractor and subcontractor, and therefore, this should be the very first thing counsel analyzes.

Most states we surveyed take a hands-off view of contract interpretation. Thus, where the contract terms are clear and unambiguous, the express terms of the contract will govern the extent of the indemnity obligation. See, e.g., Koppers Co. v. Missouri Pac. R. Co., Inc., 34 Ark. App. 273, 809 S.W.2d 830 (1991); Hagerman Constr. Corp. v. Long Elec. Co., 741 N.E.2d 390 (Ind. Ct. App. 2000); Mautz v. J.P. Patti Co., 298 N.J.Super. 13, 688 A.2d 1088 (App. Div. 1997). All analysis should start with application of the general principles of contract construction, especially if there is no dispute between the parties about the contract terms. It is important to discern immediately what effect an indemnitee’s own negligence has on the indemnity obligation. Most states we looked at have anti-indemnity statutes or rules that either forbid an indemnitee from recovering for damages resulting from its own negligence or otherwise limit the indemnitee’s recovery. See, e.g., New York CLS Gen. Oblig. § 5-322.1 (making agreements for indemnification of one’s own negligence void and unenforceable); Fla. Stat.Ann. § 725.06 (requiring a monetary limitation on the extent of indemnification that is commercially reasonable and specifically incorporated into project specifications and/or bid documents to be enforceable). Likewise, some jurisdictions, like Arizona, require that a contract specifically address the impact of the indemnitee’s own negligence on the recovery to be enforceable. These defenses arise from the mere language of the contract.


The larger question is how to proceed when the indemnity language is not crystal clear or is otherwise open to multiple interpretations — a legal gap if you will. Rare is the case where the parties simply agree that indemnity is owed. Knowing how courts have interpreted the same or similar language when presented with disagreements is therefore crucial. Most often, the issue we face as litigators is whether the language in the indemnity provision requires a finding that the subcontractor was at fault for or otherwise the cause of the claimed defect. Because contractual interpretation is usually an issue of law to be determined by the Court, it is important to be aware of how the Court will likely interpret your indemnification provisions.

This is often easier said than done. Courts have interpreted the same or similar indemnification provisions and reached different results, sometimes even within the same jurisdiction. Compare Continental Heller Corp. v. Amtech Mechanical Services, Inc., supra, with Heppler v. J.M. Peters Co., 87 Cal.Rptr.2d 497 (Cal. Ct. App. 1999) to better understand just how important it is to know your jurisdiction’s indemnity cases. In Continental Heller, the California Court of Appeals found that no finding of fault or causation was required for a general contractor to recover indemnity where the subcontractor agreed to indemnify the general contractor for any claim that “arises out of or is in any way connected with the performance of work under this Subcontract” and “shall apply to any acts or omissions … on the part of the Subcontractor.” Continental Heller, 61 Cal.Rptr.2d at 670. The Hepplercourt, however, reached the exact opposite result when looking at a nearly identical indemnity provision (“arising out of or in connection with Subcontractor’s … performance of the work…”) and held that a finding of fault on the part of the subcontractor was a prerequisite to trigger the indemnity obligation. The Heppler court expressly distinguished the facts at bar from those presented in the Continental Heller case. Specifically, the court noted the following differences in the two cases:

1. Continental Heller involved only one subcontractor positioned to control its work, whereas Heppler involved multiple subcontractors whose work was only a component part and who had no control over the other subcontractors involved in the project.

2. The cases involved different commercial contexts — a large, sophisticated subcontractor in Continental Heller and a smaller, less sophisticated subcontractor in Heppler who could be financially ruined by the potential indemnity obligation without a fault/causation requirement.

3. Continental Heller involved a slightly broader indemnity provision that applied to “any” acts or omissions of the subcontractor.

Since the vast majority of CD cases settle, the practitioner is in the tough position of determining whether he/she wants to obtain a definitive ruling on the breadth of a specific indemnity provision. A motion for summary judgment may clarify the issue, but it also may result in making bad (or good) law for the instant or future cases. In other words, sometimes the devil you don’t know is better than the one you do.

Propound and Conduct Meaningful Discovery

Bad habits can result in parties sending out routine discovery requests which result in routine, less-than-helpful responses by the opposition. Sussing out problematic indemnity issues requires thoughtful strategy. Propounding written discovery asking the general contractor to identify any and all construction defects and/or damages relating to a client’s work telegraphs defense counsel’s intention and usually results in a laundry list of damages that have no conceivable connection to the client’s work. For instance, recently a general contractor stated in discovery responses that a perimeter fence subcontractor’s work caused or contributed to problems with stucco, concrete, drywall, and roofing issues. The issue may be better saved for an expert deposition where the expert may not be prepared for the question or is less likely to strain credulity, especially when the expert knows he/she is likely to be deposed on the same or similar issues by the same attorneys in the next case.

However it is done, a practitioner should take the steps necessary to avoid what happened to Swann’s Grading the Amberwood case-a last minute disclosure of substantially more claims alleged to be “connected to” its work than previously imagined. Because the Arizona Supreme Court denied review of the appellate court’s decision in Amberwood, the risk of last minute disclosure like that allowed in Amberwood remains a nightmare scenario for all defense counsel. Thoughtful discovery requests or strategic expert deposition questions can help minimize the risk of having a drastic increase in potential liability heaped upon a client at the last minute.

Manage Client Expectations

No one likes being sued, and it is natural for contractors to take complaints and lawsuits about their workmanship personally. Contractors worry about the impact that lawsuits will have on their ability to attract future business and/or buy insurance. For these reasons and others, clients are very invested in the outcome of their litigation. A good place to start in any case is advising subcontractor clients about the impact and possible interpretation of applicable indemnity language. Amberwood and other indemnity cases also provide a good teaching opportunity to educate clients on the importance and possible effect of indemnity provisions and to encourage clients to be proactive in attempting to draft and/or revise contractual indemnity provisions for their own benefit. Providing exemplars of ideal indemnity provisions is always well received.

While most developers are savvy enough to know the impact of their indemnity provisions, some misinterpret the strength of an indemnity provision in their jurisdictions. The surest way for a general contractor to hold up a potential settlement is by making a demand that does not reflect and is not supported by the indemnity language provisions of the applicable contract. A general contractor who settled with homeowners early should not expect a full and complete (100%) recovery from the subcontractors when the subcontract’s indemnification language requires a finding of fault. Similarly, general contractors should likewise temper their expectations where they cannot locate a subcontract or, in the rare case, are not indemnified parties under the contract agreement. There is no better way to blow up a mediation or insure protracted litigation than to have a client who is not ready to accept the realities of his/her own case.

This should sound, and is on many levels, elementary. Even so, the importance of remembering the basics cannot be overstated. Many good lawyers, under the demands of a changing and busy profession, can take the likely results of a case for granted. But surprises can and do happen. In order to minimize the likelihood or impact of these surprises, defense counsel must insure that all of the “basic” items discussed above are considered.

Published in the December 2017 issue of FDCC Insights, a Journal for Defense and Corporate Counsel.