Rethinking the Role of Technical Experts in Pre-litigation Dispute Resolution

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Thanh Do and David Ojala | Forum on Construction Law

Construction disputes do not always require an expert; however, an expert is typically sought if the dispute involves particularly technical or complex issues that a lay person (including counsel and triers of fact) cannot readily understand. When is the most appropriate time to call upon a technical expert in a construction dispute? Most will turn to technical experts only after the dispute has advanced to the point where damages are high and litigation or a more formal ADR process is the likely path to resolution. Many also believe that a technical expert is required mainly for testimony in court, and therefore, late appointment of an expert shortly before trial is the most economical decision, but in many cases this may not be true. It is becoming more and more common for attorneys to retain an expert early, and the pre-litigation phase is arguably the best time to do so.

Pre-litigation Phase

During a pre-litigation or claim preparation phase, a technical expert typically serves as a “consulting expert” for one of the parties in the dispute, someone who can help evaluate any technical issues in dispute and opine on the relative strengths and weaknesses of proposed claims or positions. Another way an expert may be involved is to serve as an “independent evaluator” or a member of a “dispute review board,” jointly appointed by the involved parties, to advise on the merits of each party’s position based on the position papers and supporting information provided by the parties. Regardless of the role the expert may take and by which party the expert is retained, this process usually kicks off “after the fact” that is, when the dispute has led to large damages and/or delays. In many cases, it may already be too late for the expert to show value because the parties may already have experienced a significant economic loss, both parties may share significant fault in the escalation, and neither party is likely to clearly prevail in a settlement or litigation.

Rather than wait until this point in the dispute, we have seen the dispute resolution process be more effective when parties like owners, construction managers, design-build entities, and others retain experts earlier, even before a claim is fully formulated and a formal dispute resolution process has begun. Ideally, this kicks off when the dispute is just starting to rear its head as a disagreement, damages may not be fully formed or realized just yet, and the sides may not yet be entrenched in their positions. In this situation, the technical expert serves as a neutral third party who can weigh in on the cause of a problem and help to mitigate or resolve it (such as by performing independent design peer-review and developing a remediation plan to address the identified problems) before it escalates into a full-blown dispute in need of trial, arbitration, or formal mediation.

In this role, the expert serves as a neutral fact finder, as well as a source of technical insight. The expert plays the role of an independent evaluator or a dispute review board member by hearing each side and weighing the merits of each position, but at the same time, gets more involved in the technical nuts and bolts like a consulting expert to get to the bottom of the cause. And ideally, rather than just stop at finding the cause of the problem, the expert becomes part of the solution by proposing ways to get things under control, and potentially avoid similar problems from arising during the remainder of the project. The use of an expert in this setting has the potential to be highly cost-effective because one of the objectives is to prevent escalation of the damages that initiated the dispute in the first place. If damages are low to begin with, and stay below reasonable cost contingency levels, there may be little sense in pursuing costly recovery. A skilled and amiable expert, combined with a measured facilitator (perhaps inside or outside counsel for the owner or construction manager), can also encourage all sides to engage in solving the problem collaboratively, which can further expedite the resolution and help heal the bruises of any initial finger pointing. It can turn what might have been a failure into a success story and a triumph of teamwork.

Case Study

As an example of this sort of early expert involvement, the author was engaged by a construction manager at risk to help resolve a pair of disagreements between the project structural engineer and steel subcontractor, both of which threatened increasingly large repair costs and delays. One dispute involved widespread, seemingly random weld cracking throughout the project, for which each side blamed the other, with proposed or attempted repairs (most failing) often reflecting this finger-pointing. The other dispute involved steel assemblies that were surveyed to be out of level after installation, alternately being blamed on improper design and improper fabrication. The author was given an opportunity to review relevant documents, tour the site, speak to both parties, and perform some analysis. The author was able to discover a pattern in the seemingly random weld cracking that allowed the engineer and fabricator to focus their attention and develop alternative weld procedures and details to repair existing cracks and prevent future cracks. They also performed an analysis and facilitated load testing and surveying of the questionable assemblies to show that the appearance of out-of-level assembly was a result of benign construction tolerance issues, avoiding the need for costly replacement or retrofit. The final result was cooperation between the engineer and steel subcontractor, a halt to the escalating repair costs and delays, and a much less painful process in the long run for all sides.

Food For Thought

Before implementing this strategy, there are several questions that the involved parties and their counsel might consider:

  • How should parties that propose this type of dispute resolution broach the subject to their at-odds colleagues?
  • Like the engagement of an independent evaluator or dispute review board, can this type of process be written into contracts or teaming agreements?
  • Should everyone involved have a say in selecting the technical expert, or a right to veto the proposed expert?
  • What agreements need to be in place to encourage open and honest cooperation in the resolution process while protecting the rights of each party should litigation occur down the road? Is the potential for reducing the damage of the dispute enough encouragement for the parties to participate openly?
  • What happens if the involved parties do not cooperate or willingly provide necessary information to the jointly appointed technical expert?
  • If negotiation is unsuccessful and the claim proceeds to subsequent proceedings, such as litigation, what role might the technical expert be able to take? Might they hold any liability?

Conclusion

Regardless of the potential challenges, this kind of early expert engagement has the potential to facilitate dispute resolution and is worth exploring further by consultants and attorneys, as it aims to help all involved parties toward a positive outcome and to minimize costs before they become excessive. For us experts who are also practicing designers, this is also an opportunity to take lessons learned and apply them to future projects, preventing future disputes and bringing a type of deep satisfaction that our more traditional expert engagements cannot quite match.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Slow As A Turtle? Florida Court Finds “No Damages for Delay” Clause Has Limits

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Matthew DeVries | Best Practices Construction Law

My commute home last night took longer than usual. It was not excessive traffic, an accident, or a stalled car.  Rather, the cause of my delayed commute was a turtle: one single turtle crossing the road, holding up about 30 cars for what seemed like an eternity. (Never mind the fact that no one got out of their car to help the little guy!)

When we think of delays on a construction project, the first inquiry is to identify the turtle—the one party holding up progress or causing the delay. Many times, the parties’ contract will dictate whether the contractor can recover delay damages or will be limited to a time extension for delays beyond the contractor’s reasonable control.

In Sarasota County, Fla. v. Southern Underground Industries, Inc., 333 So. 3d 285 (Fla. 2d DCA 2022), the court recently held that a “no damages for delay” clause did not preclude an award of damages to the contractor following the County’s suspension of work.  In that case, the County issued a stop work order to the contractor installing a sanitary pipe and water line when an adjacent homeowner complained that vibration from the drilling caused damage to his home. The contractor secured an engineer’s report that concluded the damage was cosmetic only and that the vibration did not exceed the acceptable threshhold.  The adjacent homeowner rejected the contractor’s offer to fix the damages. Ultimately, the County continued the suspension of work for an additional two months while attempting to address the adjacent homeowner’s concerns.

The contractor sought additional compensation for the two extra months of suspension. The County rejected the claim, arguing that the “no damages for delay” clause in the parties’ contract precluded the award of delay damages. The court found in favor of the contractor, relying on an exception to the general rule:

Although “no damages for delay” clauses are recognized in the law, they will not be enforced in the face of governmental “fraud, bad faith, or active interference” with performance under the contract. The record supports the trial court’s finding that the County impeded work on the project, at [the contractor’s] expense, long after it was determined that it was safe to proceed with minimal damage to the adjacent homes.

What is “active interference”? While not explicitly defined in the Sarasota County case, it requires the showing of an affirmative willful act of the owner that unreasonably interferes with the contractor’s work.  Here are a few more lessons when dealing with a delay on a project:

  1. As a contractor, you need to first review your contracts for a “no damages for delay” clause. If one is present, then you will want to negotiate an “active interference” clause that defines what constitutes an active interference.
  2. An “active interference” could mean that the owner knows about the delay and still proceeds; or it could mean that the owner conceals or actively interferes by affirmative conduct.
  3. During performance, you should document the impact of the owner’s actions, including whether the owner failed in coordinating other trade contractors for which it alone is responsible.
  4. Even if your contract does not have an “active interference” exception, there may be a common law remedy of bad faith or negligence on the owner’s part, which causes the delays.  That would depend on your particular state.

In the end, active interference to overcome a “no damages for delay” clause involves more than a turtle crossing the road. The dispute will be decided on the express contract language and the offending conduct giving rise to the additional damages and delays.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Feeling Rejected? MA Court Construes for the First Time the Provisions of the Prompt Pay Act

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Matthew DeVries | Best Practices Construction Law

In life, rejection is often hard to swallow.  In construction, that rejection can sometimes amount to millions of dollars.  A Massachusetts court recently held that an owner’s rejection of the contractor’s payment applications was not properly certified and, thus, violated the state’s Prompt Pay Act.

In Tocci Building Corp. v. IRIV Partners, LLC, (App. Ct. Mass. June 7, 2022), the court was asked to construe for the first time the provisions of Massachusetts’s Prompt Payment Act, which applies to certain private construction contracts in excess of $3,000,000. The Act requires that progress payments shall not exceed: 30 days for submission; 15 days after submission for approval or rejection; and 45 days after approval for payment.  Notably, if the owner does not provide an approval or rejection within 15 days of a proper payment application, then the payment application will “be deemed to be approved”.

What is a proper rejection under the Act?  The statute specifies that “[a] rejection of an application for a periodic progress payment, whether in whole or in part, shall be made in writing and shall include an explanation of the factual and contractual basis for the rejection and shall be certified as made in good faith.” A rejection notice under the statute can be subject to the parties’ dispute resolution clause, but any contract provision that causes delay to commencement of the dispute resolution period longer than 60 days is void and unenforceable.

In Tocci, disputes arose between the owner and contractor over seven interim payment applications that were, in whole or part, not paid by the date required in the parties’ contract. The owner alleged the contractor performed defective work and failed to perform warranty work when required.  The court reviewed each of the payment applications and determined whether the owner’s emails and other communications constituted valid “rejections” under the Act.  Ultimately, the court concluded that each disputed payment applications was “deemed approved” because the rejections: (1) came after the date payment was due; (2) did not contain a contractual or factual explanation; and/or (3) did not contain a certification that it was made in good faith.

Much of the court’s decision focused on whether the owner’s communications were properly certified within the meaning of the statute:

The Legislature required this certification if a rejection is to be effective, and we are not free to ignore that requirement by deeming it merely ministerial—to do so would be to read the requirement out of the statute. In any event, the certification requirement is an essential component of the scheme set up by the statute. As this case reflects, on a complicated construction project, there may be an enormous amount of communication back and forth between the owner and the contractor. Much of it may touch on issues involving compliance with the contract, and much of it may touch on payment. The certification requirement ensures not only that the owner be deliberate about rejecting applications for periodic progress payments, and that it takes care to reject them only in good faith, its presence on a communication also provides a clear indication to the contractor that an application has been rejected, so that the contractor can know both that some response is needed and that time periods have been triggered for invoking what remedies are available.

The court made clear that the owner’s claims of defective work and other breaches of contract were not waived by the failure to include these items in a proper rejection under the statute.

So what? If your project is subject to Massachusetts law, the decision in Tocci provides an excellent summary of the Prompt Pay Act.  However, the decision also provides a good lesson to parties involved payment disputes on a construction: follow the letter of the law In other words, while you may have factual or contractual reasons supporting your position, the law may impose certain requirements to preserve and/or prevail on your claims. Make sure your contracts are up to date with the most recent laws of your state, and that you have checklists in place when disputes arise.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Inflation: The Elephant in a Construction Dispute or Contract Negotiation

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Mario R. Nichols | Stoel Rives

Inflation is hitting the country hard. Consider this: $1 million in January 2020 has the same buying power as over $1.7 million today, according to the Consumer Price Index inflation calculator. How much weaker the dollar will get is anyone’s guess.

As the economy—the construction market in particular—continues to experience inflationary challenges, it is critical that owners, contractors, and design professionals beware of the risks presented by inflation and understand the options to mitigate those risks. Following are answers to questions that industry professionals may have regarding such issues.

Where does my contract address inflation?

Odds are likely that your contract does not directly address inflation. But that does not mean that the impact of inflation is not embedded in your contract (or should be embedded in contracts you sign in the future). Review these contract provisions closely, with an inflation lens:

  • Escalation clause: If a contract includes a specific provision dealing with material price increases, then that provision is a good place to start. Escalation clauses handle price increases in a variety of ways and often entitle the contractor or design professional to additional compensation (or a credit) if the price of material “x” deviates by some fixed percentage from a baseline figure for the expected cost of that material.
  • Impossibility of performance: Depending on applicable law, this doctrine may provide a defense to a claim of breach of contract where the impact of inflation made it impossible to perform the duties of the contract. Whether performance is “impossible” will vary depending on the circumstances, and many jurisdictions will require objective impossibility—meaning that it must be impossible for any similarly situated owner, contractor or design professional to perform. This legal doctrine may also apply even if the contract does not have a specific provision addressing this issue.
  • Impracticability of performance: A cousin to the preceding provision, if performance is impracticable, but not impossible, there may still be a defense (or at least a mitigating effect) of a failure to perform.
  • Force majeure: Read the force majeure clause carefully to see if the impact of inflation could be captured, and if the relief available is merely more time to perform (which may not be helpful when dealing with inflation), or an adjustment to the cost of performance.

Such provisions are the tip of the iceberg but a good starting point. Other relevant clauses include constructive change provisions or extensions of time clauses. Creative parties may even draft a provision specifically addressing the risk of inflation.

Can I recover damages specifically for inflation?

There are limited decisions analyzing whether courts or arbitrators should take inflation into account when awarding damages. In specific circumstances, such as bad faith claims against insurers, there is precedent in some courts for taking into account the effects of inflation. For example, in this specific context the Court of Appeals for the Ninth Circuit (analyzing California law) upheld the use of inflation as an element of damages where, among other factors, “there was a steady rate of inflation during the compensable period.” (See Leslie Salt Co. v. St. Paul Mercury Ins. Co., 1981.)

Several years later the Ninth Circuit (this time analyzing Arizona law) held that “the factfinder may take inflation into account in measuring damages for breach of contract where doing so will put the damaged party in as good a position as if the contract had been fully performed and will avoid an otherwise unjust result.” (See Safeco Ins. Co. of Am. v. Duckett, 1988.)

How these decisions or related opinions will impact a non-insurer dispute under Oregon law appears to be an open question. There is dictum from a recent Oregon Supreme Court decision that appears to acknowledge the relevance of inflation when evaluating certain types of damages (see Busch v. McInnis Waste Systems, Inc., 2020), but whether the court’s reasoning in Busch will translate to a commercial construction dispute remains to be seen.

Does prejudgment interest compensate for inflation?

The objective of compensatory damages is to put a plaintiff in a position the plaintiff would have occupied if no wrongful conduct had occurred. As many disputes are resolved years after the fact, prejudgment interest is one way to compensate a party for the time value of money. But whether prejudgment interest will also account for the effects of inflation will depend on the time period at issue.

In times of high inflation, prejudgment interest may be insufficient to fully compensate a party as most prejudgment interest statutes are not indexed to account for inflation. Parties to construction disputes, in particular, are cautioned not to assume the award of prejudgment interest is a foregone conclusion—even putting inflation aside. Construction disputes often involve damages for additional work, delayed work or changed work that are heavily contested in quantum, and often subject to expert disputes. Depending on the jurisdiction of a dispute, even successful claims may not generate an award of prejudgment interest (or may only produce a limited award of prejudgment interest), which during times of inflation can be particularly damaging to a company’s bottom line.

During volatile times like these, it is critical to stay informed and plan accordingly. Tools for monitoring construction cost trends (like the one at www.mortenson.com/cost-index) are great resources. It’s important for all construction project parties to keep inflation top of mind when evaluating their next dispute or negotiating their next contract.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

What is a “Force Majeure” Clause? Do I Need one in my Contract? Three Options For Contractors, Subcontractors and Suppliers to Consider

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William L. Porter | Porter Law Group

In the world of the building and construction industry, the general rules of contracting are fairly simple.  A supplier agrees to supply equipment or materials for a specific price and within a certain time frame, does so, and is paid an agreed sum.  Likewise, contractors and subcontractors agree to build structures per plans and specifications within certain time frames and are paid accordingly.  Pretty simple.  But what happens when some outside event makes performance impossible or unduly expensive or substantially delayed?  What happens, for example, if a ship is sitting off the coast of Long Beach for three months with equipment ordered for the project and it cannot be unloaded due to a labor shortage?  What if government mandates cause factories that build needed equipment to close due to an epidemic or pandemic?  What if the supply warehouse holding the equipment until it is ready for installation unexpectedly burns to the ground?  What if a Russian missile blows up the factory in Ukraine where the intended equipment is being manufactured?  What happens then?  Who bears the financial consequence?

A properly constructed “force majeure” clause may provide the answer to these questions.  The Marriam-Webster Dictionary defines “force majeure” as a literal translation from the French meaning “a superior or irresistible force.” It further defines the term as “an event or effect that cannot be reasonably anticipated or controlled.”  The Oxford Dictionary defines force majeure as “unexpected circumstances, such as a war, that can be used as an excuse when they prevent somebody from doing something that is written in a contract.”

Using the above examples, which involve labor interruption, pandemic closure, catastrophic fire and war, the contractor, subcontractor or supplier would argue that none of those events are their fault, and they should not be responsible for the consequences.  From the perspective of the property owner who contracted to have the building built and equipped, neither is it their fault.  All things being equal, the property owner might argue that the risk of non-performance is generally on the contractor, subcontractor or supplier.  After all, if equipment is stuck on a ship, or even if the factory is bombed or the supply warehouse burned down, then the owner will argue that the contractor, subcontractor or supplier is obliged to find another supplier not suffering from these problems.  Each side claims an arguably reasonable position.  The question therefore is not so much whether there will be a risk of non-performance due to outside causes.  Such a danger always exists.  Rather, the important question relates to allocation of risk.  If someone must bear the financial burden of a failure to perform, who should that be?  The party who includes a force majeure clause to allocate risk away from themselves, will have great advantage when unforeseen issues intervene.

Before moving along to some possible force majeure clauses for consideration, some related legal doctrines warrant mention. Among these doctrines are “impossibility,” “impracticability” and “frustration of purpose.”  Without getting deeply into definitions on a tangential issue, “impossibility” might apply when events make the performance of the contracted for action impossible, for example, when a finish contractor cannot perform its work because the building where the work is to be performed has been destroyed through no fault of the contractor.  “Impracticability” may possibly be established when unanticipated events cause the cost of performance to rise to such a degree that timely performance would put the contractor out of business.  “Frustration of purpose” might be established where predecessor trades have not performed the work necessary for the finish contractor to perform its work in a timely manner.  Each one of these legal doctrines might possibly come to the aid of the contractor to avoid liability, but great uncertainty remains.  While arguments might be made on each of these three examples, there are numerous detailed articles on these legal doctrines that can be referenced.  In any case, it is highly probable that each of these scenarios would benefit from an allocation of risk a force majeure clause might provide.

Set forth below are three options for contractors, subcontractors and suppliers to consider in dealing with future force majeure issues.  Adding a clause like one of those listed below to a construction or supply contract or subcontract before it is signed allows a contractor, subcontractor or supplier to better protect themselves.  While none of the three options may be appropriate for any particular circumstance, a review of them may be helpful to those who seek to add a protection on an issue which might unexpectedly arise at any time.  The main difference between the three options presented is the length and complexity of each.  Each example is drafted as between a “Contractor” and “Contracting Party.” For use of the examples, that Contracting Party might be defined elsewhere as an Owner, Subcontractor or Supplier.

Longer Version:

#­­­___ FORCE MAJEURE  Except with respect to payment obligations under this Agreement, no Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic, contagious illness of employee(s) causing reduction in workforce, delay or disruption, or other public health situation or resulting government actions or recommendations which restrain the ability of Contractor to commence, continue or complete performance of the Agreement.  On reasonable notice, the time for performance shall be extended by the reasonable period of such delay.  If the Project is delayed for more than sixty (60) continuous or intermittent days from the same Force Majeure cause, either Contractor or Contracting Party has the discretion to terminate the Contract without liability.  Contractor shall be entitled to payment for work performed and materials supplied to the work site to the date of termination and for materials ordered if the order cannot reasonably be rescinded.

Shorter Version:

#___ FORCE MAJEURE  No Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic or other public health situation or resulting government action or recommendation which restrains the ability of Contractor to commence, continue or complete performance of the Agreement.  If the Project is delayed for more than sixty (60) continuous or intermittent days from the same Force Majeure cause, either Contractor or Contracting Party has the discretion to terminate the Contract without liability.

Shortest Version:

#___ FORCE MAJEURE  No Party shall be liable for, nor shall such Party be considered in breach of this Agreement, due to any failure to perform its obligations under this Agreement as a result of a cause beyond its control, including but not limited to any act of God or a public enemy or terrorist, act of any military, civil or regulatory authority, change in any law or regulation, fire, flood, earthquake, storm or other like event, disruption or outage of communications, power or other utility, labor problem, unavailability of supplies, epidemic, pandemic or other public health situation or resulting government action.

Note: The shorter you make the clause, the more uncertainty you have on what to do when the situation arises.

Conclusion:

When contractors, subcontractors and suppliers encounter events not properly addressed by the terms of their current contracts and subcontracts, it is time to revise the operative document.  Contractors, subcontractors and suppliers would do well to consider a clause to protect themselves from unforeseen events that impact on timely performance.  Those who actively protect themselves with protective contract language are more likely to survive unforeseen events when others do not. Before using any clause in a legal document always be sure to have the clause and the legal document in which it is included reviewed by a licensed attorney familiar with the industry in question.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.