Mississippi’s Lack of Building Codes Could Fuel Future Problems

By Jeff Jeffrey

February 17, 2012

WASHINGTON – Seven years after Hurricane Katrina, any buildings along Mississippi’s Gulf coast are ill-prepared for another significant hurricane because the state has few laws in place governing minimum building codes, according to Insurance Institute for Business & Home Safety. That assessment has some industry trade groups worried, given that 2011 brought record losses for property/casualty companies in the United States.

In a new report released by the IIBHS, Mississippi received a score of four out of a possible 100 for how the state adopts and enforces building codes, grants and enforces contractor licenses and continued code official education and training. Mississippi’s score put it at the bottom of the list of 18 states along the Atlantic Coast that the institute evaluated.

“Mississippi has virtually no regulatory process in place for building codes,” the report said. “Seven counties in Mississippi are required to enforce the wind and flood requirements of the 2003 International Residential Code. Otherwise, here is no statewide code, no mandatory enforcement, no programs or requirements for inspectors, and very few licensing requirements. General contractors are the only trade required to pass an exam prior to licensing and the state has mechanisms to discipline contractors.”

Wanda Edwards, director of code development for IIBHS, told Best’s News Service from a consumer standpoint, Mississippi’s lack of codes is “very concerning because they don’t know what they’re getting into when they buy a home.”

Edwards, who authored the report, said that could be especially true for first-time homebuyers who “have to scrape whatever money they have to get into their home. They certainly don’t have money laying around to hire a lawyer if something goes wrong.”

States should enact laws that set minimum code and contractor-licensing requirements because it would “take the local politics out of the equation.”

Mississippi is not the only state that doesn’t have statewide building codes in place. Near bottom-ranked Alabama, Texas and Delaware also lack one, but scored higher than Mississippi because they have stiffer contractor licensing and continuing education requirements. Edwards noted Georgia has statewide building code laws but doesn’t have laws in place that allow those codes to be enforced. “I don’t know what kind of situation that leaves you with,” she said.

Louisiana, the other state hit hard by Katrina scored a 73 out of 100 on the report because it passed a series of code laws after the 2005 storm leveled parts of the states and left New Orleans underwater. The levees built after the storm decrease the likelihood of a catastrophic flood event happening again; many old structures destroyed during Katrina were never rebuilt; and new construction must adhere to building codes (Best’s News Service, May 24, 2010).

Also scoring high were Florida and Virginia, which each received a 95. Edwards said those two states have some room for improvement, “but they represent the level to which other states should be pushing to achieve.” New Jersey and Massachusetts scored high as well.

While the 2011 hurricane season was relatively mild, industry trade groups say building codes could go a long way in limiting the damaged caused by future storms.

“AIA supports the goal of implementing stronger and more uniform building codes as it will save both lives and property,” said Willem Rijksen, spokesman for the American Insurance Association, in an email. “Building codes serve as an important baseline for safety standards. Florida’s implementation of strong and uniform building codes following the devastation of Hurricane Andrew should serve as a model to other states. Had such codes been in place prior to Andrew’s destruction, it is estimated that damages would have been reduced by 50% for residential and 40% for commercial properties.”


Melissa Brumback     –     Ragsdale Liggett, PLLC

The typical commercial construction lawsuit can cost an architecture or engineering firm well over $100,000 to resolve.   It is not unheard of for some construction lawsuits to rise into the multiple hundreds of thousands of dollars, and, in some cases, for damages to reach into the millions.  You might believe that because you are a small firm, performing routine, limited work, you are safe from such large claims.   However, no matter how small your role on a construction project, you can still be sued for any amount of damages.  One geotechnical engineer we defended, who performed only 5 site sample borings, was later sued for over $200,000 on a $1,000 contract.   No one who works in the construction field is immune from large claims.

 Even firms that are fully insured with large Errors & Omissions (E&O) policies run the risk of spending hundreds of man-hours in meetings with lawyers, mediation, and court—hours that directly affect your bottom line.   This white paper is intended to address the common, but critical, mistakes of design professionals, so that you can avoid (or minimize) liability on your construction projects.1   While you can never eliminate every possible avenue for claims, this paper will provide guidance on 7 specific mistakes which you can correct to dramatically lower your chances of being sued.

Mistake #1:  Not Treating The Contract Seriously

This mistake can be made in several ways—either by not having a written contract at all, not reviewing the contract terms, or allowing inconsistent provisions between the contract and your proposal.

The contract rules the parties.  It is the blueprint, if you will, that says what you can be sued for, when you can sue the other party, and what your damages will be.  If you do not have any written contract, the law presumes certain things that you may not want it to presume.

The most frequent way this mistake is made is in not having a written contract at all.   Every project should have a written contract.

The second way this mistake is made is to sign the contract presented, without reading it or attempting to negotiate any of the terms.   In this bad economy, you may think that you can not afford to make trouble.   However, almost all owners are willing to negotiate, at least to some extent.   If you run into an owner who will not budge even an inch on the contract when the parties are all working well together, it does not bode well for the relationship down the road. Some projects you are simply better off not getting.

Simply stated, you must have a written contract, and you must look at that contract before you sign it.   Standard contracts (that is, those produced by the Architect Institute of America (AIA), the Engineering Joint Contracts Document Committee  (EJCDC), or ConsensusDocs) are the norm for larger projects.   There is some built in level of projection if you use one of these standard form contracts.   Even so, however, you need to look at the contract closely, particularly those changes and modifications to the default terms.   Standard terms can cause problems if they will not work for your project and circumstances.

If your contract is not a standard contract, which is typical and appropriate for smaller projects, you must examine the proposed contract even more closely.   Contracts drafted by one party can often be extremely one-sided.   You must carefully read the contract from top to bottom to make sure everything discussed is accounted for in the document.

Another way you can make the mistake of not taking the contract seriously is by not dealing with the inevitable discrepancies between your proposal and the contract.   Undoubtedly, there are things that differ between the two.   Most contracts have a provision that is called a “merger clause,”  which  means  that  all  former  agreements  are  gone.    The  legal  fiction  is  that  all agreements have been merged into the contract itself; in actuality it may mean you will lose key terms if they are not stated within the final, executed contract.   Thus, if your proposal has a limitation of liability clause, but the contract does not, the contract will prevail.  You might think that, if the contract does not address an issue, but your proposal does, the proposal term can still apply.  Unfortunately, you would be wrong.  The merger clause typically makes any side or prior agreement null and void.   This is another reason to treat the contract seriously, and to make any changes necessary so the contract reflects the important points of your proposal.

Mistake #2:  Allowing Unfair Or One-Sided Contract Terms To Persist

Avoiding this mistake is part of reviewing your contract well, but certain contract provisions are so unfair or one-sided that they deserve special attention during negotiations.   Three of the biggest unfair provisions you may encounter are indemnity, duty to defend, and consequential damages.

a.  Indemnity

Indemnity is the agreement, in advance, of a party to assume the liability of another party. Project owners sometimes have one-sided indemnity clauses in their contracts stating that your firm will indemnify them from any claims.   Some of these provisions state that you are even required to indemnify the owner from the owner’s own negligence.   In North Carolina and other states, such a provision purporting to give someone else liability for your own negligence is void as against public policy.    If an indemnity provision is
properly worded, however, it can still be valid.   There are pros and cons to indemnity, and the area is fraught with legal issues.  For example, most E&O policies do not provide coverage for assumed contractual liabilities such as indemnity clauses.

If there is to be indemnity in the contract, the least you should do is to push for a mutual indemnity provision, where each side agrees to indemnify the other, and only to the extent the claim is based on that party’s negligence.

b.  Duty to defend

The duty to defend can exist in a contract even if the indemnity clause is stricken.   If a duty to defend is stated, that requires you to pay for the owner’s defense of the specified types of claims, whether or not your firm is negligent or even named as a defendant. Usually, the duty to defend is tied to the indemnity provision, but it does not have to be. In addition to insurance coverage issues here, there is the likelihood that the owner will pick a law firm that is top of the line, leaving you no say, yet stuck with the legal bill.  At the minimum, if a duty to defend clause cannot be stricken, you should attempt to insert clauses to modify it by including language to allow your firm to hire, direct, or be consulted on the litigation defense.

c.  Consequential damages

Consequential  damages  is  another  area  where  you  need  to  pay  careful  attention.

Consequential damages include everything that is not a direct damage.  These are indirect sources of loss, such as loss of use, loss of profit, or even loss of bonding capacity.    The standard construction agreements by AIA, EJCDC, and ConsensusDocs all have at least a
partial mutual waiver of consequential damages.   However, if this provision is modified, it should be done with full knowledge of the increased risk.  Non-standard, owner-written contracts sometimes provide for consequential damages for the owner, but not for the
design professional.  Again, if the provision is included, it must be mutual.

Mistake #3:  Not Choosing The Proper Dispute Resolution Method

Generally, there are a few distinct options if you do need to fight about a construction dispute: arbitration or trial.   The arbitration can be voluntary, or it can be mandatory.   The trial can be a bench trial or a jury trial.   Which is best?   Ask 10 lawyers and you will get 11 opinions.   This is something you should discuss with your lawyer prior to signing on the dotted line.  The default is litigation before a jury.   However, many standard forms default to arbitration, usually American Arbitration Association (AAA) arbitration.  There are pros and cons to both, depending on where the case would be heard, the amount of damages in dispute, and how, whether, or not, the underlying claim is complex.

Many lawyers are reluctant to trust a jury with a construction case, although the vast majority of them settle prior to ever getting to a jury because the stakes are so high.   However, juries generally take their job very seriously and can often be a good dispute resolution method, depending on the facts and the venue.

If you decide to forego a trial and contract for arbitration, you must decide whether it will be private arbitration or arbitration through one of the major arbitration organizations (e.g., the AAA).     If you opt for private arbitration, you also need to decide whether it will be single or three-panel arbitration.   A single arbitrator is usually faster and definitely cheaper; however, you run a greater risk of unintentionally using a poor arbitrator.    In a three-person panel, even if one is poor, there usually are fail-safes represented by the other two panel members.

These discussions are not easy, and there is no one-size-fits-all solution.   Still, the main mistake made here is in not thinking about the dispute method up front.   What may be the preferred method in one type of project may not be best for a different type of project.  Do not just assume the default; have the discussion up front.

Mistake #4:  Failing To Have Good Change Order And/Or RFI Management Processes

As a design professional, you are well aware of the often voluminous Requests for Information (RFIs) or proposed Change Orders submitted by contractors.  Many of these are simply the result of the contractor not wanting to look at the design documents; many others are the result of unscrupulous contractors or subcontractors attempting to “change order” the project to death to
make up for profit they may have conceded earlier to get the project.   Regardless, all change orders and RFIs need to be appropriately managed to avoid litigation.   You should review the contract requirements on how quickly you are required to turn around these documents and strive to stick to that schedule.   If the parties agree to hold off on a change order while additional data
or pricing is obtained, that should be documented in the change order file.   The thing that you do not want to do is to be casual with such requests since, if litigation ensues, the first thing the contractor or owner’s attorney will consider is how responsive you were to the change orders and RFIs.   If delays in response are appropriately documented at that time, you will have created a very nice business record and trial exhibit to explain to a jury why it appears you sometimes did not follow the contract requirements.

 You also may believe that, if you receive an RFI for something that should be obvious, you do not need to respond, but you do.   Do not give anyone a chance to say you were anything but thorough.  You may verbally respond to a written RFI while in the field.  That is fine, but be sure to document the verbal response once you return to the office.

Mistake #5:  Failing To Have A Quality Document Retention System

Related to the change order and RFI process, your firm should have a quality document retention system in place for every project.   This should include keeping uniform procedures for storing documents, deciding whether or not electronic documents are printed, determining where on the hard drive documents will be saved, and requiring timely filing of all incoming documents.
First, such a system will help your entire team be more productive and efficient, and it will help prevent anything from falling through the cracks.   Second, if you get sued, it will be much easier for your lawyer to find the pertinent key project documents.  If you save documents one way and your project superintendant another way, confusion is created.   If a project employee only saves
documents to his personal laptop and he subsequently leaves your employment, that data may be lost forever.   A good document retention system can save you many hours of headache in the event of a lawsuit.

Mistake #6:  Failing To Respond Properly To Claims Of Errors & Omission

Like the contractor who misuses the RFI process to document a claim of design errors, some contractors and owners tend to write letters and emails complaining of issues during the project. Often the issue complained of is minor.   Sometimes the issue has already been resolved.   It does not matter; if you get a letter that states that your firm did something wrong, respond and respond in kind.   Specifically, do not call to dispute allegations made in a letter; respond with your own letter.   For every letter stating your firm did something wrong, there should be a corresponding letter from you explaining why the facts support your position.   Sometimes clients complain that letter-writing wars are pointless, and they may very well be, at times.   However, if you do not respond (even to simply say you disagree with the opposing party’s statements), it will be that much harder to explain yourself to a jury after the fact.   The jury will wonder why you did not respond, or respond in writing, during the project.

Mistake #7:  Failing To Involve Insurance Company & Lawyer At First Time Of Trouble

No one likes to face the reality of a possible professional negligence claim.   However, you must report any such claim as soon as you become aware of it.   This is for two reasons.   First, if you do not report it right away, you run the risk of the insurance carrier later denying the claim. Second, most E&O carriers have experienced lawyers on staff who can help you minimize potential claims if you contact them immediately.   At times, the E&O carrier will even hire an attorney on your behalf to assist you behind the scenes, helping to respond to letters claiming design error and the like.   This is called “loss prevention,” and it is usually free for your firm for being a client of the insurance company.   It is generally not considered a claim (since no lawsuit has yet been filed), you usually do not have to pay your deductible, and you get free, and often critical, assistance to stop a claim before it becomes unstoppable.

If you do not have insurance (although really, you should), you still should consider having a lawyer  assist  you  behind  the  scenes  to  clear  up  potential  problems  before  they  become exacerbated.


While no single white paper, seminar, or procedure can prevent every lawsuit, of course, if you take these 7 mistakes to heart, you can dramatically lower the risk for your firm. “An ounce of prevention is worth a pound of cure,” as Ben Franklin so famously wrote.   Take some time now to implement some good policies and procedures, and it can pay multiple dividends later.


Want to re-use or distribute this white paper?   Please do; however, you must include the entire paper and the following byline:    Melissa Dewey Brumback is a construction attorney and partner in the firm Ragsdale   Liggett,   PLLC. She   is   the   author   of   Construction   Law   in   North   Carolina (www.constructionlawNC.com), a blog dedicated to the A/E community, which was awarded the 2011 Best Construction Blog Award by Design and Construction Report.    She is rated AV, the best rating of the Martindale Hubbell rating system, and is a certified LEED Green Associate.   Melissa can be reached at mbrumback@rl-law.com or at 919-881-2214.

Construction Renovation Contracts 101: Six Key Considerations for Proactive Nonprofit Organizations and Associations

Martha L. Perkins – February 17, 2012

One of the challenges that nonprofit organizations and associations periodically must address is renovation contracts for either owner-occupied or leased space.  It is a fact of life that any organization must periodically perform small and large construction renovations — everything from building or office cosmetic work to garage resurfacing, from window and roof replacements to new HVAC system installations.  Before signing a construction renovation contract, nonprofit managers and association executives should understand the potential risks and be prepared to minimize them.  Here is a checklist that will help safeguard the organization’s funds:

1. Due Diligence in Selection of Architect and/or Engineer

An architect or engineer who is experienced in renovations plays a crucial role in the success of a renovation project.  A competent design professional will assist in developing the design concepts, preparing a thorough set of project plans and specifications, selecting good contractors, and overseeing construction.   A proactive organization should either have prior successful experience with the design professional or conduct due diligence on the design firm.

2. Experienced Construction Attorney

It is advisable to retain the services of a knowledgeable and experienced attorney to help guide the organization through the project, in particular reviewing and negotiating the contracts.  This is particularly important for major renovation projects.  Often attorneys representing nonprofit and tax exempt organizations know a lot about nonprofit governance, but perhaps little about the complexities of construction law.  It is critical to retain counsel who is knowledgeable about both nonprofit legal considerations and construction law. The most important reason to retain an attorney to assist the organization with a renovation project is for the attorney to write and negotiate the contracts.  This includes the contracts with both the design professional and the contractor.  For a $2,000 lobby touch-up, these may not be a need to consult an attorney.  For large renovation contract, it makes good sense to consult an attorney

3. Crucial Bid Process

The bid process is an important step in a successful renovation project.  A good design professional should assist the organization in preparing a list of contractors asked to bid on the project.  The organization should ensure that the bid list only has experienced, competent, and professional bidders on the list.  The organization should question the design professional closely about his experience working with each bidder and check references. Organizations frequently ask when it is necessary to obtain three or more bids. Obtaining multiple bids is nearly always a good idea because they tend to drive the contract price down.  Comparing bids is a good idea because, if a bid is much higher or lower than the others, that contractor may misunderstand the scope of work or has anticipated different problems on the project.  Or the contractor may just be taking a lower margin. It is a mistake to think that the lowest bid is always the best bargain for the organization. Sometimes contractors bid low in order to be awarded the contract and then they plan to “change-order” the contract to death to increase their margins.  Such contractors usually have poor reputations, and due diligence will often uncover such undesirable entities.

4. Understand and Negotiate the Construction Contract Terms

It cannot be emphasized enough:  the written contracts between the organization and its architect and engineer and between the organization and the contractor define the legal agreements and understandings between the parties.  Contracts terms should be reviewed, understood, and negotiated so that the organization — and its funds — are appropriately protected.   Each project is unique and requires unique contracts; one-size contract forms do not fit all projects. Contractors often present owners with standard form contracts for major renovation contracts, which the organization might accept without even a minimal review.  These form contracts are often drafted for general use in the construction industry and favor the architect or contractor, rather than the owner or lessee.  Sometimes the forms presented do not apply properly to the specific project, and a contractor who tries to customize it for the particular project may inadvertently create inconsistencies with the fine print.  The upshot for the organization is that it is not properly protected.  Your contractor is not your lawyer; your own lawyer can draft the supplementary terms and conditions in order to protect the organization’s interests. A contract between the  organization and the contractor should address, among other things, the following issues:  names of the parties to the contract; scope of work; start and completion dates, contract amount, and payment terms; retainage; handling of change orders; submission of payment documents; schedule; warranties; insurance and bonds; indemnification; dispute resolution; attorneys’ fees; and termination.  These contract provisions, properly drafted, are critical for helping to protect the organization from improper and unanticipated risks. The long and the short of renovation contracts is that a nonprofit organization or association must review, understand and negotiate the terms and conditions of such contracts to ensure that the organization is reasonably and properly protected.

5. Performance and Payment Bonds: What Are They?

The world of performance and payment bonds seems to the uninitiated to be shrouded in mystery.  Both documents provide certain protections to the owner.

  • A performance bond guarantees to an owner that the project will be completed, even if the contractor defaults.  A contractor might, for instance, go bankrupt, walk away from the project for some reason, or perform so poorly that the organization terminates the contract.
  • A payment bond guarantees that certain subcontractors and suppliers on a project will be paid.  The general contractor receives payment from the owner and then pays its subcontractors and suppliers.  But what if the general contractor fails to pay them?   They will file liens against the owner.  The payment bond guarantees that those subcontractors and suppliers will be paid for work performed or materials supplied on the project.

Your agreement with the contractor may call for these bonds.  Typically, the contractor obtains the bonds from his surety company through his bonding agent and the owner pays the premium.  The bonds are usually in the amount of 100% of the contract price.  So, if the renovation contract is for $500,000, the bonds will be issued in the amount of $500,000.  The cost of the bonds is between 1-3% of the contract price. When should an organization require performance and payment bonds for a renovation contract?  There are no hard-and-fast rules on this question.  The answer depends largely on the cost and complexity of the renovation project; the higher the cost of and the more complex the project, the stronger the argument to require bonds from the contractor.  The organization must weigh the benefits versus the costs of the bonds.  For contracts under $100,000, an organization usually does not require bonds.  For contracts over $500,000, the organization should seriously consider requiring bonds.  For contracts between those amounts, the organization must make a judgment call.

6. NonProfit Organization’s Project Representative as Communicator

A clear line of communication between the owner, design professional, and contractor is essential to the smooth progress of a project.  Because a nonprofit organization is managed under the authority of a board of directors, few of whom are experts in construction projects, it usual for the board to designate an “owner’s representative” on the project.  The owner’s representative needs to (1) understand the project and the specifications; (2) have the authority to make project decisions on behalf of the organization; (3) document and organize a project file — whether hard copies and/or electronic.  In the event of a dispute between the organization and the contractor, a well-documented and -organized file can clarify many disputes, with little cost or time expended.  Often, the project representative will be someone from the organization’s staff, if it has the on-staff expertise to do the job well.  If not, the organization should consider hiring a professional to represent the organization’s interests throughout the construction process. A major renovation project at a nonprofit organization doesn’t happen often.  While it can be fun and exciting, it is also fraught with potential risks and ensuing legal disputes.  Take the time to do it right so that the project goes more smoothly to completion, without major disappointments and exhausting construction disputes.

5 Reasons Why You Need Arbitration for a Construction Dispute

by Melissa Dewey Brumback on February 18th, 2012

Arbitration may be a better alternative to some construction disputes, assuming that you use a qualified and skilled arbitrator or arbitration panel.  Here are five benefits for using arbitration over litigation:

  1. Arbitration means that the decision maker is anexperienced industry professional instead of a lay jury.
  2. Arbitration can provide better protection for your assets by minimizing your riskof large losses sometimes seen with jury verdicts.
  3. Arbitration can provide flexibility in scheduling, versus court where you are told when and where to show up without much room to negotiate.
  4. Arbitration can put an end to your case faster.  The time taken by an arbitrator is usually less than that to get a case to court to resolve a construction dispute.
  5. Arbitration costs can be much less when compared to the one charged during any other legal process like litigation.

These are five reasons why arbitration may be better for your construction dispute, so consider using an arbitration provision in your next construction contract.

Piercing the Corporate Veil: Help with Subcontractor Defaults

By Albert B. Wolf Attorney at Law

Recently, I have had a number of calls from general contractor clients complaining that one or more of their subcontractors have gone broke, leaving a bunch of unpaid suppliers.  So what do they do?  There are two possible solutions that might work if their owners have personal wealth or the subcontractors are corporations or limited liability companies. It may then be possible to prove ( 1) that the owners used payments made to their companies for something other than the payments to their suppliers, or (2) that their companies were not properly organized or maintained separate and apart from themselves.

The first remedy would lie under the Colorado trust Fund Statute discussed in an earlier Construction Law Briefs column, and the second might he under the legal doctrine of “piercing the corporate veil.” The latter potential remedy is discussed here.

To promote investment in businesses, the law provides for protection against personal liability for business obligations for those who incorporate their businesses or form them into limited liability companies, limited partnerships or other business forms.  If properly organized and maintained, the owners (shareholders, members, limited partners) of those entities are not likely to be responsible for the typical business obligations and liabilities of those companies, with certain exceptions.

However, to obtain those protections, the business must be properly organized and maintained as an entity separate from its owners. It must also carefully identify itself as one of those business forms in its contracts, stationery and other documents. When the entity is formed, it must be capitalized with sufficient funds to carry on its business, and it must maintain separate bank accounts and separate books and records.

Forming a corporation, a limited liability company, a limited partnership or other organization is easily accomplished by having the necessary papers prepared and filed with the secretary of state. However, that’s only the beginning because maintenance of the organization is critical if the owner or owners wish to avoid personal liability for the entity’s debts.

The consequence of failing to properly organize and maintain a separate organization may result in the loss of protection from personal liability. That loss may be established in court under the legal theory of “piercing the corporate veil.” If a creditor of the business is able to establish that it was not properly capitalized, was not properly organized, it did not properly identify itself as a separate entity, or it did not maintain separate bank accounts, books and records, then the business owners may be held personally liable for its debts. In that situation, the law characterizes the business as merely the alter ego of the owner or owners.

A recent example of piercing the corporate veil involved a notorious Denver project, the Beauvallon, located at 11th and Lincoln streets near downtown Denver – the project that recently had a complete facelift and millions of dollars spent for remediation of construction defects. Notwithstanding, the general contractor was successful in recovering an arbitration award against the developer corporation and, having proven that the corporation was but a shell (alter ego) of its owner, the contractor recovered a personal judgment against the corporate owner-shareholder as well.

To be successful with a “piercing the corporate veil” claim, it is necessary to prove that the owner(s) had failed to properly organize, capitalize and maintain the company as a separate entity. As a practical matter, it would be useless to make that effort if the owner does not have enough assets to pay a judgment if the claim is successful.

Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin &Madison PC.  This column was written with the intent of providing general legal information intended to be reasonably accurate although not comprehensive.  Readers are therefore urged to consult their attorneys for any specific legal advice they may desire concerning the subject matter of this column.