Monthly Archives: August 2021

The Future of Mediation by Video Conference

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Brian Gaudet | Kilpatrick Townsend & Stockton

There are two significant ways in which mediation by video conference will change construction law and both are a function of removing the need to travel. First, video conferencing allows more people to attend a mediation without significantly affecting the cost and trouble of the attendance. Second, mediation by video conference opens the doors for mediators to expand a localized mediation practice to a national one. While these two changes may also impact other specialty areas of law, they are particularly
relevant to construction law.

Prior to the pandemic, mediation consisted of selecting a local mediator who was available, and who you or colleagues had a previous experience. As the mediation day approaches, a decision has to be made about who will attend the mediation. In some mediations where the issues are not complex, the issues already have been fully uncovered and disclosed before attending the mediation.

However, in some construction cases, particularly those that are complex with a large number of issues in dispute (such as those with delay and acceleration claims), each side may not have a complete understanding of all of the facts and circumstances. This is especially true when considering that the decision maker attending the mediation is unlikely to have had the routine interactions on the project to have a good feel for what really happened.

In those instances it can be helpful to bring certain project people, and a scheduling consultant, to the mediation to help provide detail as the parties go back and forth hashing through the issues. Prior to video conferencing that meant bringing everyone physically to the mediators’ conference rooms and tying up project personnel in a conference rooms all day. For those construction companies with a statewide, regional, or national practice, those project people may be engaged on other projects far from the mediator’s office.

Mediating by video conference adds the convenience of pulling various project team members with no travel requirements and limited time impacts. For those complex cases, I think we will see more attendees and perhaps more meaningful factual exchanges which might help facilitate settlements. Given that construction cases typically involve numerous people, a large amount of documents and specialties, I expect that mediation by video conference will remain a fixture in the practice of
construction law.

The second way in which mediation by video conference will change the practice of construction law applies to the mediators. Prior to the pandemic my personal experience was typically, but not exclusively, with the use of local mediators. In cases where there were parties from multiple states you might end up with a mediator from a locale other than near the project site.

Since the start of the pandemic I have participated in several mediations either as a representative of a party or as the mediator where the mediator and the party representatives were located in several different states for the mediation. With that in mind, I believe that we will start to see more mediators, particularly those with significant experience with construction issues, start to shift to a more national reach.

Construction and construction law is fundamentally the same everywhere. There are some differences and nuances to the laws of the various jurisdictions, such as the amount of permissible retainage, lien laws, indemnity, etc. But there are also differences and nuances to the construction contracts that are at the center of the construction
disputes. The mediator can expect to learn of any important issues, including nuances of the law, from the participants’ counsel.

Soon I expect we will see mediators, as individuals or groups, who wish to engage in a national mediation practice, sponsoring and attending national conferences standing next to consultants who also have a national reach.

What Contractors Can Do to Address Rising Material Costs

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Garret Murai | California Construction Law Blog

From lumber to used cars to pastrami sandwiches, prices are rising. This past month, at a town hall meeting in Cincinnati, Ohio, President Biden acknowledged that inflation was increasing, responding to a question from a restaurant owner about labor shortages,  “I think your business and the tourist business is really going to be in a bind for a little while.” 

Although construction companies typically don’t work in the same small margins that restaurants do, labor shortages and material price increases have nevertheless impacted the construction industry. According to a recent report by Cumming, the cost of construction materials from lumber to steel to gypsum have gone up over the last 12 months, in some cases nearly double:

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For contractors entering into construction contracts and those performing work under existing contracts, the increasing cost of materials and shortage of labor creates challenges, some of which can be addressed through contractual provisions and the framework of those contracts. Here are a few things contractors might want to consider in today’s environment:

  •  Time and Material Contracts: Time and material contracts, whereby the owner pays the contractor for the contractor’s labor and material plus an agreed-upon fee, shifts the risks of price increases from the contractor to the owner. You can also include modified time and material provisions whereby the contractor will perform certain higher cost-risk work on a time and material basis, only.
  • Building in Bigger Margins: Contractors can also build in bigger margins in their fixed fee and guaranteed maximum price contracts to account for price increases and/or include larger amounts for contingencies. While this will make a contractor’s bid less attractive to an owner who is soliciting several bids, sometimes it’s better to to lose out on a job, than to take a job and find that its costs exceed the anticipated profit.
  • Cost Escalation Provisions: Contractors can also include a cost escalation provision in their contracts whereby the owner will pay for costs exceeding the contractor’s take-off calculations. These can be drafted in a variety of ways but typically provide that the owner will pay for increases in material costs which exceed a contractor’s take-off calculations or if they exceed the contractor’s take-off calculations by a certain percentage. Contractors wanting to incorporate cost escalation provisions in their contracts should be prepared to include their take-off as an exhibit to establish a baseline.
  • Force Majeure Provisions: Force majeure provisions are another avenue for contractors to try to recoup the cost of escalating material prices, but are more difficult to enforce, as many force majeure provisions weren’t drafted with the specific intent of addressing rising material costs. Further, even when such provisions are broadly worded to include additional costs “not reasonably anticipated or caused by the contractor,” disputes can arise between the parties as to the intent and meaning of those provisions.
  • Pre-Ordering Materials: Contractors can also lock in prices and help prevent delays by pre-ordering materials, particularly those involving long-lead times such as specialty equipment, but also more routine building materials they once may never have pre-ordered. Thought, of course, should also be given to the cost of storing and transporting those materials to the project site with appropriate provisions to account for those additional costs.

Ultimately, both owners and contractors want a project to come in within budget and within time, but when  economic conditions outside the control of the parties make it difficult to do so, the parties should endeavor to employ a fair balancing of those risks, and appropriately drafted contractual provisions can be the means of doing so.

Be careful out there.

Difficult Task for Court to Analyze Delay and Disorder on Construction Project

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David Adelstein | Florida Construction Legal Updates

One of my favorites quotes from a case, and I am sure others in the construction industry feel the same way or can relate, is from the District of Columbia Court of Appeals in Blake Construction Co., Inc. v. C.J. Coakley Co., Inc., 431 A.2d 569, 575 (D.C. 1981):

We note parenthetically and at the outset that, except in the middle of a battlefield, nowhere must men coordinate the movement of other men and all materials in the midst of such chaos and with such limited certainty of present facts and future occurrences as in a huge construction project such as the building of this 100 million dollar hospital. Even the most painstaking planning frequently turns out to be mere conjecture and accommodation to changes must necessarily be of the rough, quick and ad hoc sort, analogous to ever-changing commands on the battlefield. Further, it is a difficult task for a court to be able to examine testimony and evidence in the quiet of a courtroom several years later concerning such confusion and then extract from them a determination of precisely when the disorder and constant readjustment, which is to be expected by any subcontractor on a job site, become so extreme, so debilitating and so unreasonable as to constitute a breach of contract between a contractor and a subcontractor. 

Do you agree with this sentiment?  The reality is that retrospectively analyzing delay on a complicated construction project with numerous moving parts on a day-by-day, hour-by-hour, basis is no easy feat.  It is not easy for the parties and certainly not easy for courts to unravel. With every party claiming delay based on a retrospective analysis there will be another party with either a different delay analysis or providing credible cross examination as to flaws with the delay analysis.  The same bodes true with loss of productivity / inefficiency claims and the particular case-specific facts are important, preferably with evidence such as photos, videos, notifications, daily reports, manpower reports, etc., supporting the facts. But the facts are complicated, and the delay analysis is complicated, and it is a difficult task for a trier of fact to unravel these facts.

This case dealt with a dispute between a prime contractor and a fireproofing subcontractor. The subcontractor claimed its work was hindered for a variety of reasons.  In other words, the subcontractor was impeded from working efficiently and it was incurring unanticipated costs – the hallmark of a lost productivity or inefficiency claim.  The subcontractor sent notice to the prime contractor that it would be suspending its operations and did exactly that resulting in the prime contractor completing the subcontractor’s scope of fireproofing work.  A lawsuit arose and the trial court found the prime contractor liable to the subcontractor.   The trial court found the prime contractor breached implicit obligations in the subcontract as it (i) did not provide the subcontractor a clear and convenient work area that impeded the subcontractor’s work causing the subcontractor to incur additional sums, (ii) failed to reasonably sequence the work, and (iii) provided bad supervision as other trades damaged in-place fireproofing due to poor scheduling and certain space heaters belonging to the subcontractor were stolen.  See Blake Construction, supra, at 576-77 (“We are persuaded therefore that the trial judge properly concluded upon this record that these acts collectively and individually constituted a breach of implicit conditions for performance by [the prime contractor] under the subcontract.”).

The appellate court also agreed with the trial court as to the inapplicability of the no-damage-for-delay provision in the subcontract finding delays resulted from active interference “largely due to [the prime contractor’s] improper work sequencing.”  Blake Construction, supra, at 579.

The appellate court also found that the measure of damages to be awarded to the subcontractor from the prime contractor “is properly calculated by taking the cost of partial performance incurred [by the subcontractor], which was $598,666.75, and subcontracting therefrom the payment received to date by [the subcontractor] from [the prime contractor], which totaled $242,100. The difference between these two figures is $356,566.75, and constitutes the damages for which [the prime contractor is] liable to [the subcontractor].”  Blake Construction, supra, at 579.

Calif. Supreme Holds the Line on Homeowners’ Liability for Contractor Injuries

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Jim Sams | Claims Journal

A homeowner who exercised no control over the worksite is not liable for injuries to an independent contractor even though the homeowner had failed to repair an obvious hazard, the California Supreme Court ruled.

In a unanimous decision Thursday, the high court overturned the Court of Appeals, saying it will “decline to adopt a rule that subjects landowners to greater liability than other hirers for injuries stemming from known hazards.”

The high court said it saw no reason to add a third exception to the “Privette doctrine,” a longstanding legal principle in California that presumes property owners have no obligation to protect independent contractors or a contractor’s employees from safety hazards.

The case has been closely watched by professionals in the insurance, contracting and real estate industries because of its potential impact on injury claims. The American Property Casualty Insurance Association, U.S. Chamber of Commerce, California Association of Relators, Association of Southern California Defense Counsel, California Building Industry Association, Associated General Contractors of California, Civil Justice Association and Consumer Attorneys of California filed amicus briefs with the Supreme Court.

Marvin Putnam

“The Court of Appeal decision, had it been affirmed, would have resulted in an unprecedented expansion of tort liability for homeowners, property owners, and hirers, which in turn would have had massive implications for property insurers,” stated Los Angeles attorney Marvin S. Putnam, who represented defendant John R. Mathis in the case.

June Barlow, general counsel for the Realtors association, said her client was concerned by the Court of Appeals decision because real estate agents often refer their clients to contractors for home inspections or repairs. She said the Supreme Court’s ruling “takes a common sense approach.”

“When you hire an expert, you don’t expect to be sued,” she said.

June Barlow

Mathis’ housekeeper hired Luis Gonzalez’s business, Hollywood Hills Window Cleaning Co., to clean the skylight over an indoor pool inside Mathis’ one-story, flat-roofed home. The company advertised that is was a specialist in washing “hard to reach windows and skylights.”

Gonzalez has been cleaning the same skylight since the 1990s, first as an employee of another company and then as owner of his own window-washing business.

On Aug. 1, 2012, Gonzalez was at Mathis’ home while two of his employees cleaned the skylight. Mathis’ housekeeper asked him to tell the workers to use less water because water was leaking into the house.

Gonzalez climbed a ladder to access the roof where his employees were working and passed the message along. In order to climb back down, he had to walk on a 20-inch wide space between the edge of the roof and parapet wall that was built to hide air conditioning equipment.

Gonzalez slipped and fell off the roof, sustaining serious injuries. He had no workers’ compensation insurance.

Gonzalez filed a premises liability claim against Mathis. He alleged that his accident was caused by the dangerous conditions on the roof, including loose pebbles and sand, a lack of tie-off points for a safety harness, a lack of guardrails and the unreasonably narrow path between the parapet wall and the edge of the roof.

Los Angeles County Superior Court Judge Gerald Rosenberg granted summary judgment in favor of Mathis, finding that the precedent set in 1993 by the Privette decision barred his premises liability claim.

A three-judge panel for the 2nd Appellate District reversed. The court said a 2005 California Supreme Court decision, Kinsman v. Unocol, established that a premises owner can be held liable for injuries to an independent contractor “when he or she exposes a contractor (or its employees) to a known hazard that cannot be remedied through reasonable safety precautions.”

The Supreme Court said in its opinion that Kinsman did not go that far. The court said it held that a property owner who is aware of a concealed dangerous condition may be held liable for an injury to a contractor if they fail to disclose the existence of the hazard.

There was no concealed hazard alleged in Gonzalez’s lawsuit, the Supreme Court said. However, the court acknowledged that the facts in the case beg a question: If a contractor cannot correct a known safety hazard on a property, can the owner be held liable if the contractor is injured?

The high court said no.

“A landowner does not fail to delegate responsibility to the contractor for workplace safety simply because there exists a known hazard on the premises that cannot be readily addressed by the contractor,” the court said. “Were we to hold otherwise, we would vastly expand hirer liability and create considerable tension with decades of case law establishing that a hirer is not liable where it is merely aware of a hazardous condition or practice on the worksite.”

Putnam, a partner with the Latham & Watkins law firm, said in an email that California homeowners would have been exposed to “catastrophic liability” had the decision gone the other way.

“As today’s decision affirms, when homeowners hire an independent contractor to perform work, the independent contractor—rather than the homeowner—is responsible for ensuring the safety of the contractor’s employees at the worksite,” he said. “Today’s result affirms what we have said from the outset—while Mr. Gonzalez’s injuries were undeniable tragic, Mr. Mathis in no way contributed to that tragedy.”

Ellie Ruth

Attorney Ellie S. Ruth, who filed an amicus brief on behalf of the Southern California Defense Counsel, said the Court of Appeals ruling’s potential to create more litigation was just as onerous as the expansion of liability.

Ruth, who is with the Greines, Martin, Stein & Richland firm in Los Angeles, said the appellate court decision would require judges hearing injury lawsuits by contractors against property owners to make a decision about whether reasonable safety precautions could have been taken to prevent the injury. She said generally that kind of fact finding requires a trial, so summary judgment would be virtually impossible.

Ruth said the Supreme Court clearly understand that eliminating the summary judgment option for defense attorneys would have exposed insurers to increased litigation costs. The court devoted nearly five pages of its opinion to the issue. While Privette created a presumption that property owners are not liable for contractor injuries, the Court of Appeals ruling practically eliminated that presumption because the presumption would be rebuttable in almost every case, the high court said.

“In the niche that we occupy, it would be a humongous headache,” Ruth said.

Thinking About a Contract Termination? Consider This…

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Diego Rosado | Faegre Drinker Biddle & Reath

Contract termination can be expensive, particularly in today’s environment. When delays and cost impacts occur, contractors might consider contract termination in hopes of achieving a better outcome on the project. However, in many instances, it is in both parties’ interest to work together to finish the scope of work. This article discusses considerations surrounding contract termination issues and identifies some leading practices to help inform your organization’s decision-making.

Identify the Driving Forces of the Project’s Issues

The pandemic has created new challenges, such as workforce, material, and equipment shortages. However, just because your project is experiencing delays or other challenges does not necessarily mean that those delays are a direct or a sole result of the pandemic. When your project is experiencing issues, a prudent first step will generally be to determine what is actually causing the issues. Are the delays a result of pandemic-caused restrictions or unforeseeable supply chain issues? Are the issues a result of poor performance or other potential acts of default? Or are the issues caused by something else entirely? Identifying why your project is experiencing issues can be helpful when deciding whether or not a contract termination should be explored.

Of course, having documentation to substantiate your conclusion will often serve your organization well. To the extent feasible, it is sensible to document and establish when the event impacting the project started and how the project is being adversely impacted. Maintaining up-to-date documentation of the project’s progress and productivity rates can help you identify any downward trends as soon as possible and help pinpoint specific issues. Impacts to labor availability and material delivery times should also be documented, which may require your organization to obtain letters from subcontractors and suppliers regarding their staffing and other productivity impacts. Finally, contemporaneously preparing and submitting an updated project schedule upstream reflecting the project impacts will often be sensible as it reflects proactive decision-making and may help minimize the risk of an unwanted contract termination.

An additional note on pandemic-related issues: If your business concludes that the project delays or other issues were a direct result of the pandemic (for example, due to government mandates or restrictions), you may be considering relying on a force majeure clause to avoid a default or a termination for cause. However, your organization may wish to consult with counsel prior to relying on a force majeure clause. How courts interpret and apply force majeure clauses is highly dependent upon what state law governs the contract, as well as any recent court opinions on force majeure clauses issued by that state’s judiciary.

Identifying Contract Documents and Terms

Another important and sometimes overlooked initial step to consider when parties are contemplating a contract termination in the wake of project issues is identifying the applicable contract terms and conditions. When your project is off-schedule or otherwise experiencing issues, a clear understanding of what terms do and do not imply can optimize your decision-making going forward.

Thus, an analysis of what documents are and are not part of the parties’ agreement should be completed. For example, is the downstream party’s bid and any applicable post-bid supplements part of the contract? Have change orders modified the original contract or subcontract? If the parties’ agreement is in the form of a purchase order rather than a formal subcontract, which party’s terms and conditions govern? Additionally, have the parties exchanged noteworthy letters or emails that may serve as a clarification or modification to the original contract?

Once you have your arms around the key documents, an analysis of the key terms relating to termination is prudent. For instance, does the contract permit termination for convenience under the present circumstances or only for cause? If your contract is vague, you may wish to consult with counsel, as contractual termination rights may supplement, modify or provide new rights not available under applicable state law.

If your business is strongly considering a contract termination, identifying what prerequisites, if any, must be satisfied is also generally imperative. For example, what notices may need to be provided before terminating? Is your counterparty entitled to an opportunity to cure? Do the contract documents state that the party terminating for convenience will owe a termination fee?

When identifying what documents are and are not part of the parties’ agreement, when determining how contract terms relating to termination should be interpreted, and/or when analyzing what prerequisites may be necessary to effectuate a termination, your organization may wish to seek the insight of counsel.

Also, if you are considering terminating a vendor contract, ensuring continuity of service is often valuable. It may be wise to consider whether your business has all the necessary information in its possession, as well as a plan for lining up a replacement vendor, prior to providing a notice of termination to ensure continuity of service.

In sum, an understanding of the issues on the project as well as an understanding of the applicable contract terms will often position your organization well when engaging in the ultimate analysis of whether or not to terminate.

Proactive Financial and Risk Analysis

Conducting a proactive financial analysis by assessing the costs and benefits of terminating the contract versus working through the issues, including how the project schedule may be impacted, can help you put your best foot forward.

When considering a contract termination, your organization may want to consider several questions. For instance, what costs might your organization incur if the contract is terminated? And how do those variables, such as cost uncertainty, completion costs, penalties and the cost of litigation, compare to working together to modify the contract in order to complete the project?

As the Upstream Party

If your organization is considering terminating a subcontractor for cause, identifying the potential financial and schedule impacts may be just as important as determining whether or not cause exists.

First, determining that there is, in fact, cause to terminate is sometimes overlooked. Even a termination later deemed for convenience may have financial implications, as the subcontractor may elect to assert a claim for, and be entitled to, its actual costs, plus overhead and profit, depending on your contract’s terms. If a claim seems likely, it is practical to analyze whether those expenses, plus potential attorney’s fees, will be the lesser of two evils when compared to working with the subcontractor to finish the job.

Additionally, hiring a replacement subcontractor to complete unfinished work (following a termination for cause or for convenience) may cause disruption to the project schedule and other challenges. Analyzing the potential impacts to the project schedule is generally necessary. Also, completing the subcontractor’s scope of work may require costs above and beyond the value of the subcontract. Therefore, prior to terminating a subcontractor, your organization may wish to assess whether excess completion costs are anticipated and, if so, the feasibility of recovering those costs from the subcontractor and/or its surety.

As the Downstream Party

When you are the downstream party, your organization will often not have the same termination for convenience rights as your upstream counterparty. However, if you get the sense or are concerned that your upstream counterparty may be considering exercising its termination rights, holding joint brainstorming sessions and risk review workshops may help facilitate open communication regarding project issues. These meetings can also strengthen the parties’ working relationship and foster collaboration with the goal of reaching a positive (or at least acceptable) outcome for both parties. However, if such joint sessions are not conducted, your organization should still consider conducting a financial, schedule, and risk review to evaluate the potential impacts.

Although a contractor may not be privy to all of the business and financial considerations that are on the owner’s mind, discussing the owner’s concerns while identifying options for completing the project may help the owner reach a favorable decision that may not have been previously considered. For example, industrial construction projects often need to be operational by a certain date so that the owner can produce the necessary products (equipment, chemicals, etc.) to meet necessary commitments. An analysis of the financial and schedule-related issues may need to include a discussion of whether the schedule needs to be extended past the original completion date and, if so, why. Other options to bridge the gap may include adding manpower, authorizing overtime or resequencing work, if appropriate. Other more drastic options to increase cost efficiency may include temporarily shutting down the project, depending on mobilization costs and other factors.

Other issues that are currently impacting many industries are supply chain disruption and material/equipment shortages. Therefore, taking proactive measures to help minimize these impacts on your project, as well as understanding the applicable product substitution requirements, may be prudent. Would the same material/equipment be available from another supplier? Can a product substitution be made? Will you incur additional costs if the necessary materials/equipment need to be expedited? Contractors should consider communicating these types of mitigation efforts to the owner, especially if the owner may be considering a contract termination for cause because the project is behind schedule.

These sorts of transparent discussions about the issues on the project will likely demonstrate collaboration and good faith to assist the owner in making strategic and proactive decisions. It may also reduce the likelihood of the owner asserting a purported termination for cause, resulting in a costly dispute. Implementing a modified plan for the project may end up being more cost-effective than terminating the contract.

Conclusion

For all of these reasons and more, including the value of long-term working relationships, your organization will often be well served by taking the time to think through the effects and potential consequences of a contract termination. Additionally, if your organization is considering terminating a contract or is potentially facing a contract termination, you may wish to consult with counsel.