Monthly Archives: November 2022

Re-Thinking the One-Sided Contract: Considerations for a More Balanced Approach to Contracting

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William Underwood | ConsensusDocs

Construction projects can be inherently risky – often there are multiple parties (owners, architects, engineers, contractors, subcontractors, consultants, vendors, government officials, sureties, insurers, and many others), unforeseen site conditions, tangled supply chains, acts of God, inadequate funding, site safety matters, and a whole host of other issues that can make even a relatively straight-forward job complex.  Parties necessarily want to minimize their individual risk to the greatest extent possible on construction projects.  And to do so, they may seek to push as much risk as possible onto the other side through one-sided terms in their construction contract.  

But is an entirely one-sided contract the best way to mitigate risk?  In many instances, the answer is no.  Every contract is different – and many considerations should be taken into account when drafting and negotiating contracts – but entirely one-sided can often have unintended consequences and create risks that otherwise might not exist in a contract that allocates and balances risk more equally across the parties.   

This article reviews several considerations (although it is not an exhaustive list) for avoiding one-sided contracts, including some of the benefits created through the use of equitable contract clauses.  And for context, some examples of one-sided contract clauses include no relief for other contractor/owner-caused delays; no relief for force majeure events; no relief for unforeseen site conditions; and broad form indemnification clauses (i.e. one party assumes the obligation to pay for another party’s liability even if the other party is solely at fault).  Again, this is a non-exhaustive list, and many other standard contract provisions can be altered to become one-sided.  But the general premise of a “one-sided contract clause” is that it shifts all risk, obligation, and liability to one party.  And this article examines why that might not be the best idea.  

Contracts Should Generally Allocate Risks to the Correct Parties 

On the surface, it may appear that transferring as many obligations and risks as possible to the opposing is a good idea.  But generally, the better practice is to allocate risks to the parties best situated to manage that risk.  This concept is neither new nor novel.  And countless articles address this basic concept in depth – but it still bears repeating at the outset here.    

For example, if a contractor or subcontractor is forced to bear risks that it has no control over, then it has little chance to mitigate that risk.  And the contractor must (or at least should) ensure against that risk or add a further contingency to the bid price.  Either way, the costs go up (more on that below) and no one is well-positioned to mitigate the risk itself.  In many instances, this functions as a lose-lose for everyone involved, as the project becomes both more expensive and potentially delayed.   

So using a one-sided contract makes it difficult to properly allocate and assign risks to the correct parties.  And everyone can suffer because of it.  But the use of more equitable contract provisions that allocate risks to those best situated to manage the risk can lead to real-time benefits on the project.  

Better Cost Control 

As mentioned above, the allocation of risk to a party with no control over that risk is likely to lead to cost increases.  Most contractors likely recognize that they must adjust their contract price upwards to account for increased risks and potential liability—particularly those risks that are outside of their control.  So forcing all risk and liability for issues onto one party will often lead to increased contract prices.  And depending on the size of the project and the risks involved, the price increases can be quite significant.  

There are also additional “hidden costs” that may exist beyond just the contract price itself.  For example, there is a heightened chance of increased claims, which adds to the cost of the project.  And there is a real chance that bid competition itself may be more restricted and less competitive if one-sided risk shifting is made clear upfront.  Fewer contractors may be willing to bid on the job and options become limited.   

Finally, on a basic level, there is an increased chance that the relationship between the parties will simply be more adversarial if the contract is overly one-sided.  Such adversarial relationships generally are not conducive to problem-solving and overall cost mitigation.  

More Efficient Project Administration 

Balanced contracts can also help reduce the cost and burden associated with basic project administration functions.  For example, many one-sided contracts contain very short notice periods to submit claims for issues like unforeseen site conditions, force majeure events, or other sources of delays and increased costs.  And often, these notices must contain detailed statements of the subject events and their impact on time and price.  The general intent is to prevent contractor claims by creating narrow windows within which claims must be submitted or they are otherwise waived.  But in reality, most contractors are still going to try to move forward with claims anyways, regardless of whether they provided notice outside of the contractually required window.  And particularly diligent/administratively savvy contractors will simply paper every possible claim at the outset, which in turn creates a larger administrative burden on the project as everyone wades through claims.   

So allowing for a more reasonable notice period can reduce the administrative burdens created by excessive claims and allow the parties to focus on other project execution-related matters.  And this concept applies beyond just notice periods/requirements as well, as any sort of one-sided requirement could unintentionally lead to excessive administrative burdens on a project.  

Keep Your Contract Realistically Enforceable 

At the end of the day, a contractor most likely wants the provisions of its contract to be enforceable to greatest extent possible.  Every state’s laws are different when it comes to one-sided or otherwise inherently “unfair” contract clauses.  And contractors should understand the relevant laws that impact the enforceability of their respective contracts.  But even one-sided contract clauses that are facially enforceable in a particular jurisdiction (for example, broad form indemnity clauses) may still not be a good idea.  

On a practical level, if a judge or arbitrator wants to avoid the application of a certain contract clause – particularly when it is overly harsh and one-sided – he or she can usually find a way to do so, even if the clause is arguably “legal” on its face.  This is not to say that courts and arbitrators will not strictly enforce black letter laws (they will), but most dispute resolution forums lean towards finding an equitable and just result.  And the opposing party (i.e. the party harmed by a one-sided contract clause) will happily point the relevant decision-maker in the right direction.   

Furthermore, few things will make a juror dislike a party more than the perception that someone is openly and willingly seeking to take unfair advantage of someone else.  This can be particularly true within the context of a large owner or general contractor and a smaller party.  

So one-sided contract clauses may not ultimately be enforceable.  But using a more equitable approach to contracting can help increase the chances that the contract’s terms are enforced in the event of a dispute.  

Conclusion 

Although one-sided contracts may appear to be a good way to shift risk and avoid liability that may not always be the case.  In many instances, one-sided contracts can lead to unmitigated risks, increased costs, and other negative impacts for all parties involved.  So consider the benefits of equitably allocating risks to the correct parties while avoiding overly one-sided contract provisions – it may pay dividends in the long run.  

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.

Five Ways to Protect Bidding Opportunities and Bid Formulations

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Evan Blaker | Cohen Seglias Pallas Greenhall & Furman

The bidding process for a construction project includes a vast array of folks: estimators, owners, project managers, design professionals and many others. Security, especially cybersecurity, can prove a challenge, and those receiving, drafting or issuing bids would be wise to consider potential problems before they become a reality. This can be accomplished by establishing and maintaining standards and protocols to protect your work product. These protocols can cover elements including accessibility, document protections, review processes and fundamental security protections such as passwords. Here are five essential steps parties should enact to guard their proprietary bidding information:

  1. Limit accessibility to services that provide portals where new projects are presented for bid and require log-on criteria to access the portal. These limitations are the building blocks for good security. Safeguarding access to the portals—and minimizing the number of people who have access—is a simple and practical approach that can and should be used from the initiation of the services.
  2. Require any employee with access to bid requests to sign an NDA. NDAs are imperative to protecting data and can be valuable tools for doing so, assuming they are well-written and address the particulars of what employees and former employees cannot disclose.
  3. Require any and all employees to work full-time and prohibit “moonlighting” for other contractors. One potential area for leaks comes from employees working for competitors. Policies prohibiting such overlap head off such issues before they occur.
  4. Review incoming and sent emails/items from those employees that issue bids. Regular examinations of such communications can help the reviewers proactively spot and address possible issues.
  5. Keep access to bidding pro-forma documents limited and password protected. Similar to the first point, limiting access, especially to important documents, and using strong passwords, are sensible methods for strengthening security.

While there may not be any one way to protect bid formulations and processes fully, taking the above steps will significantly mitigate risk. Consistent, well-implemented and written requirements may also be useful if controversy arises, so parties should consult with their counsel to ensure their procedures are up-to-date and clearly documented.

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.

Prime Contractor Beware, No. 2: “Know Thy Owner”

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David Taylor | BuildSmart

Here’s the Scenario: After months of working with a new national developer (and providing hours of unreimbursed value engineering), you get the draft prime contract and see that the named “owner” will not be the hugely successful developer, but a specially created “limited liability company” that’s sole “asset” is the land upon which the project will be built. The developer has also shopped around to obtain investors for this project, and the LLC is made up of a series of limited liability companies, limited partnerships, etc. The project is also being financed, so that the sole owner “asset” is subject to a deed of trust/mortgage by the lender that will take precedence over any contractor lien claim. While there’s been zero discussion or mention of this “owner,” the pressure is on. What options do you have?   

A Warning

Those old timers who have been around recall the series of failed projects and bankruptcies that followed the 2008-2010 financial meltdown. This put many construction companies out of business while the lenders foreclosed, wiped out any liens, and then sold the projects without having to pay a dollar to the construction companies that built the half-completed projects. Any non-escrowed withheld retainage is gone. Always, always, know that there is a reason a “LLC” is called a “limited liability” company.

So, what can a prime contractor do?

  • Demand and ask for evidence of financing whether or not the owner is or is not financing the project. Some owners do not need financing. If using an AIA form prime contract, remember that the standard A201 General Conditions (Article 2.2) states that upon a written request, the owner is required to provide “reasonable evidence” that the owner has made “financial arrangements” to fulfill the owner’s obligations. And the contractor also has no obligation to “commence the work” until such information is provided. If the AIA form is not used, include something similar in your prime contract.
  • Don’t sign the contract until you have some reliable information about financing. For financed projects, you have some leverage. Typically, the owner/developer is ready to finalize the plans, get the prime contract signed, close the loan, and break ground. And to close the loan, it needs an executed prime contract. At this late date, it’s really hard for an owner to then find another contractor. Use that leverage if necessary. 
  • Protect withheld retainage: Many states (like Tennessee) have mandatory limitations on the amount of retainage that can be withheld (ranging from 5% to 10%), and for a long project, that’s a lot of delayed profit. Know the retainage laws (and penalties) if the retainage is not escrowed throughout the project, which is mandatory in some states (like Tennessee). Try to have the owner even agree NOT to withhold retainage, which would allow a contractor to in turn have very, very happy subcontractors. 
  • During the course of the project, track payments and don’t accept promises of payment. No matter the explanations, strictly adhere to the payment terms and conditions, especially for deadlines for notices for claims. Know deadlines for lien notices. It’s also vital to carefully examine those typically required partial lien releases that are required to be provided with pay applications: Make sure that any and all claims or proposed change orders are carved out and preserved. You better believe that after a dispute or termination, without making these efforts, these lien waivers will be thrown back in the contractor’s face by the owner or the lender.      
  • Before you exercise any default, threats to stop work, or initiate ADR proceedings, make sure that there not any other executed documents that may have been required by any lender. My previous post discussed the issues with the demand that the contractor execute the typically required “Consent and Assignment Agreement” in favor of the lender.

The Bottom Line

In 98% of your projects, contractors will get paid, which will in turn allow subcontractors to get paid, and the work will be done properly and on time. Any issues are worked through in good faith. The “we are all a team” attitude should prevail throughout a successful project, and everyone should pledge to work together again. But remember “who” you are contracting with, and it’s not the great developer. If there are issues and the developer decides to tank the project, or has issues with the lender, you could be holding the bag and face potential liability from subcontractors. “Know thy owner” is a mantra that should be a part of every internal discussion before embarking on a new project.

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.

Coverage for Collapse Ordered on Summary Judgment

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Tred R. Eyerly | Insurance Law Hawaii

    A collapsed floor in a restaurant was found to be covered. J&J Fish on Center Street, Inc. v. Crum & Forster Spec. Ins. Co., 2022 U.S. Dist. LEXIS 163661 (D. Wis. Sept. 12, 2022).

    J&J Fish rented property from Vision. Vision was obligated to keep the premises insured under an all-risk policy. Vision was also responsible for maintaining and repairing the property “including the slab flooring exterior walls of the premises.” Vision never obtained insurance on the building, but J&J Fish secured a commercial property policy from Crum & Forster.

    On May 29, 2020, approximately 25% of the building’s slab floor, the section beneath the walk-in cooler, collapsed into the crawl space below. Dr. Daniel Wojnowski inspected the crawl space and observed overall dampness as well as a pool of water in the space. He concluded that the collapse occurred because the steel support beams and steel elements of the floor corroded after prolonged exposure to moisture. Based on this report, Crum & Forster denied coverage. J&J Fish sued and the parties moved for summary judgment.

    The policy covered collapse, which meant an abrupt falling down or caving in of a building or any part of a building. Further, if the collapse was caused by decay that was hidden from view, it was covered. 

    Here, 25% of the building’s floor fell three-and-a-half feet into the crawl space overnight. On its face, it was a sudden and unexpected fall or drop that rendered part of the building unfit for use as a restaurant.

    Crum & Forester raised several arguments against coverage. First, it claimed the events did not amount to a collapse because the policy did not consider a collapse to include a building or an part of a building to be in damage of falling down or caving in. But here, the slab floor was no longer “in danger of falling down” because that danger was long-passed with the floor already having fallen.

    Crum and Forster next argued that the decay causing the collapse was not hidden from view because it could be observed from within the crawl space. Dr. Wojnowski, equipped with a flashlight, entered the crawl space on all fours and observed the decay. But the problem with this argument was that “hidden” was a matter of degree. Under the plain meaning of the term, decay that was concealed within a cramped, unlit space was “hidden from view.”

    Crum & Forster also relied on exclusions expressed in the policy in sections other than Section D which addressed collapse. The court held that Crum & Forster could not rely on these exclusions to oust coverage under section D, and J&J Fish was entitled to summary judgment on the question of liability.

    Finally, the court held that Crum & Forster was entitled to subrogation against Vision pursuant to the lease between Vision and J&J Fish. Vision breached the lease by (1) failing to acquire property insurance and (2) failing to maintain the slab floor. 

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.

Proposed FAR Rule Creates Climate-Related Inventory and Disclosure Requirements for Federal Contractors

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Christine Garson and Shaun Kennedy | Holland & Hart

On November 14, 2022, the Federal Acquisition Regulation (“FAR”) Council issued a proposed rule that may require certain federal contractors to disclose their greenhouse gas (“GHG”) emissions and associated financial risk. The proposed rule also establishes science-based targets for reduction of GHG.

This rule implements the inventory and disclosure set forth in Executive Order (“EO”) 14030, Climate-Related Financial Risk, as well as portions of other related EOs. It revises FAR Part 23, creating a new subpart entitled “Public Disclosure of Climate Information.” Importantly, GHG disclosures will be considered by contracting officers as part of a responsibility determination under the standards set forth in FAR Subpart 9.1.

Covered Contractors

The proposed rule imposes GHG inventory and disclosure requirements on two categories of contractors registered in the System for Award Management (“SAM”), with limited exceptions (discussed below):

  1. Significant contractors. Contractors that received between $7.5 million and $50 million in federal contract obligations in the prior federal fiscal year.
  2. Major contractors. Contractors that received more than $50 million in federal contract obligations in the prior federal fiscal year.

The FAR Council anticipates that approximately 5,766 significant and major contractors will be impacted by this proposed rule.

Proposed GHG Inventory and Disclosure Requirements

The proposed rule imposes several GHG monitoring and disclosure requirements. In significant part, it requires covered contractors to compile inventories for:

  1. Scope 1 emissions, which include GHG emissions from sources that are owned or controlled by the reporting company; and
  2. Scope 2 emissions, which include GHG emissions associated with the generation of electricity, heating and cooling, or steam, when these are purchased or acquired for the reporting company’s own consumption but occur at sources owned or controlled by another entity.

Under the proposed rule, GHG is defined to include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, nitrogen trifluoride, and sulfur hexafluoride.

The proposed rule also provides direction regarding the proper conduct of a GHG inventory, including reference to accounting and reporting standards and calculation tools. Further, the inventory must represent emissions during a continuous period of 12 months, ending not more than 12 months before the inventory is completed.

Major contractors must fulfill additional requirements, including the development of an annual climate disclosure, which must be published on a publicly available website. This disclosure must include:

  1. Inventories of Scope 1 and Scope 2 emissions, as defined above;
  2. Inventory of Scope 3 emissions, which are emissions that are a consequence of the operations of the reporting entity but occur at sources other than those owned or controlled by the entity;
  3. A description of the entity’s climate risk assessment process and any risks identified; and
  4. Completion of those portions of the CDP (formerly Carbon Disclosure Project) Climate Change Questionnaire that align with the Task Force on Climate-Related Financial Disclosures (“TCFD”).

Furthermore, major contractors must develop science-based targets and have those targets validated by the Science Based Targets Initiative (“SBTi”). A science-based target is a target for reducing GHG emissions that is aligned with the latest climate science, as further described in the proposed rule.

Impacts

Importantly, contractors that fail to inventory their annual GHG emissions, and disclose such emissions in SAM, will be treated as not responsible under FAR Subpart 9.1. Further, major contractors that fail to publicly share their annual climate disclosure and set targets to reduce emissions will also be treated as not responsible.

Significant and major contractors must complete GHG inventories for Scope 1 and Scope 2 emissions within one year after publication of the final rule. Major contractors have two years to complete the additional requirements specific to them.

Exceptions

Significant and major contractors falling under the following categories are listed as exempt from the GHG inventory, disclosure, and target requirements:

  1. An Alaska Native Corporation, a Community Development Corporation, an Indian tribe, a Native Hawaiian Organization, or a Tribally owned concern;
  2. A higher education institution;
  3. A nonprofit research entity;
  4. A state or local government; or
  5. An entity deriving 80 percent or more of its annual revenue from Federal management and operating (“M&O”) contracts that are subject to agency annual site sustainability reporting requirements.

There are also exceptions for certain major contractors that are considered small businesses for purposes of their primary North American Industry Classification System (“NAICS”) code identified in SAM, or where the major contractor is a nonprofit organization. Such major contractors are not required to complete an annual climate disclosure or to set science-based targets; however, they still must complete GHG inventories of Scope 1 and Scope 2 emissions and the associated SAM reporting requirements.

Conclusion

This proposed rule directly engages the federal contractor supply base in its goal of shedding light on major annual sources of GHG emissions and impending climate risks. By enhancing transparency and accountability, the Government expects that contractors will take action, resulting in increased resilience of the federal supply chain.

Public comments on the proposed rule are due by January 13, 2023.

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.