Court of Appeals Applies Collateral Source Rule in Construction Dispute

Joseph Davies | Smith Debnam Narron Drake Saintsing & Myers

Legal doctrines develop over time, with judges determined to allocate blame and risk fairly. One such doctrine – an old one – is the “one recovery” rule. The one recovery rule basically means that an injured party should only recover once for any particular injury. In practice, that usually means that if there are two people responsible for a plaintiff’s particular injury (let’s say $100,000 in damages) and one of them pays $75,000, then the plaintiff can only recover $25,000 from the other. However, as with every rule, this one has exceptions.

For the first time, the North Carolina Court of Appeals recently applied one of those exceptions – the collateral source rule – to construction disputes. In Caroline-A-Contracting, LLC v. J. Scott Campell Construction Company, the court explained the basis for the exception and why it applied to the fairly unusual facts of this case. In general, the idea is that it is unfair to allow someone who caused an injury to avoid the full cost because of payments that the injured party recovered from some unrelated (or collateral) party. As the court noted in its conclusion, to the extent such payments overlap and allow a double recovery, “in this situation, the injured party…not the tortfeasor…should reap any such windfall.” As noted above, however, the facts of this case were somewhat unusual.

The collateral source rule most frequently arises in insurance coverage cases (the insurance company being the collateral source), but here it was the result of independent failures by two different subcontractors regarding the same project. The general contractor hired one subcontractor to build a retaining wall. When it was unable to do so, that subcontractor itself hired another company – the plaintiff in this case – to correct its work and build the wall. The plaintiff, however, was similarly unable to complete the work adequately. The general contractor then hired a third company to correct the errors of the previous attempts. Caroline-A-Contracting sued both the original subcontractor (with whom it had a contract) and the general contractor (Campbell Construction, whom it did not). The general contractor alleged counterclaims based on Caroline-A-Contracting’s negligence (not any breach of contract). Caroline-A-Contracting argued that any amounts awarded to Campbell Construction on its counterclaim should be offset by amounts that it had previously recovered from the original subcontractor. The trial court determined that the original subcontractor was in no way related to Caroline-A-Contracting (it was not acting as its agent, for example) and that its payments resulted from its own failures and were independent of the plaintiff’s negligence. Therefore, it was a collateral source, and any payments it made would not reduce Caroline-A-Contracting’s liability for damages caused by its own negligence.

The Court of Appeals affirmed this decision and noted that it appeared to be the first time the doctrine was applied in construction disputes. Because of the unusual facts, the application of the collateral source rule in construction disputes may be limited, but this case confirms that it does, in fact, apply.

Render Unto Caesar: Considerations for Returning Withheld Sums

William E. Underwood | Jones Walker

Withholding sums during a dispute can be an effective and perfectly legitimate means to protect against the harms caused by another party’s breach.  However, withholding too much money during a dispute can turn a position of strength into one of weakness.  

“Why should I fund the other side’s litigation war chest?” and “Isn’t this just a display of weakness?”  are common questions raised by contractors when this issue is discussed. Often, the contractor is well within its contractual or legal rights to withhold money from a breaching subcontractor (another topic for another day).  But it may not always be in a contractor’s best interest to withhold every single penny available. 

This article addresses some of the long-term implications for failing to return withheld sums, including the potential to recover attorneys’ fees, possible bad faith, accruing interest, and overall litigation costs.  Admittedly, it can be hard to give money back in the middle of a dispute.  But sometimes it can positively impact the overall outcome of the case.

Withholding Too Much Money Can Impact Attorneys’ Fees – Yours and Theirs

 Attorneys’ fees are a huge consideration when entering formal litigation.  But they can also matter during “just” an informal dispute, as these fights still cost money and a party can later seek these fees if a lawsuit or arbitration is filed.  And withholding too much money can impact a contractor’s ability to later recover attorneys’ fees.  Depending on your contract and/or applicable state law, the “prevailing party” may be entitled to recover attorneys’ fees at the conclusion of litigation.  But how do you determine if you are the prevailing party?  Is winning $1.00 enough?  Or do you have to do more? 

Although it differs state-to-state, the general rule is that the prevailing party is the one who prevails on its “substantive claims.”  This general finding is still not particularly informative, and it is obviously important to understand the laws and rules governing your specific dispute, but usually a contractor must recover more than a few dollars to claim victory and recover attorneys’ fees. 

With that in mind, withholding too much money going into litigation can impact a contractor’s ability to “prevail.”  Although there may be a defensible basis to withhold all of that money, the withholding contractor may ultimately still have to return some of the money to the subcontractor depending on the final outcome of the litigation.  If that is the case, then the subcontractor can argue that it prevailed—and is therefore owed its attorneys’ fees; not the other way around—because it was able to recover a portion of money that it (correctly) alleged was wrongfully withheld.  Or at the very least, an argument can be made that the withholding contractor did not “prevail” on its substantive claims because it had to give some of the money back. 

Regardless, having to return a portion of withheld funds at the conclusion of litigation can impact a contractor’s ability to recover attorneys’ fees.  And in some instances it can even lead to paying the other sides fees.  This payment of fees can have a significant impact on the overall financial outcome of a case.  So returning a portion of withheld money—if appropriate—can positively impact the overall financial result of the case. 

Withholding Too Much Money Can Lead to Counterclaims for Bad Faith

Withholding sums that are plainly not in dispute can quickly lead to a counterclaim for bad faith—which is generally defined as violation of basic standards of honesty and fairness in contractual dealings.  And in many states, a successful bad faith claim can offer the claimant an avenue to recover attorneys’ fees (in addition, or as an alternative, to any of the “prevailing party” considerations discussed above). 

Most states recognize some form or another of bad faith within the context of contractual dealings (but again, it is always important to understand the laws governing your dispute).  Construction contracts are no different.  And clearly withholding more money than reasonable or defensible often provides solid grounds for the other party to claim bad faith.  Although the bar to prove bad faith is usually high, it should not be taken lightly.  Not only can a bad faith claim serve as a defense to a breach of contract, but it can also serve as an affirmative claim and a basis for attorneys’ fees. So although a contractor may have good claims and a solid basis to withhold some money, objectively withholding too much can jeopardize the chances for success by opening the door to accusations of bad faith by the other side.

So again, a contractor can quickly ruin a good claim by withholding too much money.

Interest Can Accrue on Improperly Withheld Sums.

 In many states, improperly withheld sums can (and will) accrue interest during the lifecycle of the dispute.  For example, many states have prompt payment statutes that provide for the recovery of high interest rates on withheld sums if those must be returned.  And no claim for bad faith or other improper behavior is needed to recover this interest.  For example, Georgia’s Prompt Payment Act (O.C.G.A. § 13-11-1 et seq.) provides for an interest rate of 12% per annum on unpaid sums owed to a contractor or subcontractor.  This interest can add up quickly, particularly because formal disputes can drag on for years.  And generally any portion of withheld money that must be returned is subject to the accrual of this interest (assuming the subcontractor met the statutory requirements). 

But even if a contractor does not meet the requirements to recovery interest under a prompt payment act, many states will allow contractors to recover what is known as prejudgment interest on withheld sums that are later returned.  For example, New York allows for a prejudgment interest rate of 9% per annum.  This interest is typically added to any withheld sums that must be returned at the conclusion of a dispute.  And it usually begins to accrue at the outset of the dispute. 

So withholding too much money, even if it is not in bad faith, can still lead to a reduced recovery once improperly withheld sums are returned with interest.

Returning A Portion of Withheld Sums Can Increase Your Chances of Winning And Possibly Lower Your Litigation Costs

Returning a portion of withheld funds (if appropriate) can also have practical benefits for the remainder of a dispute.  On a basic level, it can narrow the number of issues the parties are fighting over, which in turn can decreases costs and fees.  If there is less to fight about, then (in theory) there is less to spend money on. 

But returning a portion of withheld sums for weaker claims can also allow a party to focus on its strongest claims—thereby increasing its chances of “prevailing” and potentially recovering its attorneys’ fees (as discussed above).  Much like the raccoon that refuses to drop a shiny object, sometimes it is best to let go of claims that may have initially seemed appealing but ultimately prove worthless.  Doing so can allow a party to pursue the strongest claims while maximizing its overall chances for recovery.

Conclusion

Withholding too much money can have long-term negative impacts on otherwise good claims.  And although this article does not address every single negative consequence of withholding too much money, it does highlight some of the very real financial impacts that it can have on a claim.  So when entering a dispute, it is important to consider these impacts and to adjust your withholding strategy accordingly.

Dispute Boards: An Approach To The Efficient Resolution Of Disputes In The Construction Sector

Albee Bates and R. Zachary Torres-Fowler | Troutman Pepper Hamilton Sanders

Imagine a complicated engineering and construction project that has lasted years and has already cost hundreds of millions of dollars. During the project, the contractor submitted dozens of claims for additional time and money – all of which the project’s owner has rejected. Amid mounting costs, claims from various subcontractors and suppliers boiling to the surface, and the threat of liquidated damages or even termination of the project, the contractor proceeds without receiving any relief from the owner. Although the parties have tried to resolve their disputes through negotiation and even mediation, they have not been able to reach an acceptable settlement. The contractor says it has incurred significant costs to perform the work and feels it is essentially funding the owner’s changes to the project. The owner, however, says the disputed issues are the contractor’s, not the owner’s risk. Accordingly, without a dispute resolution mechanism in place to resolve these disputes in real time, the costs continue to mount, and the prospect of a lengthy, expensive, and protracted arbitration or litigation looms.

As stakeholders in the construction community know all too well, this scenario is not an uncommon one. Indeed, complex infrastructure and other construction mega-projects, whether domestic or international, are often lengthy, highly technical, and involve multi-tiered commercial relationships in which parties have millions, if not billions, of dollars at stake.1 These complexities mean that construction projects almost inevitably give rise to disputes, sometimes even over the smallest of details. As a result, over the past several decades, the construction industry has developed a unique dispute resolution approach known as a dispute board to quickly and efficiently resolve disputes and avoid or minimize the need to resort to formal litigation or arbitration.

Dispute board” is a generic term that describes a panel of three independent and impartial individuals such as lawyers, engineers, and other experts who are selected by the contracting parties to resolve project-level disputes before the commencement of more formal dispute resolution processes such as arbitration or litigation.2 Dispute boards attempt to facilitate the resolution of disputes by mediating issues that arise during an extended project or adjudicating more contentious disputes.

This article introduces this approach by summarizing the advantages and disadvantages of dispute boards, discussing some key variables and features parties should consider when deciding to utilize a dispute board, and exploring how other industries might adopt this useful and efficient dispute resolution tool.

Advantages and Disadvantages

On high-value construction projects of significant durations, dispute boards can be a cost-effective method for resolving project disputes without souring project-level relationships or disrupting the progress of the work.3

A readily available panel of experts who are well versed in the nuances of a specific project can moderate the parties’ positions and facilitate compromise. Parties are often less willing to take extreme positions before a dispute board because the board’s members, with their relevant backgrounds and familiarity with the project, can be expected to parse through many of the technical issues presented by the parties. Moreover, because dispute boards are often engaged for the duration of the project, a party that decides to take an extreme position before the dispute board may risk losing credibility in the long run.4

The dispute board members’ knowledge and understanding of the project also often give parties confidence that the dispute board will fairly and carefully address their concerns. In doing so, parties may be more willing to accept the dispute board’s decisions, even ones that are unfavorable. Indeed, statistics suggest that dispute board decisions are rarely challenged in subsequent litigation or arbitration.5

Dispute boards also save time. By ensuring that contentious disputes, many of which involve significant cost and time ramifications, can be resolved in real time, a dispute board limits the risk that a contractor, subcontractor, or supplier will suffer the severe cash flow limitations that can come with protracted disputes. Specifically, during construction disputes, when an owner believes it has been wronged by a contractor, the owner commonly withholds payment from the contractors to protect itself from loss. Because contractors often rely on the cash flows generated by the project payment process to finance their efforts, any withholding of money could force the contractor to fund the project on its own. Further, when the value of the withholding is substantial, protracted disputes can jeopardize not only the project but the financial health of the contractor and its subcontractors as well.

Dispute boards can save money, too. Because dispute boards offer a less formal process that does not necessarily require the direct involvement of outside attorneys and experts (though many parties do consult with attorneys and experts behind the scenes), the cost of resolving a dispute is often less than it would be in conventional arbitration or litigation.6 This is especially helpful for low-value disputes that might not be worth litigating or taking to arbitration. Although parties usually present a number of disputes to a dispute board at a time, the cost of doing so can be relatively low when compared to more conventional dispute resolution proceedings, meaning that dispute boards can limit the need to aggregate large numbers of claims until they reach a value that would justify arbitration or litigation.

That said, dispute boards are not without their drawbacks.

For one, dispute boards can be significant cost centers. Although they are intended to save the project money, they do not, in and of themselves, generate revenue. Standing dispute boards, panels that are engaged for the duration of a project, often require the contracting parties to pay the fees and expenses for three professional engineers and/or attorneys to travel to the project site on a periodic basis and oversee complex technical disputes. Over time, these fees and expenses can add up. As a result, while the overall costs of a dispute board are typically less than an arbitral tribunal in a formal arbitration proceeding, they are not inconsequential and may not be justified for smaller, more routine projects.

Further, some practitioners believe that there is a risk that the dispute board members, especially engineers who lack formal legal training, may disregard the requirements of a contract in favor of their own sense of equity and judgment.7 In doing so, there is a risk that a dispute board could deny a party the benefit of their bargain by ignoring specific contractual terms.

Finally, and possibly most problematically, dispute board decisions, whether binding or not, are relatively easy to ignore and difficult to collect. For example, even if a dispute board issues a binding determination, construction contracts often allow either party to challenge the determination within a set period of time and take the dispute to arbitration or litigation.8 Moreover, binding dispute board determinations, even if not challenged, cannot be enforced by an arbitral tribunal or court like an arbitration award under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).9 As a result, some observers view dispute boards as an additional and costly step in the process of ultimately obtaining a binding and enforceable decision.

Features

Depending on the preferences of the parties and the unique issues raised by a particular project, dispute boards can take a variety of forms. While there are too many variables to describe here, the two most significant factors parties should consider when deciding to implement a dispute board are whether the dispute board should be a standing or ad hoc board and what the board’s role should be.

Standing vs. Ad Hoc Dispute Boards

A standing board is appointed at the outset of a project, meets with the parties at regular intervals, and disbands at the end of the project or when the final project-level disputes have been resolved by the board. By contrast, an ad hoc dispute board is appointed only after the parties refer a formal dispute for resolution.

The current trend among dispute board rules favors standing boards. For example, in 2017, the International Federation of Consulting Engineers (FIDIC), an influential international organization best known for producing a series of widely used standard form engineering and construction contracts, recommends that dispute boards be appointed as standing boards.10 While more costly than ad hoc boards, standing dispute boards have the ability to remain engaged for the duration of the project, which ensures that the dispute board members can familiarize themselves with the parties, the intricacies of the project, and the issues most likely to give rise to disputes early on. This feature is thought to be the principal advantage of a standing board.

The Dispute Board’s Role

Most dispute boards fall within one of three types: a dispute review board, which issues non-binding recommendations concerning project disputes, a dispute adjudication board, which provides interim binding determinations for project disputes, and a hybrid combined dispute board that can offer both informal counseling to the parties and formal recommendations or decisions regarding disputes.11 The differences between these dispute boards primarily hinge on what role the parties believe the dispute board should fill – formal dispute adjudicator, mediator, or both.

Historically, dispute boards filled the role of an interim dispute adjudicator, where the board’s principal purpose was to issue formal decisions or recommendations on the merits of the dispute. As explained below, formal dispute board decisions can take one of two forms: nonbinding recommendations or interim binding determinations.)12

Under the dispute review board (DRB) format, the model more commonly followed by US rules and projects, after hearing the parties’ respective cases, the dispute board will issue a nonbinding recommendation concerning its assessment of the merits of the dispute.13 Although the parties are not obligated to follow the recommendation, in concept the decision may facilitate some form of settlement between the parties. Under the dispute adjudication board (DAB) model, following a DAB hearing, the board is entitled to issue an interim binding determination on the merits.14 When such a decision is issued, the parties are obligated to comply with the determination. If the losing party disagrees with the decision, it may issue a notice of dissatisfaction at which point the dispute would have to be formally resolved by litigation or arbitration. In the interim period, however, before a final judgment or arbitration award is issued, the parties are still obligated to comply with the DAB’s decision.

The current trend among dispute boards, however, has been to shift their focus away from dispute adjudication to early dispute identification and avoidance through combined dispute boards. Indeed, FIDIC’s most recent 2017 update to several of its standard form construction contracts call for the use of a combined dispute board model, called a DAAB. According to FIDIC, the combined dispute board model allows the board to involve itself with the project early and often and enable those boards to identify and resolve disputes without the need for any formal recommendation or decision.15 Early dispute avoidance is intended to empower dispute boards to seek out and facilitate discussions about issues that the dispute board’s members or parties sense are ripe grounds for dispute. In theory, the process should promote open communications and foster a more cooperative environment than would be the case with an adversarial process. However, given that the combined dispute board model is something of a new development, time will tell whether this format bears fruit in practice.

Use of Dispute Boards Outside the Construction Industry

Dispute boards are successful in the construction industry because of the unique features of construction disputes. The lengthy duration of construction projects, complexities of the underlying engineering disputes, number of claims and disputes, and, at least in some circumstances, cultural differences between parties on international projects, all mean that construction projects commonly generate disputes that retain features not common to most business relationships.

A number of industries and businesses, however, have experimented with the standing dispute board model, including maritime construction, financial services, joint ventures, and corporate governance agreements.16 In these cases, parties typically enter into long-term financial relationships where disputes are likely to arise and could risk jeopardizing the underlying venture.

Separately, although the construction industry has moved away from the use of ad hoc dispute boards, ad hoc  dispute boards may be the most promising area for growth for dispute boards outside the construction industry. Specifically, the ad hoc dispute board model could create a platform for the parties to test their positions before a neutral body of subject matter experts. In doing so, the dispute board might provide the parties an unvarnished assessment of their cases before the parties incur the expense and effort of pursuing their claims through arbitration or litigation. Although this form of procedure is not uncommon to some mediation practices, a formalized dispute board proceeding might help focus the parties’ efforts on resolving the specific issues in dispute and avoid failed mediation attempts because the parties fail to clearly stake out their positions.

Much more could be said about dispute boards and their work inside and outside the construction industry, but we hope this brief overview encourages readers to consider this model as one more option beyond mediation, litigation, and arbitration. While they may not be appropriate for all industries or business situations, dispute boards are an underappreciated dispute resolution tool that is worth serious consideration both inside and outside the construction industry.

Footnotes

1 This article is based, in part, on the research presented in the authors’ article Dispute Boards: A Different Approach to Dispute Resolution published in the Comparative Law Yearbook of International Business (2020), available at https://www.troutman.com/insights/dispute-boards-a-different-approach-to-dispute-resolution.html.

See generally Cyril Chern, Chern on Dispute Boards (2008).

See generally  John W. Hinchey, et al., Chapter 10: Construction Dispute Resolution,  International Construction Law: A Guide for Cross Border Transactions and Legal Disputes (2009), pp. 253-63; Lukas Klee, Chapter 11: Construction Dispute Boards, International Construction Contract Law, at 244-45.

See Hinchey, et al., supra  note 3, at 255-56.

See  Kathleen M. Harmon, Effectiveness of Dispute Review Boards, J. Construction Eng. & Management (2003); See generally  Dispute Resolution Board Foundation, Concept: Introduction and Development of the DRB Concept, DRBF Practices and Procedures (2007).

6 This is not to suggest that outside attorneys and experts are not commonly involved in the dispute board process. Outside counsel and experts are often utilized, either directly or indirectly, in many of the disputes that may be presented to the dispute board, particularly with respect to larger-dollar items in dispute.

See  Hinchey, et al., supra  note 3, at 256.

See, e.g. FIDIC, Conditions of Contract for EPC/Turnkey Projects (Silver Book), Sub-Clause 21 [Disputes and Arbitration]; Sub-Clause 21.4.4 [Dissatisfaction with DAAB’s decision] (2017). Mark Goodrich, Dispute Adjudication Boards: Are they the future of dispute resolution? (Sep. 6, 2016) available at  https://www.whitecase.com/publications/article/dispute-adjudication-boards-are-they-future-dispute-resolution (“On the other hand, there are also projects in which one or both parties simply serves a notice of dissatisfaction to every DAB decision as a matter of course.”)

9 U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997, 330 U.N.T.S. 38.

10 See, e.g., FIDIC, Conditions of Contract for EPC/Turnkey Projects, Guidance for the Preparation of Particular Conditions and Annexes, 51 (2017).

11 See generally International Chamber of Commerce, Dispute Board Rules, in force as from 1 October 2015, with Appendices in force as from 1 October 2018 (2018), at 14-19 (generally describing the three forms of dispute boards).

12 Compare  American Arbitration Association, AAA Dispute Resolution Board Guide Specifications (2000); FIDIC, Conditions of Contract for Construction For Building and Engineering Works Designed by the Employer  (“Red Book”) (1999); see also  Chern, supra  note 2, at 4-5.

13 See  Dispute Resolution Board Foundation, The Report, DRFB Practices and Procedures, pp. 1-2 (2007); American Arbitration Association, AAA Dispute Resolution Board Guide Specifications (2000).

14 FIDIC, Conditions of Contract for Construction For Building and Engineering Works Designed by the Employer  (Red Book) (1999); FIDIC, Conditions of Contract For Electrical and Mechanical Plant, and For Building and Engineering Works, Designed by the Contractor (Yellow Book) (1999); FIDIC, Conditions of Contract for EPC/Turnkey Projects (Silver Book) (1999).

15 See, e.g., FIDIC, Conditions of Contract for EPC/Turnkey Projects (“Silver Book”), Sub-Clause 21.3 [Avoidance of Disputes] (2017); International Chamber of Commerce, Dispute Board Rules, In Force from 1 October 2015, with Appendices in force as from October 2018, 19 (2018); NEC4, Engineering and Construction Contract, Option W3, at 52-53 (2017).

16 See  Randy Hafer, Dispute Review Boards and Other Standing Neutrals: Achieving “Real Time” Resolution and Prevention of Disputes, CPR Dispute Prevention Briefing: Construction (2010); Cyril Chern and Christopher Koch, Efficient Dispute Resolution in the Maritime Construction Industry: Dispute Boards in Maritime Construction (2005); Chern, supra  note 2, at 256.

Six Key Questions When Settling And Releasing Legal Claims

Louise Stoupe and Keiko Rose | Morrison Foerster

Most disputes settle, so it is important for legal teams to be aware of the key issues involved in drafting a settlement agreement. This is particularly true now, as companies around the world grapple with the COVID-19 pandemic and the resulting strain on supply chains and business relationships.

When businesses decide to resolve issues amicably, the settlement agreement should accurately reflect the compromise that the parties have reached. Too often, the focus is only on the amount to be paid in exchange for the release of claims, but there are other, equally important considerations that need to be addressed.

Below are six questions that business and in-house legal teams should ask themselves when pursuing settlement negotiations and finalizing settlement and release agreements.

1. Do you want a broad or narrow release of claims?

Parties should carefully consider which claims they want to release as part of a settlement agreement and whether the language in the settlement agreement captures those precise claims. Releases may cover different categories of claims, including:

  • Claims asserted in pending litigation or arbitration;
  • Claims arising out of or related to a particular agreement;
  • Claims arising out of or related to a particular subject matter or event; or
  • Claims arising out of or related to the relationship between the parties.

In deciding which option is best for you, consider whether you want to foreclose all potential litigation (which is attractive if you would be the defendant in any future litigation) or whether you may want to retain certain claims to assert in the future.

It is also important to clarify in the settlement agreement whether the release of claims is mutual. For example, if only one party has asserted claims in pending litigation, you may want the settlement agreement to release not only claims asserted in the litigation but also any claims that the defendant may have related to the same underlying events.

2. Do you want to release unknown claims?

Put differently, do you intend to release claims that are not yet known to exist but may later be discovered? If so, then the settlement agreement should explicitly release all known and unknown claims. A general release of claims is not always sufficient to release claims that were unknown at the time of settlement.

For example, California Civil Code Section 1542 provides that a general release of claims does not extend to claims that the releasing party “does not know or suspect to exist” at the time of the release and that, if known, “would have materially affected” the settlement. If your settlement agreement is governed by California law or has another nexus to California, a provision stating that the parties agree to waive Section 1542 must be included in order to release unknown claims.

3. Who should be covered by the settlement agreement?

Normally, the parties to a settlement agreement would be the parties to the contracts at issue or the parties to the pending litigation or arbitration. But should the agreement cover anyone else? Consider whether you would benefit from adding a provision stating that entities with a legal relationship to the parties also agree to release claims. For example, you may want to ensure that the release covers a party’s “parent, subsidiaries, assignees, transferees, representatives, principals, agents, shareholders officers or directors, and all persons acting by, through, under, or in concert with them.” You may also want to include a release covering downstream customers in certain circumstances.

If you are the defendant, then you will want to ensure that all of the opposing party’s related entities are covered by the release of claims to broaden the reach of the agreement. However, even if you are in the position to assert claims, you may be willing to include such a provision if none of your related entities would have a viable claim in any event.

4. Who should bear fees and costs?

Parties to a settlement agreement often agree to bear their own legal fees, but are there any particular costs the parties should share?

5. How and when will the settlement payment occur?

The settlement agreement should be clear as to the date of any settlement payment, any conditions precedent to payment, and the means of transferring such payment. Additional considerations include whether you want the ability to assign the right to receive the payment to affiliates and, if so, whether that assignment can occur with or without the consent of the other party.

6. Who is allowed to know about the settlement agreement?

The settlement agreement will include a provision explaining confidentiality obligations, and parties typically agree that the terms of the settlement agreement must remain confidential. But consider whether you want to be able to share the existence of the settlement agreement with anyone besides the parties to the agreement. For example, you may want your customers or certain business partners to be aware of the settlement. Confidentiality provisions also normally allow disclosures to the extent required by law, regulation, or court order.

How to Prepare for Potential Construction Disputes Resulting From COVID-19

Helga A. Zauner and Sonia Desai | Construction Executive

Every industry has been affected by the COVID-19 pandemic, and construction is no exception. While construction work was deemed essential in some places, it has been limited only to pandemic-related projects in others.

In the current climate, construction companies face a myriad new challenges, including concerns about health and safety, delays resulting from employee illnesses, supply chain disruptions and increased prices for materials, as well as contract delays or cancellations by concerned contract owners. Contractors must keep their employees safe and institute what could be costly best-practice measures, while facing potential claims from employees if they get sick due to a company’s perceived lack of response to the dangers of the coronavirus.

Stakeholders in the construction process need to prepare for potential disputes and understand their rights and responsibilities. This includes understanding applicable clauses in construction contracts and subcontractor agreements as well as business interruption clauses and other provisions in insurance contracts. Stakeholders may need to seek professional counsel to help them understand their rights and responsibilities in potential disputes.

Here are some steps to take in preparing for potential disputes arising from the effects of COVID-19:

KEEP RECORDS IN ORDER

Maintaining good business and financial records will be vital in determining costs incurred by builders and potential reasons behind delays or cost overruns. This includes all contracts, signed Authorization for Expenditure (AFE) forms and change orders (with supporting budgets, estimates and documentation), all invoices with supporting backup, such as material invoices and time sheets, as well as internal accounting documents such as percentage of completion schedules. Project owners must keep good records of payments to contractors and any direct payments to subcontractors. Any communications, including memoranda, letters and emails related to a potential claim, should also be preserved. Contractors also need to file and document notice of delay with the project owners in a timely manner.

DETERMINE WHETHER YOU HAVE A CLAIM OR WHETHER A CLAIM MAY BE FILED AGAINST YOU

Owners may have the option of filing a delay claim. Their contract will specify whether liquidated damages are applicable or if they have a basis for a claim. A fundamental issue that will be resolved in COVID-19 claims is whether construction delays fall under a force majeure clause, meaning the construction delays were excusable. The nature and responsibility of delays resulting from the disruption of the supply chain also will need to be assessed.

Contractors may have the right to file breach-of-contract claims if it was the project owner who delayed or cancelled a project, outside of the provisions in their contract.

In addition, employees who are getting sick are filing claims against employers for lack of due care to protect them from the virus.

CALCULATE DAMAGES

The calculation of lost profit damages derived from COVID-19–related delays will be particularly complex. A classical shifting-the-curve or profits-delay approach will be insufficient. Unrelated market factors will need to be considered, such as the general downturn in the economy, industry-specific effects and even the trend in energy prices. Delays caused by different actors may need to be evaluated separately.

If project owners cancel or delay construction projects, contractors may also be able to claim losses. A lost profits calculation in this case would require a detailed analysis of the lost revenues, the cost of mitigating efforts and an assessment of whether any other factors are directly causing the contractor’s losses. It will be important to determine whether revenues are truly lost or merely delayed.

In addition, if a company benefited or may benefit from the Paycheck Protection Program (PPP) forgiveness provisions in the CARES Act, it could affect the calculation of their lost profits. The following example shows the lost profits calculation for a company that suffered a two-month delay due to COVID-19. Cases I and II show the lost profits calculation without and with the PPP loan forgiveness program, respectively. Case II assumes that the company received forgivable PPP loans, which it used to pay eligible rent and payroll costs. The forgiven loan proceeds must be used to offset the costs, or alternatively, recognized as income.

The IRS has disallowed the deduction of expenses paid using PPP loans for income tax purposes. However, Congress has alluded to the possibility of revising this rule. In any calculation of lost profits, the impact of the non-deductibility of expenses should be considered.

Note that PPP loans may or may not reduce a company’s lost profits, as they are designed to improve liquidity, rather than mitigate losses. For example, if a company retained non-essential employees to maximize forgiveness of its PPP loan, it may incur higher expenses than if the company had not taken advantage of the PPP loan.