A General Introduction to Projects and Construction in USA

Henry Scott, Karen B. Wong and Miguel Duran | Milbank

An extract from The Projects and Construction Review, 11th Edition

Introduction

The project finance market in the United States benefits from a well-developed legal framework and sophisticated financial markets. The US legal system is generally viewed as clearly codified, stable and efficient, as well as one that is enforced in a regular and open manner.2 Contractual agreements between parties are recognised by law with few exceptions related to public policy concerns. The project finance sector has strong access to both the public and the private financial markets and is in some limited areas even supported – directly or indirectly – by government policies.

This combination of a strong legal framework and financial markets has facilitated the development of a robust project finance sector in the United States. Project finance is premised on the ability of the parties to contractually allocate risks among themselves and to enforce those contractual obligations in a reliable manner. A successful project finance regime is also dependent on commercial laws that allow developers to protect themselves through special purpose entities that benefit from non-recourse financing and that, similarly, allow lenders and investors to obtain security in the project assets and to enforce their claims against the project. Likewise, a sophisticated private financial market has the flexibility to allow the developer and the financing providers to create complex financing structures and to tailor those structures to the specific needs of a particular project.

This chapter discusses various transactional structures available to projects and the legal documentation frequently used to implement them. It reviews the various risks associated with project finance transactions and how parties allocate these risks. It also examines how the US legal framework supports the ability of lenders and investors to protect their interests, including obtaining, perfecting and enforcing security interests in a manner that permits lenders to enforce their rights in the event that a project encounters financial problems. This chapter also considers how the legal framework is influenced and affected by social and environmental considerations. The role of a complex legal framework and sophisticated private financing providers and the public sector is also addressed, followed by a summary of the impact of taxes on investment, which may be of particular interest to foreign lenders and investors. The framework for how dispute resolution is processed in the United States is discussed in the final section.

The year in review

The nature and complexion of project finance in the United States has been shifting, mostly as a result of the expiry of certain government incentives, regulatory changes relating to power plant emissions, declining prices of distributed generation technologies, including battery storage, and lower natural gas prices as a result of increased domestic production. More recently, the sector has been shaped by the enactment of a package of amendments to the tax code at the end of 2017, 3 by the imposition of tariffs on imported solar cells and modules in January 2018 and the covid-19 pandemic. The issuance on 1 May 2020 of an executive order addressing national security threats facing the US bulk-power system, in particular by restricting the acquisition, installation and use of certain imported equipment essential to the power grid,4 could potentially be significant for the sector as the result of the regulatory uncertainty created by the new ban given that clarification on the scope and impact of that executive order on the development and operations of energy projects using equipment from countries deemed to be ‘foreign adversaries’ will depend on the US Department of Energy’s rulemaking process. Furthermore, while the long-term impact of the covid-19 pandemic remains to be seen, the pandemic has already impacted a number of projects with force majeure claims and construction delays, and introduced uncertainty given the turbulence in financial markets and economic recession.

Despite fears that the approval of the US tax reform (particularly the reduction in the corporate tax rate from 35 per cent to 21 per cent and the implications of the base erosion anti-abuse tax to certain international financial institutions active in the market) would curtail the availability of tax equity financing in the market in 2018 and beyond, tax equity investors have maintained a substantial presence as financing sources and renewable energy projects continue to remain a significant component of the market. In 2019, approximately 30 per cent of the total value of project finance transactions in the country was invested in the renewable energy sector.5 For example, 9,143MW of wind energy (a 20 per cent increase from the 2018 level)6 and 13.3GW of solar energy (a 23 per cent increase from the 2018 level, and including approximately 8.4GW of utility-scale installations, which represents a 37 per cent increase from the 2018 level) were installed in 2019.7 Approximately 24,690MW of wind capacity (the highest amount on record) was still under construction at the end of March 20208 and nearly 20GW of solar capacity is expected to be completed in 2020.9 Additionally, hydroelectric capacity could increase from 101GW to approximately 150GW by 2050, not only through the construction of new power plants but also through the upgrade and optimisation of existing plants and by the increase of the pumped storage hydropower capacity.10

Throughout 2019, much of the project financing activity in the United States involved energy projects that were able to qualify for a production tax credit (PTC)11 or the 30 per cent investment tax credit (ITC)12 by meeting certain requirements. Additionally, developers of clean energy projects employing new or innovative technology that was not in general use were able in 2019 to request loan guarantees pursuant to Section 1703 of the Department of Energy’s loan guarantee programme,13 including for advanced fossil energy projects that avoid, reduce or sequester greenhouse gases14 and for renewable or efficient energy technologies.15 In December 2016, the Department of Energy announced a conditional commitment to guarantee up to US$2 billion of loans to construct a methanol production facility employing carbon capture technology in Lake Charles, Louisiana, which would represent the first loan guarantee made under those solicitation programmes.16 In February 2018, Congress enacted the Bipartisan Budget Act of 2018,17 which substantially increased the value of the Section 45Q tax credit available for carbon capture, utilisation and storage projects, and significantly expanded the universe of companies that would be eligible for this federal subsidy (which was originally made available in 2008) by increasing the eligible uses, decreasing the carbon capture threshold and eliminating the prior programme’s limitation to the first 75 million tons of carbon captures. The Section 45Q tax credit will be available for eligible projects placed in service after 9 February 2018 and for which construction begun prior to 1 January 2024 and can be claimed over a 12-year period.18 In February 2020, the Internal Revenue Service (IRS) issued guidance with respect to the determination of the beginning of construction for purposes of the Section 45Q tax credit19 and the allocation of the Section 45Q tax credit by partnerships,20 which is expected to increase the development of carbon capture and sequestration projects.

Furthermore, the Protecting Americans from Tax Hikes Act of 201521 and the Further Consolidated Appropriations Act of 202022 extended the PTC programme for certain eligible facilities for which construction began before 1 January 2017 and for otherwise qualifying wind facilities for which construction began before 1 January 2021 (with a progressive phase-out reduction if construction begins after 31 December 2016) and the ITC programme for qualified solar facilities for which construction began before 1 January 2022. Current IRS guidance provides for certain safe harbour provisions with respect to the beginning of construction requirement, requiring the performance of certain specified actions (based on either physical work or the incurrence of costs) prior to the applicable qualification deadline and placement in service of the facility within four years of the qualification deadline. On 27 May 2020, the IRS modified its prior guidance and extended the four-year safe harbour requirement by one additional year to address the unforeseen interruptions experienced by developers because of the covid-19 pandemic.23

Propelled by extended federal incentives, advances in green technology that decrease investment costs, state incentives and regulatory policies implementing renewable energy portfolio standards (RPS) on utilities, and the positioning of renewable energy as a key component for strategic energy independence for the nation, the development of renewable projects is expected to continue moving forward. As at June 2019, 29 states, the District of Columbia and three US territories have enacted RPS programmes, and eight additional states and one US territory now have voluntary goals for generation of renewable energy.24 For example, California’s RPS programme, one of the most ambitious in the United States, requires that utilities derive 33 per cent of their energy from renewable sources by the end of 2020, 44 per cent by the end of 2024, 52 per cent by the end of 2027 and 60 per cent by the end of 2030 (with the ultimate goal of obtaining 100 per cent of the retail sales of electricity to end-use customers and the electricity to serve all state agencies from renewable energy resources and zero-carbon resources by the end of 2045).25 While all three of the largest California utilities have enough renewable energy capacity under contract to meet the 2020 threshold, the generation forecasts that those utilities prepared in 2019 (risk adjusted to account for a certain degree of project failure) show that, in the aggregate, there will be a deficit beginning in 2026.26 Other states, such as New Mexico and Washington, have similar 100 per cent carbon-free goals in the next few decades and Hawaii has gone further by requiring 100 per cent renewable energy generation by 2045.27 As a result, there is a need for additional renewable energy generation in California and the rest of the United States. As the existing fleets of wind generation projects developed before 2000 approach the end of their useful lives, it is also expected that repowering investment will significantly increase during the next decade.

While still in its early stages, the US offshore wind energy sector recently experienced noteworthy developments. In 2018, Vineyard Wind LLC’s 800MW offshore wind project was awarded six long-term power purchase agreements with Massachusetts utilities through a competitive process,28 which represents the largest single procurement of offshore wind in the United States.29 Besides the mere size of the award, the most significant feature of those power purchase agreements is perhaps the energy purchase price, which is substantially lower than the price in prior reported transactions and confirms the increased competitiveness of offshore wind energy. The first offshore project to be constructed and achieve commercial operations is the 30MW Block Island Wind Farm, which has a power purchase agreement with a starting price of US$244/MWh and the reported price in other subsequent offshore power purchase agreements ranged between US$132/MWh and US$160/MWh.30 In contrast, the starting price under the Vineyard Wind power purchase agreements is US$74/MWh for the first 400MW phase and US$65/MWh for the second phase.31 While the Vineyard Wind project experienced an unexpected permitting delay in the summer of 2019, the US Bureau of Ocean Energy Management anticipates its final decision by 18 December 2020.32

Fuelled in part by improvements in technology (lowering costs and reducing risk) and government support, particularly on the north-east coast of the United States,33 offshore wind is becoming widely seen as a notable opportunity;34 it was brought to the industry’s attention with Ørsted’s acquisition of Deepwater Wind (the owner of the Block Island Wind Farm) in November 2018.35

In recent years, the US Environmental Protection Agency (EPA) has attempted to implement regulations aimed at limiting greenhouse gas emissions from existing fossil fuel-fired electric generating units in part by setting state-specific goals for reducing emissions from the power sector. The final rules were released in August 2015 (the clean power plan) but were confronted by immediate legal challenges from a large number of affected states and state agencies, utility companies and energy industry trade groups. After a protracted legal process (including actions before the US Supreme Court), the EPA’s final repeal rule became effective on 6 September 2019.36 Numerous affected parties (including 22 states, multiple cities, power companies and non-profit organisations) immediately filed petitions for review before the US Court of Appeals for the DC Circuit. The petitioners’ opening briefs were filed on 17 April 2020 and the briefing is expected to continue until 13 August 2020.37

Going forward, most renewable energy projects will increasingly rely upon commercial banks and capital markets to satisfy capital demands. For larger projects, mixed bank–private placement transactions with two or more tranches of funds may provide a preferred financing structure. In the past couple of years, the market has seen an increase in the amount of available capital for project financings combined with a reduction in the number of projects seeking funding, as a result of which financiers have been driven to offer almost unprecedented conditions (including a significant downward trend in pricing for capital) to remain competitive. This environment has allowed sponsors to refinance existing facilities with inexpensive long-term capital sources and has fostered an increased interest in the acquisition of operating assets.

New financing tools have also become increasingly important for renewable energy projects, particularly in the field of structured finance. For instance, approximately US$1,600 million was raised in 2019 as part of the securitisation of thousands of residential and commercial solar energy contracts.38 As other solar developers increase their portfolios, they may choose to follow this lead to secure financing.

After several years of uncertainty and doubt about its staying power, the ‘yieldco’ model has started to gain stability and remains a prominent feature of the US market. A yieldco is a publicly traded corporation similar to a publicly traded master limited partnership (MLP) vehicle except that its assets do not qualify for MLP status. In the renewable energy sector, a yieldco is expected to obtain stable cash flows from ownership of operating projects that have entered into long-term power purchase agreements and minimise corporate-level income tax by combining recently built projects that are still producing tax benefits with older projects. Yieldcos started achieving prominence in 2013 for energy companies and increased their presence exponentially until the downfall of prominent sponsors of yieldcos, such as SunEdison (TerraForm Power Inc and TerraForm Global Inc) and Abengoa (Atlantica Yield, formerly known as Abengoa Yield), turned investors’ attention to, and increased investors’ concerns about, yieldcos. After years of sharp declines in the value of shares of yieldcos and a flurry of dispositions by sponsors that led to the conversion of some yieldcos to private entities,39 some of the remaining yieldcos have shown improved health.40

Outside the renewable energy space, the retirement of coal and nuclear facilities generated renewed interest by sponsors in the development of new gas-fired power plants. Since 2016, natural gas-fired generation in the United States has surpassed coal generation every year and the gap keeps increasing.41 Natural gas-fired electric generation is expected to grow to a forecast level equal to over 36 per cent of the total generation by 2050 while coal-fired electric generation is expected to decrease to less than 14 per cent of total generation by 2050.42 The introduction of new capacity markets may further spur investment in gas-fired projects, which have been challenged by lower wholesale electricity prices in some markets, such as Texas. Additionally, project developers have devoted more attention on gasification facilities, which convert feedstock into a synthetic gas that is used as fuel or further converted into a variety of products, including hydrogen, methanol, carbon monoxide and carbon dioxide. These projects have commonly used fossil materials such as coal and petroleum coke as feedstock, although there are several gas-to-liquid projects in development and there is an intensified interest in the use of biodegradable materials, including municipal solid waste and forestry, lumber mill and crop wastes. The bankruptcy filings of Westinghouse Electric Company in March 2017 43 and FirstEnergy Solutions Corp in April 201844 may be a harbinger of further headwinds in the nuclear sector.45

Although still in its infancy from a technological and economic perspective, the nascent sector of electro-chemical energy storage (batteries that store electrical energy in the form of chemical energy) is beginning to attract the attention of a broad range of project finance participants.46 Reliable and cost-efficient battery energy storage systems have the potential to shake up the energy sector. Significantly, this type of storage system could become an ideal complement for intermittent resources such as wind and solar energy power plants and facilitate power grid balancing efforts. As a consequence, natural gas ‘peaker’ plants (those that are used when there is high demand for electricity) may become less significant and the electricity generation mix could be reshaped further.

Another development in the energy sector involves an ongoing transformation in the identity of the power purchasers in the market. As electricity prices have been declining, it has become more difficult for developers to secure long-term offtake agreements with investment grade utilities, and businesses, universities and other non-traditional offtakers gradually have been taking their place. Additionally, in some states, communities have started forming Community Choice Aggregations (CCAs) to source electricity.47 CCAs purchase electricity from a utility and sell it to their residents and businesses. While only eight states have legislation governing CCAs,48 these entities may become more significant in the near future. Utilities, especially those in western states, face increasing difficulty in maintaining their credit standing, as they confront a declining customer base due to the emergence of CCAs and distributed generation technologies, legacy pension liabilities, and the implications of climate change, including liability for utility-caused wildfires.

In addition, constrained state and local fiscal budgets, limited federal transportation funding, decreased tax revenue and the considerable need for new infrastructure assets and the refurbishment, repair and replacement of existing assets may hasten the further use of the public-private partnership (PPP) project finance structure (further described in Section IX). While most large infrastructure projects in the United States, at least since the introduction of the interstate system in the 1950s, have been completed using public funds rather than through the participation of private entities, a confluence of factors may be creating a fertile ground for the development of increased government and public acceptance of PPPs. According to the latest report card by the American Society of Civil Engineers, the infrastructure of the United States has a D+ grade point average49 and an estimated investment of approximately US$5.1 trillion (in addition to the approximately US$5.6 trillion currently contemplated to be funded) will be required by 2040 to maintain a state of good repair.50 The Trump administration’s infrastructure plan, published in February 2018, is intended to stimulate at least US$1.5 trillion in new infrastructure investment over the next 10 years 51 and 12 federal agencies agreed on a framework to expedite the environmental review and approval of infrastructure projects.52 Given that existing legislation has been insufficient to satisfy the country’s needs for infrastructure funding, state and local governments started to turn to the private sector to fill the gap. Recent significant PPP projects include the up to US$4.9 billion Automated People Mover project and US$2 billion Consolidated Rent-A-Car facility at the Los Angeles International Airport,53 the approximately US$3.7 billion I-66 Outside the Beltway project in Virginia,54 and the approximately US$5.7 billion Gordie Howe International Bridge connecting Detroit (United States) and Windsor (Canada).55 While in some jurisdictions developers will need to navigate uncharted legislative and regulatory waters, and may also have to overcome negative public perception regarding the private management of public infrastructure, the opportunities for growth may be unprecedented.

Outlook and conclusions

In the long term, project finance is expected to continue to be a popular vehicle to finance the necessary energy and infrastructure assets in the United States, particularly to replace the ageing fleet of coal-fired plants, nuclear plants and other public infrastructure, given the support of the strong legal framework and a strong, sophisticated private financing market (in addition to political support and other factors).

The US Energy Information Administration (EIA) estimates that energy consumption, across all sectors, will increase by 0.3 per cent per year between 2019 and 2050.95 While additions to power plant capacity are expected to slow from the construction boom years in the early 2000s, it is expected that there will be more long-term growth in certain sectors, such as projects from renewable sources and natural gas. For example, the EIA projects that electricity generation from renewable sources will grow so that its share of total US energy generation will increase from approximately 19 per cent in 2019 to approximately 38 per cent in 2050 in the reference case, or as high as 40 per cent based on a high oil price case.96 Additionally, projections from industry sources foresee that the United States may need close to US$5.1 trillion in additional funding to support its standard infrastructure needs in the coming years.97 With the enduring need for energy and infrastructure, the United States will look to project finance structures as one of the tools for satisfying this need.

Surviving the Construction Law Backlog: Nontraditional Approaches to Resolution

Jeffrey Kozek | Construction Executive

Across the construction industry, COVID-19’s impact has caused a range of problems for contractors and projects—prolonged or intermittent work shutdowns, supply chain delays, pricing increases on materials and funding shortfalls. It has also led to court closures. The legal backlog for claims and disputes means that owners and contractors are facing the option of waiting until the courts are functioning the way they were previously or utilizing alternative approaches to resolution to keep projects and businesses running. 

Though courts across the country reopened to some extent in the latter half of 2020, many state and federal facilities were shut down or working with a limited capability for weeks or months. The closures not only froze the progress of numerous disputes already underway, but caused new schedule, cost and COVID-19-related claims to also be held up in the same backlog that is slowly being addressed under current restricted operations. New safety measures to reduce viral transmission, including reduced usage of courtrooms, restrictions on personnel and increased cleaning and sanitizing measures, have limited the number of cases courts can handle on a daily basis and lengthened legal timelines in ways many parties had not anticipated and cannot afford. 

That many small businesses have continued to struggle financially through the pandemic period further complicates payments and work completions on projects that have been disrupted. Before filing or proceeding with a claim, contractors and construction owners will have to take a harder look at the significance of the claim they’re filing, the likelihood of success and potential for recovery, and the added risks of prolonged litigation. These deliberations are certainly familiar, but their potential outcomes take on a greater significance now. Having to wait longer for discovery and a trial to occur, for a judge to rule on motions or to decide a case, could ultimately determine whether moving forward with litigation should even be considered versus reaching an alternative settlement. 

With parties on all sides looking to recoup the lost time and cost from the pandemic, as well as resolving their prolonged matters in dispute, some parties may opt to instead settle more quickly and for less money. Though nonbinding, dispute resolution options like mediation can offer the chance to reach an agreement without going through arbitration or litigation. After both sides select a neutral mediator or review board, schedule time and prepare statements, they may be able to come to an agreement based on the mediator’s determination. On the other hand, if not satisfied with the nonbinding decision, the matter can still be re-mediated and/or litigated. It’s important to note that while this process is typically quicker than legally binding routes, it is not an overnight answer to resolution either. 

The best option to resolve each project’s disputes will vary as there’s still a lot of uncertainty in the pandemic environment, including how it is impacting options for construction litigation. For better or worse, these delays have already altered how contractors and owners approach contracts and cases. No one yet knows what the new normal looks like, what expectations should be about legal timelines and costs due to the limited operations of the court system, but parties should expect to face similar extended circumstances regarding claims and disputes for the foreseeable future and be prepared to adapt. 

Virtual Hearings and Mediations Are Here to Stay

Patrick J. Mahoney | JAMS

As the COVID-19 pandemic recedes, every aspect of our pre-pandemic ways of work is under review. Simply returning to our old ways is not the answer. To do so is to ignore the lessons learned while working remotely. Dispute resolution, like almost every aspect of society, changed as a consequence of the pandemic and what will remain is the extensive use of video. Why because it is less costly, efficient and effective.

COVID-19 thrust the legal community to work online. To the surprise of many lawyers, mediators, arbitrators and judges, the work continued to get done. Virtual hearings and mediations proved to be so successful that they are here to stay.

At the outset, one obstacle to conducting virtual hearings was learning how to operate in a virtual world, such as how to sign on to a virtual platform, upload and access documents and move participants between “rooms.” Security measures were enhanced to provide access only to the designated participants. In contested hearings, protocols were developed to preclude real time coaching of witnesses. Finally, adoption was slow until it became obvious that virtual hearings were essential to resolve disputes. Like riding a bike, once you learn, you do not forget.

What drove the acceptance was need. Courts were effectively closed for public hearings, and the convening of a jury was a rare event. The only way to address a legal dispute was virtually. Increasingly, legal professionals learned that the work could get done in a more efficient manner. For example, travel ceased to be an issue, which reduced costs and facilitated scheduling. Documents could be sent electronically to anyone at any time. Witnesses no longer had to sit and wait to be called; a simple text message could alert them when to sign on. Breakout rooms allowed parties and counsel to caucus in their own cyber room. Given that this process was not business as usual, lawyers learned to cooperate in scheduling and related aspects of a hearing.

However, there are lingering limitations. In mediations, personal contact can be critical in the final stages of a negotiation. The impromptu hallway conversations do not exist. Participants can simply sign off in frustration, and there is no opportunity to stop them at the elevator door. Distractions at participants’ locations can divert their attention, and participants are no longer sequestered in a single room mulling over the issues.

In-person contested hearings make it easier for the arbitrator to manage all the participants. Everything that is before a witness can be seen. The interactions between counsel and client are observable, which may not be the case in a virtual hearing. As a consequence, there is a perception that assessing credibility is enhanced by in person proceedings. An article by Judge Wayne Brazil, “Credibility Concerns About Virtual Arbitration Are Unfounded,” demonstrates that is not the case.

There are benefits of in-person proceedings, but I believe they are marginal in the overwhelming number of matters. The concerns about credibility or presenting evidence in a virtual hearing have not been borne out. The efficiencies of virtual hearings have driven their acceptance and continued use.

Top 10 Things To Like About Virtual Insurance Mediations

Andrew S. Nadolna | JAMS

Virtual mediation is the newest tool in the insurance alternative dispute resolution (ADR) toolbox, and it is here to stay. Here are 10 reasons to use virtual mediation for insurance-related matters.

1. Inventory reduction—now

Right now, there is a window of opportunity. COVID-19-related insurance cases are arising quickly. They will soon swamp lawyers, clients and insurance companies in multiple lines of insurance. These cases will take a disproportionate amount of time. Those working in claims for insurance companies, or as in-house counsel and risk managers, or for law firms working in the insurance space are seeing a massive influx of business interruption claims under property policies; but other lines, such as employment practices liability, directors and officers liability insurance and commercial general liability, are not far behind. The increase in volume will be monumental. In the meantime, every other case will be put on the back burner. Virtual mediations led by experienced neutrals can help. With no need to travel, or even commute, it is much easier for even the busiest mediators to be available, and you don’t need to schedule them months in advance. Go ahead. Settle some cases—virtually.

2. Scheduling convenience

Scheduling is a lot easier. Part of the reason for this is because you don’t have to worry about travel. Once travel has been eliminated, you don’t have to worry about the day before and/or the day after for participants or the mediator. You also don’t have to worry about commuting. You also don’t need to wait for an available room in a busy dispute resolution facility. Virtual rooms are virtually unlimited.

3. Ease of starting

See above: no commuting. I rarely hit traffic when I am walking down the hallway to get to my laptop. Virtual mediations tend to have everybody present and ready to go on time. Leveraging virtual platforms, there is the option to book as many as 50 rooms or only a few—at no additional cost. This means that matters involving complicated towers of coverage can have breathing room. Everyone gets their own room, and various participants can be assigned easily to that room. Participants just need to dial in, and the administrator or mediator will instantly put each participant in the appropriate room.

4. Geography doesn’t matter— so you can focus on skills

You can look nationally or even globally for the appropriate neutral with the kind of expertise you need, without any travel expenses. The participants can be anywhere. I’ve had cases with participants in four time zones. Many policyholder and insurer law firms have national (or international) practices aligned to the needs of their clients. Some mediators have a similar focus. Drawing on their skills is now easier than ever.

5. More meaningful mandatory ADR

There are now more mandatory alternative dispute resolution (ADR) clauses in more insurance policies (and other contracts) than ever before. If you are required to mediate, do it well and do it now, before you get inundated. A good mediator can help transform a session from a “check the box” exercise into a meaningful discussion and risk-analysis session. The worst-possible outcome is that your views of the facts, the law and the policy language will be thoroughly tested. The best thing that could happen is discovering that your idea of a reasonable settlement is not far off from the other side’s idea, so you settle. It’s worth a try.

6. Increased intensity of focus

There is something about being on camera that creates an unusual and helpful level of focus, but it can be extremely draining for any length of time. However, the benefit is that we tend to get to the point in a different—more considered and concise—way. Things are happening quicker in online insurance mediations. That isn’t necessarily always a good thing. Some cases require a more leisurely unfolding of events. Being aware of this can lead to more productive sessions.

7. Flexibility and creativity

The processes for conducting a virtual mediation will rapidly evolve. The global mediation community is now using online meeting platforms for mediation. We are engaged with the technology. We are thinking about how to do it better. We are thinking about the range of processes and structures that might benefit our clients and our cases. There are many possibilities.

8. The efficiency of a disaggregated mediation

A mediation can be separated into segments over the course of a few days or weeks, and the time in between can be used for assessment. Maybe the magic of the day can be transformed into bite-sized pockets of magic. Why is this important? Many insurance mediations have become multiday efforts, allowing each side the opportunity to regroup and consider what happened. Often there is a lot of downtime. Now we have the chance to have separate caucuses without keeping everyone else sitting in a room waiting for their turn. We can schedule it.

9. The new and improved opening session

We may be communicating more effectively now than ever before, which may mean that a substantive joint session can be productive and lead to negotiations. The strange intimacy of the technology— it can feel like you are very close to the people on your screen—enhances civility in discourse. With some guidance from the mediator—structured around a few issues and rules about time and types of discourse—we can get so much more accomplished at the beginning of a session. The other possibility is that the joint session becomes a two-part presentation over a couple days, and before the individual caucuses or bargaining begins, each side has the opportunity to consider whether there is anything new in the other side’s presentation that requires an alteration to its mediation strategy.

10. Technology choices

Pick your platform. Although Zoom seems to be the default option given its range of mediation- appropriate features, cost and ease of use, there are many other options. Many clients prefer platforms such as Microsoft Teams, Cisco Webex, Endispute or BlueJeans. Similar to any other detail concerning the mediation process, the selection of a virtual platform and any additional communication modalities is a matter that can be tailored to the needs and specifications of the parties. The time it takes to master the controls of any of these platforms is minimal. Mediators can work through any technology issues by using the platform for presession activities and can arrange for a brief practice session to get everyone comfortable with the technology.

As you can see, this tool belongs in your case resolution toolbox.

AIA Arbitration Provisions May Limit Recoverable Damages on Colorado Projects

Kelly Smith | Snell & Wilmer

The American Institute of Architects (“AIA”) produces form contract documents widely used in the construction industry. Because of the prevalence of AIA contracts, many parties consider them to be standard and may not fully scrutinize the contract provisions or their future implications. This is especially problematic in Colorado where the use of AIA contracts, specifically their arbitration provisions, may jeopardize a party’s ability to recover punitive damages or cause a party to spend additional time and incur substantial fees litigating what damages are recoverable.

Many AIA contracts include binding arbitration provisions if the parties elect to include them to govern future dispute resolution. They generally also include choice-of-law provisions stating that the contract shall be governed by the law of the place where the project is located. Importantly, Colorado Revised Statute § 13-21-102(5) prohibits exemplary (or punitive) damages from being awarded in arbitration proceedings “[u]nless otherwise provided by law.” Thus, § 13-21-102(5) bars a party from recovering punitive damages if there is a binding arbitration provision in a construction contract and the project is located in Colorado.

Typically, to avoid this prohibition, a party must successfully argue that the Federal Arbitration Act (“FAA”), rather than Colorado law, governs the parties’ arbitration dispute. Colorado courts have acknowledged that when the FAA governs, § 13-201-102(5)’s prohibition on awarding punitive damages does not apply. See Gidding v. Fitz, 2018 WL 480607,*3 (D. Colo. Jan. 19, 2018); Pyle v. Securities USA, Inc., 758 F.Supp. 638, 639 (D. Colo. 1991). The FAA governs arbitration proceedings that arise out of contracts involving interstate commerce—even if those contracts include a Colorado choice-of-law provision. See 1745 Wazee LLC v. Castle Builders Inc., 89 P.3d 422, 425 (Colo. Ct. App. 2003). “Commerce” is construed broadly and includes interstate shipment of goods. Comanche Indian Tribe v. 49 LLC, 391 F.3d 1129, 1132 (10th Cir. 2004). Accordingly, one way a party may be able to invoke the FAA and recover punitive damages in arbitration is to show that the materials utilized for a Colorado construction project came from out of state.

However, a party will not likely be able to invoke the FAA where the actual arbitration provision states that it is governed by Colorado law. Pyle, 758 F.Supp. at 639. Further, it is possible that some Colorado construction projects may involve only materials, equipment and labor sourced from within the state. In those cases, a party who has signed an AIA contract with a binding arbitration provision and Colorado choice-of-law provision may be barred from seeking punitive damages.

In sum, before entering into a seemingly standard AIA contract (or any contract at all), a party involved in a Colorado construction project may want to consider consulting with counsel. Parties may want to pay particular attention to:

  • The general choice-of-law provision in the contract;
  • Dispute resolution provisions in the contract;
  • Whether the dispute resolution provisions contain additional choice-of-law designations;
  • Who the other parties to the contract are; and
  • To the extent possible, from where project materials, equipment and labor will be sourced.

These factors will typically affect the types of damages that a party can recover in the event of a contract dispute.