construction contracts and dispute resolution 101

Houston | Austin | Dallas | San Antonio | New Orleans

Construction Contracts and

Dispute Resolution 101

Orlando, Florida

January 12, 2017

Daniel Lund IIIDirector


Houston | Austin | Dallas | San Antonio | New Orleans 2

Contract Interpretation

Interpretation of a contract is the determination of the

common intent of the parties


Contract InterpretationDetermining Intent

No further interpretation when intent is clear

When the words of a contract are clear and explicit

and lead to no absurd consequences, no further

interpretation may be made in search of the

parties’ intent.


The words of a contract must be given their

generally prevailing meaning

Words of art and technical terms must be given

their technical meaning when the contract involves

a technical matter.

Contract InterpretationDetermining Intent



Determining Intent

In case of doubt that cannot be otherwise resolved, a provision

in a contract must be interpreted against the party who

furnished its text.




• “Claim”?

• “claim”?

• “such Claims”?

• “…any claim, damage, demand…”

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• Tenant shall have right to sublease…”

• “In the event Owner consents to a sublease…”



“Any other written notations…other than those

required on the outside of the Bid Envelope and which

have the effect of amending the bid are invalid…”

“Written notifications on the outside of the Bid

Envelope which have the effect of amending the bid are

invalid…”


Workmanlike MannerGood workmanlike manner is implied by law in every

contract

• It means work is free of defects of workmanship and

material

• It is determined by an objective showing of want of:

• Skill,

• Efficiency,

• Knowledge, OR

• Ordinary care in the performance of work or

selection of equipment


Spearin Doctrine

If work is constructed in accordance with plans

and specifications, the contractor will not be

liable for any destruction of deficiency.


Payment Provisions

When is payment due?

Payment is due at the completion of the job

unless otherwise specified.


Payment Provisions

Pay if Paid v. Pay When Paid Clauses


Modifications/Change Orders


Modifications/Change Orders

• A contract may be modified only by mutual consent, which:

• May be presumed by silence

• May be oral

• Is an agreement to modify original contract.

• Special rules for public contracts.

• Exceptions to writing requirement:

• Alteration cannot be supposed to have been made without Owner’s knowledge

• Alteration is not foreseen but is necessary for completion.


Quantum Meruit

Principal of law that no one should be enriched at the expense of another.

• Contractor may recover value of services despite invalid, unenforceable contract.

• Quantum meruit award may include:• Labor

• Materials

• Overhead

• Profit


General Conditions

AIA Forms

(for example, AIA A201 General Conditions)

• Boilerplate

• Favor Architect, Owner, and General Contractor

• Principal change through the years: no more architect supervision, but notice to the architect


General ConditionsSecrets to Success with AIA Forms

• Read the contract EVERY TIME.

• Check the version.

• Know what is attached.

• Word processing.

• Use an attorney.


General ConditionsKey Contract Clauses

• Incorporation by Reference

• All construction documents should be referenced

by date, page, title, edition, and any other type of

identifying mark possible.


General ConditionsKey Contract Clauses

• Pay

• Should be made timely and fairly.

• Progress payments.

• In order to be entitled to full payment, Contractor must fully complete the work and produce date confirming that all liens, claims and securities have been handled.


Substantial Completion• Lien periods run

• Punch list issued

• All contract monies due except enough for

punch list and liens

TIP: File a Certificate of Substantial Completion

or Notice of Termination


Final Completion

Final payment is due

• No liens against project

• Lien period has run

• Punch list is done


Indemnity

• “. . . damages, losses, expenses, attorneys’ fees arising out of or resulting from performance of the work.”

• Typically only to the extent of one’s negligence, acts/omissions.

• Includes lien claims.

• Contractor defense: nonpayment by owner.

• If negligence of another: must be express; now prohibited in construction contracts in many states.


Indemnity

There are three types of indemnity clauses:

• limited - liability only to the extent of the indemnitor’s

fault or negligence.

• intermediate - indemnitor assumes all liability except for

the sole negligence of the indemnitee, and

• broad form - indemnity clauses impose the entire risk of

loss upon the indemnitor, even for the sole negligence of

the indemnitee.


Indemnity

Key aspects within most indemnity clauses

• Duty to Defend

• Unintended consequences due to indemnitee's obligations and

indemnities

• Anti-indemnity prohibitions for construction contracts


No Damage for Delay Clauses

No damages for delay clauses can be very costly. Below is atype of no damages for delay clause:

– Notwithstanding anything to the contrary in the ContractDocuments, an extension in the Contract Time shall be thesole and exclusive remedy for the Contractor for any: (1)delay in the commencement, prosecution or completion of theWork; (2) hindrance or obstruction in the performance of theWork; (3) loss of productivity; or (4) other similar claims(collectively referred to in this paragraph as Delays) whether ornot such Delays are foreseeable.


No Damage for Delay Clauses

If unable to have this type of language removed, consider:

1. Try to obtain coverage for indirect overhead extension costs for delays

caused by others. This would include all costs except for direct craft

labor.

2. Try to negotiate a cap that essentially says there are no damages for a

delay up to a certain percentage of additional cost above the original

contract price. If the contract delays increase the cost by more than

that percentage, then delay charges would be recoverable.

3. Worst case scenario: you should add a significant amount to your

contract price to attempt to cover any reasonably anticipated delays.


Lien Waiver Clauses and Forms


Notices• In writing.

• Oral notice?

• Possibly equity, but don’t count on it.

• 21 day claim notice in AIA.

Read the contract every time –

it’s an open book test!


Waiver of Consequential/Liquidated Damages

• AIA A201

• 1997 change on consequential damages.

• Liquidated damages an afterthought.

• Consensus Docs

• The more prominent consequential/liquidated damages.

• Liquidated damages for substantial completion and final

completion delays.

• Liquidated damages as a double-edged sword.

• ALL OF THESE ARE OPTIONAL CLAUSES!


Arbitration and MediationAIA Forms

• A201-1997 Mandatory Arbitration and Mediation

• A201-2007 Changed:

• “Initial Decision Maker” (architect is default IDM) is initial

reference for disputes.

• Thereafter, mediation is still necessary.

• Arbitration no longer the final binding dispute resolution

(courts are the default mechanism if arbitration is not

selected).

• Arbitration joinder provisions added.


Other Significant Changesover the Years

• (from A201-1997)

• Great Expectations:

• No longer results “intended” by Contract Documents,

by “indicated.”


Other Significant Changesover the Years

• (from A201-1997)

• Contractor review of documents

• No longer obliged to find errors, omissions or

inconsistencies in Plans and Specifications.

• Simply must inform if found.


SubcontractsKey Clauses

• Mandatory arbitration consolidation provisions

to avoid inconsistent results

• Consolidation must also be in the general contract or

else there is no merit to the subcontract provision

• Scope clarity: what is this subcontractor to be

doing, compared to other subcontractors?

• Schedule consistency/reference

• Pass-through provisions, for example,

liquidated damages


Litigation,

arbitration, and

mediation.

Claims and Disputes:


E-Discovery

• A party is “. . . under a duty to preserve what it knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.”

Zubulake v. USB Warburg,

220 F.R.D. 212 (S.D.N.Y. 2003)


E-DiscoveryThings You Should Know

• Electronically Stored Information (ESI) includes: emails,

temporary internet files, text messages, previously deleted

files, metadata, etc.

• Programs that claim to “permanently delete” information are

not always effective and can be detected.

• Threatened or pending litigation, government investigation

or audit: litigation hold.

• Use an attorney.

• HAVE A PLAN – costs can be high if there is not a plan.


• Project documentation

WIN THE CASE!


Project documentation

• Project schedules

• Owner’s milestone schedule

• As Planned

• As Built

• The Contract

• Meeting Minutes

• Memos, Transmittals, Letters, Emails


• Schedules

• Contract Schedule

• Document Contractor’s Schedule

commitments

• As Planned

• All docs considered in development

(quantity, productivity, crew size, etc.)

• As Built

• Maintain project documentation validating

key as-built dates



• Schedules (continued)

• Must maintain separate, labeled electronic

versions of all schedule updates (native

format)



• Acceleration

• Constructive acceleration

• Delayed contractor essentially ordered to finish within

the original contract timeframe

• Factors

• The delay is a result of causes that would entitle

the contractor to time extension under the

contract

• The Contractor requests time extension for the

delay in a timely manner, in accordance with the

contract

• The owner fails or refuses to grant a time

extension to the contractor

Delay versus acceleration/constructive acceleration


Delay versus acceleration/constructive acceleration

• Constructive acceleration

• Factors (continued)

• The owner requires the contractor to complete the

work in accordance with the original schedule or

indicates an intention to penalize the contractor

for failing to complete the work in accordance

with the original contract schedule

• The contractor then endeavors to accelerate by

working additional hours, by committing

additional resources, or by other means

• The contractor incurs additional expense in

carrying out these acceleration efforts


• Use of email

• Less formal, less careful

• All emails will eventually be produced!

Email and its relevance in disputes


• Effective use of Email

• No foul language, sarcasm, off-color

humor

• Do not be self-critical

• If you would not put it in a formal

letter, don’t email it

• Avoid ALL CAPS




• Effective Use of Email (continued)

• Facts, not feelings

• 24 hour rule

• Use the subject line appropriately

• Don’t mix projects

• Deleting an email does not erase it

forever!

• Consider whether a formal letter is

more appropriate

• Protect privilege


Documentation diligence!

• Do not stop documenting when a project

becomes distressed

• Instead, considering adding additional

personnel to fully document.


Litigation to arbitration

and mediation

Comparing:

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Houston | New Orleans | San

Alternative (to litigation)

Claim Resolution“The goal is the delivery of justice in a democracy…

in a time and in a manner that does not rob it of

meaning. This is the promise of alternative dispute

resolution; it is our task to work for its fulfillment.”

Professor A. Leo Levin

Keynote Address at the 1985 Annual

Chief Justice Earl Warren Conference


Alternative Claim Resolution Process

Federal courts recognize and encourage Alternative

Dispute Resolution:

– Federal Arbitration Act of 1988 establishes federal

substantive law favoring agreements to arbitrate


Arbitration

A method of dispute resolution involving one or more

neutral third parties who make a determination regarding

the dispute at issue.


Mediation

Mediation is a form of alternative dispute resolution, a

way of amicably and essentially informally resolving

disputes between two or more parties. Typically, a third

party, the mediator assists the parties to negotiate a

settlement.

Houston | Austin | Dallas | San Antonio | New OrleansAustin | Clear Lake | Dallas | Houston | New Orleans | San

Antonio

Arbitration

- Hearing may

commence quickly

after claim is filed

- Arbitrators typically

are technical experts,

familiar with industry

customs

- Typically less expensive

due to quicker proceedings

- Discovery more streamlined

Litigation

- Hearing may not begin

until years following

filing of claim

- Fact finders likely have

no industry expertise

- More expensive procedure

due to protracted process

- Extensive discovery

procedure

Commonly held beliefs:

Arbitration v. Litigation


Antonio

Commonly held beliefs:

Arbitration v. Litigation

Arbitration- Absence of strict procedural

and evidentiary requirements

- Limited grounds of appeal

- Panel decisions have no

precedential effect on future

disputes

- Arbitration may occur at

location most convenient to

parties

Litigation

- Strict Procedural and

evidentiary requirements are

followed

- Awards by court may be

appealed on many bases,

including factual disputes

- Decisions may have precedential

effect upon other disputes

- Hearing must occur at proper

courthouse


Austin | Clear Lake | Dallas Houston | New Orleans | San

Antonio

ArbitrationWhat arbitration looks like

Challenges to arbitration:

• in court if the question is whether the contract or provision calling for arbitration is null/void: Do we have a valid agreement to arbitrate?

• reach of the clause: is typically for the arbitrator to decide


Antonio

Arbitration

Federal Arbitration Act: 9 USC § 1 et seq.

• Arbitration is favored if specified/agreed to


Antonio

ArbitrationFederal Arbitration Act: 9 USC § 3

Stay of proceedings brought in violation of arbitration agreement

If any suit or proceedings be broughtin any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for arbitration. . .


Antonio

Arbitration

Federal Arbitration Act: 9 USC § 10Motion to vacate award; grounds; rehearing

***A. Where the award was procured by corruption, fraud, or undue means.B. Where there was evident partiality or corruption on the part of the

arbitrators or any of them.C. Where the arbitrators were guilty of misconduct in refusing to postpone

the hearing… or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced.

D. Where the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

Where an award is vacated … the court may… direct a rehearing by the arbitrators.


Arbitration

Filing the arbitration

• finding the right company

• selecting the arbitrator

– one or three arbitrators?

– arbitrator disclosures/disqualification

• the arbitration complaint

• the arbitration response


Arbitration

Accessing documents and witnesses

• Arbitrators can issue subpoenas, Federal

Arbitration Act: 9 USC § 7


Antonio

ArbitrationThe arbitration hearing

• informality

• no transcript typically; no record!

• opening statements

• order of presentation of case

• examination of witnesses by both sides


ArbitrationThe arbitration hearing

• use of exhibits

– admissibility/relevance

– be really organized: there will not be a clerk

• motions during the hearing

• rebuttal witnesses

• closing the hearing

– will there be post hearing briefs?


Arbitration

The award

• forms of award

• rights of appeal/finality

• no precedential value/effect


ArbitrationThe award: confirming and enforcing the award

Federal Arbitration Act: 9 USC § 9.

Motion to confirm award; jurisdiction; notice

At any time within one year after the award is made any party to the arbitration may apply to the court in and for the District within which the award was made for an order confirming the award…


Moving towards mediation

Unique arbitration issues/characteristics:

– what arbitration is not: mediation

• What is mediation?

• Can you mediate and arbitrate?


Mediation success or failure

• Selecting the mediator

• What mediation company to use if a

company at all?



The mediation process:

what the day looks like



Top 10 reasons mediations fail:

10. Parties don’t understand process

9. Failure of counsel to analyze the case and

law

8. Failure to put the mediation 1st for the day

7. Lack of authority “in the room” to settle

6. Overdone mediation presentation



5. Process broken off too early

4. Lack of good faith by one or more parties

3. Overly contentious party or advocate




2. Bad settlement strategy





1. Unrealistic expectations


Closing the mediation:

ALWAYS: a written settlement agreement at the

moment of settlement



Fin.Merci!

Daniel Lund III

[email protected]