Issues in Dispute Resolution Procedure and Practice PARTNERS IN CONSTRUCTION November 12, 2014James J . Palecek www.paleceklaw.com

CASE STUDY:

• It is critically important to review and “manage” your contract provisions when dealing with a Change Order or potential differing site condition claim on the project

Change Orders / Differing Site Conditions

Concerns During the Project:

• Contract provisions that impact a Change Order / DSC Claim

• See Supplement

Change Orders for Changed or Extra Work

• See sample Contract Provisions (Supplement)

PROCEDURE FOR REQUESTING CHANGE ORDERS – EXTRA

• Written or Oral Instructions involving a change or extra work which contractor believes it should receive extra compensation

Written Request for Change Order

• Claims for extra costs, together with supporting documents must be filed within 10 days after performing the work

File Claim within 10 Days • No change or extra work

shall be performed unless authorized by written “Change Order”

• Claim for extra cost not valid unless approved

Approval

Procedure for Requesting Change Orders: Extra Time

Contract Time Change

• Contract time may only be changed by Change Order

Written Notice

• Written Notice to Engineer – 7 Days

• Supporting data – 45 Days

• Include:

• Cause of Delay

• Date of Occurrence

• Additional time requested

Contract Time Extension Approval

• Extended in amount equal to time loss due to delays beyond the control of Contractor

• Delays include: acts or neglect by others, fires, floods, labor disputes, epidemics, abnormal weather conditions, or acts of God

Differing Site Conditions

• Conditions encountered which are (1) Subsurface or otherwise concealed and (2) are of an unusual nature and differ materially and substantially from those anticipated in the contract

• Written Notice within 24 hours after first observance (before conditions are disturbed)

• See Supplement

Warranty Period

• Work guaranteed for a period of 2 years (731 days) after date of final acceptance

• See Supplement

Time is of the Essence

• See Supplement

Liquidated Damages

• See Supplement

Severability Clause, Dispute Resolution, Applicable Law

• See Supplement

QUERY:

• Does one continue with the work of the contract when it is in a dispute with regard to a major or “material” change to the scope of work in the form of a disputed Change Order or a Differing Site Condition Claim?

Subcontractors’ Concerns

• Subcontractors always need to be aware of the prime contract and any specification due to the “incorporation by reference” clause or “contract documents” clause in its subcontracts.

Dispute Resolution Issues upon Termination

• See Supplement

Duty to Indemnify vs. Duty to Defend • 2 VE R Y IMPO R TA NT CO NCE PT S IN DISPUTE R E SO L UTIO N

Duty to Defend / Indemnify – Clause 1 Jokake Construction Co. v. Elward Construction Co., 2010 WL 334992 (2010)

• Indemnification – To the fullest extent permitted by law, Subcontractor will indemnify, defend (at Subcontractor’s sole expense), and hold Contractor and Owner, together with their respective employees, agents, officers, directors, shareholders, partners, representatives, and affiliated entities, Contractor’s property, and Owner’s property, free and harmless from, and will indemnify each of the foregoing for and against, any and all expenses (including without limitation investigative and repair costs), causes of action, suites, judgment, claims, losses, liens, damages, including consequential and incidental damages, injuries, and liabilities arising from…the damage or destruction of any property or properties, caused by or connected with the performance or nonperformance of any act hereunder or pursuant hereto by Subcontractor or its agents, materialmen, licensees, or employees…

Duty to Defend / Indemnify – Clause 1 (Cont.)Jokake Construction Co. v. Elward Construction Co., 2010 WL 334992 (2010)

• Subcontractor further indemnifies Contractor and agrees to reimburse Contractor within 15 days’ written notice of the costs of any warranty work done by Contractor for which Contractor is not paid out of funds still due to Subcontractor hereunder…Subcontractor’s obligation hereunder to indemnify, defend, protect, and hold harmless any Indemnified Party will apply with full force and effect regardless of any concurrent negligence, whether active or passive, primary or secondary, by any Indemnified Party, by anyone directly or indirectly employed by indemnified party, or by anyone for whose acts any Indemnified Party may be liable, unless such concurrent negligence was the sole material cause of the Claim or Expense for which indemnification is sought.

Duty to Defend / Indemnify – Clause 2 • INDEMNITY. All work covered by this Subcontract Agreement done at the

site of construction, or in preparing or delivering materials or equipment, or any of all of them, to the site, shall be at the sole risk of the SUBCONTRACTOR. The SUBCONTRACTOR shall, with respect to all such work which is covered by or incidental to this Subcontract Agreement, defend, indemnify and hold harmless from and against each of the following:

• (a) Any claim, liability, loss, damage, cost, expenses, including attorneys’ fees, awards, fines or judgments arising by reason of the death or bodily injury to persons, injury to property, design defects (if the design was originated by the SUBCONTRACTOR, his supplier, employee or agent), or other loss, damage or expense, including any of the same resulting from GC’s alleged or actual negligent act or omission, regardless of whether such act or omission is active or passive; provided, however, the SUBCONTRACTOR shall not be obligated under this Subcontract Agreement to indemnify GC with respect to damages which are due to the sole negligent or willful misconduct of GC, his agents or servants.

Practice Pointer:

• General Contractors:

• There is a wide variety of language in contracts related to the Duty to Defend and Indemnify Clause which, depending on the language in your contracts, might prevent you from obtaining valid duties to indemnify and defend from your subcontractors, so have your Duty to Defend clauses reviewed by counsel.

• Subcontractors:

• Upon receiving Tenders of Defense from commercial general contractors or residential builders, transmit the Tender to your counsel immediately so that your counsel can take certain steps initially to protect yourself during the litigation.

Conundrum: • When an insurance company won’t defend your company

Differing Site Conditions

• “Contractors encountering actual site conditions differing materially from those anticipated at bid stage, may suffer serious financial losses. These conditions typically arise from sub-surface or latent surface site conditions such as rock, groundwater, and unsuitable soil. Historically, without the availability of realistic remedies for these differing site conditions, contractors typically sought to protect themselves through bid contingencies (cause higher or inflated bids) to provide for unforeseen circumstances.”

Source: Arizona Construction Law Manual, Section 5.3.1.7

Differing Site Conditions

“To avoid the burden of these added bid expenses, Changed Condition clauses have been developed and are generally found in standard construction contracts. The effect of these Changed or Differing Site Condition clauses is to equitably allocate or shift the risk of liability for unforeseen differing site conditions from the contractor to the Owner. These clauses generally provide for the contract price or contract time, or both, to be equitably adjusted for compensable differing site conditions.”

Source: Arizona Construction Law Manual, Section 5.3.1.7

Type 1 Differing Site Conditions:

1. The contract documents must have affirmatively indicated or represented a subsurface or physical site condition that forms the basis of the claim.

2. There must actually be encountered subsurface or site conditions differing materially from those indicated in the contract.

3. In interpreting the contract, the contractor must have acted reasonably and prudently.

4. The contractor must have reasonably relied upon the representations or indications contained in the contract.

Source: Arizona Construction Law Manual, Section 5.3.1.7

Type 1 Differing Site Conditions (Cont.):

5) The actual site conditions must not be reasonably foreseeable.

6) The contractors’ damages must be solely attributable to the materially different subsurface or other site conditions

Source: Arizona Construction Law Manual, Section 5.3.1.7

Examples of Type 1 Conditions:

• Rock or other soil conditions not indicated in borings, drawings, or from a reasonable site inspection

• Encountering unforeseen groundwater or other unstable subsurface conditions

Source: Arizona Construction Law Manual, Section 5.3.1.7

Type 2 Conditions:

• A Type 2 Changed Condition does not require a comparison between the indications on the contract documents with the actual site conditions. Rather a Type 2 Changed Condition occurs when the actual site conditions encountered differ materially from those ordinarily expected and recognized as inherent in the character of the contract work.

Source: Arizona Construction Law Manual, Section 5.3.1.7.2

Elements of Type 2 Claim:

1. Contractor must establish the known, recognized, and usual conditions of the site.

2. The physical condition encountered must be unknown and not foreseeable at the time of contracting.

3. This physical condition is not customarily expected, could not have been anticipated from a reasonable site inspection, and is materially different from the known, recognized, or usual conditions.

4. The physical condition is the sole cause of the increased costs of the contractor.

Source: Arizona Construction Law Manual, Section 5.3.1.7.2

Type 2 Conditions:

• Type 2 Claims are much more difficult to prove than Type 1 Claims, due to the “subjectivity” of a Type 2 Claim.

• Type 2 Claims are more easily derived from expert testimony

Source: Arizona Construction Law Manual, Section 5.3.1.7.2

Sample Changed Conditions / Differing Site Condition Clauses found in Contracts

• AIA Document A201(2007), Article 3.7.4, Concealed or Unknown Conditions:

• “If the contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for tin the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions...

Sample Changed Conditions / Differing Site Condition Clauses found in Contracts (Cont.)

• The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially and cause an increase or decrease in the Contractors’ cost of or time required for, performance of any part of the Work, will recommend and equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and Contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15.”

• This AIA Document A201 provision cover both Type 1 and Type 2 Conditions.

Limitations on Differing Site Condition Claims

• AIA Document A201, Article 13.4.1 (2007) expressly states that rights, duties and obligations contained in the standard form “shall be in addition to and not a limitation of duties, obligations, rights, and remedies otherwise imposed or available by law.”

vs.

• Section 13.7 of the ConsensusDOCS200(2007) provides: “The Parties’ rights, liabilities, responsibilities and remedies with respect to this agreement, whether in contract, tort, negligence or otherwise, shall be exclusively those set forth in this agreement.”

Source: Arizona Construction Law

Manual, Section 5.3.1.7.2

(emphasis added)

Practice Point for Lawyers:

• “depending on the circumstances (including the controlling contract provisions), the practitioner should consider various other common law theories for recovering on Differing Site Condition claims, including fraud, misrepresentation, impossibility, breach of warranty, mutual mistake, unjust enrichment, quantum meruit, and negligence.”

Source: Arizona Construction Law Manual,

Section 5.3.1.7.2

Why is the Previous Quote Important to YOU as Contractors?

• If your contract includes a clause that limits your remedy on a Differing Site Condition claim to the procedure in the contract for such a claim, then all of the other remedies that your lawyer might think of in the preceding slide are unavailable.

• So, following the notice provisions in your contract are of premium importance.

NOTICE:

• Most construction contracts require the contractor to give notice of Differing Site Condition Claims within a fixed period of time

• For Example: AIA Form A201, Article 4.2.3.6: “…before conditions are disturbed and in no event after 21 days after first observance…”

• Please be aware of all Notice Provisions in your contract, as some notices likely will require different time frames within which to give notice than a general notice provision found in a construction contract

Case Law

• New Pueblo Constructors, Inc. v. State of Arizona, 144 Ariz. 95, 696 P.2d 185 (App. 1985)

• Chaney Building Co. v. Sunnyside School District, 147 Ariz. 270, 709 P.2d 904 (App. 1985)

• Unforeseen winds cause damage to the Project.

• Although the contractor made no request in writing for an extension of time to complete its work within the 7 day written notice provision, the Court held that the Owner had actual notice of the cause of the delay and was not prejudiced thereby.

• It concluded that the Owner waived the notice requirement by considering the merits of the claim, even though it had only been put on notice orally by the contractor.

• These two cases might give contractors some level of comfort even if they have not followed particular notice provisions, so don’t delay in presenting a claim, even if you believe you missed strict compliance with such contract provisions on any current projects.

• HOWEVER,

• See Handout, NPC Court of Appeals Case

• See Handout from Construction Claims Manual

• COMMENT ON EXPERT WITNESSES

Summary

• THE SUCCESS OF DISPUTE RESOLUTION OFTEN – TIMES WILL DEPEND CRITICALLY ON HOW THE CONTRACTOR “MANAGES” ITS CONTRACT.

• IF ONE FOLLOWS GUIDELINES AND PROCEDURES, THEN CERTAIN CLAIMS FOR EXTRAS OR DIFFERING SITE CONDITIONS CAN BE RESOLVED MORE PROMPTLY / SUCCESSFULLY

• SUBCONTRACTORS’ ADHERENCE TO THE PRIME CONTRACT DOCUMENTS ON SUCH CLAIMS IS CRITICAL.

• POST-COMPLETION / TERMINATION DISPUTES NEED TO PAY SPECIAL ATTENTION TO DUTY TO DEFEND CLAUSES.

James J. Palecek Jim@paleceklaw.com

JAMES J. PALECEK is a co-managing member of Palecek & Palecek, PLLC. Mr. Palecek, a graduate of Duke University and Denver Law School, has advised construction and other corporate clients for over 18 years. His clientele includes suppliers, subcontractors, general contractors, developers and consultants in both the commercial and residential construction arenas and in both the public and private sector.

In addition to a focus in construction law, he has also led the Firm’s corporate transactional and real estate practice areas for the last 10 years.