Team arrangements are commonly made by contractors in connection with bids for public works projects, particularly federal ones. A number of factors are providing new incentives for construction firms to partner up in order to make their services or bids more attractive. These factors include competition for a smaller pool of projects in a down economy and new industry opportunities, such as state and federal incentive programs for green building and renewable energy projects.

Why enter into a team agreement?

Most parties enter into team agreements because it is commercially beneficial to do so, usually because each party brings to the table different strengths that, when combined, make the team more competitive than either party could be on its own. In some circumstances, the customer (i.e., a government agency) may require a team arrangement in order to qualify to bid.

Get it in writing

Whatever the reason for entering into a team arrangement, it is prudent to formalize the relationship in the form of a written agreement. Written contracts not only establish the nature of the relationship between the parties and the commercial terms, but they also distribute risk and reward between the parties. All team agreements are different. Do not assume that the previous form of agreement will fit the next situation.

Confidentiality

When entering discussions with another party to decide whether to move ahead with a team arrangement, it is usually necessary to disclose or obtain from the prospective counterparty certain proprietary and confidential information. Before doing so, it is advisable to enter into a nondisclosure/confidentiality agreement that sets the ground rules for information exchange and the consequences for unauthorized disclosure. Such agreements may be simple or quite complex, depending on the preferences of the parties and the nature and sensitivity of the information that may be disclosed. The team agreement itself should address confidentiality, in which case the terms of a pre-existing nondisclosure agreement may be incorporated by reference.

Assessing your potential teammate

Before entering into any formal team agreement, be sure to carefully vet potential teammates. Seek answers to questions such as:

• How healthy is their balance sheet?
• What is their reputation in the market?
• What assets, contacts, skills or experience do they bring to the relationship?
• Do they have the appropriate licenses and authorizations to perform the anticipated work or services?
• Have they been involved in any disputes or litigation with past partners?
• What are their weaknesses?
• What are their expectations?
• Why do they want to team with us?
• Have they been blacklisted or investigated by any relevant governmental contracting agency?
• Could this relationship cause us to breach any other agreements?
• Will the relationship negatively impact our relationships with other business partners?

Beware of antitrust issues

It is critically important to review the potential legal implications of any proposed team agreement with legal counsel. It is not uncommon for parties to inadvertently fall afoul of antitrust laws, consumer protection laws or anti-collusion regulations or bidding requirements. This is the case, in particular, when the parties are or have previously been competitors in the same industry, but it also depends on the number of competitors and their size, the proposed nature of the collaboration and a number of other factors. Suffice it to say that pitfalls exist for the unwary.

Carefully outline the scope of the relationship

Too often the parties to a team arrangement fail to take the time to carefully outline the nature of the relationship, usually because they believe they already fully understand it and how it will work. All too often this proves not to be the case. Some key issues that should be considered and addressed in team agreements are (and this is not an exhaustive list):

• Is the relationship for a single project or purpose, or will it be ongoing?
• Is the relationship exclusive? (Note that some federal agencies prohibit the use of exclusive team arrangements)
• Can a party compete separately against a joint bid by the team? If so, will a firewall be set up between internal bidding teams?
• Is the relationship to be limited to a specific geographic territory?
• How will potential business opportunities and profits be allocated?
• What are the triggers for collaborating on a given project?
• What contractual relationship will the teammates have in relation to the customer on a given project? Will the parties form a joint venture or will one party subcontract to the other?
• Will one party always be the prime contractor and the other a subcontractor? Or can it change on a project-by-project basis? (This sort of flip-flopping may be prohibited by some laws, regulations or bidding requirements)

Anticipate and address disputes

The team agreement provides a critical opportunity to address how the relationship is to be ended and how disputes are to be resolved, issues that parties often are uncomfortable discussing at the beginning of a relationship when collaboration is at its height. If there is a dispute down the road, it will likely be decided by an impartial third party and that person will need to understand how the relationship was intended to work. In this regard, contract recitals are a useful tool for providing background and context to the agreement. However, there is no substitute for a well-drafted and suitably detailed scope to remove the guesswork from the decision of an arbitrator or judge.

Adam Walters is an attorney in the construction and design practice group at Stoel Rives LLP. Contact him at 206-386-7675 or acwalters@stoel.com.

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Subcontractors have little bargaining power, even in the best of times. The situation is exacerbated in a down economy, when new projects are scarce and competition is fierce. Contractors experience the same market forces, albeit on a different scale, and yet the current reality is that many contractors are successfully forcing onto subcontractors standard terms that are so unfair, onerous and one-sided that were they proposed by an owner, the same contractors would never agree to the terms, even in this economy.

Why should owners care if subcontractors are getting the short end of the stick? Because subcontractors must inevitably build the costs of the additional risks into their prices, in the long run if not at present. This is already evident in contractors’ increased use of “subguard”-type insurance – that is, insurance taken out by contractors against default by the subcontractor, usually for the contractor’s sole benefit, the cost of which may be passed onto subcontractors but is ultimately borne by owners one way or another.

Which subcontract terms are so egregious as to warrant concern about rising project costs? Subcontractor indemnities tend to make the best candidates. Indeed, indemnities broader than Greg Oden’s wingspan seem to have become the norm. But indemnities are not the only culprits. To belabor that point, here are the “top 10” egregious clauses from subcontracts issued so far this year (excluding indemnities and in no particular order):

Adhesion contract
“This subcontract must be executed below…without modification. If not, and if subcontractor elects to perform any of the subcontract work without first securing a fully executed subcontract, then subcontractor shall be deemed to have accepted this subcontract, unmodified, as issued. Subcontractor’s delivery of the subcontract without modification…(is an) express condition precedent to any payment to subcontractor.”

Contract interpretation
Where there is a conflict between provisions of the subcontract, “the interpretation that is more costly to, or which imposes the greater duty upon the subcontractor shall control.”

Payment waivers
Subcontractor’s receipt of final payment “shall constitute a waiver of any past, present or future claims by subcontractor arising out of or relating to the subcontract.”

Pay if paid, with a twist
“Subcontractor acknowledges and agrees that owner’s payment to contractor…is a condition precedent to contractor’s obligation to pay such amounts to subcontractor. Subcontractor further acknowledges that it is relying on the credit and ability of the owner to pay for work performed and not contractor and accepts the risk that it will not be paid by contractor for work performed in the event contractor is not paid by owner for such work.”

A condition precedent to final payment
A “complete and full satisfaction of all claims, demands and disputes…arising out of or related to the subcontract,” expressly including disputes between subcontractor and any third party.

Responsibility for the design of others
“Subcontractor shall be responsible for the coordination of all drawings and design documents relating to subcontractor’s work, whether or not such drawings and documents are prepared or performed by subcontractor, subcontractor’s subtier-consultants, or others. If design work has been performed by others, subcontractor is nevertheless fully responsible for, and accepts full responsibility for, such earlier work, as fully as if all work had been performed by subcontractor itself.”

All control and no risk
“Contractor shall be entitled to decide the time, order and priority for performance of the various portions of the subcontract work to the extent necessary, in contractor’s judgment (to comply with the prime contract schedule), and to direct the performance of the work accordingly. Subcontractor shall not be entitled to an adjustment of the subcontract amount or an extension of time in connection with any such direction by contractor as the subcontractor shall anticipate and provide for such activities in the (subcontract price and schedule).”

Unilateral limitation of liability and release
“In no event shall (contractor, owner or their employees, affiliates, etc.) be liable to subcontractor…for any consequential, special, incidental, indirect, exemplary, multiple or punitive damages or damages arising from or in connection with loss of use or loss of revenue or profit, actual or anticipated or otherwise, and subcontractor hereby releases each of (the above-noted parties) from any such liability.”

Unilateral dispute resolution
“Except as otherwise provided in the subcontract, contractor shall initially decide all disputes arising out of the subcontract…Contractor’s decision shall be final and conclusive unless subcontractor advises contractor in writing within 48 hours of receiving the decision of the basis for its disagreement with the decision. Subcontractor agrees that if it does not contest the contractor’s decision within the time and in the manner required under this (section), contractor’s decision shall be final and conclusive and the subcontractor shall be deemed to have waived any right to contest the decision.” (The provision gives contractor the unilateral power to choose arbitration or litigation as the means for resolving disputes not waived pursuant to this clause.)

Pre-assignment of agreements
“Subcontractor hereby assigns to contractor, as security for subcontractor’s performance hereunder, all lower tier subcontracts and all other contracts, purchase orders, equipment leases and other agreements entered into in connection with the project, and appoints contractor its attorney in fact to enforce said contracts according to their terms.” Such assignments are “operative only upon notice by contractor.”

So, what is the solution? One possible solution, provided that contractors accept it, is for the owner to impose on the contractor an obligation to ensure that its subcontracts for the project treat subcontractors no less favorably than the contractor is treated under the prime contract, except where reasonably necessary to enable the contractor to meet its obligations thereunder. It is not uncommon, after all, for prime contracts to require contractors to include various “pass-through” provisions in their subcontracts. Why not a pass-through of fairness?

Adam Walters is an attorney in the construction and design practice group at Stoel Rives LLP. Contact him at 206-386-7675 or acwalters@stoel.com.

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It is common in construction contracts for the parties to make certain “representations and warranties” regarding the existence of certain facts relevant to the agreement. For instance, each party may “represent and warrant” to the other that it has the legal capacity to enter into the agreement.

Whether the representations and warranties are consolidated into a single article or are interspersed throughout, the question arises: Is there any distinction to be made between a representation and a warranty as used in this context, such that a party to a construction contract should avoid using either term?

There are two primary schools of thought in this regard. The first view is that customary use of the phrase “representations and warranties” has over time melded the two terms into a single concept when used in reference to an assertion of a fact.

The second view is that there is a material difference between a representation and a warranty, and that a breach of a representation has different consequences from a breach of a warranty.

A representation is a statement of a past or existing fact at the time the statement is made. If a fact about which a contractual representation has been made proves to be false, then the party to whom the representation was made may have a tort claim for deceit or fraudulent misrepresentation, provided that it relied upon the false representation to its detriment.

The injured party normally has a choice of remedy for such claims; that party can either rescind the contract and sue for restitution, or affirm the contract and sue for damages. In most cases the injured party will be entitled to recover its out-of-pocket expenses incurred due to its reliance on the misrepresentation. In some cases the injured party may also recover punitive damages.

A representation concerning a fact that occurs in the future is not a true representation. Many construction contracts contain provisions that state that a representation will automatically come into existence when a party carries out an act anticipated or required by the contract.

For instance, the contract may provide that by submitting a monthly progress claim a contractor or subcontractor represents that it has paid all laborers, subcontractors and suppliers up to the date of the progress claim. Unless the representation is actually made at the time the relevant fact comes into being, it is questionable whether the injured party has a valid claim should the representation prove false.

The two schools of thought part ways when it comes to the definition of warranty and the consequences for breach of warranty when it relates to an assertion of fact. According to the first school, the term warranty has no meaning when used in concert with a representation.
Some proponents of this view argue that parties should make only representations and not warranties, because the use of the term warranty serves only to add confusion, given its different meaning when used in other contexts.

The second school of thought holds that a warranty is a promise that a fact is or will be true in the future, and an indemnity if the statement of fact turns out to be false.

The purpose of the warranty is to relieve the party receiving the warranty from having to determine the truthfulness of the fact in question. Unlike with representations, reliance is not an element of breach of warranty; the injured party may sue for breach of warranty even if it knew the statement was false (with some exceptions).

The remedy for breach of warranty is to give the injured party the benefit of its bargain. Unlike with representations, contract rescission is not usually available for a breach of warranty.
There is always some uncertainty as to how a court or arbitrator may interpret representations and warranties when they concern the existence of facts in construction contracts. Therefore, it is advisable to assume that the two terms have different meanings and consequences, even when used together.

This usually means that owners will prefer to obtain both warranties and representations, whereas contractors and consultants will prefer to give only one or the other, depending on the circumstances.

Adam Walters is an attorney in the construction and design practice group at Stoel Rives LLP. Contact him at 206-386-7675 or acwalters@stoel.com.

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