In resolving construction contract negotiations and disputes, we’ve seen a number of overlooked clauses carry significant importance: a 20-year roof warranty limited to material replacement costs (no tear-out, no install) and only if the owner gives notification of a defect within 60 days;  limitations of liability clauses that cap damages significantly below insurance coverage the owner paid for; and, in perhaps the most egregious example, an attorney’s fees clause written in reverse that had the winner pay the loser’s legal fees!

Whether you’re building your dream vacation home, renovating an existing commercial structure, or developing a multimillion-dollar mixed-use project, construction contract terms matter. Interpretations of one often overlooked clause – addressing contractual “third-party beneficiaries” – varies considerably from state to state. Consistent inconsistency makes it prudent to address the issue at contract formation to manage the risk inherent in blindly agreeing to default form contract language.

A third-party beneficiary (TPB) is a person or entity who, though not a party to the contract, stands to benefit from the contract’s performance. Typically, the TPB needs to be expressly named in the contract from which it stands to benefit. For example, if a contractor and a subcontractor agree to a subcontract that specifies the subcontractor will render some performance to a project for the express benefit of the owner as a TPB, then that owner is a third-party beneficiary of the subcontract, even though it is not a party to the subcontract. TPB status may exist up and down the contractual chain.

TPB status carries substantial benefits. In the preceding example, an owner may assert claims directly against the subcontractor for breach of the subcontract, breach of warranty, negligence, or other claims arising out of the subcontracted work for the project. This allows the owner flexibility to pursue the potentially liable parties rather than having to first seek recourse from its prime contractual partner – the general contractor. These direct rights can also help avoid an economic loss rule defense by the offending party (the economic loss doctrine generally provides that a party cannot recover in negligence for purely “economic loss” – i.e., not personal injury or property damage). There are risks, however, because if not drafted correctly, a TPB clause could grant unintended rights, such as giving a subcontractor direct claims against the owner, or a general contractor direct claims against a project lender.

Interestingly, default form contract language is largely silent on the TPB issue. The AIA’s B101-2017 Owner-Architect agreement states at section 10.5, “Nothing contained in this agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the owner or architect,” but does not address the desired TPB situation. This means the parties are left to the applicable law of the place in which the project is located, which can vary considerably from state to state.

In Oregon, to the benefit of owners, the Supreme Court ruled that where an owner, even as a remote purchaser, can demonstrate actual property damage rather than purely economic loss, the economic loss rule does not bar a negligence claim for construction defects. Thus, even if an owner is not a TPB of a subcontract in Oregon, that owner may have direct rights of recovery against a subcontractor for actual property damage to the owner’s property.

In Washington, the situation is different. Washington’s Supreme Court rebranded the economic loss rule as the independent duty doctrine. It provides that an injury is remediable on a negligence theory if it traces back to the breach of a duty arising independently from the contract terms. In the context of a defective construction case, Washington courts have explained there is no independent duty to avoid economic loss – i.e., the bargained-for quality, absent an independent duty or other risk of harm. These cases suggest that in Washington, without a TPB clause, the upstream party needs to show an independent duty or harm separate from the construction defect in order to maintain a direct action against a non-contracting construction party.

And in Utah, we find the rule directly opposite to that in Oregon. There, the Utah Legislature has actually codified the economic loss doctrine to make it clear that an action for defective design or construction is limited to breach of contract. Absent a TPB clause in a Utah contract then, an owner has little recourse against a construction party with whom it lacks privity of contract.

Legal interpretations vary and construction contract terms matter. The oldest advice remains the best: If you want something done right, do it yourself. When negotiating your next construction contract, consider adding your own TPB clause clarifying the upstream parties benefiting from the work have direct rights of action against downstream parties in order to equitably hold each party accountable for deficiencies in each party’s work. Protect your rights by not leaving your contracts open to default form contract terms and the law of unintended consequences.

C. Andrew Gibson is a partner and a member of the construction and design practice group in the Portland office of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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With construction teams navigating the effects of the COVID-19 pandemic and the world’s material supply chains, securing project performance has perhaps never been at such a premium. If a contractor cannot timely perform, or if a subcontractor simply pulls out of a new project bid in order to pursue a more attractive opportunity, the project owner and/or prime contractor face potentially significant damages. These include corrective work, costs of completion or substitute performance, and delay. Two chief security options exist to protect against such risks: performance bonds and subcontractor default insurance (SDI). Choosing one over the other requires informed decision-making as each type of security carries its own unique characteristics and project consequences.

Security structure and form

A performance bond is a three-party agreement between the principal (the contractor or subcontractor), the obligee (the owner), and the surety. The surety agrees via the bond to answer for the principal’s default in performance. Any damaged party may make a claim. In contrast, SDI is a two-party agreement between the insured contractor and the insurer in which the insurer undertakes to indemnify the insured against loss resulting from a contingent default. SDI only protects against subcontractor default – not default of the prime contractor – and only the general contractor – not the owner – may assert a claim.

History and legal precedence

Suretyship has been around for millennia, with references found in ancient Greece and the Old Testament. In 1884 the American Surety Company began underwriting construction performance bonds, and in 1894 Congress passed the Heard Act requiring surety bonds on federally funded projects. Performance bonds’ long history and statutory frameworks provide considerable legal authority that help predict outcomes of disputes under a bond. Conversely, SDI has a much shorter history. It was first introduced by Zurich N.A. Insurance Company in 1995 and then subsequently offered by others. As such, with SDI there is virtually no legal precedent from which to glean interpretation of disputes, with just a dozen or so reported cases and most not interpreting policy language.

Use

Performance bonds are required by statute for most public projects exceeding $100,000 and are often used for private projects. Although courts have imposed insurance-like duties (such as claims-handling procedures) on sureties, bonds are not insurance policies. Typical SDI projects are large and involve annual volume thresholds in the tens of millions of dollars or projects exceeding $100 million. SDI is also likely not an acceptable substitute for bonds on public projects.

Premiums and personal security

Bond premiums vary but can range from 0.5 percent to 1.5 percent of the contract amount, with the average above 1 percent. While there are no deductibles, bonds require an indemnity agreement and collateral, often with guarantees putting an officer of the contractor personally on the hook. SDI policies do not require collateral. SDI premiums are typically lower and can be 50 percent to 70 percent the cost of a bond, not counting deductibles and co-pays. This lower cost can provide an advantage in bidding a project. However, many SDI policies carry large deductibles, from $350,000 to $2 million with co-pay sharing at $1 million-$5 million.

Subcontractors and risk shifting

A performance bond surety screens and prequalifies subcontractors and investigates and responds to any default. However, the surety also has a self-interest in denying the predicate of a default occurrence. Under SDI, the contractor screens the subcontractors and retains the majority of risk through deductibles and co-payments. The contractor might also run into difficulty with subcontractors reluctant to share sensitive financial data. Still, the contractor retains control of project completion and can maximize efficiencies to avoid further delays and increased costs.

Recoverable damages

On a performance bond damages generally cannot exceed the penal sum of the bond, which can pose a problem in projects involving numerous change orders if the bond sum does not include those changes. Also, delay damages are not typically recoverable on a bond, though courts in Pennsylvania and California have allowed recovery. SDI tends to afford broader recovery for damages, including the cost of completion, losses due to corrections of defective work, indirect losses including possibly liquidated damages, and legal costs.

SDI can provide some advantages in the form of lower costs, control over subcontractor selection, and direct management of default situations. However, there are financial risks to the general contractor, which may also face opposition by subcontractors in the prequalification process. Also, SDI is limited to subcontractor defaults and not those by the general contractor. The dual insurance relationship of SDI is not a clear substitute for the tripartite surety bond setup, and the lack of legal decisions regarding SDIs injects a higher level of uncertainty as to how the policies might be interpreted. Project participants should carefully consider the benefits and risks of all options to best secure project performance.

C. Andrew Gibson is a partner and a member of the construction and design practice group in the Portland office of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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Carrying adequate insurance is a critical risk management tool for developers, builders and designers. Yet parties too often focus on commencing work and overlook the important intricacies of coverage. Future coverage denials can result from deference to “standard” insurance forms, reliance on informal broker assurances, and reluctance to wade through the swamp of policy “endorsements” that exclude particular claims, among other oversights. To mitigate the danger of lacking or losing coverage, keep in mind some of the more common insurance coverage mistakes and best practices the next time you’re reviewing coverages or claims.

Mistake no. 1 – Failure to obtain adequate proof of insurance

Traditionally, parties rely on stock contract terms requiring each party to only produce a Certificate of Insurance or ACCORD Certificate. However, these certificates can be largely worthless as evidence of coverage when a claim arises because the certificates typically do not specify the endorsements excluding coverage (e.g., exclusions for multifamily projects, condominiums, mold, and/or cross-suits by one insured against another).

Best practices: To confirm project-specific coverage, obtain copies of the actual policies by contractually requiring production, double-check all endorsements, and include in the contract an insurance clause that specifies particular insurance endorsements that shall be included or excluded.

Mistake no. 2 – Failure to ensure insurance downstream

Too often a key subcontractor performing a material or risky portion of work carries only its standard $1 million coverage. Coverage of $1 million may not be adequate for some jobs, especially if the policy is meant to cover all projects of the insured and not only the project.  Moreover, some sub-trades, like geotech consultants, frequently add a limitation of liability for substantially less than the policy limits, preventing access to the majority of the policy when it is needed.

Best practices: Specify requirements in prime contracts for the prime contractor or architect to ensure certain insurance levels for their sub-trades. Consider project-dedicated insurance policies for high-risk trades and avoid or negotiate more reasonable limits of liability whenever possible.  Consult an insurance broker from the outset to gain independent written confirmation of the appropriate types and limits of coverage for the project, including endorsements to obtain or avoid.

Mistake no. 3 – Failed insurance tracking protocols

After expending considerable effort at the contracting stage to secure the right insurance, parties often neglect to track insurance during construction and for duration of the applicable statute of repose. Consequently, when a claim arises several years after project completion, evidence of policies and coverage is hard to locate and determine.

Best practices: Compile policy copies (or at least the certificates) in a separately labeled electronic file. Calendar regular intervals following project completion to reconfirm policy limits and obtain information on any change in policy providers. In some cases, one can request and be automatically provided with Certificates of Insurance upon annual renewal, prompting review of the new policies and endorsements. If a contracting partner is out of business, determine whether there is need to take separate action to insure interests. Finally, utilize an Insurance Tracking Log or similar one-page spreadsheet that lists each project participant and their policy numbers, limits and notable exclusions each year during construction and in each year following project completion.

Mistake no. 4 – Failure to timely report a claim

Most policies have prompt reporting requirements in the ISO forms, requiring reporting and cooperation within a specific or reasonable time period.  Delays in recognizing and reporting claims can result in partial (pre-notice) or complete denial of defense and indemnity coverage.

Best practices: Review policies annually for applicable reporting requirements or ask a broker or attorneys to identify the specific timelines therein. Ensure project managers are aware of the deadlines and practice prompt reporting of claims.

Mistake no. 5 – Failures regarding additional insureds

Standard ISO endorsements are available to provide additional insured (AI) status to various classes of entities on construction projects, and it can be routine to do so. However, endorsements can limit AI coverage only for ongoing operations and may prohibit coverage altogether via a cross-suit exclusion for coverage where one insured sues another insured under the same policy.
Best practices: Seek both ongoing and completed operations AI coverage, remove any cross-suit exclusion from the policy, and ask a broker or attorneys to review the AI endorsements for other potential risks.

Construction projects carry complex insurance coverage issues that require detailed and timely analysis to mitigate the risk of coverage oversights. Ensure periodic reviews of insurance policy language (including all endorsements), utilize tracking protocols, and double-check policies on specific projects to ensure that needed coverage is not excluded. While the law of unintended consequences suggests that all parties to a project will likely face risks and claims, a little foresight and planning will help parties get the most out of the insurance assets covering their projects.

C. Andrew Gibson is a partner and a member of the construction and design practice group in the Portland office of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post OP-ED: Best practices to ensure one’s construction project remains insured appeared first on Daily Journal of Commerce.

The Oregon Legislature intended the mechanic’s lien laws to be relatively straightforward. On the issue of when to record a lien, ORS 87.035(1) requires a lien claimant under ORS 87.010(1) or (2) to perfect the lien by recording it “not later than 75 days after the person has ceased to provide labor, rent equipment, or furnish materials or 75 days after completion of construction, whichever is earlier.”

This seems simple enough, right? An unpaid contractor should make sure it records its lien 75 days after it has completed its significant (nontrivial or non-trifling) contract work and removed its equipment. And an owner should be able to rest assured of no subcontractor liens 75 days after each trade completes its work, and ultimately be worry-free of liens 75 days after project completion.

Unfortunately, the law of unintended consequences often renders the simple and straightforward much more complex. Take the recent case of Bethlehem Construction, Inc. v. PGE (2019). A subcontractor contracted with a general contractor (GC) to produce and deliver precast concrete panels to be used as part of a new power plant generation building for the project owner. For the contract price of $122,851, the subcontractor produced and delivered the panels, completed the work in April 2015 and submitted its final billing to the GC at that time. Subsequently, the GC requested additional work from the subcontractor in December 2015. The additional work consisted of an engineering opinion regarding load tolerances. The parties memorialized the add-on in a change order to the original subcontract for $578.13. The subcontractor provided the additional work and billed for the same. Days later, the owner terminated its prime contract with the GC. The GC failed to pay the subcontractor both the final payment due under the original contract and the amount due under the change order.

The subcontractor recorded its mechanic’s lien in January 2016, within 75 days of providing the work in the change order but well past 75 days after providing the work under the original contract. The owner contested the validity of the lien and the subcontractor sued. On cross-motions for summary judgment, the trial court sided with the subcontractor and concluded that the subcontractor did not cease to provide labor or furnish materials within the meaning of ORS 87.035(1) until it performed the additional work requested by the GC in December 2015, pursuant to the first change order. The trial court thus concluded that the subcontractor’s January 2016 lien was timely. The owner appealed.

On appeal, the owner argued: 1, the subcontractor’s December engineering opinion was under a separate contract and thus not part of the original contract completed in April such that the subcontractor could not lien for any of that original contract work, and 2, that subcontractor’s $578.13 December work was trivial or trifling when compared to the $122,851 original contract and thus inadequate to keep alive any lien claim for the work completed under the original contract (on this second argument the owner relied on prior Oregon case law holding that “a contractor does not extend the time to file a lien by returning to a job to perform some trifling work or a few odds and ends after apparently completing the job and removing its equipment”).

The court of appeals dispensed with the owner’s first argument in finding that the GC and the subcontractor “fully expressed their intentions through the change order.” The change order referred to the original contract and contract number and further specified the scope of change to that original contract. The court found no evidence in the record that any party, owner included, intended or considered the December work not to be part of the initial contract.

On the trivial or trifling question, the court of appeals reasserted prior decisions that explained “cost alone does not determine if work is trifling.” Instead, the law will look to whether the later work is “directly related to the original work and in furtherance of (the subcontractor’s) contractual obligation to provide precast concrete panels that would perform a particular structural function …” The court found “the December work was significant because, absent the engineering opinion, (the GC) could not rely on the panels to perform that structural function.” The court thus affirmed the trial court’s decision, upholding the validity of the subcontractor’s mechanic’s lien.

What lessons can be learned? Contractors should be aware of their lien rights and calendar the 75-day expiration of the same following their completion of work on projects – don’t count on later change order work reviving lien rights as happened for the subcontractor here. Owners should be aware of the various trade and prime contractor lien rights on their projects and ensure that trade contractors are being paid timely by requiring lien and claim waivers and releases with payment applications (conditional for current pay applications and unconditional for past pay applications).

And beware of later additional work constituting a change to an existing contract that extends the lien filing period. To mitigate this risk, use a new short form contract or purchase order (as opposed to change order on the existing contract) where possible to clarify that the new work is part of a new, separate contract.

C. Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

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Whether building a dream vacation home, renovating an existing commercial structure or developing a multimillion-dollar mixed-use project, negotiating construction contract language in 2017 can have important consequences years into the future. The obligations and rights arising from one often overlooked clause, addressing contractual “third-party beneficiaries,” can vary considerably from state to state and even case to case. Those inconsistencies make it prudent to address the issue at contract formation in order to manage the potential risk inherent in blind agreement to default form contract language.

Legal dictionaries define a “third-party beneficiary” (TPB) as “a person or entity who, though not a party to the contract, stands to benefit from the contract’s performance.” Typically, the TPB needs to be expressly named as such in the contract from which it stands to benefit. For example, if a contractor and a subcontractor agree to a subcontract that specifies the subcontractor will render some performance to a project for the express benefit of the owner as a TPB, then that owner is a third-party beneficiary of the subcontract, even though it is not a party to the subcontract. TPB status can also be granted to prime design professionals from sub-consultants or to general contractors from sub-subcontractors or suppliers to a subcontractor.

The benefits gained from TPB status can be substantial. In the example above, the owner may assert claims directly against the subcontractor for breach of the subcontract, breach of warranty, negligence, or other claims arising out of the subcontracted work for the project. This allows the owner flexibility to pursue the potentially liable parties efficiently and directly rather than having to first seek recourse from its prime contractual partner, the general contractor. These direct rights can also help avoid an economic loss rule defense by the offending party (the economic loss doctrine generally provides that a party cannot recover in negligence for its purely “economic loss” – i.e., not personal injury or property damage). There are risks, however, because a TPB clause, if not drafted correctly, could grant unintended rights, such as giving a subcontractor direct claims against the owner, or a general contractor direct claims against a project lender.

Interestingly, default form contract language is largely silent on the TPB issue. The AIA’s B101-2017 Owner-Architect Agreement states at section 10.5, “Nothing contained in this agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the owner or architect,” but does not address the reverse TPB situation. Also, word searches for third-party beneficiary language in the AIA’s A102 and A201-2017 Owner-Contractor Agreement and general conditions turn up similarly short. This means the parties are left to the applicable law of the project’s location, and those laws can vary considerably from state to state.

In Oregon, fortunately for owner parties, the Supreme Court has ruled (in Harris v. Suniga) that where an owner, even as a remote purchaser, can demonstrate actual property damage rather than purely economic loss, the economic loss rule does not bar a negligence claim for construction defects. Thus, even if an owner is not a TPB of a subcontract in Oregon, that owner may have direct rights of recovery against a subcontractor for actual property damage to the owner’s property.

In Washington, the situation is different. That state’s Supreme Court decided in a pair of 2010 cases (Eastwood v. Horse Harbor Foundation Inc. and Affiliated FM Ins. Co. v. LTK Consulting Services Inc.) to rebrand the economic loss rule as the “independent duty doctrine.” It provides that “an injury is remediable in tort (i.e., negligence), if it traces back to the breach of a tort duty arising independently of the terms of the contract.” In the context of a defective construction case, Washington courts have explained there is no independent duty to avoid economic loss, “defined as a mere defect in the bargained-for quality,” absent an independent duty or other risk of harm (see Eastwood and Nichols v. Peterson NW Inc.). These cases suggest that in Washington, without a TPB clause, the upstream party needs to show an independent duty or harm separate from the construction defect in order to maintain a direct action against a non-contracting construction party.

And in Utah, we find the rule directly opposite to that in Oregon. The Utah Legislature has codified the economic loss doctrine to make it clear that “an action for defective design or construction is limited to breach of contract,” including written and oral agreements for “both express and implied warranties.” Absent a TPB clause in a Utah contract then, an owner has little recourse against a construction party with whom it lacks privity of contract.

Given the variety of legal applications, and the silence of default form language, the oldest advice remains the best: If you want something done right, do it yourself. At the time of negotiating your next construction contract, consider adding your own third-party beneficiary clause that sets out all parties’ expectations that the ultimate beneficiary of the work being performed shall have direct rights of action against downstream subcontractor or sub-consultant parties in order to directly hold each party accountable for deficiencies in that party’s work. Protect your rights, and don’t leave your contracts open to default terms and the risk of unintended consequences.

Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

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Carrying adequate insurance is a critical risk management step for developers, builders and designers working on construction projects. Yet the important intricacies of coverage are too often overlooked at the time of contracting as the parties deal quickly to get a project moving forward.

Deferral to simplistic insurance certificates, reliance on informal broker assurances, and reluctance to wade through the swamp of policy “endorsements” that act to exclude particular claims can too often lead to future coverage denials at the exact time the parties have the greatest need for the insurance coverage they thought they’d secured. To mitigate that danger, keep in mind some of the following common insurance coverage oversights and potential corrective measures.

Oversight No. 1: Parties fail to obtain adequate proof of insurance

Traditionally, parties rely on stock contract terms requiring each party to produce a certificate of insurance or ACORD certificate. However, these certificates can be largely worthless as evidence of coverage because they typically do not specify the endorsements excluding coverage (e.g., for multifamily dwellings, condominiums, mold, and cross-suits by one insured against another).

Corrective measures: To confirm project-specific coverage, obtain copies of the actual policies, double-check all endorsements and use an insurance rider to the contract specifying that particular endorsements are not included.

Oversight no. 2: An insured delays reporting a claim

Most policies, and especially claims-made policies, have prompt reporting requirement language in the ISO forms requiring reporting and cooperation within a specific or reasonable time. Delays in recognizing and reporting claims can result in complete denial of coverage.

Corrective measures: Review policies annually for applicable reporting requirements or ask a broker or attorneys to identify the specific timelines therein. Ensure that project leads are aware of the deadlines and practice prompt reporting of claims.

Oversight no. 3: A party fails to delete the contractual liability exclusion

This can potentially negate coverage for obligations assumed in a contract or agreement.

Corrective measures: Ensure that the contractual liability exclusion is not part of the policy and/or expressly include contractual liabilities in the project-specific insurance rider.

Oversight no. 4: Unintended consequences of naming additional insureds

Standard ISO endorsements are available to provide additional insured, or “AI,” status to various classes of entities on construction projects, and it can be routine to do so. However, endorsements can limit AI coverage only for ongoing operations and may prohibit coverage altogether via a cross-suit exclusion for coverage where an insured sues another insured.

Corrective measures: Remove any cross-suit exclusion from the policy and analyze any potential consequences of naming multiple parties as additional insureds.

Oversight no. 5: Insurance tracking protocols

After expending considerable effort at the contracting stage to secure correct insurance, the parties neglect to track insurance during construction and for the duration of the applicable statute of repose. When a claim arises several years after project completion, evidence of policies and coverage is hard to locate and determine.

Corrective measures: Compile policy copies (or at least the certificates) in a separate electronic file for each project labeled “Insurance” rather than leaving the certificates in each designer’s or builder’s file. Calendar out regular intervals following project completion to reconfirm policy limits and any change in policy providers. If a contracting partner is out of business, determine whether separate action is needed to insure interests. Finally, utilize an Insurance Tracking Log or similar one-page spreadsheet that lists each project participant and its policy numbers, limits and notable exclusions for each year of construction and for each year following project completion.

Complex construction projects carry complex insurance coverage issues. Take time to carefully think through and mitigate the risk of potential oversights in coverage. Ensure periodic reviews of insurance policy language (including all endorsements), utilize tracking protocols, and double-check policies on specific projects to make certain coverage is not excluded. While the law of unintended consequences mandates that all parties to a project will likely face problems, disputes or potential claims, with some foresight and the right questions of insurance brokers, attorneys and each other, the parties can be best prepared for any potential coverage issues when they arise.

C. Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

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A few years back I wrote a 91��Ƶ article advising parties contracting for construction to contractually specify their own particular statute of limitation and/or repose periods on claims in response to Oregon’s ever-evolving and multi-tiered law on the subject. Recently, the Oregon Supreme Court issued a ruling in Shell v. The Schollander Companies Inc. that served up another instance of differing time limits on construction defect claims of which both buyers and builders must be aware.

The Oregon Revised Statutes (ORS) contain a number of significant time limits, known as statutes of limitations and statutes of repose, that govern the filing of construction claims on private projects. A statute of limitations sets the time limit that legal proceedings may be initiated after damage or an event, usually running from either event occurrence or damage discovery. A statute of repose restricts the time within which a lawsuit may be filed regardless of when the injury occurred or was discovered, running instead typically from occurrence of a particular event, such as construction of a building. Significantly, as the plaintiff homeowner discovered in the Schollander case, failing to file a lawsuit within the applicable statute of limitations or repose can result in the complete waiver of one’s claim.

The Schollander case took up the issue of which of two statutes of repose applied to claims of negligent construction stemming from the purchase and sale agreement for an existing “spec” home, one built in anticipation of sale to the public but typically without the eventual owner’s input. While both of the statutes at issue provided for a 10-year repose period, each contained a different accrual period to start that 10-year clock.

ORS 12.115(1), governing actions for negligent injury to property, starts its clock on “the date of the act or omission complained of.” ORS 12.135(1)(b), entitled “Action for damages from construction, alteration or repair of improvement to real property,” does not commence its 10-year clock on claims until the date of a project’s “substantial completion.” The problem among the competing statutes is that the act complained of (e.g., negligently installed windows) typically occurs months before substantial completion of the overall project. In such instances, which 10-year period applies?

In Schollander, the plaintiff homeowner contracted with the defendant spec builder in May 2000 to purchase the home. The contract also called for some changes to the home’s interior systems. Once the builder completed the additional work, the sale closed on July 12, 2000.

In July 2010, fewer than 10 years after the sale closed but more than 10 years after the homeowner entered into the purchase and sale agreement, the homeowner filed a claim against the builder for defective construction of exterior house elements, including the windows, siding, water resistant barrier and flashing (importantly, the interior work done under the parties’ contract was not at issue).

The builder sought summary judgment from the court that the 10-year statute of repose in ORS 12.115(1) barred the homeowner’s lawsuit because the acts or omissions complained of (i.e., the construction of the windows and other envelope systems) occurred more than 10 years prior to filing suit. The homeowner responded that the builder was relying on the wrong statute and that ORS 12.135(1)(b) applied to allow claims within 10 years of “substantial completion” of construction, which she contended occurred once the builder completed all work and the sale closed.

The Oregon Supreme Court upheld the lower rulings dismissing the homeowner’s claims as waived under ORS 12.115. The court keyed on the definition of “substantial completion” in ORS 12.135(4)(b) to determine that statute’s later accrual period did not apply to a spec home sale because the homeowner was not a “contractee” party to a construction agreement capable of accepting the construction and starting the limitations period to run. The court reasoned: “If there is no contract to construct, alter or repair an improvement to real property and thus no ‘contractee’ whose acceptance will trigger the period of repose, ORS 12.135(1)(b) does not apply” and “the more general period of repose set out in ORS 12.115 will govern.” The court further offered that since a spec home theoretically might not be sold for years, starting the time limitations period on the ultimate sale, rather than the act complained of, could unacceptably broaden the applicable period.

So where does this decision leave us in a time of expanding development? It may be prudent for builders to track when each trade completes its individual work. And buyers or owners of spec homes should be aware that the time clock(s) on claims could be running from substantially earlier than their purchase date, and even then on multiple tracks depending on when each trade completes its work. Finally, if this decision is found to apply to all purchases of real property wherein the buyer is not a “contractee” under ORS 12.135, its reach could be significant and extensive.

The best advice remains the oldest – if you want something done right, do it yourself. Consider adding your own time limits on claims to any contract for greater certainty. Setting time limits on claims can help manage risk and promote collaboration rather than adversity among the contracting parties. Conversely, leaving claims up to the “default” statutory rules of limitation and repose risks a procedural waiver of rights and subjects one to the law of unintended consequences. Protect your rights, and consider specifying time limits on claims at the time of contracting.

C. Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

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Among the worst nightmares for every construction project is the subcontractor default, where a particular trade subcontractor cannot meet its contractual obligations due to insolvency, mispricing or other misallocated risks. A subcontractor default poses potentially significant damages to the prime contractor and owner, including corrective work, costs of completion and delay. Two chief options exist to protect against such risks – performance bonds and subcontractor default insurance (SDI) – but choosing one over the other can be complex because each vehicle carries its own unique characteristics and project consequences.

Vehicle structure and form

A performance bond is a three-party agreement between the principal, the obligee, and the surety. The surety agrees through the bond to answer for the debt or default of the principal. Any damaged party may make a claim.

In contrast, SDI is a two-party agreement between the insured and the insurer in which the insurer undertakes to indemnify the insured against loss as a result of a contingent default. With SDI, only the general contractor may make a claim, and not the owner.

History

Suretyship has been around for millennia, with references found in ancient Greece and the Old Testament. In 1884 the American Surety Company began underwriting construction performance bonds, and in 1894 Congress passed the Heard Act requiring surety bonds on federally funded projects.

Conversely, SDI has a much shorter history, first created by Zurich N.A. Insurance Co. in 1995 and subsequently offered by several others around 2010.

Intended use

Performance bonds are required by statute for any federal or state public project in excess of $100,000, and are also used on some private projects. Although courts have imposed insurance-like duties (such as claims-handling procedures) on sureties, bonds are not insurance policies.

Typical SDI projects are large, as policies involve annual volume thresholds in the tens of millions of dollars or projects in excess of $100 million. SDI is also generally not allowed on public projects.

Cost and deductibles

Bond premiums vary but can range from 0.5 percent to 1.5 percent of the contract amount with the average above 1 percent. While there are no deductibles, bonds require an indemnity agreement and collateral, often with personal guarantees.

SDI policies do not require collateral. SDI premiums are typically lower and can be 50 percent to 70 percent of the cost of a bond, not counting deductibles and co-pays. This lower cost can provide an advantage in bidding a project. However, many SDI policies carry large deductibles, from $350,000 to $2 million with co-pay sharing at $1 million to $5 million.

Subcontractor prequalification and risk shifting

With a performance bond, the surety remains responsible for screening and prequalifying subcontractors, investigating any default, and responding to complete the contract or make payments. However, the surety also has a self-interest in denying the predicate of a default occurrence.

Under SDI, the contractor screens the subcontractors and retains the majority of risk through deductibles and co-payments, which could balloon if multiple defaults occur in the same calendar year. The contractor might also run into difficulty with subcontractors reluctant to share sensitive financial data. Still, the contractor retains control of the completion of the project and can maximize efficiencies to avoid further delays and increased costs.

Damages

Recoverable damages on a performance bond generally cannot exceed the penal sum of the bond, which can pose a problem in projects involving numerous change orders if the bond sum does not include those changes. Typically, delay damages are not recoverable on a bond, though courts in Pennsylvania and California have allowed recovery.

SDI tends to afford broader recovery for damages, including the cost of completion, losses due to corrections of defective work, indirect losses including possibly liquidated damages, and legal costs.

Legal precedent

Performance bonds’ long history and statutory frameworks provide considerable legal authority that help predict outcomes of disputes under a bond.

Conversely, with SDI there is virtually no legal precedent from which to glean interpretation of disputes, with just a dozen or so reported cases – and most not interpreting policy language.

SDI can provide some advantages in the form of lower costs, control over subcontractor selection, and direct management of default situations. However, there are financial risks to the general contractor, who may also face opposition by subcontractors in the prequalification process.

The dual insurance relationship is not a clear substitute for the tripartite surety bond setup, and the lack of legal decisions regarding SDIs injects a higher level of uncertainty as to how the policies might be interpreted. Project participants should carefully consider the benefits and risks of all options to protect against defaults prior to commencing their next construction project.

C. Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

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In construction, substantial and final project completion carry many potential pitfalls for the owner, contractors and design professionals. Most parties are understandably concerned about completing the project on time, and work may be progressing out of sequence or on an accelerated schedule to accomplish that.

The parties also tend to be concerned about final payment, punch list work and lien deadlines (or claims thereof), which often create conflict on what may have otherwise been a mutually beneficial project to that point. When nearing project completion on any construction job, big or small, think through the following traps and tips to ensure that proper due diligence is being conducted and to hopefully protect against risks going forward.

Trap: An accelerated work schedule can lead to an inadvertent cover-up of incomplete or defective work.

Tip: If the speed of the work must be increased, increase supervision by assigning a construction manager or third-party inspector to monitor the work. Also, consider photographing and/or videotaping the last stage of the job to compile a record of work performed (if you’re the contractor or a subcontractor) or the overall project (if you’re the owner).

Trap: A final inspection is incomplete or avoided altogether.

Tip: Perform a final inspection and partner with the owner, architect, engineers, prime contractor and major subcontractors to check completed work against the final versions of the design documents. Document in writing via trackable communications (letter/email) any items for correction. Cross them off when complete.

Trap: A specialized inspection is not conducted, leaving a building’s critical components and systems unchecked.

Tip: Consider commissioning focused inspections by third-party specialists, such as for the building envelope, any LEED performance specifications, and compliance with the Americans with Disabilities Act.

Trap: Early release of retention contrary to the provisions of the project contract documents.

Tip: The purpose of retention is to ensure project completion and should be used for such. However, if certain percentages of retention are to be released during construction, tie that release to critical milestones that, when met, ensure the success of the job and acknowledgment of no additional claims for work performed through that milestone date.

Trap: Lien waivers and releases are not collected routinely.

Tip: Establish and follow a procedure for collection and submission of lien and claim waivers each pay period to ensure the contemporaneous acknowledgment of no unknown pending changes or additions. This practice benefits everyone involved up and down the line.

Trap: Waiver of unknown (latent) claims upon final payment.

Tip: The project contract documents should spell out the procedure for closing out the project, including all documentation required of the various parties. Whether you’re a contractor, design professional or the owner, check any release document you’re asked to sign against your contract requirements, and if necessary, limit the scope of any release to just the scope and items of work that may be in dispute.

Trap: Disputes over whether work is truly defective.

Tip: With time at a premium, most defective work disputes are pressured by the proverbial ticking of the clock. Consider using a warranty bond or tolling agreement to preserve the status quo and afford the parties the time necessary to fully investigate and resolve any existing defective work claims at the time of project completion.

Trap: Warranty periods, disclaimers, and the statutes of limitation and repose.

Tip: Owners should carefully read all warranty disclaimers and calendar out the expiration of any warranty periods and applicable statutory periods for claims. Consider securing extended product warranties where applicable. Schedule and conduct one-, two-, six-, and 10-year reviews of the building and its critical systems for any latent deficiencies.

Trap: Insurance tracking protocols are lacking or nonexistent.

Tip: Whether you’re the prime contractor, the design professional or the owner, by the time of completion make sure you have complete copies of all insurance certificates and the policies that might afford you coverage in the case of a potential claim. Use a tracking spreadsheet to summarize the policy providers, policy numbers and limits of coverage. Then create a yearly reminder to update that tracking system with the renewed completed operations and tail coverage for the project.

Trap: Amid the rush to finish a project, an ill-considered email – perhaps a complaint or an uncomposed comment – is fired off by a representative of one of the parties involved.

Tip: Remind all employees that email messages live on in perpetuity, and if there’s a dispute, the emails can be subject to discovery by opposing parties. Never put in an email something you wouldn’t say in person to the recipient or the person about whom the email is written. When in doubt, print a draft and get a second set of eyes on it before clicking “send.”

Complex construction projects carry complex problems as they approach completion, and whether you face those traps identified above or other issues, take time to think through these tips and others you might follow to avoid pitfalls. The law of unintended consequences mandates that you’ll likely face problems, but with a little foresight you’ll be prepared for them when they arise.

C. Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

The post OP-ED: Finishing strong vs. finishing wrong appeared first on Daily Journal of Commerce.

The Oregon Revised Statutes (ORS) contain a number of significant time limits, known as statutes of limitations and statutes of repose, for filing construction claims on private projects. Failure to file a lawsuit within the applicable statute’s time limit can result in the complete waiver of a claim.

A statute of limitations restricts the maximum time after damage or an event that legal proceedings may be initiated, typically running from either the occurrence of the event or the discovery of the damage. For example, ORS 12.080 provides that an action upon a written contract must be commenced within six years, and has been interpreted to apply to construction contracts running from the time of breach. Other statutes governing damages to persons and property not arising on contract apply two-year and six-year limits to claims, and typically run from discovery of the damage.

In contrast, a statute of repose limits the time within which a lawsuit may be filed regardless of when the injury occurred or was discovered, running instead typically from when a particular event occurred, such as the construction of a building. ORS 12.135 identifies these periods of ultimate repose on construction claims, the most oft-cited of which provides for a 10-year statute of repose for claims after substantial completion or abandonment of construction, alteration, or repair of a residence or small commercial structure or certain large commercial structures.

As one might imagine, interpreting these time limitation rules is far from easy. Knowing which rules to apply and when to apply them is not always clear and can be a difficult task even for the courts. Last month’s decision in Riverview Condominium Association v. Cypress Ventures Inc. is only the latest example of the seemingly constant evolution of Oregon law regarding construction claims.

In Riverview, the Court of Appeals considered a case involving water intrusion at the Riverview condominium complex in Multnomah County. Construction of the condominiums completed with certificate of occupancy in May 2000, although a notice of completion was not filed until December 2000. In subsequent years, the individual unit owners experienced varying but increasing stages of water intrusion from allegedly leaking windows.

In November 2008 an inspection service report for the owners concluded that the siding assembly was not performing, that water was entering wall cavities with no place to escape, and that parts of the substrate were rotting. The report recommended extensive siding repairs and in July 2010 the condo association filed suit against various involved parties.

Upon appeal from summary judgment rulings, the Court of Appeals chiefly wrestled with the question of which statute of limitations applied to the association’s construction defect claims – i.e., claims based on defendants’ negligence during construction. The association argued that the claims were subject to a six-year statute of limitations set forth in ORS 12.080(3) “for interference with or injury to any interest of another in real property,” running from discovery of the injury (the “discovery rule”). The builder countered that the claims were subject to the two-year statute of limitations in ORS 12.110(1) that provides “any injury to the person or rights of another, not arising on contract (or otherwise enumerated) shall be commenced within two years,” and alternatively if the longer statute applied, that there was no discovery rule.

The Court of Appeals engaged in considerable discussion of precedential case decisions, including a much-debated footnote in a 2011 Supreme Court case, before concluding that construction defect claims alleging damage to real property are governed by ORS 12.080(3)’s six-year statute of limitations. The court further debated when such claims “accrued” for purposes of starting the time period to run, and whether a discovery rule applied.

Citing a 2014 Supreme Court decision in Rice v. Rabb, the Court of Appeals confirmed that the association’s construction defect claims that were characterized as tort actions under ORS 12.080 were in fact subject to a discovery rule. Given conflicting testimony whether the association knew or should have known of the harm, causation and tortious nature of the conduct within six years prior to filing suit in July 2010, the court reversed the lower court’s summary judgment ruling on that issue and remanded the case for further proceedings.

In light of this evolving law governing claims periods in Oregon, the best advice is also the oldest – if you want something done right, do it yourself. Notwithstanding the slew of aforementioned legal rules, parties to a construction contract may designate a limitation period for claims.

In 2007, the court in Reedsport School District No. 105 v. Gulf Insurance Co. held that a statutory limitations period in the Oregon Revised Statutes “is not exclusive, but is, instead, effectively a ‘default’ provision – that is, the statutory limitation period governs ‘an action upon a contract’ unless the contracting parties have specified a different limitation period.”

Accordingly, for any private construction project, consider adding your own time limits on construction claims and causes of action. Include a provision in contracts that defines the applicable period of limitations for claims, be it six years, 10 years or some other period. Be sure to specify the triggering event under which the period of limitations will start to run.

While this can be a point of negotiation for what may be “fair” in each situation, the party making the claim may want to ensure the time does not begin to run until it is fully aware of some or all of the following: 1, the identity of the party(ies) responsible; 2, the magnitude of the damage or injury; and 3, the cause(s) of the damage or injury.

Setting your own time limits on claims in a construction contract can help manage risk and promote collaboration rather than adversity among contracting parties. Conversely, leaving claims up to the “default” statutory rules of limitation and repose all too often results in a procedural waiver of rights and other unintended consequences. Protect your rights, and practice specifying time limits on claims at the time of contracting for construction.

C. Andrew Gibson is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9878 or andrew.gibson@stoel.com.

The post OP-ED: Put in writing when the clock starts ticking appeared first on Daily Journal of Commerce.