Construction projects are almost always a race against time. Owners want shovels in the ground as quickly as possible, and starting sooner generally means finishing sooner. Yet modern construction contracts are complex documents — often running dozens or even hundreds or thousands of pages — and can take weeks or months to draft and negotiate.

This creates a recurring tension: How can parties advance a project while the contract is still being negotiated? And how can they do so without inadvertently creating obligations — or liabilities — they never intended?

Below are the common approaches, associated pitfalls, and practical strategies for managing the desire to move forward before the contracts are complete.

Letters of intent and memoranda of understanding

Letters of intent, also known as memoranda of understanding, are used when parties want to begin negotiating while making it clear that there will be no deal until the parties sign a definitive agreement. These agreements can be binding or nonbinding. Binding letters of intent usually require the parties to perform certain limited obligations necessary to advance negotiations and may also assign payment for this limited work. Nonbinding letters of intent typically disclaim all obligations or liability unless (and until) a definitive agreement is signed.

The risk with both types of agreements is that the parties, through their conversations, correspondence or conduct, can override the initial terms in the letter of intent. For example, extensive negotiations followed by a project owner’s press release and the contractor’s attendance at a ground-breaking ceremony can be used as evidence that an agreement was formed.

While these risks can be addressed in the legal terms of the letter of intent, the parties should be vigilant about honoring those terms and conduct themselves accordingly.

Moving forward without a written agreement

All too often, project teams begin scheduling, planning, mobilizing, and even performing work before a written agreement is executed. The intention is that the contracts will follow.

This approach is fraught with risk because the terms of the deal are often unclear. A written agreement is a must, because without it disputes can arise about scope, deadlines, compensation, and risk allocation. In the absence of a written agreement addressing these key terms, it is difficult to predict how such disputes will be resolved.

Authorizations to proceed with construction work

Authorizations to proceed typically are letter agreements authorizing the contractor to start construction while a written contract is being negotiated. These agreements generally take two forms: The first is nearly devoid of any legal terms and simply authorizes the contractor to proceed with the construction work. For the party authorizing the work, this type of agreement is not much better than the absence of a written agreement.

The second — and better — approach is to enter into a letter agreement that includes a limited scope of work, a schedule for performing that work, a maximum cost to be incurred, and other legal terms such as indemnity, termination, insurance, dispute resolution, and other important terms. The letter agreement also should include a provision stating that the parties are negotiating toward a definitive agreement and that nothing in the letter agreement creates a binding obligation beyond what is expressly stated.

Because letter agreements include key legal provisions, they often require additional time to negotiate. Those negotiations also distract the parties from negotiating the construction contract. In addition, starting work typically results in a significant loss of negotiating leverage for the nonperforming party, as it can be costly to change contractors after the work has started. Finally, letter agreements give the parties more time to negotiate the construction contract, often prolonging those negotiations.

An even better approach is to avoid letter agreements altogether and use urgency as the impetus to conclude negotiations and sign a final agreement.

Conclusion

Starting work before a final agreement may be desirable, but it is important to evaluate whether the benefits outweigh the risks. With careful drafting, disciplined communications, and consistent behavior, parties can maintain flexibility, preserve their negotiating leverage, and avoid unintentionally creating binding obligations before they are ready to be bound.

Sean Gay is a Stoel Rives LLP partner and a member of the construction and design practice group in the firm’s Portland office. Contact him at 503-294-9239 or sean.gay@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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Construction is an industry with a long history that stretches back thousands of years. Over time, the industry developed its own specialized language. Indeed, the “Oxford Dictionary of Construction, Surveying and Civil Engineering” has more than 8,000 entries. Not to be outdone, the legal industry similarly developed its own specialized language. The leading law dictionary, “Black’s Law Dictionary” (12th edition), contains definitions for over 65,000 legal terms. These two specialized languages meet in construction contracts, which are rife with legal and construction jargon.

Terms like change order, submittal, superintendent, and substantial completion are familiar to construction industry professionals. However, legal terms may not be as familiar. To address the perceived excessive use of legal jargon, there is a movement urging lawyers to draft documents in “plain English.” Documents written in plain English generally have shorter sentences, include commonly understood words, and avoid the use of arcane Latin and French legal terms. The goal of this movement is to create clear, concise legal documents that the average nonlawyer can understand.

Although the plain English movement has gained momentum, lawyers are generally risk averse and reluctant to deviate from past precedent in their legal writing. In some cases, lawyers intentionally introduce vagueness and ambiguity in contracts, with the belief that doing so is advantageous to their client. It is likely that, for the foreseeable future, legal documents will include some measure of legal jargon. This article focuses on several commonly misunderstood legal terms found in modern construction contracts.

Pro tanto

The first of two Latin phrases in this list, pro tanto means “to that extent.” It is often used in construction lien waivers when the intent is for the lien claimant to waive its lien to the extent of payment. Enforceability of a written waiver often hinges on whether the party understands which rights are being waived. As a result, using the term pro tanto (which is likely not familiar to the average person) may create enforceability issues. The better practice is to ditch the Latin phrase in favor of “to the extent.”

Force majeure

“Superior force” is the literal translation from French. In contracts, it generally refers to an event or impact that is outside the control of the contracting parties and could not be anticipated. However, if used, this term usually is expressly defined in the contract, meaning the parties have agreed to their own definition for purposes of their contract. Parties often draft force majeure definitions that narrow or broaden its general meaning to favor their role in the project. It is therefore important to read and understand the particular definition for this term as used in each contract.

Mutatis mutandis

Although less commonly used, this Latin phrase means “making all necessary changes.” It is typically used when parties enter into multiple contracts. They use mutatis mutandis to carry forward certain terms in a previous contract to the current contract, while making necessary changes to reflect the current business deal. Before the use of computers, this shorthand approach was convenient because it avoided having to restate the entire contract. However, it begs the question: What are the necessary changes? The better practice is to avoid using this phrase, save the previous contract as a new version, and update it to include the necessary changes in the current contract.

Indemnify

Indemnify means “to reimburse another for a loss.” In contracts, it is used at the beginning of a lengthy sentence describing the types of losses and circumstances under which one party will pay the other for a loss. If you struggle with the word indemnify, one way to simplify it is to think “pay” when you see it in a sentence. Although substituting “pay” is an oversimplification and does not capture the term’s nuanced legal meaning, it can be helpful to a nonlawyer in understanding the meaning of an indemnification provision.

Mediation and arbitration

Because they often appear in the same section of a construction contract, these terms are commonly mistaken for each other. Mediation is a dispute resolution process in which a neutral third party works with the disputing parties to help them reach a negotiated resolution. Arbitration is a dispute resolution process in which one or more neutral third parties issue a binding decision about the issues in dispute.

Warranty

A warranty is an express or implied promise in a contract that relates to a fact concerning the subject matter of a contract. Warranties are typically express or implied promises that certain facts are or will be true. A typical construction contract warranty states that the contractor warrants that the work will be performed in a “good and workmanlike manner.” In the construction industry, the term warranty is frequently conflated with the contractor’s one-year corrective obligation, which is a separate performance obligation unrelated to the warranty.

Time is of the essence

At first glance, this phrase may appear harmless. It is used in everyday speech and possesses a common meaning that is different from its legal meaning. In common speech, it means that something must be done immediately. However, its technical legal meaning is much more significant. In a contract, “time is of the essence” means that the timely performance of an obligation is so important that a failure to meet the stated deadline constitutes a material breach, allowing the other party to terminate or rescind the contract.

Although drafting legal documents in plain English is a worthy goal, the legal industry is historically slow to change. In the meantime, it is important for construction professionals to read and understand what the fine — and arcane — print means in the contracts governing their legal relationships. In doing so, you will be in a better position to understand and manage projects’ risk.

Sean Gay is a Stoel Rives LLP partner and a member of the construction and design practice group in the firm’s Portland office. Contact him at 503-294-9239 or sean.gay@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 A primer for decoding legal jargon in construction contracts | Opinion appeared first on Daily Journal of Commerce.

Construction projects involve significant risks to project owners, designers, and contractors. Many such risks are allocated in the parties’ contracts, which in turn require those parties to obtain insurance — further allocating risks to insurance companies. By providing coverage for losses and collecting premiums, insurers help those parties protect against financial loss by covering the “losses of the few” through the “contributions of the many.”

The typical construction project implicates several types of insurance policies. The most common policies are worker’s compensation, employer’s liability, commercial general liability, business auto liability, excess/umbrella liability, professional liability, and builder’s risk insurance. These policies form the core of any construction project insurance program. However, there are several other types of insurance policies that should be considered. Here are several lesser-known policies along with brief descriptions of the coverages that they provide:

Owner’s protective professional indemnity insurance

OPPI policies cover a project owner’s losses caused by the designer’s professional negligence when the designer’s professional liability coverage is insufficient to cover the owner’s losses. Thus, OPPI policies can help fill gaps in coverage when the owner’s claim exceeds the design professional’s coverage limits.

Cyber and privacy insurance

These policies cover, among other risks, costs incurred responding to a data breach, loss of data resulting from extortion, and theft of money or data resulting from unlawful access to company computer systems. Because commercial general liability policies do not adequately cover these types of risks, cyber and privacy policies have steadily increased in popularity.

Drone insurance

Contractors are increasingly using drones — or unmanned aircraft — to document project progress, perform inspections of difficult-to-reach areas, and take photos and video for marketing purposes. Commercial general liability policies frequently exclude coverage for aircraft (including drones), but coverage often can be added to these policies by way of an endorsement. The coverage under such endorsements is often limited, however, and in some situations, it may be prudent to purchase additional insurance, such as an aviation policy.

Railroad protective insurance

If construction work will be performed near or within a railroad right-of-way, it is likely that the railroad owner will require that all contractors carry a railroad protective policy (RRP). In addition, commercial general liability policies typically include exclusions that relate to work performed on or within a specified distance from a railroad. Unlike many other types of insurance, the contractor purchasing the RRP does not obtain coverage for itself. Instead, the RRP covers the named railroad for third-party bodily injury and property damage and physical damage to the railroad’s property.

Inland marine (contractor’s equipment) insurance

Inland marine (also known as contractor’s equipment) coverage is a specialized type of property insurance for property in transit over land. Contractors that move materials, equipment, and tools from one project to another often purchase inland marine insurance to cover these items while they are being moved from one job to another. Similarly, project owners may need inland marine insurance to cover valuable materials and equipment while they are being stored or transported to the project site.

Subcontractor default insurance

SDI is a type of insurance purchased by a general contractor to cover losses associated with a subcontractor’s failure to perform on a construction project. SDI typically covers the cost of completing the defaulting subcontractor’s work, the cost of correcting defective or nonconforming work, as well as legal and other costs incurred in the investigation and defense of losses. Additionally, SDI may cover indirect costs such as liquidated damages, job acceleration, and extended overhead.

Contractor’s pollution liability

CPL provides environmental damage, bodily injury, and property damage coverage for pollution incidents caused by work performed by contractors at the project site. Examples include exacerbation of pre-existing hazardous conditions at the project site and the release of hazardous substances in building materials that are released during demolition, during construction, or after the project is completed. Like several other policies discussed earlier, CPL addresses a gap in, or inadequate coverage under, the typical commercial general liability policy.

Contractor’s professional liability

This insurance covers legal liability for professional services (such as architecture, engineering, surveying, and construction management) performed by a contractor or its consultants and design-build subcontractors. It generally covers negligent acts and errors and omissions in the performance of professional services.

Depending on a project’s nature, other insurance coverage not highlighted perhaps should be considered.

In sum, a thorough evaluation of project risks and available insurance coverage will go a long way toward ensuring that a project’s participants are adequately insured.

Sean Gay is a Stoel Rives LLP partner and a member of the construction and design practice group in the firm’s Portland office. Contact him at 503-294-9239 or sean.gay@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 Lesser-known insurance policies for addressing project risks | Opinion appeared first on Daily Journal of Commerce.

Introduced as a ballot measure, Oregon’s Employer Liability Law (ELL) was described in a voter’s pamphlet from 1910 as “a law requiring protection for persons engaged in hazardous employments, defining and extending the liability of employers, and providing that contributory negligence shall not be a defense.” Proponents of the ELL argued that it would require “that a safe place in which to work be provided and that ropes, chains, beams, machinery, etc., be properly tested before the workman is asked to risk his life with them.” Three years later, the Legislature enacted Oregon’s worker’s compensation law, which created a compensation fund for injured workers and immunity for contributing employers.

Oregon’s current ELL imposes liability on owners, contractors, subcontractors, and others who are in charge of, or have responsibility for, work that involves risk or danger. Oregon’s current worker’s compensation law gives injured workers the right to file a claim, seek medical care, and access benefits for time off. In many jurisdictions, like in Oregon, recovery from worker’s compensation insurance is the injured worker’s exclusive remedy, and the injured worker’s direct employer is immune from civil claims (including ELL claims). However, in certain situations, the ELL permits the injured construction worker to collect on their worker’s compensation claim and sue the project owner and other contractors involved in the construction project.

Contrary to ELL’s original aim, the current statutory scheme arguably prioritizes risk shifting over worker safety. Because liability for ELL claims arises under three types of situations, project participants other than the direct employer (“indirect employers”) are incentivized to avoid liability through their actions and by shifting risk to others by contract.

Liability may be imposed on those indirect employers in the following situations.

“Common enterprise” liability

An indirect employer may be liable under the ELL when the injured worker’s employer and the indirect employer are working together on a common enterprise. The situation arises when the indirect employer is in charge of or has control over a risk-creating activity or equipment. For example, a general contractor owns a forklift and regularly allows its subcontractors to use it to unload deliveries of materials. If the general contractor fails to properly maintain its forklift and a subcontractor’s employee is seriously injured when the hydraulic system fails, the general contractor may be liable to the injured worker.

“Actual control” liability

An indirect employer also may have liability under the ELL when it actually controls the manner or method in which the risk-producing activity was performed. Closely related to the concept of “means and methods,” an indirect employer may incur ELL liability by giving detailed instructions to the direct employer as to how construction work must be performed. If the direct employer’s worker is injured because of those detailed instructions, the injured worker may sue the indirect employer under the ELL.

For example, a general contractor directs a subcontractor to construct an elevated temporary work platform without fall protection. If the subcontractor follows that direction and the subcontractor’s employee is injured in a fall, the general contractor may be liable to the injured worker because the general contractor exercised actual control over the manner or method in which the risk-producing activity was performed.

“Retained right to control” liability

The third situation in which an indirect employer may have ELL liability is when it has the legal authority to exercise a right to control the risk-producing activity. For example, if a subcontract between a general contractor and subcontractor gives the general contractor’s superintendent the right to inspect construction work in progress and require the subcontractor to take additional safety measures, the general contractor may have retained a right to control sufficient to trigger ELL liability. Oregon courts have held that, unless a subcontract unequivocally states that the subcontractor alone is responsible for the safety of its direct employees, the general contractor’s right to inspect construction work and require additional safety measures may result in ELL liability.

Why incentives matter

A common theme running through all these situations is the indirect employer’s involvement in and control of construction project safety. To avoid potential ELL claims by subcontractor employees, indirect employers (such as project owners and general contractors) will likely:

• avoid having their employees work with their subcontractor’s employees on aspects of the work;
• avoid allowing workers from different employers share safety equipment (such as fall protection devices), construction equipment, scaffolding, and temporary works;
• develop contracts that make subcontractors solely responsible for their workers’ safety; and
• limit safety inspections to issues that relate to their own employees and avoid performing safety inspections related to aspects of the work being performed by subcontractors.

In short, Oregon’s ELL arguably discourages cooperation and collaboration among separate contractors as it relates to project safety. The ELL also arguably incentivizes contractors to require subcontractors to be solely responsible for their direct employees’ safety and avoid inspecting those subcontractors’ work or requiring them to address safety issues.

Recall that Oregon’s worker’s compensation system provides the exclusive remedy for an injured employee and gives its direct employer immunity from civil liability. This immunity protects direct employers from ELL claims. If a direct employer is a subcontractor, the general contractor cannot sue the subcontractor, even if the subcontractor’s negligence was a substantial factor in causing the employee’s injury. Indeed, in Oregon, the ELL prohibits a jury from considering the direct employer’s fault or negligence. This means that the party in the best position to prevent the injury – the direct employer – is not held directly responsible for the injuries that are suffered by its employee.

The result is that Oregon law shifts considerable risk to indirect employers on Oregon construction projects. Oregon is unique in this regard, as other states either provide immunity for all employers or allow for an equitable allocation of liability based on fault. Whenever parties are required to shoulder additional risk, they generally seek to cover that risk by increasing their margins and passing additional costs along to the consumer.

Oregon should reform (or repeal) the ELL. In its place, the Legislature should enact legislation that encourages cooperation among project participants and fairly allocates liability when injuries occur. In so doing, the Legislature can incentivize project safety while lowering the cost of construction in Oregon.

Sean C. Gay is a Stoel Rives LLP partner and a member of the construction and design group in the firm’s Portland office. Contact him at 503-294-9239 or sean.gay@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 Oregon’s Employer Liability Law: It is time for a change | OP-ED appeared first on Daily Journal of Commerce.

As economic stimulus and infrastructure spending increase, an unfortunate side effect is an environment that encourages unethical and illegal bidding practices.

The construction industry relies on competitive bidding to ensure that participants receive commensurate value for their efforts. Similarly, public and private owners alike depend on the competitive bidding process to obtain lower prices, promote innovation, encourage efficient utilization of goods and services, and provide a level playing field for participants in the construction industry.

When confidence in the integrity of the bidding process is eroded, these goals are undermined. Unethical and illegal bidding practices also diminish confidence in the procurement process and result in the inefficient allocation of resources. Discussed below are several categories of unethical and illegal bidding practices.

One common complaint about the bidding process involves the practice of bid shopping. Bid shopping is the disclosure of the low bidder’s price to other bidders in an attempt to obtain an even lower bid. Bid shopping frequently occurs when a prime contractor uses the low bid as leverage in post-bid negotiations with other subcontractor bidders.

Although bid shopping is legal, for several reasons, the construction industry generally condemns the practice. For example, bid shopping can limit competition, as subcontractors may choose not to submit bids to general contractors that have a reputation for bid shopping. Bid shopping also can result in increased construction costs when subcontractors artificially inflate their bids in anticipation of having them shopped. Other potential negative impacts include increasing claims, encouraging corner-cutting, project delays, and harming the reputation of the industry generally.

The Associated General Contractors of America has stated that it is “resolutely opposed to the practice of bid shopping” and refers to it as an “abhorrent” business practice. Similarly, the American Society of Professional Estimators has described bid shopping as “unethical,” “unfair” and in violation of its Code of Ethics.

A related practice is bid peddling, which occurs when a bidder makes a post-bid offer to lower its price in an attempt to displace the low bidder and receive an award of the contract. Like bid shopping, bid peddling is legal but considered unethical. Yet another related (and legal) practice is bid chiseling. Bid chiseling occurs when there are post-bid negotiations with the low bidder aimed at decreasing the amount of the bid without changing the scope of work.

Although the construction industry generally condemns bid shopping, peddling and chiseling, it has struggled to develop effective solutions to eliminate them. For example, bid listing requirements on public projects (such as the first-tier subcontractor disclosure requirement under Oregon law) have limited bid shopping to some extent. The AGC has been opposed to bid listing statutes and has instead advocated for contractors to voluntarily hold themselves to ethical standards.

In contrast to the above unethical practices, the next category of conduct—bid rigging—is illegal. Bid rigging is the practice of conspiring with another bidder to bid (or not) with information that would typically not be known to a bidder. The term bid rigging covers a wide variety of illegal bidding conduct. Examples of bid rigging include agreements between two or more bidders to: submit identical bids, share profits with a contractor that does not submit a bid, submit higher or lower bids in rotation, set up territories or allocate the market to restrict competition, or agree not to submit bids.

The goal of these practices is to determine the winning bidder in advance or otherwise influence the award of the contract. In many jurisdictions these illegal practices carry significant consequences if the behavior is discovered: criminal sanctions, debarment of claimants, and civil damages, including the potential award of compensatory and exemplary damages.

Discussed below are several strategies that firms can use to reduce the prevalence of these unethical and illegal practices:

• Educate and train employees about proper bidding procedures.
• Require that employees act ethically and in compliance with the law.
• Encourage employees to treat all bidders the same and discourage favoritism.
• Establish protocols for bidding and communicate them to the bidders in writing in advance.
• Encourage competition by soliciting multiple bids.
• Evaluate and consider reducing or eliminating potential barriers to increased competition.
• Streamline the bidding process and seek to reduce bid preparation costs.
• Allow bidders adequate time to prepare and submit their bids.
• Stay abreast of market trends and pricing changes.
• Open lines of communication with bidders and encourage them to contact management when they believe they may have been treated unfairly. Conduct post-bid interviews and solicit feedback.
• Keep records of bidding and contract awards and evaluate them for irregularities and potentially concerning trends.
• Investigate and take action to correct or otherwise address inappropriate behavior.

Unethical and illegal bidding practices are unlikely to disappear. However, the above strategies can go a long way toward limiting these practices and mitigating their effects, while at the same time raising the stature of the construction industry.

Sean Gay is a Stoel Rives LLP partner and member of its construction and design practice group. Contact him at 503-294-9239 or sean.gay@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: How to know when bidding practices cross the line appeared first on Daily Journal of Commerce.

Nearly all construction industry standard form contracts require mediation as part of their dispute resolution provisions. Often confused with arbitration, mediation is a negotiation facilitated by a neutral third party. Unlike arbitration – a proceeding like a trial – mediation does not result in a final binding decision. And the mediator typically does not have any decision-making authority in the context of the mediation.

Instead, like any negotiation, the outcome of mediation is entirely in the hands of the parties. The mediator helps the parties by managing the exchange of information and other aspects of the negotiation process, like finding common ground and dispelling unrealistic expectations. Although much of the work preparing for mediation will be done by the parties’ lawyers, clients should keep in mind the following considerations to maximize the possibility of a successful outcome.

• Consider the potential costs of not settling. Most importantly, consider the potential cost of a loss at trial or arbitration and the attorneys’ fees that will be incurred. Also, consider the cost associated with the significant time and effort that will be expended preparing for and being present at trial. There is an opportunity cost associated with not settling – time spent preparing for trial is time that could be spent running one’s business, spending time with family and friends, etc.

• Understand that the mediation may continue. While the parties and mediator will try to reach a resolution during in-person (or virtual) mediation, it is not uncommon for mediation to continue for days or weeks (or longer) by phone and email. In some cases, additional mediation sessions may take place months after the initial mediation.

• Don’t expect to “win.” It is rare for a party to “win” at mediation. Rather than viewing a final offer/demand as a win or loss, consider whether you will be content to have settled the following week when the dispute is no longer on your agenda.

• Mediation is voluntary. Understand that mediation is a voluntary process and that the mediator has no authority. The mediator can help facilitate a settlement, but cannot force someone to settle who doesn’t want to.

• Arrive prepared. Do homework ahead of time. Think about what your bottom line will be, while staying open-minded that it might change during mediation. Be prepared to exchange several rounds of offers and counteroffers.

• Be patient. Expect to negotiate all day and (perhaps) into the night. Avoid the temptation to become frustrated with the slow pace of negotiations and blurt out your bottom line prematurely.

• Keep an open mind. Be flexible and open to settlement approaches that are “outside the box.” Someone with a preconceived notion of settlement may find that the mediator suggests alternatives that provide a better deal.

• Be prepared to negotiate with the mediator. Understand that although you want to be friendly with the mediator, he or she is focused on achieving settlement. As a neutral third party, the mediator is not an advocate for one party or the other. Recognize that a “win” for the mediator is settling the case – the terms of that settlement are largely irrelevant to the mediator. The mediator’s interest (a settlement) is not fully aligned with your interest (a settlement favorable to you).

• Don’t think that the mediator is advocating for the other party. It is the mediator’s job to challenge the parties’ legal and factual positions, which may come off as taking the other side’s position. Rest assured that the mediator is taking a similar approach when talking to the opposing party.

• Feel free to talk directly to the mediator. Mediation is informal, and clients can (and should) engage with the mediator. Try to demonstrate to the mediator your passion and conviction for your case.

• Don’t show fear of depositions or trial (or anything else). Fear is a strong emotion that can and will be used by the mediator. Even if you have concerns about the legal process, keep emotions in check while talking with the mediator.

• Don’t indicate a strong desire to settle. Seek to appear rational and reasonable but otherwise able to “take it or leave it” when it comes to settlement.

• Don’t feel the need to agree with the mediator. The mediator will be using information provided by your opponent without knowing how truthful it may be. It is frequently inaccurate. While admitting truthful facts can build trust with the mediator and facilitate settlement, accepting inaccurate statements just to appease the mediator will hurt your case and likely your chances at a successful settlement. Hold your ground when justified and accept negative information when there is no escaping it.

Although this list is by no means comprehensive, it does include many items that we as lawyers want our clients to keep in mind leading up to and during a mediation. The key point is that you, as the client, have an important role to play in the mediation process. The better prepared you are, the more likely it is that you will have a successful mediation.

Sean Gay is a Stoel Rives LLP partner and member of its construction and design practice group. Contact him at 503-294-9239 or sean.gay@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: Strategic tips that parties should consider when mediating disputes appeared first on Daily Journal of Commerce.

If you are involved in the construction industry, risk management is part of your job – like it or not. From home office executives to workers in the field, each person is expected to manage schedule, cost and safety risks. While these risks are common, the recent prolonged period of economic growth has created new challenges. One of those challenges is managing the risk of taking on larger projects or more than you can handle. A related challenge is recognizing and avoiding work with other firms that have bitten off more than they can chew.

According to Christopher Daum of FMI, a construction industry management consulting firm, “Contractors don’t starve to death; they die from gluttony. They get too much work, too fast, with inadequate resources, and then they get into financial trouble and run out of cash.” Mr. Daum’s quote describes the concept of overextension, which is when a firm takes on more work than it can handle. While there is often no foolproof way to detect when a firm is overextended (that is, until it’s too late), there are several warning signs:

• Firms that have experienced rapid, uncontrolled growth. Rapid growth that results from a successful strategic plan is not a red flag. However, if a firm has experienced rapid, uncontrolled growth, there will be several additional signs, such as overworked employees, poorly performing projects, cash-flow problems, etc. The key is to understand whether the firm’s growth resulted from a solid business plan or via a haphazard response to a booming economy.

• Firms that have expanded rapidly into new markets. A similar warning sign is rapid expansion into new markets. Savvy firms avoid becoming overextended by expanding into new markets in a controlled manner. They realize it takes time to develop strategic relationships in, and gain a deeper understanding of, new markets.

• New firms with inexperienced executive teams. The construction industry historically has had a significant number of firms entering and exiting the market coinciding with boom-and-bust cycles. Many of these new firms are formed by people with some construction knowledge but little or no management experience. Overextension results when a firm’s inexperienced executive team cannot accurately judge how much work their firm can handle.

• Firms that have recently experienced significant executive turnover. Because executives usually are among the first to know when a firm is becoming overextended and on the brink of failure, their sudden departure may be a warning sign.

• Firms with inexperienced project management teams. Economic growth and changing demographics have combined to create a shortage of qualified and experienced managers. Although the shortage of skilled labor has received significant attention in the news media, firms also struggle to hire and retain experienced project management personnel. Increasingly, to address this shortage, some firms are hiring and promoting managers who do not have enough experience to handle more complex projects. Instead of being set up for success, these inexperienced managers are asked to step into more advanced positions without the requisite experience or support.

• Firms without robust management and accounting systems. A core component of any construction firm’s success is its ability to manage the massive stream of cost and other data created on a typical construction project. Sophisticated firms have robust management and accounting systems that allow them to manage this data and leverage it to quickly recognize and solve potential problems. Firms that lack these management and accounting systems are at a distinct disadvantage. Because they lack these critical tools, they struggle to timely identify and address poor performance and cost overruns that often result when a firm is overextended.

• Firms with a poor safety record. A poor safety record is often an indication that a firm has other problems. Overextended firms typically do not have the personnel or resources to appropriately manage safety and this, unfortunately, is reflected in their safety record.

These are not hard-and-fast rules and, for each red flag, there may be legitimate explanations unrelated to a firm being overextended. However, as the industry continues to expand along with the economy, construction firms should be mindful of the possibility that they – and the firms that they do business with – may become overextended.

Sean Gay is an attorney in the Stoel Rives LLP construction and design practice group. Contact him at 503-294-9239 or sean.gay@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not 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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Subcontractor default insurance (SDI) has been gaining in popularity among general contractors. SDI is insurance that covers certain losses related to a subcontractor’s material breach of a subcontract.

Contractors favor SDI for several reasons, but primarily because it addresses subcontractor performance risk and potential loss of profits that result when they have to quickly step in to remedy a subcontractor’s breach. Additionally – and this is rarely mentioned – contractors who properly manage their subcontractors and avoid making claims under an SDI policy are eligible to receive a retro premium from the SDI insurer. Because contractors include the SDI premium as part of their estimated project costs, any retro payment they receive goes directly to their bottom line.

The risk of subcontractor default has historically been addressed through subcontractor payment and performance bonds. Shortly after SDI policies were introduced, many contractors were quick to change horses and begin using SDI.

Sureties assert that bonds are better than SDI because, among other things, they: 1, have a more rigorous underwriting process; 2, do not require deductibles; 3, provide a direct remedy for lower-tier parties if the bonded subcontractor is unable to pay them; and 4, incentivize the owners of a subcontractor to favor bonded projects over unbonded projects because their personal assets (or other collateral) are at risk under their indemnity agreements with the surety.

The most common complaint about bonds has been that sureties are slow to pay claims. Because a surety’s liability is joint and several with the subcontractor under the bond and the subcontractor is obligated to defend the surety in any lawsuit, sureties typically tender disputed claims to the allegedly defaulting subcontractor. Except when it is clear the subcontractor cannot pay, sureties typically pay claims only after the dispute is resolved and the subcontractor cannot satisfy a final judgment. In other words, the dispute resolution process must play out before a claim is paid, and in many cases that can take several months or years.

Proponents of subcontractor bonds historically have not advertised quick resolution of claims as a selling point – until recently. The expedited dispute resolution (EDR) bond has the coverage of a traditional bond with an abbreviated investigation and dispute resolution process. While a speedy resolution may be desired in some cases, this approach raises several concerns:

• EDR bonds use arbitration as the initial form of dispute resolution. The laws concerning arbitration generally require that the parties to the arbitration agree, in writing, to arbitrate their disputes. If the dispute involves other parties who have not agreed to arbitrate, it may be difficult to fully resolve all issues in the EDR bond arbitration.

Here is an example. In an EDR bond arbitration, the general contractor asserts a delay claim against subcontractor A and its surety. In its defense, subcontractor A alleges that subcontractor B caused part of the delay. However, if subcontractor B is not bound to arbitrate disputes with the general contractor, subcontractor A, and subcontractor A’s surety, the general contractor may not be able to fully resolve the delay claim in the EDR bond arbitration.

• One related issue is that the general contractor may need to file a separate lawsuit or arbitration against subcontractor B. This may result in increased legal fees, because it is more costly for the general contractor to separately pursue subcontractor A in one dispute resolution forum (expedited arbitration) and subcontractor B in another forum.
• Another related issue is that, if there are separate forums, there is a risk of inconsistent results. In the example above, it is possible that the arbitrator in the EDR bond arbitration against subcontractor A could decide that subcontractor B is responsible for delay. At the same time, it is also possible that in the general contractor’s separate action against subcontractor B, the decision maker could determine that subcontractor A was responsible for the delay. This worst-case scenario would not happen if the general contractor, subcontractor A, subcontractor A’s surety, and subcontractor B resolved their disputes in the same forum at the same time.
• To compete with SDI, EDR bonds must provide for a speedy resolution, usually in the range of 30 to 60 days. However, speed often comes at a cost. One of the most time-consuming aspects of litigation is the discovery phase, during which the parties discover facts. In complex construction disputes, the discovery phase can take months or longer. Condensing months’ worth of discovery into days means that it is highly likely that the arbitrator will make a decision based on limited (and perhaps inaccurate) information. More likely than not, this will favor the subcontractor – and its surety – because the general contractor has the burden of proving its claim.
• Some EDR bonds entitle the parties to a de novo appeal of an arbitration decision in court. A de novo appeal allows the court to review the evidence and law without deference to the arbitrator’s ruling. Depending on the jurisdiction, an appeal could result in significant delay, thus defeating the purpose of expediting the dispute resolution process.

As the above points illustrate, there are potential pitfalls with EDR bonds. As with any new product or service, parties who use EDR bonds should carefully consider both their advantages and disadvantages.

Sean Gay is an attorney in the Stoel Rives LLP construction and design practice group. Contact him at 503-294-9239 or sean.gay@stoel.com.

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The start of construction is the culmination of significant effort on the part of the owner, designers, contractors and others. It is an exciting – and often hectic – time. However, in the rush to get started, important management tasks may be overlooked or subordinated by “higher priority” tasks. The importance of completing many pre-construction tasks may not become apparent unless and until there is a legal dispute. There are several items that, when not completed timely and/or properly, tend to result in issues that are amplified (often at significant expense) in the context of a legal dispute.

Following is a brief checklist that will help owners, contractors and subcontractors start their next project on the right foot and provide a decided advantage should a dispute arise.

Paper originals of the entire contract

In the days and weeks leading up to contract execution, it is not uncommon that multiple electronic drafts of a contract are exchanged between the parties. In some cases, rather than prepare and sign original paper versions of the entire contract, the parties will merely exchange PDF copies of the signature page via email. When issues arise months (or years) later, it can be difficult to determine which of the many versions of the contract the parties intended as their final agreement. In the context of a dispute, significant attorneys’ fees may be incurred as the parties’ lawyers argue about which electronic version of the contract was the “final” version. These costs may be avoided if the parties prepare, exchange and retain paper originals of the final, fully executed contract.

Bonds on the correct forms

If the owner-contractor contract requires payment and performance bonds, the bonds should be obtained before work begins. In addition, if the contract specifies the form of bond, the parties should verify that the surety has provided the correct form. Like with the contract, the parties should retain signed original paper versions of payment and performance bonds.

Agreements with adjacent property owners

Construction projects often impact neighboring landowners in ways that affect their property rights. For example, a crane may swing over a neighboring parcel’s airspace. In these circumstances, written permission should be obtained in advance. So-called “swingway easements” provide for terms and conditions that govern the use of a construction crane over adjacent property. Because these agreements may take time to negotiate, neighboring landowners should be approached well in advance of construction and any agreements reached should be reduced to writing.

Proof of insurance and additional insured status

Nearly all construction contracts require contractors to maintain insurance and name other involved parties as additional insureds. Before work begins, proof of insurance and additional insured status should be obtained. This information should be compared to contractual insurance requirements to ensure that all parties have appropriate coverages and policy limits.

Builder’s risk insurance

All major standard form contracts (AIA, ConsensusDocs, DBIA and EJCDC) require the owner to purchase builder’s risk insurance, which provides coverage for property during construction. Setting aside contract requirements, because there are risks that likely would not be covered by other insurance, builder’s risk coverage provides significant protections for all parties with interests in the project. Accordingly, it’s important for an owner or contractor performing work on the project to confirm that an appropriate builder’s risk policy has been obtained for the duration of construction.

Notice to proceed

Many contracts require a written notice to proceed issued by the owner to the contractor. A notice to proceed authorizes the contractor to begin construction activities and establishes the start date for contractual time periods. Because substantial completion and other critical project milestones are often calculated based on the date of issuance of a notice to proceed, if called for in the contract, the owner should send this critical document to the contractor. Likewise, the contractor should insist on receiving the owner’s notice to proceed before starting work.

Baseline construction schedule

Ideally, the baseline construction schedule is completed before the work starts. However, if the contract allows for it to be submitted after contract execution, the schedule should be completed as soon as possible (and in accordance with any contractual deadlines). Because it represents the contractor’s original plan for completing the work, paper copies of the baseline schedule should be kept along with backup electronic versions.

Although this list is by no means comprehensive, it does include many items that we as lawyers frequently encounter when litigating disputes. The key point is that, in many instances, had the parties simply taken time to perform or complete these tasks, the legal issues they created – and significant attorneys’ fees expended on them – could have been avoided.

Sean Gay is an attorney in the Stoel Rives LLP construction and design practice group. Contact him at 503-294-9239 or sean.gay@stoel.com.

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Contractors and designers know that assembling the right team is vital to any construction project’s success. Savvy project owners also know this. For example, a project owner may ask a design-builder to submit information about its team of designers and trade contractors, including their track record of collaborative successes.

Those same team members may contribute significant resources in preparing the proposal and participating in interviews. This effort, of course, gives rise to an expectation that, if awarded the contract, the same team will work together on the project. To realize these expectations, the parties should define their roles and responsibilities in a written teaming agreement – and address those aspects of their relationship that may be left for negotiation later.

A teaming agreement is one in which team members set out their relationship and responsibilities in pursuit of a contract award. More specifically, a teaming agreement defines the rights, remedies and responsibilities of the team members during proposal preparation and lays the groundwork for subsequent agreements after award.

As such, a teaming agreement is, to some extent, an “agreement to agree.” If not drafted properly (or no written agreement exists whatsoever), a teaming agreement may not be enforceable.

The following list is not exhaustive, but teaming agreements should, at a minimum, include:

Recitals

The recitals should, among other things, generally describe the parties’ relationship, the specific contract being pursued, how all parties will contribute to and benefit from the agreement, and include a statement reciting each party’s unique capabilities and the team’s ability to provide the owner with the best combination of performance, cost and delivery.

Responsibilities

This section should describe each party’s obligations both before and after contract award. These provisions should divvy up proposal preparation responsibilities and explicitly state who will submit the proposal and attend any interviews. In addition, the parties should describe how they will proceed after award. For example, team members could agree to negotiate but disclaim any obligation to enter into a later binding agreement. One of the most heavily-litigated issues arises when team members fail to address their respective obligations after award.

Payment

If a team member will receive compensation for its pre-award contributions, the agreement should include the payment amount and terms. In addition, for design-build projects, owners will occasionally offer a stipend to partially defray proposal preparation costs for unsuccessful teams.  The teaming agreement should state how any stipend payments will be divided among team members.

Proposal preparation costs

Depending on the nature of the procurement, there may be significant proposal preparation costs. These costs should be allocated or, if each team member intends to bear its own costs, the teaming agreement should expressly state that no team member will have any right of reimbursement for any reimbursement or compensation from any other team member for costs incurred in pursuit of the contract.

Legal relationship after award

Team members also should state their intended legal relationship following award. Examples of legal relationships include prime-subcontractor, joint-venture, and limited liability company (LLC) arrangements. To the extent the parties have agreed on the legal terms of those arrangements, they should consider attaching draft copies as exhibits to the teaming agreement. They also should list any conditions or terms that remain open for later negotiation. For example, a prime contractor and subcontractor team may attach a draft subcontract to the teaming agreement, leaving price, schedule and other terms open for negotiation after award.

Duration and termination

The duration of the teaming agreement and its eventual termination also should be addressed. If the team intends to pursue multiple contracts or multiple phases under a single contract, the teaming agreement should identify those contracts or phases. Similarly, the agreement should have a fixed end date that is based on the occurrence of certain conditions. Those conditions may include failure to receive award, failure to execute the contract being sought, and failure to execute a subsequent subcontract, joint venture or LLC agreement. It is also important that the parties agree that the teaming agreement terminates upon execution of the subsequent agreement related to performance of the contract. Failure to do so may result in substantial legal uncertainty, as a court could hold that both the teaming agreement and subsequent contract govern the parties’ legal relationships during the project.

Confidential and proprietary information

Proposal preparation often requires team members to share confidential and proprietary information. The teaming agreement should address protection of this information.

Exclusivity

Team members should address whether any of them will be permitted to submit competing proposals, collaborate with other competing teams, submit their own competing proposals, or, if the team is not awarded the contract, perform work or services for the team that was awarded the contract. Similarly, the teaming agreement should state whether the parties are free to pursue other unrelated contracts during the teaming agreement’s term.

Joint development of intellectual property

If, during preparation of the proposal, the parties develop a new invention, process or technology, the teaming agreement should state who owns the related intellectual property and the rights of other team members to use that intellectual property going forward.

Dispute resolution

Although team members may be full of optimism at the beginning of their relationship, there is always potential for disputes. The teaming agreement should anticipate such disputes and provide for applicable law and a forum for resolving them.

Depending on the circumstances of a particular procurement, there may be additional provisions that should be considered.

In sum, a well-drafted teaming agreement will keep team members focused on winning the contract and help avoid the pitfalls that beset those who fail to take this critical step when joining forces to compete for contracts.

Sean Gay is an attorney in the Stoel Rives LLP construction and design practice group. Contact him at 503-294-9239 or sean.gay@stoel.com.

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