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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The construction industry has undergone a sea change over the last 15 years. I wrote a column in this space back then about the rise of technology and the coming age of “paperless” projects, and the potential impacts that change would have on the industry. In that piece, which the 91��Ƶ published in January 2003, I posed a number of potential issues related to the cost of technology, the security of data, and the nature of the third-party provider.

In large measure, those questions have been put to rest. In the intervening 12 years, technology has improved by leaps and bounds. Where we used to communicate by “snail mail” and then fax machines, we now communicate via email and PDF documents. We have the ability to scan hard copies using software programs that have amazing optical character recognition abilities. And we have dramatically decreased the amount of physical space that is required to hold all the records from a construction project. All of these advances lead to cost savings and efficiencies in managing construction projects.

Yet, while we have reduced the amount of physical paper, we have dramatically increased the amount of sheer data that is generated on a given project. This increase is, in large measure, due to the substitution of emails and text messages for phone conversations. So how does this affect contractors when they end up in disputes on projects?

On the one hand, the increased use, in particular, of email to communicate has resulted in many “agreements” being memorialized that would previously have been made on a telephone call. Those phone call conversations were often eventually forgotten, leading to battles over whose memory of an agreement was better. When those discussions and agreements—over scope changes, time extensions, material substitutions, and the like—are communicated via email, though, it can be much easier to track what the actual “deal” was on a given issue.

Still, an email exchange is no substitute for a formal contract communication. Informal communication can lead to misunderstandings, emotional reactions that may not be warranted, and beliefs about agreements that may or may not have ultimately been reached. That is particularly true when the terms and conditions of a contract require particular types of notice to be documented and delivered in particular ways, such as on a formal change order request delivered to, and accepted by, a person with actual authority to bind the other side to a change in the contract. Failure to follow the contract, and thinking that an informal communication is “good enough,” can lead to a major problem in the event of a dispute later in the project.

The reliance on technology can also lead to a false sense of security. Too many times, I have been told by clients that they agreed with the other side about some important issue and that there is an email covering the subject, only to find that the email doesn’t exist or the discussion doesn’t support with the client’s memory.

The best practice is to always convert these “informal” discussions to formal contract documents. If the discussion involves a change in scope, with price and time implications, it should be converted to a formal change order or change request. If the contractor is being delayed as the result of a circumstance beyond its control, a formal notice of delay and possible cost impacts should be prepared and sent.

In other words, the informal electronic communications that we have come to rely so heavily on should be used to supplement formal contract communications. They should not be seen as a substitute for those important documents, which ultimately form part of the contract itself.

Prudent members of the construction industry should have clear and well-communicated policies in place for the use of electronic communications, including when an issue has risen to the level that requires a more formal document than is prescribed in the contract documents. Taking a proactive approach, and recognizing that email is a tool, but not a panacea for all potential issues that may arise on a project, can result in much cleaner contract documentation and a reduction in claims, disputes, and the need to pay your friendly attorney a visit at the end of the project.

Jeremy Vermilyea is a shareholder with the law firm of Schwabe, Williamson & Wyatt, and a co-chairman of its construction and design practice group. He has nearly 20 years of experience advising construction businesses throughout the Northwest. Email him at jvermilyea@schwabe.com, or follow his latest tweets @NWConstLaw.

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A review of the headlines suggests that anyone connected to the real estate and construction industries is cautiously watching the markets for a new “boom.” Those of us who have been around for more than one economic swing, however, are also thinking about the corresponding “bust” that comes with a rapid increase in projects: the real possibility of widespread claims and lawsuits.

A fixed economic reality was borne out during the recent Great Recession, when many longtime contractors either did not survive or barely survived by working lean while marketing their skills and niche effectively. Those contractors that have made it through are balancing the need to ramp up more quickly than anticipated. This is happening when many senior-level employees or well-experienced field personnel may have retired or moved on to more secure paychecks in other fields or other states.

So, where does this leave the parties that are looking to start a new project? With less-than-optimal staffing, fewer skilled personnel, and less experience as to how to realistically bid and perform the work than they had a decade ago. And there is greater competition for the reduced number of subcontractors that did survive the downturn (many are facing the same issues at the lower levels).

Therefore, both owners and contractors must look not just to the current project or short-term effort to get and complete “this job,” but view the long-term protection of their entities and assets in a cost-effective manner to sustain growth and survive the next inevitable lull. So, how does one use “lean and mean” recession-developed skills? By following these five core points with diligence:

1. Pick the right partner. Nothing is more important than selecting a project partner with integrity. All must view the project as a true, united team effort: design and build it well, for a fair cost and profit, and know goals for delivery. The idea is for all parties to keep the reasonable profits they rightly have earned through their diligent work. No shortcuts. No one makes a quick buck. Through well-set-out expectations and balanced contracts, everyone makes the project “pencil out.” Partnering should be with a long-term view. If the parties perform well and fairly, everyone benefits and does well. Trust is critical.

2. The devil is in the design details. As the market moves to different trends in projects and designs to accommodate sustainability, demographic desires and needs, and provides protection for entities in the legal liability structure, it is ever more critical to vet the designs for both constructability and to ensure they have reasonable maintenance and operational expectations. Also, the design should consider from available historic information in light of the type and nature of the project what potential claims may arise in the two- and five-year window as well as within the statute of limitations period.

For instance, has the project/design been built in this locale and this climate (including microclimate), and what lessons were learned during prior construction of this type of project? If it involves residential spaces, what have been the top 10 complaints or concerns during the sales/leasing period and/or the common warranty claims? Have livability issues – such as sounds, smells and interactions with demographics (common walls/floor/ceiling) – been addressed? On all projects, has facilities management or O&M responsibility been properly laid out in writing and disclosed (with training where appropriate)? Is there an ability by both the contractor and the owner or subsequent owners to reasonably maintain and repair the project?

3. Determine the risk assessment for the project. How does the risk affect the nature and type of insurance coverage or other asset and entity protection? Do the parties need to consider risk based on the entity model that owns the project? Is entity windup considered? Where will the risks go, or where will it try to follow if there are claims and lawsuits? Is there a need for bonding, and is that consistent with the contract terms?

4. Consider contract integration and flow-down. Too often projects are put together piecemeal, and a global “front to back” view of the component parts, which includes the field-level daily operation, is not performed. Are the contracts integrated for coordination and flow-down obligations from the owner to the contractor to the subcontractors?

Are there state restrictions to the terms? How does that impact the contract expectations and course of construction management of the work, documentation and warranties? Who is obligated to determine the cause and repair for a claim or defect? As to third parties that could be harmed, does the state law have differing liability standards as against the owner and the contractor? How is that risk addressed in the contract and insurance/bond structure?

5. Don’t neglect post-construction coordination. The partnering must continue through the completion of construction and into operation in order to ensure proper transition, reduction of claims, and correct operation and maintenance of the project. Have the owner and the contractor established a course of construction and post-construction risk management process and QA/QC? How do the owner and the contractor verify that the project is built properly, and is there an incentive to report and remedy the natural challenges that arise during construction? Or is there a pervasive practice to avoid or cover up the problem (e.g., “not my scope,” “just get this finished”)? It is virtually always less costly to do it right and fix it during construction than to do so after the fact.

Risk rarely disappears; it just gets managed or moved. Each of these core points is intended to translate into an integrated project program designed to give the owner and the contractor (as well as the subcontractors and the project investors) confidence that reasonable risks are properly and economically managed to protect the entities and assets, both short term when it is more economical and post-project, by significantly mitigating against manageable claims.

Tamara Boeck is an attorney in the construction and design practice group of Stoel Rives LLP. Contact her at 208-387-4256, or tami.boeck@stoel.com.

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Inherent in our concept of justice is the fact that one who causes an injury should pay for it, and where multiple entities are jointly responsible for the same injury, liability should be allocated consistent with their degree of culpability. As a cumulative result of a number of Oregon laws, however, parties with the greatest culpability may not pay anything for the injuries they cause.

In Oregon, as in most states, the statutory workers’ compensation system is the exclusive remedy for an employee injured on the job against his or her direct employer. Only the direct employer that provides the workers’ compensation insurance is actually immune from civil liability, however, and the injured worker can collect workers’ compensation benefits and still sue another contractor or the owner of the job site.

When an injury results from the immune employer’s failure to train, provide safety equipment or supervise its own employees, liability cannot be allocated fairly. Those who are defendants in this type of lawsuit are not allowed to bring a claim against the immune employer regardless of the degree of negligence resulting in the injury. In fact, Oregon law says a jury cannot even consider the fault or negligence of the immune employer when allocating fault to the defendants.

Also unique in Oregon is the Employer Liability Law (ELL). Prior to passage of workers’ compensation laws, this statute was introduced to provide a statutory cause of action to an employee against the direct employer. The problem is that it was never repealed. So, while the ELL does not apply to the “employer” anymore, it places a high burden on the non-immune contractors, subcontractors and owners having responsibility for work involving a risk or danger to employees because this law requires the use of “every device, care and precaution that is practicable to use for the protection and safety of life and limb … without regard to the additional cost of suitable material or safety appliance and devices (ORS 654.305).”

The immune employer is not the only beneficiary of the Legislature’s protection. The workers’ compensation insurer has a lien against any recovery the injured employee may get from a third party for the benefits the insurer paid under the workers’ compensation system, and the workers’ compensation insurer even has the right to bring the lawsuit against potentially liable third parties if the employee does not. So, even if the immune employer had the greatest degree of fault in actually causing the injury, if the injured employee recovers against the non-immune defendants, the workers’ compensation insurer may ultimately pay nothing at all.

In the context of construction, parties are not free to allocate risk as they are in other industries because the law voids risk allocations in “construction agreements” broadly defined to include contracts for the “planning, design, construction, repair, improvement or maintenance of any building, highway … or project … attached to real estate (ORS 30.140(3).” For instance, ORS 30.140 voids indemnity agreements to the extent that they require one party to indemnify another party for the other party’s fault.

Construction contracts frequently require that a contractor name the project owner as an “additional insured” on general liability insurance policies. One benefit of being an additional insured in most states is that when sued by a contractor’s employee for an on-the-job injury, the owner can tender the lawsuit to the contractor’s insurer. But not in Oregon.

Also void are any contractual terms requiring that one party have its insurer waive the right of subrogation. Subrogation is the right of the insurance company that has paid a claim (such as a workers’ compensation insurer) to bring a lawsuit against other parties who may be liable for the same injury.In Oregon, contractors are a uniquely protected class. A provision that waives their rights of subrogation, indemnity or contribution is void to the extent the injury or damage is caused by another person (ORS 30.145(1). Other states allow construction projects to include workers’ compensation insurance in wrap-up policies purchased by the owner or general contractor for the benefit of all employers, whereas Oregon allows this only when the project value is over $90 million.

It is time that the Oregon Legislature took another look at the equities of the cumulative effect of these piecemeal laws. Maybe workers’ compensation should be the exclusive remedy of an injured worker against everyone working on the job site as it is in other states. Perhaps it is time to bid adieu to the ELL or modify the laws to allow a jury to consider the fault of the immune employer when awarding damages against others.

Louis Ferreira is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9412 or lou.ferreira@stoel.com.

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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.

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In the hurly-burly world of construction, it’s not uncommon for parties to cut corners in their haste to enter into contracts. Although some legal formalities are less important now than they once were, parties should not disregard them generally in favor of expediting their projects. Some formalities are legally necessary, while others may reduce the likelihood of unintended consequences and increased legal fees if a dispute arises. Following are several categories of legal formalities that should be observed in preparing construction and design contracts.

Correct legal entity name

One of the most common mistakes that parties make is not using the correct entity name or otherwise not entering into a contract with the correct party. Usually, the mistake is minor, such as inserting (or omitting) a comma before the “LLC” or “Inc.” However, occasionally the error is more serious.

In a recent arbitration, we represented a party that was contracted to provide design services to a project owner. The contract listed a nonexistent limited liability company as the “owner” and was signed by its “manager.” Because the named entity did not exist and the manager did, we sued the manager for unpaid invoices.

To the manager’s surprise, the arbitrator held him personally liable for the debt of the nonexistent entity. This result and the significant legal fees that were expended by both sides might have been avoided if the parties had checked with the Oregon Secretary of State. In doing so, they likely would have discovered that the named entity did not exist and, as a result, could have used a proper entity name when entering into the contract. Although this is an extreme example, it illustrates the importance of both determining whether an entity name provided by a party actually exists and using the correct entity name.

Correct signature block

Depending on the type of entity (partnership, LLC, corporation, etc.), there are commonly accepted signature block formats that should be used. The primary purpose behind an accepted signature block is to clearly set out the chain of legal authority that permits an individual to sign on behalf of a contracting entity.

When accepted formats are not used, there can be confusion – or worse, disputes – about which individual or entity entered into the contract and the authority of the individual signing the contract.

Document execution

Although exceptions exist, certain legal documents must be signed to be effective. This rarely is an issue when the value of the contract is significant. More commonly, one party will issue a purchase order, change order or contract amendment, and fail to require the other party to sign it. Later, if a dispute arises, the non-signing party may argue that the document is not enforceable. If the stakes are high enough, the issuing party may incur significant legal fees attempting to establish that, despite the other party’s failure to sign, there was a binding agreement.

These disputes can easily be avoided by diligently insisting that the other party return signed documents.

Proper signing authority

Even if a legal document has been signed by both parties, there can be questions about signing authority and whether the person has sufficient authority to bind an entity on whose behalf the person is signing.

Generally, if a document is signed by the president of a corporation or the manager of a limited liability company, there is at least apparent authority to sign and bind the entity, although for a significant transaction you may want to confirm that authority. On the other hand, a person signing as an authorized signer or in a lower-level or undefined capacity may or may not have been granted authority to sign.

If there is any question about the authority of the individual signing the contract, you can request that the other party provide documents establishing that the signer has power of attorney or has otherwise been delegated the legal authority to execute documents and bind the contracting party.

Attach contract exhibits

Construction and design contracts frequently include one or more exhibits, such as written descriptions of the scope of work, lists of drawings and specifications, and construction schedules. A complicating factor is that the content of these exhibit documents is often in flux both before and after the contract is executed.

For example, a contractor may issue several construction schedules leading up to the contract’s execution. As a result, unless these exhibits are physically attached to the contract or referenced in sufficient detail, it may be difficult (and expensive) to later prove which of several versions of a document was incorporated into the contract.

Delivery

Even assuming that the above formalities have been adhered to, a fully executed contract should be delivered to the other party. We typically recommend that the parties execute two or more duplicate original copies of the contract (including exhibits and other attachments). Once the contract has been signed by both parties, each retains a fully executed original.

Although courts and arbitrators are inclined to enforce contracts despite a party’s failure to strictly comply with legal formalities, disputes about them are often costly and may lead to unpredictable outcomes. Accordingly, parties to construction and design contracts would do well to observe the above legal formalities when entering into their contracts.

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

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Litigation is an unfortunate byproduct of the construction industry. With so many players contributing design services, construction services, materials and equipment in a confined space under a tight budget and timeline, it is no surprise that disputes develop.

And it should be no surprise that the contracts between these players often contain differing dispute resolution clauses that can prevent all parties from entering one forum to resolve their differences. Too often we see some portion of related claims being resolved in court while the balance is resolved in one or more arbitrations. This leads to extensive and overlapping hearings, increased attorney fees, and sometimes inconsistent results from multiple decision makers operating in isolation.

Disciplined use of consolidated dispute resolution clauses will minimize or prevent these problems.

1. Standard consolidation clauses

Many standard form contracts (such as AIA and AGC forms) already provide an option for consolidated arbitration. They state that both parties to the contract agree that all project participants involved in the dispute may be consolidated into a single arbitration if the other parties’ (e.g. subcontractors and suppliers) arbitration clauses allow for consolidation under similar procedural rules and arbitrator selection procedures.

This option was not always available in standard forms. Earlier versions of the standard forms did not specify consolidation, and the arbitration service organizations and courts would refuse to consolidate disputes absent mutual agreement of all parties. Some involved parties refused to participate in consolidated proceedings, hoping that sitting on the sidelines would marginalize their involvement in settlement talks and minimize their share of the blame in the final adjudicated result. This approach produces mixed results for the parties that refuse consolidation.

2. Standard consolidation clauses often fail

While today’s standard consolidation clauses are a good start, they fail to solve the entire problem. The prime contractors and architects do not consistently include flow-down clauses that require all their subcontractors to abide by the same consolidation agreement. Moreover, even if the prime parties do include proper flow-down language, the subcontractors often fail to include this language in their sub-sub contracts and purchase orders.

A typical water intrusion case illustrates the problem. The owner usually has the same consolidated arbitration clause with its prime contractor and architect. If the prime parties are sophisticated, they have good flow-down language with their subcontractors. But when a subcontractor purchases envelope products such as windows, doors, siding, paper or caulk, it often uses purchase order forms that get very little attention, and consolidated dispute resolution is ignored. If a product failure is a substantial contributing factor in a dispute, there is limited ability to join the product manufacturer in a consolidated proceeding, and the manufacturer usually elects to sit on the sidelines.

3. Maximizing consolidation

Several steps can be taken to avoid the pain of unconsolidated disputes. First, ensure that all prime contracts between the owner and the contractor, the architect and any other party hired directly by the owner (such as civil, environmental and geotechnical engineers) contain the same consolidation clause. Second, in the prime contracts, require that the prime vendor include flow- down language which ensures its subs and even sub-subs, suppliers and manufacturers are bound by the same or very similar consolidated arbitration provisions.

Third, at least for major subcontractors and suppliers, the owner and prime vendor should require an advance copy of the final contract before it is signed to ensure that consolidation (along with other key issues) is appropriately addressed. Fourth, consider using a prime consolidation clause that gives the owner the power to elect litigation in court (either by a judge-only trial or a jury trial), in the event one or more parties significantly involved in the dispute are not contractually bound to consolidated arbitration.

The advantages of arbitration may be outweighed by the need to get all parties into one forum, even if that forum is the courtroom. Giving the owner discretion to select its forum when faced with consolidation problems could be challenged by opposing parties, but because the goal is advancing consolidation, courts should be inclined to enforce the clause.

4. Consolidated trials

When the parties are considering a court proceeding, they should not assume that all parties are subject to the consolidated jurisdiction of a single court. Care must be taken to ensure that proper forum selection clauses and governing law clauses are employed in conjunction with consolidated dispute resolution clauses.

Unlike other clauses that require heavy negotiation, most parties agree that consolidated dispute resolution is a good idea. Achieving consolidation merely requires careful drafting and enough rigor to ensure that downstream parties are governed by the same contract language.

Eric Grasberger is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9439 or eagrasberger@stoel.com.

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During a busy development project, it’s often difficult for an owner to take time to manage all the details related to the performance of its contractor or designer. Tackling important issues as they arise, however, can be critical to a project’s success. Here are six examples:

1. Know the contract and follow it

After contracts are signed, they’re sometimes handled as if they’re radioactive: packed away, never to be touched again. And, rather than reading the contract, owners may rely on their memory of what was agreed to, or what they consider standard industry practice. But this approach comes with significant risks, and could harm an owner’s rights under the contract or its ability to hold the contractor or designer to what was agreed to in the contract. For example, if there’s a dispute between the parties, there’s often a step-by-step process for resolving it. A working knowledge of the contract terms is best, but, at a minimum, an owner should read the contract (or have its attorney read it) when an important issue arises, to know what the contract says about the issue.

2. Review meeting minutes

You might ask yourself: Who has time to review meeting minutes? Minutes, however, may be the only written record of a project meeting, and they might not accurately reflect the meeting discussion or what, if anything, was decided (for example, whether the owner agreed that the contractor is entitled to a time extension). Take time to read meeting minutes, flag any substantive errors and omissions, and correct the record if necessary.

3. Close change orders

It’s not uncommon for written change orders to lag behind informal discussions between an owner and its contractor about how much extra time and money the contractor is entitled to because of a scope change. This is understandable, if keeping the project on schedule is more important than a final decision on cost and time impacts. However, change orders should be signed as soon as possible, because the further one gets away from the change decision the harder it may be to assess its impacts or to negotiate cost and time adjustments. It’s also important to make sure that the change order is consistent with intent. For example, the change order should accurately describe the changed work, and the contractor shouldn’t reserve claims that not intended (for example, a change order to increase the contract price that reserves the contractor’s right to assert a claim for additional time).

4. Respond to correspondence

Like all busy professionals these days, an owner faces an avalanche of emails, letters and other documents, and it’s tempting to procrastinate about responding to project documents (or not respond at all). While that approach may be necessary and appropriate in some situations, it’s important to develop a sense for when a response is required – for example, if a contractor describes a situation that may result in a claim, it’s important to have all relevant facts in the record.

5. Document claims

Even the best claim can be crippled by poor documentation. If an owner believes its contractor or architect has made an error, it should notify the contractor or architect in the way the contract requires. If specialized help is needed to assess an error, consider hiring a qualified expert. If an employee familiar with the claim is about to retire and move to Tahiti, interview the employee about the claim. If the claim can be visually examined, photograph it. Above all, collect, review and store documents relevant to the claim.

6. Ensure that the designer reviews design changes

Coordination between a contractor and designer can be a pain, and it can be tempting for an owner to try to take on a designer’s responsibilities in order to save time and money. For example, an owner may try to approve a change in the work without consulting its project architect. The risk with this approach is that, absent limited circumstances, a contractor won’t be responsible for the design, and a failure to consult with the project architect may result in the owner bearing the risk of a design issue.

There are only so many hours in the day, and the details of a project can be overwhelming. At the same time, letting important issues linger can make project success more at risk. Addressing important issues in real time is the best approach.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or spkelly@stoel.com.

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Unfortunately, insurance requirements in contracts are not easy to understand. The language used in insurance requirements is not always intuitive, but we all know that the consequences of not having the right insurance can be severe.

Following is a look at the language used to describe commercial general liability (CGL) policies. They insure a business for bodily injury, personal or advertising injury, or property damage lawsuits. The insurance is for third-party claims, so it does not usually cover damages to the insured’s own property, but it does usually require that the insurer pay for a defense from lawsuits against the insured that seek damages of the type that are covered.

The terms “bodily injury,” “personal or advertising injury” and “property damage” all have specific meanings in CGL policies. Typically, bodily injury is the coverage that responds when someone is hurt or killed. But does it also cover someone who is not physically injured but claims to have been emotionally distressed? The answer is maybe – it depends on the wording of the policy.

How does bodily injury differ from personal injury? In CGL language, “personal or advertising injury” coverage is a defined list of things like false arrest, libel/slander or wrongful eviction (when committed by a landlord). The advertising coverage extends to lawsuits claiming publication of materials that slander or libel, using someone else’s idea or copyright in your advertisement, or publication of information that violates a person’s right of privacy.

Property damage means physical injury to tangible property. It also usually covers damages caused by the loss of use of property. These are broad categories of coverage, and the next dozen pages or so of policy language limit or exclude coverage from these “grants” of coverage.

In contractual insurance requirements parties try to describe the coverage they want. The first thing we ask for is a standard CGL policy form written by a reputable insurer that will still be solvent if there is a lawsuit. Usually we see something like “a CGL policy written on an ISO form;” sometimes the ISO form is even specified, like “CG 00 01 10 01.” ISO (Insurance Services Office Inc.) is an organization that drafts forms for the insurance industry. Not all insurers use these forms, but they are the closest thing to a standard in the industry.

The next requirement may say that the insurer has to be rated by Best’s Insurance Guide with some minimum rating. This rating is intended to rate the insurer’s ability to pay claims and meet its financial obligations. Usually we want something better than a B+ rating. This is usually followed by a roman numeral that categorizes the size of the insurer in millions of dollars of worth.

Next, we focus on the limits of insurance required. The “limit” is the maximum that the insurance policy will pay. Limits come in different types. There are “general aggregates,” which express the maximum amount of money the insurance company will ever have to pay under the policy. There is usually a “per occurrence” limit, which is the most the insurer has to pay for each separate “occurrence,” another defined term in the policy. Then there is the “ongoing operations” versus “completed operations” issue.

Think of it as the distinction between accidents that happen while the contractor is still working and those that happen after the work has been done. To cover accidents that occur after the contractor has driven away, we seek coverage for “products, completed operations,” which expresses limits for bodily injury and property damages that may arise away from the insured’s premises and after the insured has completed its work.

While the standard ISO form does provide coverage for completed operations, companies that are looking for a deal sometimes buy policies with no completed operations coverage. Also, a per-project limit can ensure that the contractor’s insurance is not used up on one of the contractor’s other projects.

Then there is frequently a medical expense limit. Why is there a separate limit for medical expenses when the policy provides for a separate bodily injury limit? Because the medical expense coverage is a “no-fault” coverage for third-party bodily injury that occurs on the business’s premises or arises from the business’s operations. If there is fault and a lawsuit ensues, the loss falls under the bodily injury coverage.

There are also additional insurance issues that specify who will be named as an additional insured and what the scope of that coverage will be. Will it go to ongoing operations only, or will it extend to claims arising after the contractor’s work is done?

Always be on the lookout for “endorsements” to a policy. We frequently see insurance endorsements that exclude what the insured wouldn’t want to see excluded from its policy. For example, insurance companies frequently add endorsements to policies limiting coverage for residential work, work on buildings of more than two stories, or work on condominiums. We have even seen roofers with policies that have endorsements excluding coverage for any damage arising out of roofing operations and general contractor’s policies that do not cover construction operations.

It’s also important to consider how long coverage is needed. Since only the damage that occurs during the policy year is covered, contracts requiring insurance typically specify the number of years that insurance must be maintained to account for the possibility of a lawsuit to be filed years after the project is substantially complete.

It is important to understand what coverages are available and what exclusions may be in the fine print, and to recognize this language in the contract. But then an insured party can do a better job of managing risk on its projects.

Louis Ferreira is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9412 or laferreira@stoel.com.

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