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Construction Disputes: Arbitration or Litigation?

by | 9 August 2017 | , , ,

This is Part 1 in a 20-part series of articles dealing with issues of arbitration in the construction industry.

The question of whether to arbitrate or litigate disputes comes up fairly frequently in the construction industry. From my humble perspective, with respect to construction disputes, there are very few circumstances where I would choose litigation over arbitration. Why?

Choice of Decision Maker
With arbitration, in general, you pick the decision maker(s) as opposed to being assigned a judge through a blind draw in the court system. That level of arbitrator selection may range from picking from a list under the American Arbitration Association Rules to hand picking a blue-ribbon panel of arbitrators or even a single arbitrator through private arbitration. If you are assigned a judge through the courts, you may end up with a judge who does criminal proceedings in the morning, divorce proceedings before lunch, and then handles your complex construction law dispute in the afternoon, in 15-minute increments, along with multiple other disputes in what looks to an outsider like a giant cattle call. Unless your contract provides otherwise, you may also be in the unlucky position to try your complex construction disputes to a jury.

Engineer Loses Claim for Coverage as an Additional Insured

by | 10 July 2017 | ,

Being an additional insured on someone else’s insurance policy does not guaranty protection. Such was the lesson learned by an engineering firm in Orchard Hiltz & McCliment Inc. v Phoenix Ins. Co. and Federated Mutual Ins. Co., (U.S. 6th Circuit Court of Appeals, Jan. 2017).

In Orchard Hiltz, the Village of Dexter hired the design firm, Orchard Hiltz & McCliment (OHM), to oversee upgrades to Dexter’s wastewater treatment plan. While contractors were removing a lid on a digester tank, sparks from a torch ignited methane gas causing an explosion. One worker was killed and another was injured. The injured worker and the family of the deceased worker sued OHM in state court, claiming that OHM breached the standard of care by failing to ensure that the contractors followed the plans and specifications and by failing to ensure that the contractors implemented safety measures. OHM’s professional liability insurance carrier, XL Specialty Ins., provided a defense to OHM in that state court case.

Construction Contract Clauses, Part 6 – Waiver of Claims for Insured Losses

by | 29 June 2017 | , , ,

Many insurance sections of construction contracts contain language whereby the parties involved in the construction project waive all claims against all other parties involved in the project for insurable losses such as property damage and personal injuries.

Owner and Contractor waive all rights against each other and their respective officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them for all losses and damages caused by, arising out of or resulting from any of the perils or causes of loss covered by such policies and any other property insurance applicable to the Work; and, in addition, waive all such rights against Subcontractors and Engineer, and all other individuals or entities identified in the Supplementary Conditions as loss payees (and the officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of them) under such policies for losses and damages so caused.

Construction Contract Clauses, Part 5 – Conversion Clauses

by | 29 June 2017 | , , ,

A conversion clause arises in the context of contract termination. There are generally two types of termination; termination for cause and for convenience. Each type of termination differs with respect to the basis for termination, as well as the limitations on payment rights the terminated party retains post-termination. A conversion clause operates to convert a wrongful termination into a termination for convenience. The following is an example of a conversion clause.

If it is determined, by litigation, arbitration or otherwise, that termination for default was unjustified for any reason, the termination shall be deemed a termination of convenience and Subcontractor’s remedies shall be limited to those provided for as a termination of convenience.

Construction Contract Clauses, Part 4 – Express Trust Clauses

by | 29 June 2017 | , ,

An express trust clause can be used in a construction contract to create a trust over payments received by a contractor or subcontractor. The effect of establishing a trust is that it creates property rights in construction project payments and obligates the contractor receiving such payments to fulfill the fiduciary duty of using the trust funds to pay the named beneficiaries. The following is an example of an express trust clause:

All payments made by Contractor to Subcontractor shall be held in trust for the benefit of the Contractor and those persons having contracted with Subcontractor to provide materials or labor to the project.

AIA 2017 – What’s New About The Old?

by | 21 June 2017 | , ,

In April 2017, the American Institute of Architects (AIA) released the 2017 editions of its flagship agreements, including the Owner-Contractor Agreement (A101), Owner-Contractor Agreement, Cost Plus a GMP (A-102), the General Conditions of Contract (A201) and the Contractor-Subcontractor Agreement (A401).  Significantly, AIA also created a new comprehensive insurance and bonds Exhibit (Exhibit A) to be used with these agreements.

Some interesting changes to note:

Liquidated Damages. Liquidated Damages are now expressly identified with a new provision.  In prior revisions, LDs were merely suggested in a “prompt” as an insertion. Furthermore, the Owner is not required to file a Claim to impose liquidated damages.  Prior AIA versions were silent on whether Owner was required to file a formal claim; courts addressing the question reached differing results.
Captive Insurance Costs.  Contractor must obtain Owner’s prior approval of Contractor’s costs for insurance provided through a captive insurer owned or controlled by Contractor.
Allocation of GMP.  Adopting a revision commonly made by the parties, if a GMP is given, allocation of the GMP does not constitute a separate GMP for each individual line item on the Schedule of Values.

Construction Contract Clauses, Part 3 – Site Investigation Clauses

by | 13 June 2017 | , ,

A site investigation clause is a provision in a construction contract that indicates that one of the parties has made an inspection of the property, project, or location where certain services, labor, or material will be provided, and that the party making the inspection is satisfied that performance will be possible given the circumstances. The following is an example of a site investigation clause:

Each contractor shall examine the construction site and area and compare its findings with the Drawing and Specification and shall inform and satisfy itself as to all matters necessary for carrying out the work; including but not limited to, general working conditions, labor and equipment requirements, accessibility, condition of the premises, obstructions, drainage conditions, actual levels, excavating, filling, etc. The Contractor shall investigate all conditions as to character of the site and character of existing structures at or adjacent to the site, and the character and extent of the Owner’s and other Contractors’ operations in the area, and in connection with the project, and shall take all such matters into account in submitting its bid. No allowance or extra payment will be subsequently made because of any such items or conditions occasioned by the Contractor’s failure to make such comparison and examination or on account of interferences from the Owner’s, Construction Manager’s and other Contractors’ activities, or by reason of any error or oversight on the Contractor’s part.

Minding Your Zoning Ps & Qs

by | 17 May 2017 | ,

Some say it’s better to beg forgiveness than ask permission. That’s not the case when it comes to complying with zoning ordinances, as recently learned by defendants in a zoning enforcement action brought by the Village of Pentwater.

In Village of Pentwater v Bates, (March 2017), Bates bought a 12×12 storage shed and moved it to an 8-acre wooded, vacant parcel in the Village of Pentwater. Bates initially claimed that village officials said they didn’t need a permit to place the shed on the parcel. Later, the zoning administrator informed Bates that because the parcel was within a single family residential zone, the shed was permitted only if it was an accessory building to a residential structure. Bates responded that they intended to build a house on the parcel. They then received a zoning permit to build a house. Thereafter, however, Bates abandoned any immediate plans to build the home.

Labor Under the Federal Miller Act: The Known Unknown

by | 25 April 2017 | ,

Here’s what we know. On federal projects, the Miller Act requires prime contractors to furnish a payment bond “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person.” The Act authorizes “every person that furnished labor or material in carrying out work provided for in a contract” who has “a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond.”

Further, we know that the Act is “highly remedial in nature” and “entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects.” However, while liberally construed in favor of subcontractors, the Miller Act is not without limit.

Beyond notice, timeliness, and venue requirements, which are all necessary elements to state a prima facie claim for relief under the Miller Act, many forget to analyze the obvious: whether the subcontractor performed “labor” within the purview of the Miller Act. Despite the ostensibly inclusive language in the Miller Act requiring a bond for the protection of all persons supplying labor and materials in carrying out the work, several federal courts have imposed limits on the types of work constituting “labor” on construction projects.

Court Enforces Subcontractor’s Demand for Arbitration of General Contractor’s Claim

by | 11 April 2017 | ,

The Court of Appeals recently enforced an arbitration agreement between a contractor and its subcontractor in a dispute involving indemnity and insurance coverage for a claim by subcontractor’s injured worker. (Spence Bros. v Kirby Steel, March 2017). In this case, the general contractor, Spence Brothers, was the project manager overseeing the University of Michigan’s expansion of the Crisler Arena. Spence subcontracted with Kirby Steel to provide structural and metal work. Spence’s letter accepting Kirby’s proposal directed Kirby to list Spence as an additional insured. The parties’ subcontract contained a standard indemnity clause requiring Kirby to defend and indemnify Spence against all losses. The subcontract also required that Kirby’s insurance policy name Spence as a named insured.