American Bar Association Forum on Construction Law. Writing Outside the Lines: Changes to Contract Clauses (From the Contractor s Perspective)

Transcription

1 American Bar Association Forum on Construction Law Writing Outside the Lines: Changes to Contract Clauses (From the Contractor s Perspective) Todd Bressler Suffolk General Counsel West Region Los Angeles, California Special Acknowledgment Kate Glaze Carrington Coleman Presented at the 2017 Fall Program October 3-7, 2017 Westin Copley, Boston MA 2017 American Bar Association 1

2 Table of Contents Introduction..4 Consequential Damages...4 A Language...4 Owner-Friendly Version...5 Contractor-Friendly Version.5 Contractor Commentary 5 Finding Middle-Ground.7 Insurance Options..8 Delays/Damages for Delays.8 A Language.8 Owner-Friendly Version 8 Contractor-Friendly Version.9 Contractor Commentary 9 Middle-Ground Language Suggestion...9 Insurance Options.10 Indemnity.10 A Language 10 Owner-Friendly Version 11 Contractor-Friendly Version.11 Contractor Commentary 11 Practical Examples.12 Case Cites..12 Middle-Ground Language Suggestion...12 Insurance Options..13 Termination for Convenience.13 A Language.13 Owner-Friendly Version 13 2

3 Contractor-Friendly Version.13 Contractor Commentary 13 Middle-Ground Language Suggestion...14 Conclusion 15 3

4 I. Introduction Parties in a major construction transaction rarely sign an unmodified AIA contract. Most experts consider the standard AIA form contracts to be more favorable for Contractors than Owners. But even so, there are many revisions that Contractors typically make to the standard form, and the Owner often presents the Contractor with a heavily revised contract as well. While a Contractor s wish-list of revisions might be long, there is a short-list of issues that are mostly likely to be the sticking points after diluting the comments from both parties. This paper focuses on the issues that most often are the sticking points which necessarily involve heavier negotiations. In doing so, we will focus on real-world examples, solutions, and language to help you avoid stalling out during the final round of negotiations. More specifically, this paper will address each short-list issue by presenting: (1) the standard A201 language, (2) Owner-friendly language that an Owner might propose, (3) Contractor-friendly language that a Contractor might propose, (4) commentary and real-world examples of the Contractor s concerns, (5) a middle-ground resolution that might satisfy both parties, and (6) a discussion of any insurance that might be available to either party to mitigate the risk. II. Consequential Damages a. A Language Waiver of Claims for Consequential Damages The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed 4

5 there, for losses of financing, business and reputation, and for loss of profit, except anticipated profit arising directly from the Work. This mutual waiver is applicable, without limitation, to all consequential damages due to either party s termination in accordance with Article 14. Nothing contained in this Section shall be deemed to preclude assessment of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents. b. Owner-Friendly Version Owners will often start with deleting the aforementioned provision entirely. c. Contractor-Friendly Version Contractors will generally not want to revise the standard A201 language for this provision. If they do, however, it would be only to be to clarify that the language applies to third party consequential damage risk introduced as a result of the indemnity provisions. d. Contractor Commentary Consequential damages result naturally, but not necessarily from the acts complained of, and they must be foreseeable and directly traceable to the wrongful act. 1 Consequential damages are basically indirect losses that are one step removed from the immediate loss. Examples in a construction context include: 1. Lost profits from business interruption 2. Lost use of real property 3. Lost sales contracts because of delayed or canceled closings 4. Reduced value because of defective design or building quality 5. Damage to reputation 6. Interest and finance charges (higher on construction mortgages) 5

6 7. Extra rent and/or holdover rent because of delayed relocation to new construction. Despite being indirect, consequential damages like the ones discussed above can be substantial, and in some cases, can exceed the direct costs. For example, if the Contractor s negligence causes a project delay and the Owner is unable to open for business on the expected day, the amount of daily lost business may be quite high (a consequential damage) while the extra costs involved in more days of work (direct damage) may be comparatively low. In one instance, a Contractor was excavating in the process of pouting the mat slab for a thirty-story tower in a heavily populated metropolitan center. The excavation ran smoothly and no issues were encountered. A year plus downstream, the Owner contacted the Contractor to advise that a neighbor in a building adjacent to the project site filed a Claim asserting lost business as a result of the construction activities. This business Owner, a tenant in a neighboring tower, operated a printing facility that required the use of sensitive laser equipment. It was alleged that vibrations resulting from the excavating during foundation Work prevented this business Owner from operating the necessary equipment. As a result of being shut down for four weeks, the business Owner alleged in excess of one million dollars in damage. Negotiations about consequential damages often turn to negotiations about liquidated damages. If damages for the prospective breach of a contract are difficult to measure and the stipulated damages are a reasonable estimate of actual damages, then such a provision is valid and enforceable as liquidated damages; otherwise it is void as a penalty. 2 Contractors push back against an Owner who wants to delete the mutual waiver of consequential damages provision, but who has already successfully negotiated for liquidated damages. The Contractor will likely argue that the purpose of the liquidated damages is to protect the Owner from 6

7 potential consequential damages resulting from delay. However, and as supported by the vibration example noted above, risk of consequential damage extends well beyond those stemming from delay. The standard A201 does not include a liquidated damages provision and parties most often insert the language into the A101 (or other standard contract form) in the substantial completion deadline provision. A liquidated damages provision might read: The time of completion is of the essence of this contract. The Work shall be completed within calendar days from the date of the Notice to Proceed. The Owner and Contractor, recognizing that calculation of damages caused by Contractor's failure to complete within the contract time are difficult to assess, hereby agree that liquidated damages shall be assessed Contractor at the rate of $ per calendar day for each day Contractor is late in completing. The Owner and Contractor agree that the foregoing represents a reasonable estimate of actual damages that the Owner will incur because of delay and is not penalty. e. Finding Middle-Ground The best way to find a middle-ground regarding the mutual waiver of consequential damages is to have a conversation with the other party. The Owner should be able to articulate whether there is a specific indirect damage that concerns it. For example, is the project a hotel and the Owner is concerned about fulfilling bookings for opening day? Or is it worried about breaching a lease covenant if it fails to complete construction by a certain deadline? Understanding the specific concern allows the parties to draft a narrow provision addressing that issue rather than waiving all consequential damages proves to be a deal breaker. If the parties agree that the Contractor will bear the cost of any fees or penalties arising under the Owner s lease because of late completion, the parties could then include the standard mutual waiver of consequential damages, but carve out fees and penalties airing under a specific provision of the lease. 7

8 f. Insurance Options While there are no insurance products that provide coverage for liquidated damages, there are products and strategies that will provide coverage for consequential damages. In fact, coverage for consequential damage risk is often included within the general liability policy utilized on a given project, whether that is a traditional product, an OCIP, or a CCIP. As a negotiating tool, the insurance discussions between the Owner and Contractor should include a focus on loss of use and builders risk coverage. While reviewing these policies, the parties must also scrutinize the definition of a covered loss. In the example provided earlier, the vibration most likely will not be a triggering event such that, at least in that example, neither the Contractor nor Owner had insurance that would provide a defense or indemnity for the loss. III. Delays/Damages for Delay a. A Language If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section , or other causes beyond the Contractor s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine. b. Owner-Friendly Version If the Contractor is delayed at any time in the commencement or progress of the critical path of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section , or other causes beyond the Contractor s control which it could not have avoided by the exercise of diligence; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, 8

9 and the Owner determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Owner may determine. [emphasis added] c. Contractor-Friendly Version The Contractor will generally be comfortable with the standard AIA provision. d. Contractor Commentary Addressing delay issues really comes down to a question of risk shifting which party will bear the risks of a project delay? Delay can come in many forms including: 1. Weather 2. Owner interference or delayed decisions 3. Concealed conditions 4. Labor/materials shortages It seems like the party most able to avoid or mitigate the risk should be the one to bear such risk, and the Contractor would argue that where neither party can avoid or mitigate the risk (such as in the case of a natural disaster), then the Owner should bear the risk because as the project Owner, it also receives the lion s share of the reward. It is important, from a Contractor s perspective, that the language allows for the extension of time and increase in costs associated with delays under this force majeure language. The negotiations between an Owner and developer most often focus on what the Contractor could control. e. Middle-Ground Language Suggestion i. Modify the A201 language to address both parties concerns: If the Contractor is delayed at any time in the commencement or progress of the critical path of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section , or other causes beyond 9

10 the Contractor s control and which by the exercise of commercially reasonable diligence the Contractor is unable to prevent or provide against; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then provided that Contractor is in compliance with the Contract Documents, the Contract Time shall be extended and the Contract Sum increased, provided that Contractor has given written notice of such delay to Owner within ten (10) days following the commencement of such delay or within ten (10) days after Contractor first becomes aware of the events giving rise to the delay, whichever is later. ii. Consider addressing weather delays separately and define what normal weather for your area and time of year will be based on historical data, include a specified number of bad weather days into the agreed contract time, and require that extensions for bad weather days prevent any Work for more than a specified percentage of the day on any critical path items. f. Insurance Comments Rather than losing focus on what is or what is not within the Contractor s control, the parties should evaluate the type of coverage afforded by the builders risk policy. Such a policy often can include business interruption coverage that will account for delays resulting from force majeure events making the difficult negotiations easier to navigate. IV. Indemnity a. A Language To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect s consultants, and agents and employees of any of them from and against claims, damages, losses, and expenses, including but not limited to attorneys fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party 10

11 indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section b. Owner-Friendly Version To the fullest extent permitted by law, the Contractor shall indemnify, defend and hold harmless the Owner, Architect, Architect s consultants, and agents, and employees, officers, directors, shareholders, successors and assigns of any of them from and against claims, damages, losses, and expenses, including but not limited to attorneys fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section c. Contractor-Friendly Version: Most Contractors are comfortable with the standard AIA language. d. Contractor Commentary The Contractor does typically indemnify the Owner against certain losses related to the construction project, but the parties can have difficulty negotiating the terms of the indemnity provision. Also, many states have statutes that limit the parties ability to have the Contractor indemnify the Owner for the Owner s own negligence. The issues typically come down to whether the Contractor will indemnity the Owner for its own negligence and whether the Contractor will indemnify for all Claims resulting from the Work, only those Claims resulting from the Contractor s negligence, or only those Claims resulting from the Contractor s gross negligence. 11

12 i. Practical Examples: The largest concern relative to indemnity is often the Contractor s willingness to defend and indemnify the Architect or the Owner s other consultants. Unless a Contractor is doing design-build Work, the Contractor does not want to provide indemnity to an Architect that prepared a design over which the Contractor had no control. Assuming responsibility for design also becomes a problem considering the fact that the Contractor likely does not carry professional liability coverage. Also and practically speaking, construction defect litigation will more often include a design and construction component making the defense and indemnity of the designer(s) a more difficult exercise if the Contractor has assumed design responsibility. e. Middle-Ground Language Suggestion If the parties are confident that all of the indemnified risks can be covered within an insurance policy, then they may be willing to use broad indemnity language, but limit the indemnity to the extent that the indemnitor has insurance for such loss, and require that the Contractor obtain certain levels of insurance and the appropriate endorsements for contractual obligations. This approach allows the parties to have a frank conversation about whether all of the risks are insurance and the cost of such coverage. Even if the result is the determination that some of the risks are not insurable, the parties have likely narrowed the conversation down to only the uninsurable risks. f. Insurance Options Contractors should confirm that their insurance policies include any endorsements necessary to include contractual undertakings to ensure that their indemnity obligations are included within their insurance coverage. 12

13 V. Termination for Convenience a. A Language 14.4 Termination by the Owner for Convenience The Owner may, at any time, terminate the Contract for the Owner s convenience and without cause Upon receipt of notice from the Owner of such termination for the Owner s convenience, the Contractor shall.1 cease operations as directed by the Owner in the notice;.2 take actions necessary, or that the Owner may direct, for the protection and preservation of the Work; and.3 except for Work directed to be performed prior to the effective date of termination stated in the notice, terminate all existing subcontracts and purchase orders and enter into no further subcontracts and purchase orders In case of such termination for the Owner s convenience, the Owner shall pay the Contractor for Work properly executed; costs incurred by reason of the termination, including costs attributable to termination of Subcontracts; and the termination fee, if any, set forth in the Agreement. b. Owner-Friendly Version An Owner will likely be comfortable with the standard AIA language. c. Contractor-Friendly Version A Contractor might want to delete the entire termination for convenience provision. d. Contractor Commentary Contractors have difficulty with termination for convenience provisions because they typically bid a project assuming that the project will run through completion. Termination for convenience can make sense if the project is being bid on a unit basis where profit and overhead is built into each unit price. But more typically, the Contractor does not make its profit until the end of the project, with costs and retainage being frontloaded. If the Owner is able to terminate the contract at any time without penalty, the Contractor risks losing its opportunity to realize the full benefit of the project, which is what justified taking on the risks of the project in the first 13

14 place. Also and importantly, some Owners may want to capitalize on the front-end Work performed by a Contractor (e.g. bidding; subcontractor procurement; other preconstruction efforts). In those rare instances, an Owner can assume the Contractor s role and all the Work performed up to a given point in time by terminating the Contractor for convenience. While an Owner will always maintain the ability to terminate a Contractor for cause, it is important, as a component of the discussion on termination, to establish reasonable triggers. Put differently, it is critical not to contractually agree to triggers that will make it easy for an Owner to terminate the Contractor for cause. To further protect the Contractor, it is recommended that any clause converting an improper termination for cause to a termination for convenience be stricken. Lastly and again related to a termination for cause, it is imperative that a cure period be inserted within the notice period allowing the Contractor to commence and diligently pursue a cure. Including this language will, again, provide the Contractor with some protection from a termination for cause in those instances where the Owner s decision is not supported by the facts and/or, at a minimum, allow the Contractor an opportunity to right a wrong. e. Middle-Ground Language Suggestion 14.4 Termination by the Owner for Convenience The Owner may, upon five (5) days notice, terminate the Contract for the Owner s convenience and without cause Upon receipt of notice from the Owner of such termination for the Owner s convenience, the Contractor shall.1 cease operations as directed by the Owner in the notice;.2 take actions necessary, or that the Owner may direct, for the protection and preservation of the Work; and.3 except for Work directed to be performed prior to the effective date of termination stated in the notice, terminate all existing subcontracts and purchase orders and enter into no further subcontracts and purchase orders In case of such termination for the Owner s convenience, the Owner shall pay the Contractor for Work properly executed; costs incurred 14

15 by reason of the termination, including costs attributable to termination of Subcontracts; reasonable overhead and profit for the uncompleted Work not to exceed $ ; and the termination fee, if any, set forth in the Agreement. VI. Conclusion Having middle-ground approaches in mind when going into a negotiation is the best way to succeed in protecting your client while, at the same time, avoiding failed negotiations. To do so, you must understand both sides of the issue. Instead of saying no, consider asking, what is your biggest concern about this issue? and Can you give me a real world example? Offer alternatives rather than rejecting the entire revision. Seeking to understand and address the deep issue will often allow the parties to move forward by coming up with a customized solution for the specific project. 1 Arthur Anderson & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex. 1997). 2 Flores v. Millennium Interests, Ltd., 185 S.W.3d 427, 431 (Tex. 2005). 15