Monday, October 11, 2010

Lessons The Construction Industry Can Learn From The Foreclosure Crisis

One of the major headlines in the news lately has been the moratoriums banks have put on foreclosures. Some of the major lenders, including JP Morgan Chase, Bank of America, and GMAC, have voluntarily stopped foreclosing on residential properties due to questionable underlying documentation. Many state attorneys general have also come forward demanding that banks stop foreclosures until they can provide proof that they have all the proper paperwork on the properties in question.

No doubt, many of the properties subject to foreclosure formed the basis of the boom period for residential construction companies. But apart from the macroeconomics of supply and demand, are there any lessons the construction industry in general can learn from watching the banks?

Absolutely. The biggest problem I see with the banks was carelessness or sloppiness in their documentation and record-keeping.

Lenders relied heavily on forms with a few blanks to be filled in with the details of each transaction. With as many mortgages as were being sold, contracts, assignments, deeds of trust, and other critical documents were completed by unskilled employees who did not appreciate the significance of the documents they were creating or, more importantly, the consequences if they were not done correctly.

Unfortunately, I have seen these themes rear their ugly heads in the construction industry all too often.

Anyone who has spent any time in construction can tell you how critically important good record-keeping is. It is key in submitting payment applications, documenting compliance with scopes of work and code requirements, and proving claims or defenses if litigation arises.

When it comes to protecting your rights to payment through liens, accurate and proper documentation is indispensable. Liens are easy enough to perfect. However, they are also highly technical, and a failure to comply with the statutory requirements of your particular jurisdiction can render your lien unenforceable.

Of course, the most egregious sin of poor record-keeping in the construction industry–at least in my opinion–is the handshake contract. (A close second is the two-line purchase order that doubles as the contract for your major construction project.) In a perfect world, a handshake agreement would be fine. Unfortunately, we don’t live or work in that imaginary place. What happens when there is a question about scope of work? Or about how long construction will take? How are payments to be made, and what happens if there is a dispute about defects? When will as-built drawings be provided, and what happens if they aren’t?

The beauty of contracts is that they clearly define the duties and obligations of all the parties and eliminate ambiguity. Obviously, the larger the contract value and more complex the construction project, the more detailed the contract should be to address–in advance–all the potential ambiguities.

Banks and residential lenders have gotten themselves in trouble because they did not accurately document their transactions. Now they are paying the price by having difficulty foreclosing when borrowers have defaulted.

Contractors can learn a valuable lesson. Avoid headaches down the road such as payment delays, liquidated damages, or even litigation, by having good practices in place and accurately documenting your work.

Tuesday, August 31, 2010

4 Practical Steps to Help Ensure Prompt Payment

If I have seen one trend in construction over the past couple years, since the downturn in the industry, it has been an increase in payment disputes. These have ranged from simple disagreements about the scope of work in a contract to an upstream party closing its doors and leaving its subcontractors with no payment and little practical recourse.

The conversation I most dislike having with my clients is telling them that yes, they are owed a significant sum of money, but due to the other party’s insolvency, they will probably never see a penny. While most contractors understand why they are not getting paid, it does little to ease the financial sting. To help avoid this conversation, here are four practical steps every contractor can take to enhance the likelihood of being paid on their contracts.

Practical Step #1: Know Who You’re Contracting With

As relatively small as the construction industry is, there are still a lot of players entering into contracts. Unfortunately, construction is one industry (among many others) that has its fair share of fly-by-night companies–ones that you’d never heard of 6 months ago and that you’ll never see 6 months from now. Other times, contractors will be generally familiar with a company, but not well versed in the nuts and bolts of how it operates, its track record of making payments, how it handles change orders, etc.

Perhaps most importantly, the financial stability of another company may not be well known to the contractor.

During the construction boom where there were plenty of projects for everyone, contractors could be a little more selective with whom they worked. If they didn’t feel completely comfortable with a developer, general contractor, or subcontractor, they could simply pass, as another project wouldn’t be far behind. But this is a different day, and contractors have gotten a lot less selective about they projects they take on (and the profits they will accept). As a result, there is a greater chance of contracting with a company you’re not familiar with.

I’m not going to advise contractors who are straining to keep their doors open or avoid layoffs to turn down potential business just because they do not know the other party. However, when working with a new company, it is wise to perform some due diligence, whether it is a developer, general contractor, or a sub.

Due diligence may not be the first step you take in the bidding process, but it should be part of your company’s protocol before signing a final contract and making a substantial commitment of time and money. Consider the care you take before simply hiring an employee–you request a resume or job application, conduct an interview, check references, sometimes conduct a second interview, and possibly require a drug test. Your process for evaluating companies you contract with and with whom you are committing thousands or millions or dollars should be no less strenuous.

Knowing a little more about who you’re contracting with will not prevent all disputes, but it will definitely help you avoid a great number of them.

Practical Step #2: Payment Bonds, Payment Bonds, Payment Bonds!!!

Surety bonds protect your construction investments! This is not only the title of a recent guest post, it is an accurate statement of the purpose of these instruments. Even the best developers and construction companies sometimes are unable to pay on contracts. Whether it’s an industry-wide downturn or a project that has simply been disastrous, sometimes a party simply cannot or will not pay their obligations. In that scenario, it is extremely important to have a financially sound bonding company in place that can step in and pay.

Obviously, the bigger the project the more important a payment bond is. As the contract price goes up, so does the potential negative impact of nonpayment.

However, I’ve seen many smaller projects where no payment bonds are used. I realize that at a low enough project price, the added expense of bonds make a contract economically unfeasible. But before you write off the importance of this added bit of “payment insurance,” ask yourself how your company could withstand the impact of nonpayment. Not slow payments, not partial payments, and not the ability to win a judgment in litigation. Can your company absorb a complete non-payment. If this scenario spells disaster for your business, it is critical to have a little insurance in the form of a payment bond rather than rolling the dice on another party’s ability (and willingness) to pay you.

Practical Step #3: File Your Liens...ON TIME

Mechanics liens are one of the easiest ways to ensure payment on a construction project, and yet they are one of the most commonly botched practices among contractors. All other tricks for getting paid on a project rely on the willingness, ability, and legal obligation of another party to pay up. Liens, on the other hand, place your remedy in the land and its improvements (which, in theory, always have intrinsic value).

Liens are generally fairly easy to perfect. However, they are highly technical and have strict deadlines that have to be met. Failure to strictly comply with these deadlines and other technical requirements can render your lien invalid (and could possibly subject to you liability for improperly filing a lien; the penalty in Texas is not less than $10,000).

The specific deadlines vary from state to state, but generally, a contractor must first provide notice to the original contractor and property owner within a couple months of the work or materials being furnished. Then, they must file a lien affidavit with the county clerk of the county in which the property is located. Notice should be given to the original contractor, the owner, and possibly the general contractor.

Liens on residential construction are usually a little more technical because state legislators tend to protect homeowners (who are generally less sophisticated than commercial developers). For example, Texas lien laws require residential construction contracts to be signed by both a husband AND wife. If you’re in the residential construction business, make sure you’re familiar with the nuances of your state’s residential lien laws, as a failure to follow them to the letter can render your security interest worthless.

Contractors should have protocols in place that make sure the prerequisites to filing a lien have been timely satisfied. Send out regular notices every month as work is performed. And most importantly, don’t keep waiting month after month after month for payment. As a construction attorney, I have told too many clients who come to me to file a lien that they have blown their deadlines and cannot lien property. The good news is that with a little advance preparation, that conversation can be easily avoided.

Practical Step #4: Be Proactive Once You See Trouble Coming

How many times have you heard this excuse: “We’re going to get you your payment–we just need to get paid on this next project and we’ll have your money.” Then ask yourself how many times that scenario had a happy ending. You patiently wait and wait only to be given a new excuse. Sometimes, this leads to lien deadlines being blown.

I am not one to advocate for litigation where it can be avoided or where it makes no sense economically. However, I firmly believe that contractors need to be very proactive when it comes to payment disputes. If you have a slow payer, send a demand letter for the amount owed. Many states require this as a prerequisite to being able to recover attorney’s fees in breach of contract lawsuits. At a minimum, it shows you’re serious and are creating a paper trail. Consult an attorney–sometimes lawyer letterhead has a way of getting a party’s attention. If my client is not interested in maintaining an ongoing business relationship with the other party, I will often send a draft of a lawsuit that will be filed if arrangements cannot be reached.

If the party you contracted with cannot pay you what is owed today, there is little likelihood that their situation will change in a week, a month, or a year. Take appropriate steps to protect your interests. Whether that is filing a lien or filing a lawsuit, it is important to make your company a priority to the other party. Don’t wait for them to pay other contractors or subs before getting to you.

Thursday, August 12, 2010

Construction Bonds: How They Can Protect Your Project

From time to time, the Texas Construction Law Blog would like to feature guest bloggers who offer different perspectives on issues affecting the construction instrustry. The following article is the second of a two-part series about the legal protection and financial security surety bonds offer those involved in construction projects. The guest author is Danielle Rodabaugh, a principal for Surety

In her last piece, Danielle discussed the basics of the bonding process in the construction industry. Today she will be delving further into the subject matter, explaining each of the three major kinds of construction bonds:

* bid bonds
* performance bonds
* payment bonds

As with other surety bonds, construction bonds provide legal financial protection to guarantee the work done by professionals within the industry.

Bid Bonds: Locking in the Price
Contractors must get bid bonds to assure a project’s developer that—if selected—they will enter into a contract for the amount quoted in the original bid. Contractors provide the bid bond along with their bid proposal. Doing so keeps contractors from increasing their bids on projects after being contracted by the developer. Additionally, the language in bid bonds requires the contractor to secure performance and payment bonds as necessary throughout the project.

If the contractor breaks the bond’s terms, the bond’s financial guarantee allows the developer to collect reparation. Usually this is in the amount of how much more the developer has to pay to contract the next-lowest bidder for the project. If the contractor cannot cover the cost, the surety will be held accountable for paying reparation up to the bond’s full face value.

Performance Bonds: Guaranteeing Execution
Performance bonds guarantee that a contractor will perform all aspects of a project according to the contract. Contractors secure this bond to guarantee their work to whoever requests the bond—usually a government entity. If the contractor does not complete the project satisfactorily, the performance bond keeps the project owner from losing the investment.

If a contractor does not perform his work satisfactorily, then the performance bond will require the surety to fulfill all facets of the contract. The surety could also be responsible for paying retribution up to the bond’s full face value for delay damages and other fees incurred due to the principal’s inability to perform.

Payment Bonds: Assuring Compensation
Contractors get payment bonds to assure that they will pay all necessary labor and material costs. These bonds confirm that workers will be paid according to the terms set forth in the contract. Because mechanic’s liens—which ensure payment of outstanding debts upon sale of a property—can only be used on private property projects, payment bonds are essential to making sure that all bills are paid in full. The payment bond essentially takes the place of a mechanic’s lien when a contractor or subcontractor is working on a public property project.

If the contractor fails to issue payments or otherwise breeches the contract, subcontractors and/or other workers can make a claim against the bond so that they can receive their deserved compensation. Once again, if the contractor does not have the funds to do so the surety will be left footing the bill.

***Performance bonds and payment bonds are often issued in conjunction with one another, and are sometimes issued as one contract called a “performance and payment bond.”

Construction Bond Regulations
Before searching for a surety agency, you need to check with both state and local regulations about bonding in your area. Federal, state, and local laws all mandate that bid bonds, performance bonds, and payment bonds be utilized for most public projects. The federal Miller Act dictates the use of surety bonds for all projects in excess of $100,000. Many states have have passed “Little Miller Acts,” which elaborate further on the federal act regarding construction bonding regulations. For example, Illinois surety bond requirements mandate that bonds be used on all public construction projects that cost $5,000 or more, whereas requirements in other states keep the limit at $100,000. This huge variance in regulations means its crucial for those working on a construction project to check the regulations set forth by their jurisdiction before seeking out a surety provider.

Monday, July 26, 2010

Surety Bonds Protect Your Construction Investments

From time to time, the Texas Construction Law Blog would like to feature guest bloggers who offer different perspectives on issues affecting the construction instrustry. The following article is the first of two about the legal protection and financial security surety bonds offer those involved in Texas construction projects. The guest author is Danielle Rodabaugh, a principal for Surety

Unfortunately, the economic downturn has had many detrimental effects on the construction industry. The resulting financial instability of many professionals, companies, and banks have made payment issues increasingly probable when working with projects of all sizes. It is not surprising for individuals to go unpaid when little or no legal protection was established prior to beginning the project. Whether you're the proprietor, banker, or contractor, you want to make sure:

* the project has a solid financial foundation before work begins
* legal protection is in place to guarantee that your work will be compensated later on

Surety bonds provide this legal protection and financial guarantee.

Functionality of Texas Surety Bonds
Many people–even those who are required to be bonded by law–aren't sure exactly how surety bonds work. Essentially, a surety bond is a legal agreement between three parties to help ensure the fulfillment of a contract:

1. The principal performs a service and secures a bond to guarantee his work according to the contract.
2. The obligee receives the work performed by the principal and is protected by the bond's financial guarantee.
3. The surety issues the bond as a neutral third party to ensure that all work done by the principal is completed according to the contract. The surety is also responsible for overseeing obligations on the part of both the principal and the obligee.

Since bonds are legally binding documents, they encourage the principal to fulfill the contract's terms or else face financial retribution. If the principal fails to meet the bond's conditions, such as making necessary payments, the obligee can make a claim on the bond. This means that bond money can be made available to the wronged obligee. A bond's obligee will vary due to a number of factors, such as the specific bond type or the legal language used in the bond's wording.

Financial Accountability
Depending on the bond type and its specific language, the surety bond company can be held fully accountable for the principal's faults, i.e. the surety could be left paying the bills. This encourages surety bond specialists to take great care in completing a thorough financial review of a principal before issuing the bond. If the contractor or construction company is unable to secure a bond then the entity might not be contracted to do the work, as its performance might be viewed as worrisome. This part of the process helps weed out contractors and construction companies that may be financially unstable due to past problems.

Legal Regulations Regarding Bonding
Various state-mandated regulations require different kinds of bond protection depending on the specific project and those involved. In construction, the Miller Act states that contract surety bonds are to be utilized for all federal projects involving the construction, alteration, or repair of any building or public work project in an amount exceeding $100,000. This law also requires a contractor working on such a project to post two bonds: a performance bond and a labor and material payment bond. Consequently, surety bond agencies issue a number of different construction bonds for large projects that involve in-depth, provisional contracts.

Unfortunately, the Miller Act can only be enforced on federally-funded construction projects that cost more than $100,000. This means that a great deal of construction contracts are still written without ever giving a thought to bonding those involved. Those working with smaller construction contracts are oftentimes at risk, as such contracts may be agreed to by "word of mouth" rather than being officially recorded, leaving loopholes so that legal accountability cannot be determined at a later date. Even though bonding might not be required by law for all projects, it's important for people to realize that they can still choose to protect their assets with a surety bond in these instances.

Although getting a surety bond in Texas might seem complicated or confusing at first, a little research can go a long way in guaranteeing the validity of your work or investments. For a more detailed look at how surety bonds can help resolve payment issues in the construction industry, check back when the second half of the discussion will be posted.

Wednesday, June 30, 2010

A Few Construction Laughs

There are plenty of serious construction law topics to discuss, but it's nice to have a laugh every once in a while. So just be glad you're not having to explain any of these to your insurance carrier!

This probably isn't OSHA-compliant.

"Design Defect"

Umbrellas At Work.

Getting Mixed Signs.

Like my grandfather used to say, "When you find yourself
at the bottom of a hole, quit digging."

I think this is a variation of "Measure Twice, Cut Once."

There has to be a DOT-approved sign in there somewhere.

Tuesday, June 22, 2010

What Can the Construction Industry Learn from the BP Oil Spill?

For way longer than anyone would prefer, BP and the Deepwater Horizon explosion and oil spill in the Gulf of Mexico have been front and center in the news. By even the most conservative accounts, it has become one of the worst environmental disaster in U.S. history. The consequences of the BP oil spill will be felt far and wide, particularly in the oil and gas industry and on the Gulf coastline. But apart from the technical aspects of the Deepwater Horizon explosion and subsequent oil leak, are there any bigger picture lessons to be learned? And can those lessons apply to a construction industry based a long way away from that broken pipe at the bottom of the sea.

As I watch news of the BP oil spill develop, I see three major themes that have direct application to everyone in the construction industry, whether they are working on billion-dollar stadiums and factories or residential remodels. Every contractor should take these lessons to heart so that they need not be learned the hard way.

Lesson #1: Be Aware of Risk-Shifting Provisions in Contracts

BP has been the primary focus of news coverage of the Gulf oil spill, not to mention Congressional hearings and a primetime address by President Obama. However, when all the investigations have been completed, will BP be the party held primarily responsible (at least financially)? Hyundai Heavy Industries of South Korea built the Deepwater Horizon rig for its owner, Transocean. Anadarko Petroleum was a partial owner of the well. Transocean leased the rig to BP. You can rest assured that the various contracts between these parties contained risk shifting provisions, such as indemnity provisions or limitations on liability. Was Transocean contractually obligated to indemnify BP for BP’s negligence (or vice versa)? Contracts between BP and Transocean and their various subcontractors may have contained similar provisions, or even liquidated damage clauses. Could it end up that, if the explosion was caused by the negligence of some contractor, that contractor is financially responsible for the entire cleanup because of a throw-away indemnity provision that no one paid any attention to during contract negotiation?

Finally, while everyone is focused on the environmental disaster and the price of clean-up, one thing has been overlooked. Millions upon millions of dollars worth of oil are being lost on a daily basis. That oil, or at least the rights to it, were acquired at a very significant cost. Additionally, BP’s lease on the Deepwater Horizon rig from Transocean was almost $500,000 per day, so it clearly had to be generating significant income for BP and the other leesees. Who will be responsible for these lost profits, or are the parties’ potential liability mitigated through limitation of liability clauses? While lost profits are definitely not the primary focus of the media, with the high price of cleanup you can rest assured that this issue will come up eventually.

One thing is certain–the first thing BP’s and Transocean’s lawyers did was to review all the contracts that touched upon the ownership, maintenance, and operation of the Deepwater Horizon rig to determine if another party might be responsible for the enormous tab this oil spill has generated. Contractors would be wise to undertake this same analysis–before disaster strikes. Know what your responsibilities are before the project starts, including whether you will be responsible for another party’s mistakes. This won’t eliminate all catastrophes, but it will better position you to deal with them when they do strike.

Lesson #2: Skeletons in the Closet Always Come Out

As the investigation into the causes of the BP oil spill deepens, BP has come over increased scrutiny for what some spectators have called “shortcuts” that the company took in the face of significant risks. The upcoming investigations by Congress, various governmental agencies, and eventually, discovery conducted by attorneys in litigation, will turn over every stone at BP, Transocean, Anadarko, Halliburton, and every other company remotely linked to the Deepwater Horizon platform in search for the culpable parties.

Old data never dies in this era of electronic communications and near-infinite storage. The emails you deleted and then deleted out of your Deleted box still exist on a server somewhere. Voicemail has gone digital too, meaning it lives on well past its removal from your New Messages folder.

For better or worse, what we say and what we write has a much longer life than it used to. While a paper shredder used to capably cover ones tracks, it is no match for the data that exists in slack space.

It is likely that somewhere, on some server, there is an email from some underling at BP or Transocean that warned about what, at the time, seemed like an unlikely disaster. And the warning may in fact have been absurd at the time it was written. But when a tech team, paired with a legal team, gets a hold of that obscure email, it will cause unmitigated headaches for whoever was the subject of that note.

The lesson to keep in mind is be careful what you email, and even the voicemails you leave. The passage of time distorts context, and the raw data will live long beyond your memory of the setting in which the note was emailed.

Lesson #3: Accidents Happen - Plan for Them

Finally, a major reason the BP oil spill has become such a disaster is that they have had difficulties stopping the oil from flowing out of the broken underwater pipe. While some catastrophes were probably anticipated, clearly the one that materialized did not have a firm response plan.

If there is one thing that is certain in any business as dangerous as the construction industry, it is that accidents will strike at some point. With rigorous attention to safety, most of the worst catastrophes can be prevented. However, accident nevertheless happen.

How will you respond? Who is your first call? Who is in charge on the ground? And when the dust settles, how do you move forward–first with addressing the accident, and second, by simply getting back to business?

The minutes, hours, and days following a catastrophic accident is no time to plan how your company will respond to it. That plan should be in place long before anything bad ever happens so that when it does occur, you and your company will know what steps to follow for everything from immediate medical care to documenting the accident scene to insurance coverage.

In many ways, the BP oil spill is very remote from the day-to-day dealings of most construction companies. After all, the uniqueness of working on a broken pipe one mile under water is the source of many of the issues. However, if you stop to look at the bigger picture and the themes that have unfolded, there is much that can be applied to the construction industry. Accidents do happen despite the best planning. But by paying attention (and controlling) risk shifting provisions in contracts, being careful about the electronic data you generate, and planning in advance for disaster, your response can keep a bad situation from getting worse.

Monday, March 8, 2010

The Final 1%: Getting the Project Finished (and Getting Paid For It)

Who has the most touchdowns in NFL history? Most football fans can quickly tell you the answer is Jerry Rice. And most fans know that Brett Favre has the most touchdown passes. Touchdowns are an important statistic because they are so crucial to success in the game of football. Fans and students of the game also realize that it is difficult to get that final yard. It is much easier to move the ball half way down the field than it is to finally push it over the goal line. Not that the first 50-80 yards of turf are necessarily easy, but that last yard is always the hardest.

The same can be said of construction projects. Planning and designing a development, getting financing, winning contracts, and moving dirt all present plenty of potential pitfalls. However, that final push–moving a project from 99% done to completely finished–is many times the most difficult part. Parties fumble around as to details of their final responsibilities and, equally importantly, the timing of those obligations.

Far too often, in the rush to get a project started, final close-out matters are not thoroughly addressed (they definitely aren’t the sexiest part of a project). Parties ignore these details at their own peril.

To avoid disputes at the end of projects, take the time to give them proper attention in the contracting stage early on. For example,
  • Have specific deadlines for when architects are to make final inspections and issue certificates for payment.
  • Provide a definitive timeline for punch list items to be completed.
  • Address all the lien waivers that are needed.
  • Decide whether a surety needs to sign off on anything.
  • Determine whether warranties run from substantial completion or when specific portions of the project were completed.
  • Determine when as-built drawings are to be provided, to whom (and in some cases, from whom), and in what form (blueprints, CAD drawings, pdf, etc.).
  • Most importantly, firmly lay out all the prerequisites that must be satisfied for before the final application for payment.

Most construction disputes arise from ambiguity–not knowing which party has what responsibility, and not knowing the time in which that obligation must be met. Fortunately, ambiguity it is a preventable ailment.

A smooth close out of a construction project begins long before the first shovelful of dirt is moved. All the parties may be rearing to start on the Next Great Building, but you can be assured everyone will be much less excited–and willing to cooperate–on the back end when trying to get that project from 99% finished to 100%.

Monday, February 22, 2010

Builders Should Learn From Olympic Luge Tragedy

If you have turned on the television, listened to the radio, or picked up a newspaper recently, then you’ve probably been inundated with coverage of the Vancouver Winter Olympics. Unfortunately, the 16-day period that is generally regarded as one of the most joyous in sports began on a very sad note. During a training run, Georgian luger Nodar Kumaritashvili had a horrific accident that resulted in his death.

While Olympic officials and many commentators cited athlete error for the unfortunate event, many felt that the luge track was too fast–that designers and builders created a course that simply allowed its users to reach unsafe speeds.

I live in Texas, where luge is an event that is watched every four years (and not too often in between) and luge track building is a construction niche that never enters the mind. However, I have seen construction projects in other fields lead to unfortunate accidents and even deaths. For that reason, everyone in the construction industry can use this Olympic tragedy as a learning moment.

Every builder should ask themselves this question: "What happens if someone is severely injured or, heaven forbid, killed on a project I’m working/worked on?" If you don’t know the answer, then you need to immediately start doing some homework.

If the project is still in the midst of construction, you should be sure you are taking all the safety precautions needed to project your own crews. First, it is the right thing to do, and secondly, companies do not want OSHA conducting an investigation only to find your company liable for a preventable accident.

Assuming the project is post-construction, the first thing any builder or contractor should do when they hear about an accident is grab their contracts. These will lay out if there is indemnity to you from another party, or if you were a named insured under another contractor’s insurance policy. If you do have indemnity, you can breath a little easier as another party will be responsible for your defense and all settlements/judgments.

Conversely, if you are the party providing indemnity to another, it is imperative that you immediately notify your insurer of this incident. Insurers are typically not obligated to provide coverage until their insured ask for a defense. Also, third party notification is not sufficient–the actual insured needs to demand coverage and defense from their carrier.

Once these preliminary steps are taken, the case will probably turn into an investigative matter on causation. In other words, what caused the injury or death, and who was responsible for that cause. In the Georgian luger death, most commentators who did not blame the athlete cited the course design (that it was designed to be too fast for even elite lugers to safely navigate). That is an element that would most likely fall to the architect and engineers. There have not been allegations of defects in construction, so the parties swinging the hammers would probably not be the target.

On other projects, however, the design might be just fine, but the execution flawed. In those situations, the general contractor and subs would probably be the parties facing potential liability.

It is indeed a shame that the Vancouver Winter Olympic Games began on such a sad note. This Georgian luger’s death should remind us how fragile life is and how much we should treasure every moment. But let it also be a reminder to all in the construction industry to follow best practices. Protect your own crews and provide a safe working conditions for others. Know your indemnity obligations, and make sure they are enforceable. Stay in close contact with your insurer and do not give them any basis to deny coverage. And thoroughly investigate the true cause of accidents to defend current claims and prevent future ones.

Wednesday, January 27, 2010

Lien Waivers: Caveat Contractor!

Ok, my Latin may be lacking, but one thing I do know is that contractors should beware when lien waivers enter into construction contract negotiations.

Frequently, lien waivers are thought of in the mid-project, payment context. Basically, where a contractor or sub-contractor gets paid and signs a release of their lien rights. In this context, lien releases are harmless because the party has been paid. There is no reason, and in fact, no legal basis to file a lien. In this setting, lien releases actually serve an important role in getting a project to completion. At the end of the day, owners and developers need a building/structure/etc. that is relatively free and clear of encumbrances when they have paid those to whom they owe payments.

Where lien waivers get a little riskier is when they become an up front contractual requirement instead of post-payment documentation. In short, in these pre-construction lien waivers, upstream parties require downstream parties to prospectively waive their lien rights in advance. By entering into this type of arrangement, the downstream party essentially forfeits one of their most powerful tools to ensure payment for labor and materials–the mechanics lien/materialman lien.

Why have prospective lien waivers become an issue? From an owner’s or lender’s perspective, they are a great deal. Owners and lenders are able to limit the pool of potential parties who could place an encumbrance on a property should payment issues arise. This becomes even more attractive on larger projects where there are more subcontractors (i.e. the potential for more mechanics lien claims) and the property at issue is high value.

Lien waivers are not such a good deal for the downstream contractors and subcontractors, however. One of the best tools contractors have to make sure they get paid is the mechanics lien/materialmans lien. Companies become insolvent, financing falls through, but real property does not go away. And without payment, neither does a lien.

Contractors who enter into construction contracts that include prospective lien waivers should realize what they are agreeing to in advance. If the contract is lucrative enough, this risk may be worth taking on, given the potential profits. However, at a minimum, contractors should hedge their risk by insisting on a payment bond. This is common on larger projects, but payment bonds are not always incorporated into smaller ones. If a party is asking you to waive lien rights, they should at least provide some assurance that you will have a remedy if payments are not made.

Of course, lien waivers are deal points, like so many other things (including price). They can be negotiated. At the end of the day, if you are going to accept the risk that you will forfeit your lien rights, insist on some sort of consideration in return.

Monday, January 4, 2010

Top 10 New Year’s Legal Resolutions for Everyone in Construction

10. Know who you’re contracting with, and make sure they are financially viable (or have a bonding or insurance company that is).

9. Treat your employees and staff fairly and they will (usually) treat you fairly in return.

8. The best defense to an OSHA investigation is to prevent an OSHA investigation.

7. Prevent costly personnel ambiguities by having well defined, fair, written policies in place in advance–and communicate those policies to all employees.

6. Don’t agree to any indemnity provision unless you’re willing to financially be on the hook for another party’s own negligence.
6a. If you negotiate indemnity from another party, make sure the indemnity provision in the contract is actually enforceable.

5. Do not include heavy-handed, punitive liquidated damage provisions in your contracts–courts will not enforce them.

4. Old emails never die–if you wouldn’t put it on paper, don’t type it and hit "Send."

3. Limitations of liability are serious stuff–if you use them, use them correctly.

2. Have good billing practices, know your lien deadlines, and stick to them!

And the #1 New Year’s Legal Resolution...drumroll please....

1. Read your contracts. Understand your contracts. Enforce your contracts!