Opinions on arbitration as an alternative to traditional litigation are as varied as there are contractors and lawyers who draft the contracts. There are certainly benefits and drawbacks to both forms of dispute resolution. However, prudent contractors should decide which form is appropriate for the job and make sure all contracts within that project are consistent. Otherwise, you run the risk of having to fight the same battle in both litigation and arbitration at the same time.
Let me provide an example on the importance of consistency in dispute resolution forums. You’re the general contractor on a project, and the owner insists on an arbitration clause in your contract whereby all disputes between you and the owner will be sent to arbitration. You aren’t particularly a fan of arbitration, but it was a big deal to the owner, so you went along with it. With the prime contract in place, you execute contracts with all the subcontractors that are needed to bring this project to life. Since these contracts are for smaller dollar amounts, they are simpler, more form-based, and do not include arbitration agreements. So far, this probably sounds like a pretty common scenario. However, by this point, the potential for problems has already been created.
Things are going well on the project until the electrical contractors make a mistake (sorry to pick on the electricians in this hypothetical). They are willing to fix their mistake, but it has added 3 weeks to the project. They also blame the mistake on an ambiguity in the engineer’s plans and have requested a significant change order on the pricing for this correction. Unfortunately, by the time this mistake has been corrected and is ready for inspection, the engineer has gotten extremely busy and cannot make it to the project site for the inspection for another 2 weeks.
Then bad weather delays inspection by another week. All of a sudden, the project is 6 weeks off schedule. The owner is upset at the delay, you’re mad at the electrical contractors for getting the project off schedule, and the electricians are not happy because you’ve withheld payments because of their delay (which they blame on the engineer). Before you know it, you’ve been sued by the electrical contractor for payments, and the owner has begun arbitration proceedings to recover delay damages. You’d like to consolidate these disputes into one case–however, the owner has a valid arbitration clause and refuses to go into traditional litigation, and you have no basis to force the subcontractor out of court and into arbitration. So you’re left fighting two battles at twice the cost, twice the time, and twice the headache.
At some point, every contractor will have a project that involves both upstream and downstream disputes similar to this hypothetical scenario. So how can a builder avoid being torn in two directions? The key is through good planning at the contracting stage. Have a careful eye to the dispute resolution forums in your contracts. If the contract is silent on this issue, then that means any dispute will be traditionally litigated through the courts. If there is a valid arbitration agreement, then that is where any disputes will likely be determined.
To prevent being dragged into both arbitration and litigation at the same time, make sure all your contracts on a project are consistent on the dispute resolution forum. If one contract has an arbitration clause, make sure all your contracts contain a similar provision. Conversely, if the "upstream contract" makes no mention of arbitration (meaning litigation would be the dispute resolution forum), keep your "downstream contracts" silent as well.
As with any construction project, the key is good advance planning. Adding a little forethought to your contract will help avoid being torn in two directions later should disputes arise.
Wednesday, November 18, 2009
Tuesday, November 10, 2009
Recent Andorran Bridge Collapse Should Make Contractors Double Check Risk-Shifting Contract Provisions
Question: If/when a catastrophic accident hits your job site, what is your immediate response? What if the accident happens to your subcontractor or a third party, then how do you respond (or does it make a difference)?
Unfortunately, construction crews in the tiny Pyrenees principality of Andorra are now having that conversation. Recently, five workers died and six more were injured when they fell 50 feet as bridgework they were on collapsed.
This tragic accident serves as an obvious reminder that safety should always remain job #1. However, it should also be a wake-up call to contractors to make sure their risk-shifting and risk management is up to date.
If or when that catastrophic accident hits your job site, your contract documents–believe it or not–should be one of the first things you look at. In fact, they may be the thing that guides your next move. Why? Because they will be probably be the documents that determine if you or some other party will be responsible for the defense and indemnification of the injured worker’s claims.
Most construction contracts contain some sort of risk shifting provision, whether it be an indemnification clause, a limitation of liability provision, or an additional insured requirement. Prudent contractors include these in their favor in anticipation of a catastrophic accident. These contractual provisions essentially shift potential liability away from you and place the risk of loss on another party.
When a serious construction injury occurs, rest assured that every company remotely connected to the accident site will be brought into the claim and, perhaps, into litigation. Before this happens, contractors should carefully analyze their contract documents to determine if another party owes them indemnity or if a third party’s insurance will cover them. Conversely, contractors should determine whether they owe indemnity or insurance to a third party.
Shifting the defense and indemnification for a claim to a third party, particularly in catastrophic accident situations, can result in significant savings (depending on a contractor’s own insurance). It could lead to the savings of a deductible, a large self-insured retention amount, and even premiums. All of a sudden, those seemingly mundane deal points are worth a whole lot. But these provisions must be explicitly stated in the contract documents.
The tragic Andorran bridge collapse should remind contractors to be vigilant in their contract negotiations and not to ignore risk shifting mechanisms such as indemnity clauses and additional insured provisions. Just like any construction project, proper planning and attention to detail will pay off down the road when your company is dealt a curve ball.
Unfortunately, construction crews in the tiny Pyrenees principality of Andorra are now having that conversation. Recently, five workers died and six more were injured when they fell 50 feet as bridgework they were on collapsed.
This tragic accident serves as an obvious reminder that safety should always remain job #1. However, it should also be a wake-up call to contractors to make sure their risk-shifting and risk management is up to date.
If or when that catastrophic accident hits your job site, your contract documents–believe it or not–should be one of the first things you look at. In fact, they may be the thing that guides your next move. Why? Because they will be probably be the documents that determine if you or some other party will be responsible for the defense and indemnification of the injured worker’s claims.
Most construction contracts contain some sort of risk shifting provision, whether it be an indemnification clause, a limitation of liability provision, or an additional insured requirement. Prudent contractors include these in their favor in anticipation of a catastrophic accident. These contractual provisions essentially shift potential liability away from you and place the risk of loss on another party.
When a serious construction injury occurs, rest assured that every company remotely connected to the accident site will be brought into the claim and, perhaps, into litigation. Before this happens, contractors should carefully analyze their contract documents to determine if another party owes them indemnity or if a third party’s insurance will cover them. Conversely, contractors should determine whether they owe indemnity or insurance to a third party.
Shifting the defense and indemnification for a claim to a third party, particularly in catastrophic accident situations, can result in significant savings (depending on a contractor’s own insurance). It could lead to the savings of a deductible, a large self-insured retention amount, and even premiums. All of a sudden, those seemingly mundane deal points are worth a whole lot. But these provisions must be explicitly stated in the contract documents.
The tragic Andorran bridge collapse should remind contractors to be vigilant in their contract negotiations and not to ignore risk shifting mechanisms such as indemnity clauses and additional insured provisions. Just like any construction project, proper planning and attention to detail will pay off down the road when your company is dealt a curve ball.
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