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.

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%.

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.

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.

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.
OR
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!

What Does Tiger Woods Have To Do With Construction Law?

You cannot turn on the TV, pick up a newspaper, read a magazine, or listen to the radio these days without hearing the latest chapter in the Tiger Woods saga. We have been inundated with the most private details of Tiger’s personal life, from text messages and voice mails to web streamed confessions and (supposedly) intimate photos. Conversations that were supposed to be hidden have been splashed all over the news for the world to view.

"Yeah, but what does that have to do with construction law?" you may be asking yourself.

Quite a bit.

The construction world (just like any industry), and every construction project in general, is full of casual communications. From emails and voice mails to red-line changes to Word documents and Excel spreadsheets, a significant portion of our communications is done digitally. Which means somewhere, on some computer or some server, there is a copy of that communication. Or, someone else, who we do not control, has a copy of that document that never completely goes away.

In other words, virtually everything pounded out on a computer or left on a digital messaging system has the potential to end up in front of a jury.

Most construction projects of any significant size almost always entail some sort of disputes, such as delays, cost overruns, punch list items, and payments. The majority of these are worked out between the parties, but a few end up in litigation. And when that happens, all those emails become discoverable. So do electronic drafts of documents, and faxes with your scribbled notes. All of a sudden, your private email conversations about a project are being read by an opposing lawyer and could quite possibly end up as Exhibit 1 for a jury to view. Claims against a subcontractor for delay damages are really weakened by a hasty email to a co-worker that admits you were slow in approving change orders because your office was overworked and understaffed.

It has been stated many times before, but it is worth stating again–take the same precautions in sending emails and creating electronic documents that you would take in creating paper communications. Just because you deleted that email, and then emptied your "Deleted" folder, does not mean that communication has gone away. It still probably rests on a server or in the hidden world of slack space on a hard drive.

Just as communications have gone digital, so have lawyers. Attorneys know to ask for emails and images of hard drives (so that the techies can cull through the slack space) because so often, that is where the dirt is. And it is very easy to see the edits and changes in many Word documents, not to mention metadata such as when the file was created and by whom.

Like it or not, our data has a longer life now than it ever has before. Tiger Woods never imagined that his most intimate text messages would end up in a David Letterman monologue, but they have. Don’t make the same mistake with your communications. Before hitting that "Send" button, think whether you would mind having your thoughts displayed as a trial exhibit for a judge, jury, and whole world to read.

Consistent Contract Drafting Will Keep You from Fighting the Same Dispute in Both Arbitration and Litigation

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.