2014 Construction Law Update October 28, 2014 Session 1: - - PDF document

October 28, 2014

2014 Construction Law Update

Session 1: Implementing Integrated Project Delivery: Theory Meets Reality

Mark Voigtmann Partner

First the Theory

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The case for IPD is not hard to make . . .

Sheer number of participants Each with competing priorities Working in separate silos Performing at different times

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Inherent project inefficiencies

The case for IPD is not hard to make . . .

Separate contracts with conflicting obligations Obligations flowing through isolated tiers In an environment of constant change

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Inherent legal inefficiencies

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OWNERS DESIGNERS

An unhealthy game . . .

design in isolation

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Attack performance of

• thers to

improve margins Attack performance of

• thers to

improve margins

Understate cost to win bid Understate cost to win bid

“Guaranteed max”

OWNERS CONTRACTORS

An Unhealthy Game . . .

design

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Integrated Project Delivery

Involving more parties

at the beginning (and throughout)

Sharing of risks and

rewards

Incentivizing

cooperation

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Design- build Design- build with inclusivity Tri-party “All in”

A Much-Used Catchphrase . . .

INTEGRATED PROJECT DELIVERY

Now for the Reality

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Began with a research project

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The IU Health Project: Ten companies + one neutral

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IPD Team

5

Design Firms

3

Trades

1

Owner

1

CM

1

Counsel

Project Counsel INDIANA UNIVERSITY HEALTH Owner

Single Agreement Signed By All

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“All in” IPD

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Executive Team Project Management Team

Implementation Team Implementation Team Implementation Team

Project Counsel The Structure

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Project Accountant

The incentives

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Reimbursable Costs Profit Pool Project Reserve Project Reserve Target Cost Overrun

Owner pays / IPD Team works at cost

Savings shared 50/50

“Contract in Motion”

Objective Results

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There were significant savings

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Reimbursable Costs Profit Pool Project Reserve Project Reserve Original authorization

$220M

Target cost

$200M Savings $20M +$9M _____ $29M _____ $191M

The Schedule was Shortened

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RFP Design (6 mos. instead

• f traditional
• ne year)

Construction (shortened due to efficiencies)

Key stakeholders engaged before design

Duplication was Eliminated

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Electrical contractor does detailed electrical drawings Design professional re- draws them Electrical contractor does detailed electrical drawings End of process

Traditional project IPD project Savings on IU Health project = $500K

The “status quo” was challenged

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Traditional project IPD project

Owner imposes its “standards” Team implements Minimal incentive to save Owner imposes its “standards” Team challenges

• rthodoxy

Savings is realized

Resulted in lower costs and significant operational energy savings

Operational energy savings were realized

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$3.76 per square foot (IPD design) $5.35 per square foot (prior design) 203,500 BTU per square foot (IPD design) 289,760 BTU per square foot (prior design)

Non-owner change orders were lower than expected

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1.6% of cost (this IPD project) 6% of cost (traditional healthcare project)

Requests for information (RFIs) were non-existent

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None

Claims were non-existent

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None*

* Excluding workers compensation claims and one internal contract interpretation question

Subjective Results

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Did the IPD model that was used add value?

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96% Yes 4% Too Early to Tell

How was value added?

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97% 82% 68% 57% 54%

Coordination between design / construction Eliminate posturing Efficiency of process Reduction of mistakes Empowering innovation and creativity

What was better? What was worse?

Better: “When the group of contractors sit in a room and

have conversations about what the right thing is to do versus defending why they aren't responsible or why they need [to be] paid for something there is an obvious improved value that is created.”

Worse: “Insufficient formalities / memorialization.”

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What was better? What was worse?

Better: “Sense of teamwork between the individual

contractors and owner, ability to incorporate innovative changes into design while minimizing risk of unintended consequences on other trades.”

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What was better? What was worse?

Better: “True collaboration. Focus on serving the customer

• vs. managing individual company risk. Worse:

Documentation and cost forecasting could be improved.”

Better: “The colocation of the entire team working on the

project has been great and taken the interaction of the team to another level.”

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What was better? What was worse?

Better: “Access to the most appropriate expert on the team

is better... With decisions made more collectively among the experts (there is always more than one and the Architect or Engineer is not always the most appropriate).

Worse: “The conditions of satisfaction and financial models

could be better. We made them too objective.”

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What was better? What was worse?

Better: “The model allowed for open communication between

team members which should result in a design that will be more efficient to construct. It also allowed time up front to complete coordination and identify and fix problems that historically would have gone through the RFI / wait for an answer / price a change order / process that is inherently inefficient and expensive.”

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More About the Nuts and Bolts

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“Contract in Motion”

Select IPD Team The selection of compatible partners is key. Project Retreat and Charter This is the moment the team takes shape. Multi-party Agreement This is the constitution for the project.

1 2 3

“Contract in Motion”

Financial Model Setting of target cost, project reserve, profit pool, profit split and claims trigger Statement of Program Determination of scope and schedule, and allocation between IPD team members Conditions of Satisfaction Setting of short and long term subjective and objective goals

4 5 6

Concepts of “Lead Designer” and “Lead Constructor”

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Project Reserve

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Project Counsel

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Standard subcontract form

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Claims Trigger

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Dispute resolution (internal)

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Implementation Team Implementation Team Project Management Team Project Management Team Executive Team Executive Team Project Counsel investigation / report Project Counsel investigation / report Project Counsel conciliation Project Counsel conciliation Formal mediation Formal mediation Dispute resolution (arbitration or litigation) to the extent permitted by many waivers of liability Dispute resolution (arbitration or litigation) to the extent permitted by many waivers of liability

Dispute resolution (external)

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The IPD Team The IPD Team Any external party Any external party

Insurance

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OCIP OCIP Practice PL policies Practice PL policies Contract risk exclusions Contract risk exclusions

CCIP CCIP Project policy Project policy Practice PL policies Practice PL policies Contract risk exclusions Contract risk exclusions

Indy project Cincy project

Common “studio” space with BIM server

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Revisions to this model in next iteration

Overall simplification Addition of Project Accountant Simplified profit split rules Pre-loading of certain “constitution” elements into initial Project

Charter

Addition of “Owner Reserve” concept Improvement of the “rules” for Conditions of Satisfaction Address changes in company management Means of gaining greater clarity regarding original scope Greater training

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Session 2: Construction and Design Defects

Ben Petre Associate

Construction Defect Claims: Common Considerations

There are a number of frequent legal issues that arise in construction defect cases. These often center around the following questions:

When does a claim begin to accrue? That is, when does the clock

start running?

How long does the claimant have to pursue the claim (i.e., statute

• f limitations and statute of repose)?

Who are the liable parties (e.g., design, construction,

management, etc.)?

What types of claims may be asserted (e.g., contract, tort, etc.)?

Johnston v. Centennial Log Homes & Furnishings, Inc., 305 P.3d 781 (Mont. 2013)

Background Facts

The Leonards contracted with Centennial for the sale of a log home

kit and construction of a custom log home on their property

After the construction, the Leonards granted 36% of the interest in

the property to the Johnstons, who were Sandy Leonard's parents

Shortly thereafter, in 2005, the Leonards and Johnstons discovered

the existence of construction defects and property damage

Centennial and the Leonards eventually executed a “General

Release” in favor of Centennial

The Leonards, Centennial, and all of Centennial’s subcontractors

were all parties to the release, but the Johnstons were not

The Johnstons eventually obtained 100% interest in the property and

discovered even more serious construction defects in 2008 and 2010

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Johnston v. Centennial Log Homes & Furnishings, Inc., 305 P.3d 781 (Mont. 2013)

Issue No. 1: Whether the Johnstons’ claims were barred by the

applicable statute of limitations?

The Supreme Court of Montana found that, where there is

conflicting evidence as to when a cause of action accrued, a jury should decide whether the action is barred by the statute of limitations

Application of the discovery rule

Issue No. 2: Whether the release entered into in with the Leonards

barred the Johnston’s claims

The Supreme Court of Montana found that the Leonards’ release

did not bar the Johnstons’ claims, because it did not apply to the Johnstons’ interest in the property

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Johnston v. Centennial Log Homes & Furnishings, Inc., 305 P.3d 781 (Mont. 2013)

Takeaways

When you observe potential property damage or some other

physical manifestation of a potential defect, or learn of a construction defect itself, TAKE ACTION!

The failure to do so could result in you losing your claim When you are negotiating a settlement, make sure that you identify

everyone that has an interest in the property and require that they all be a party to the release

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Hewitt v. Kirk's Remodeling and Custom Homes, Inc., 310 P.3d 436 (Kan.App. 2013)

Background Facts

Homeowners, the Hewitts, purchased their newly built home from a

builder, Kirk's Remodeling and Custom Homes, Inc. (Kirk)

Express warranty to provide a house free from defects in materials

• r workmanship

Promised that if defects arose during the 1–year warranty period,

Kirk would repair or replace the defects

Immediately prior to the expiration of the warranty period, the

Hewitts gave Kirk written notice of construction defects

Kirk failed to repair or replace the defects The Hewitts brought action against Kirk for breach of construction

contract and breach of express warranty

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Hewitt v. Kirk's Remodeling and Custom Homes, Inc., 310 P.3d 436 (Kan.App. 2013)

Issue: When did the Hewitts’ cause of action for the breach of

repair or replace warranty accrue? Was the claim barred by the statute of limitations?

Kirk argued that the breach of warranty claim accrued on the date

• f the sale and delivery

Hewitts argued that the claim accrued when Kirk refused to repair

• r replace the defective work

Holding: The breach of the warranty occurred when Kirk refused to

repair or replace the defects. The key inquiry was when the Hewitts knew about Kirk’s refusal, not when Hewitts knew about the defects.

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Hewitt v. Kirk's Remodeling and Custom Homes, Inc., 310 P.3d 436 (Kan.App. 2013)

Takeaways:

Construction professionals A repair or replace warranty may result in a longer statute of

limitations

The statute of limitations on express warranties frequently

begin to run on the date of sale and delivery

The statute of limitations applicable to a repair and replace

warranty may not run until the construction professional fails to repair or replace

Owners The statute of limitations applicable to your warranty claims

may expire much earlier than you realize

When you learn of facts that may give rise to a claim, TAKE

ACTION!

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Jai Ganesh Lodging, Inc. v. David M. Smith, Inc., 2014 WL 3559701 (Ga.App. 2014)

Background Facts

A newly constructed Holiday Inn Express experienced structural

damage that resulted from settlement of the rear parking lot, pool areas, and one side of the building itself

Property owners and a hotel operator sued grading contractor and

grading subcontractor, and later added individual defendants related to grading subcontractor, for breach of contract, negligent construction, and continuing nuisance

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Jai Ganesh Lodging, Inc. v. David M. Smith, Inc., 2014 WL 3559701 (Ga.App. 2014)

Issue No. 1: Whether the previously undisclosed owners of the

property were third-party beneficiaries to the contract between a contractor and subcontractor?

Holding: The contract did not reference with undisclosed owner,

and neither the contractor nor the subcontractor intended a benefit for the undisclosed owner. Thus, the undisclosed owner could not bring a breach of contract claim.

Issue No. 2: Whether the plaintiffs could maintain a tort claim,

given that there was no privity of contract.

Holding: There is a duty implied by law to perform the work in

accordance with industry standards, and it is independent of any contractual duty.

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Jai Ganesh Lodging, Inc. v. David M. Smith, Inc., 2014 WL 3559701 (Ga.App. 2014)

Issue No. 3: Whether the acceptance doctrine barred the plaintiff’s

negligence claim

The acceptance doctrine protects a negligent contractor only if the

defect is not hidden but readily observable on reasonable inspection

Here, the grading contractor’s failure to properly compact the fill

material was concealed from view and below the surface

Holding: summary judgment was inappropriate because there were

issues of fact as to whether the defect was readily observable on reasonable inspection

Takeaway – Again, if you observe a defect, property damage, or

• ther sign of a potential defect – TAKE ACTION!

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Beacon Residential Community Ass’n v. Skimore, Owings & Merrill LLP, et al., 327 P.3d 850 (Cal.App.4th 2014)

Background Facts

Condominium owners association brought construction design

defect action against developer, architectural firms, and others, alleging that defects made homes unsafe and uninhabitable for significant portions of the year due to high temperatures

The architecture firms allegedly designed the homes in a negligent

manner, but did not make the final decisions regarding how the homes would be built.

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Beacon Residential Community Ass’n v. Skimore, Owings & Merrill LLP, et al., 327 P.3d 850 (Cal.App.4th 2014)

Issue No. 1: Whether design professionals owe a duty of care to a

homeowners association and its members in the absence of privity?

Matter of first impression in California Holding: An architect owes a duty of care to future homeowners in

the design of a residential building where the architect is a principal architect on the project.

The duty of care extends to architects even when they do not

actually build the project or exercise ultimate control over construction

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Beacon Residential Community Ass’n v. Skimore, Owings & Merrill LLP, et al., 327 P.3d 850 (Cal.App.4th 2014)

Takeaways: Design professionals in California can no longer rely on

their historical argument that they do not have a contractual relationship with the future homeowners.

An architect can no longer escape negligence liability on

the ground that someone else – be it a developer, contractor or homeowner – made the final construction decisions.

In short, greater potential liability

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Burch v. Superior Court, 223 Cal.App.4th 1411 (2014).

Factual Background

Purchaser of new house brought action against general contractor,

developer, and their owners for breach of the sales contract, negligence, breach of implied warranty, unjust enrichment, and breach of contract/third party beneficiary

California has a Right to Repair Act, which states that in any action

for damages arising out of deficient residential construction, a builder’s liability is limited to the liability for violation of certain construction standards

It provides a remedy for certain residential construction defects

that cause no property damage

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Burch v. Superior Court, 223 Cal.App.4th 1411 (2014).

Issue No. 1: Whether California’s Right to Repair Act limits

common law claims for damages for construction defects that have caused property damage?

Holding: No, it does not limit such common law claims

Issue No. 2: Whether the general contractor owed a duty of care to

future owners that would allow the owners to pursue a negligence claim?

Holding: Yes, given that Custom Home Builders was the general

contractor on the project and responsible for the overall construction

Takeaway: greater potential liability

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South Texas College of Law v. KBR, Inc., 433 S.W.3d 86 (Tex.App.-Houston 1st Dist. 2014)

Factual Background

A law school brought an action against construction manager after

defects were discovered in work performed by general contractor hired by the manager

Building was completed 24 years before suit was filed The construction manager was granted summary judgment based

upon the 10-year statute of repose

Law school attempted to argue that the statute of claims applicable

to construction claims applied to a construction manager who did not physically construct or repair an improvement to real property

Law school argued that a construction manager is akin to an owner

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South Texas College of Law v. KBR, Inc., 433 S.W.3d 86 (Tex.App.-Houston 1st Dist. 2014)

Issue: Whether the statute of repose applicable to claims against

construction professionals applies to claims against persons, such as construction managers, whose involvement in the design and construction is limited?

Holding: Yes, the statute of repose does apply to claims against

construction managers

The construction manager was being sued for failing to properly

supervise the contractor and subcontractor

CM was clearly active in the construction Accordingly, the CM was entitled to the protections of the statute of

repose

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South Texas College of Law v. KBR, Inc., 433 S.W.3d 86 (Tex.App.-Houston 1st Dist. 2014)

Tongue-in-Cheek Takeaway:

Owners: Don’t wait 24 years to file a lawsuit Construction Professionals: If you are sued on project that is 24

years old, you will likely prevail

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Session 3: Three Things to Remember Before Terminating Your Contract

Patrick Miller Partner

A Few Preliminary Words About Termination . . .

• 1. Avoid it if you can
• 2. Have a written contract
• 3. Make sure your written contract has a termination

provision

• 4. Remember what your termination provision says

Hope Electric v. Schindler Elevator Corp., 324 Ga. App. 859

Facts: Project was to rehabilitate escalators at multiple Metro

Atlanta Rapid Transit stations

Owner: MARTA; General: Schindler;

Electrical Sub: Hope Electric

“Violation No. 1” “Violation No. 2” The “Wayside Violation” The “Georgia Dome Violation”

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Hope Electric v. Schindler Elevator Corp., 324 Ga. App. 859

Facts (cont.): Following investigation into Wayside Violation, MARTA

issues letter ordering removal of Hope from the site

Schindler terminates for default Hope Electric files suit to recover damages based on

“wrongful termination”

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Hope Electric v. Schindler Elevator Corp., 324 Ga. App. 859

“If the Subcontractor repeatedly fails or neglects to carry out the Work in accordance with the Subcontract Documents or

• therwise to perform in accordance with this Subcontract and

fails within a ten-day period after receipt of written notice to commence and continue correction of such default or neglect with diligence and promptness, the Contractor may, by written notice to the Subcontractor and without prejudice to any

• ther remedy the Contractor may have, terminate the

Subcontract and finish the Subcontractor's Work by whatever method the Contractor may deem expedient....”

(AIAA401-2007, Sec. 7.2.1)

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Hope Electric v. Schindler Elevator Corp., 324 Ga. App. 859

The Issue: Was the termination wrongful?

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Hope Electric v. Schindler Elevator Corp., 324 Ga. App. 859

Trial Court: No – Summary judgment in favor of Schindler

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Hope Electric v. Schindler Elevator Corp., 324 Ga. App. 859

Court of Appeals: Reversed. Reasoning: “Repeatedly” is ambiguous, and therefore, the jury must

decide whether Hope Electric “repeatedly” failed to carry

• ut the work

Contract did not define “repeatedly” Dictionary definitions were also ambiguous MARTA’s Prime Contract dealt with removing “personnel”

and not entire firms (so that did not save Schindler)

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REMEMBER! If you sign the AIA contract, you’re going to trial.

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Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382

Facts: Project was the Salem Home Depot regional distribution

center

General Contractor: Catamount Constructors;

Subcontractor (Steel): Steelwood; Sub-subcontractors: Shelter Products and others

Catamount has a subcontract with Steelwood and a joint

check agreement with Steelwood and Shelter

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Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382

Facts (cont.): June 16, 2010 – Catamount issues a defective work and

delay notice to Steelwood

The letter also states that there will be a meeting on

Monday the 19th to assist Steelwood in performing

June 19, 2010 – Catamount terminates for convenience

(without explanation)

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Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382

Facts (cont.): Catamount also holds payment Steelwood, Shelter and others file liens Catamount, without additional notice, cleans the site,

corrects Steelwood’s work, and asserts back-charges of $76K

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Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382

The Issue: Was Catamount allowed to terminate for convenience and back-charge for the clean up and corrective work?

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Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382

The Trial Court:

• No. Summary judgment for Steelwood.

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Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382

Court of Appeals: Affirmed Reasoning: Catamount was not allowed to terminate for convenience

and, without notice or opportunity to cure, back- charge for defective work

Warranty language (which was excellent) did not save

Catamount

T for C language making Steelwood responsible for pre-

termination work did not save Catamount

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Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or.App. 382

“…we agree with the trial court that, contrary to Catamount's assertions, the text of the termination for convenience clause, in context, does not under the circumstances of this case permit Catamount to both terminate Steelwood without cause and subsequently proceed against Steelwood as if it had terminated the agreement for cause.”

(emphasis in original)

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REMEMBER! If you have a written contract and termination provision, comply with the terms.

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Machisa Design Services v. Columbus Board of Education, 563 Fed. Appx. 458

Facts: Machisa was selected as the design architect for a new

school facility

Machisa turned out to be unqualified, failed to perform,

and was eventually terminated

Machisa, and the owner of the company, filed a federal

lawsuit alleging claims under 42 U.S.C. 1981, 1983 and 1985 (race discrimination and violation of the Due Process Clause)

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Machisa Design Services v. Columbus Board of Education, 563 Fed. Appx. 458

Facts: The allegations to support the claim were: The facilities director said Machisa was not right for

the project, commented on the owner’s accent, and asked if he had anyone “around here” other than his family

A member of the advisory board (“upon information

and belief”) stated to third parties that the School Board hired Machisa “to help a local black architect”

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Machisa Design Services v. Columbus Board of Education, 563 Fed. Appx. 458

The Issue: Do these allegations constitute race discrimination or a violation of the Due Process Clause?

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Machisa Design Services v. Columbus Board of Education, 563 Fed. Appx. 458

Trial Court: No – Judgment on the pleadings for the Board.

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Machisa Design Services v. Columbus Board of Education, 563 Fed. Appx. 458

Court of Appeals: Affirmed. Reasoning: The allegations “contained no factual matter supporting a

plausible inference of intentional race discrimination.”

A plaintiff may not bring a 1983 claim for a simple breach

• f contract when there is an adequate remedy at law

Machisa admitted in other allegations that the termination

was based on professional grounds

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REMEMBER!

• 1. If you’re terminating:

The Golden Rule

• 2. If you’re being terminated:

You’re best remedy is always, always, always your contract

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A Few Bonus Reminders. . .

Polo Elec. Corp. v. New York Law School, 114 A.D.3d 419

(2014): Don’t sue a Law School.

Window Specialists, Inc. v. Forney Enterprises, Inc., ---

F.Supp.2d ---- (2014): Your expert probably cannot opine

• n whether the termination was “wrongful” (in a jury

trial).

A Few Bonus Reminders. . .

Hanover Insurance Company v. United States, 116 Fed.Cl.

303 (2014): If your federal government contract is terminated, you still need to submit a written claim to the contracting officer under the Contract Disputes Act (before filing suit).

A Few Bonus Reminders. . .

Allen Engineering Contractor, Inc. v. United States, 115

Fed.Cl. 457 (2014): Maintain your bonding during the project!