What’s Up With Division 1 (No. 14)

This year my family chose somewhat of an atypical holiday photo.  We proudly feature the Division 1 branded umbrella!  You can see the #1 logo just over my daughter's shoulder.  

I hope you and your family/friends are having a wonderful holiday season.  I know how busy 2021 felt for many of our D1 members and we all deserve some down time before we ramp back up in 2022! 

Even with the heavy workloads and crazy, evolving work life balance decisions we had to make in 2021, I am so proud of the efforts Division 1 members made this year to engage, educate, and network with each other.  Here is a listing of some of the programs and events we conducted:

• Virtual Escape Room (Feb. 2021) with Divisions 7/9
• Napa Valley Wine School Online Class (March 2021)
• Return on Investment of Construction Claims (March 2021) 

• Privilege Walk (April 2021) with the Forum's D+I Committee and NAWIC
• Charting Your Path to an ADR Practice (June 2021) with the Section of Litigation's Construction Litigation Committee, NAWIC, and the AAA

In addition, we scheduled eight Division 1 Toolbox Talk Series programs this year.  Our TTS Planning Team has demonstrated incredible creativity and effort to get this series off the ground.  Big thanks to Jade Davis, Patricia Thompson, David Ponte, Daya Naef, and the other TTS team members / discussion leaders that put on these programs!  We are going to continue strong in 2022. Contact me (rtdunn@PierceAtwood.com) if you want to get involved. 

Finally, Catherine Delorey and The Dispute Resolver editorial staff published nearly 40 posts in 2021.  Great job TDR Team!

Looking forward, our next TTS program is scheduled for Thursday, January 27, 2022 at 12:00PM ET.  Sakib Kahn will be co-leading a discussion about thorny topic of litigating design delegation issues.  Registration page and promotion of that will be sent out next week.  

We also are conducting a second Building Results program for the Forum/D1's law student membership on February 2, 2022 at 5PM ET. The Forum's law student liaison and D1's YLD liaison, Lexie Pereira and I will co-moderate this program with excellent panelists: Jeff Cruz, Leslie O'Neil, Carmela Mastrianni, and Richard Wittbrodt.  

The Forum's midwinter meeting is in San Diego on February 23-25, 2022.  Division 1 events will include:

• Division Lunch - A Perfect Storm: The Engineering and Legal Lessons Learned in the 10th Year Anniversary of the Indiana State Fair Stage Collapse."  Our speakers will be Kurt Hoigard, an engineer with Raths, Raths, Johnson (RRJ) and John Van Winkle, Van Winkle Baten Dispute Resolution.  Thanks to Marissa Downs for taking the lead on this lunch.   

• Practicum - Advanced Advocacy Skills in Mediation Practicum | Wednesday, February 23, 2022, 1:00PM – 4:00PM, San Diego, CA.  Construction cases are complex and often involve not only complex technical issues, but also numerous parties, voluminous documents, and a myriad of claims and counter-claims.  Many construction cases are resolved through mediation – and nearly all of them will at least attempt mediation voluntarily, or be required to by contract.  However, a successful mediation of complex construction cases requires a skilled neutral and experienced advocates. This Mediation Practicum will provide advanced mediation and negotiation insights and skills for construction lawyers, construction companies, and neutrals alike to maximize the potential to effectively mediate and resolve complex construction cases.  This practicum will be an interactive event with the attendees including participating in and observing role plays and learning from some of the top construction lawyers and mediators.

REGISTER HERE FOR THE PRACTICUM

After the midwinter meeting, the ABA Forum on Construction Law is conducting 3 additional meetings in 2022:

• New York City - May 4-7, 2022
• Lake Tahoe - July 26-28, 2022
• Memphis - October 2022

Happy Holidays and looking forward to working with you all next year!!  

Tom Dunn, Division 1 Chair

Pierce Atwood LLP

rtdunn@pierceatwood.com

View from the Field Part 2 - The Front-End Makes the Megaproject

This series of blog posts provides a practitioner’s view of the management processes and challenges associated with megaprojects as well as large and complex projects. Addressed by both Edward W. Merrow of Independent Project Analysis, Inc. and construction lawyer Andy Ness at a recent ABA Forum on Construction Law conference, their high-level perspectives are elaborated herein. This multi-part series has and will expand upon some practical aspects of the many challenges facing managers as well as highlight suggestions for implementation by inside or outside counsel.

Mr. Merrow’s High-Level Findings

In Mr. Merrow’s presentation, he advised and emphasized that only about 35% of Megaprojects are successful. By contrast, Major Projects less than $500 million have a success rate of approximately 63% (hence even these projects experience a failure rate of one-third). Key metrics are: Cost Index, Cost Growth, Execution Schedule Index, Execution Schedule Slip, and Production Problems. Mr. Merrow’s theme for success – “The Front-end Makes the Megaproject.”

The summary, highest level findings (regarding Megaprojects) of Mr. Merrow’s presentation are:

• The Front-end Makes (or breaks) (is essential for success of) the Megaproject
• Sponsors of Megaprojects have three critical responsibilities:
• Shaping – shape the project such that stakeholders are aligned
• Basic Data – technical data are correct and complete
• Front-end Loading – fully define the project before starting execution
• All of these are owner responsibilities alone (i.e., not contractors).

Mr. Ness’ High-Level Findings

Mr. Ness wrote a paper Why Megaprojects Fail So Often and Why You Should Care, No Matter the Size of Your Project and focused on business decisions in “4. Business Decisions That Hurt Prospects for Project Success.” Several key points follow:

Business-driven actions or inactions…

These include under-investing in up-front project development, failing to assign the full required team to the project, untimely changes to the project’s scope, demands to shave the budget or compress the deadline for completing the project without reducing the scope, and involving the company’s purchasing organization in the process of selecting key project contractors and other participants.

Mr. Ness continues “The monumental mistakes usually belong to the business side.” Hence, this is not “The Field” (defined below).

Why Study Industrial Megaprojects?

Given Mr. Merrow’s findings and Mr. Ness’ perspectives, it is legitimate to question the value since most projects, although they may be large and/or complex, are not industrial megaprojects. The reasons are:

• Problems are similar on large & complex (not megaprojects) projects – lessons learned are valuable
•  Large & Complex success rate is 60%+, therefore, failure rate is 30%+
• Formulas and managerial methodologies for success are valuable models for planning and execution of large and complex projects (not megaprojects).

View from the Field – The Front-End

What is the Field? In this case, we define “The Field” as any Project Management Team (PMT): owner, contractor(s) (including engineering, architectural, construction and specialty), suppliers and vendors. I have had all of these roles in large and complex projects, some megaprojects.

Shaping (shape the project such that stakeholders are aligned) – Stakeholder Alignment managerial process is addressed in several industry standards. These resources include PMI Project Management Body of Knowledge (PMBOK), Stakeholder Management and Project Management, as well as Kerzner, Stakeholder Relations Management. Stakeholder Alignment can be achieved using these (and other) processes. The processes can be implemented within the Project Execution Plan (PEP) (also known as Project Plan, Project Management Plan, and other titles) using an extensive PEP workshop process.

In Leading Complex Projects, Mr. Merrow describes the PEP as:

A project execution plan (PEP) is a document that is produced by almost all project teams in all of our clients across all industrial sectors. It is a ubiquitous document that is, in theory, supposed to tell the expected story of the project and its execution. Some PEP’s we see are very good and some of the PEP’s are utterly horrid.

Stakeholders such as inside or outside counsel may achieve insight into the status of Stakeholder Alignment by attending a few workshop sessions and/or reviewing the PEP deliverable.

Basic Data – requires specialized and suitably credentialed Subject Matter Experts (SME’s).  I have encountered these situations and made the decisions to acquire suitable SME’s. Credentialed SME’s should deliver a report assessing basic data status and readiness to proceed into the project development process.

Front-end Loading – How does the project team evaluate readiness (suitable front-end loading)? A creditable tool is Construction Industry Institute (CII) Project Development Readiness Index (PDRI). These tools are available for various industries. Business unit representatives/SME’s (not merely the PMT) provide creditable expertise for representing/contributing business interests, values and requirements. Further, stakeholders such as inside or outside counsel, could assess the status by attending working sessions and/or reviewing standard reports.

Conclusions (Part 2)

The Front-end makes the large and complex project. The developmental processes are all the responsibility of the owner. Hence, owners (including owner PMT’s) need to make sure that this process is robust and complete. Contractors need to evaluate the degree of completeness during the bidding process. Inside and outside counsel can use the managerial processes and deliverables as assessment tools in order to evaluate the large and complex project readiness for further development (or readiness for passage through the next stage gate).

View from the Field – Interface Management

Part 3 of this series will address the challenges of Interface Management that is required when using “Mixed” contracting approach.

Author George T. McLaughlin PMP CCM has worked worldwide in this industrial marketplace since the early 1980’s. He serves Owners, Prime Contractors, and Subcontractors. For the most part, Mr. McLaughlin’s work is performed on-location where the relevant work is being performed hence the title “view from the field.” Mr. McLaughlin is a principal of McLaughlin & McLaughlin out of Austin, Texas.

Meet D1’s Neutrals Series: CLIFFORD J. SHAPIRO

Company: Shapiro Dispute Resolution LLC

Office Location: Chicago, IL

Email: clifford@shapiroadr.com

Website: www.shapiroadr.com

Law School: George Washington University, JD 1982

Affiliated ADR Organization: AAA National Panel - Construction and Commercial Claims

Types of ADR services offered: Arbitration & Mediation

Geographic area served: United States

Q: Describe the path you took to becoming an ADR neutral.

A: I have been a construction litigation attorney for more than 35 years, and for the past 13 years I was an equity partner and chair of the Construction Law Practice Group at Barnes & Thornburg, an AmLaw 100 firm with 20 U.S. offices.  In that capacity, I handled just about every kind of construction claim that exists, and I worked to resolve those claims through litigation, arbitration, and mediation.  About five years ago, I decided to become an arbitrator and mediator. I spent quite a bit of time obtaining formal and informal training, and I was selected by the American Arbitration Association to be a member of its National Roster of Neutrals for construction and commercial claims.

Q: What percentage of your current legal practice is spent on ADR work?

A: As of January 1, 2021, I am working 100% as an arbitrator and mediator.  I primarily handle complex construction disputes and related insurance claims, as well as commercial disputes.

Q: Mediators are oftentimes described as “facilitative,” “evaluative,” or “transformative.” Do you have a style?

A: Each mediation is different, but generally I begin mediations in a more “facilitative” role and progress to a more “evaluative” role when it is appropriate to do so.  Particularly if a party requests it, I will share my thoughts about the risk analysis of the claim.

Q: What should attorneys and their clients take into consideration when selecting a mediator?

A: I think subject matter expertise is important in construction cases.  Also, in a complex, multi-party case, it helps to have a mediator who has successfully handled those kinds of claims both as an advocate and as a mediator.  It can also be important for the mediator to understand and be able to handle the numerous kinds of insurance issues that often arise in connection with construction claims. 

Q: Are virtual mediations as effective as in-person mediations? Do you anticipate that mediations will continue to be conducted virtually post-pandemic?

A: I handled quite a few virtual mediations and arbitrations during the pandemic, and they were all successful.   Frankly, I was surprised at how well these proceedings worked.  However, as we move out of the pandemic, most counsel and parties are telling me they want to have in-person mediations and arbitrations again, or at least to have “hybrid” proceedings at which the key parties and counsel appear in person and other participants can appear virtually.

Q: What role do you think videoconferencing will play in the arbitration landscape post-pandemic?

A: I now regularly use video conference technology for preliminary meetings.  Particularly with respect to mediations, I highly recommend having a virtual meeting with counsel and the key client representatives for each party in advance of the first mediation session.  These meetings almost always provide important information that is not found in the written submissions, and they are a great way to begin the process of building the trust and respect that is critical to a successful mediation. In addition, these meetings often make it possible to forego having opening statements or presentations at the start of the mediation.

Q: Can you describe one of the more notable arbitration matters that you have handled?

A: The most memorable case I had this past year was a AAA arbitration matter where I served on a panel for a large, complex dispute that involved more than 40 different construction claims exceeding $35 million in claimed damages.  The dispute arose out of a luxury apartment building project and involved more than five parties.  The claims were presented to the panel during two weeks of live hearings in St. Louis and then three weeks of virtual hearings via Zoom during the pandemic.  The panel issued a 46-page award.

Q: What are some of your interests or hobbies outside of your ADR Neutral practice?

A: I am a road bike cyclist (who used to be faster), and I play acoustic and electric guitar.  My wife and I also like to visit our grown daughter and her family, and we like to travel.

Irreconcilable Differences and the Right to Cure (Terminating Construction Contracts - Part 1)

In this series we will provide a brief summary of a very complex topic: the termination of construction contracts. Termination should be a last resort on a difficult construction project. There are a myriad of reasons why termination can backfire if not executed carefully and thoughtfully.

This series will scratch the surface of selected legal issues arising from contractual terminations. Although much of this analysis is from the perspective of an owner, we hope the discussion will also be of use for other parties, including design professionals, general contractors and subcontractors.

Complex construction projects can be long, difficult and frustrating endeavors. Inevitably, things go wrong. Delays happen, unforeseen circumstances arise and costs increase. After months of interaction both on-site and during project meetings, personalities clash and patience wears thin. 

In this charged atmosphere with large amounts of capital at risk, it can be tempting to consider the merits of terminating certain contracts. As we counsel our frustrated clients regarding the potential benefits of termination, and more importantly the potential pitfalls and liabilities that could end up in protracted litigation or arbitration, sometimes the best service we can provide is simply letting an exasperated client blow-off steam while reminding them to maintain written records of project-related communication and a back-up set of all project documents. Termination may sound viable in the heat of the moment, but it is hardly a decision that should be made without careful planning and detailed scrutiny of all the legal and practical implications. 

Irreconcilable Differences and Practical Considerations

Unfortunately, certain differences are irreconcilable. In these circumstances, termination may be the only viable option to finish a project. However, even when a material breach occurs, clients should be counseled regarding several important practical considerations before even reaching the litany of legal concerns.

For example, even assuming an owner has the right to terminate a contractor for cause, the owner may not have an adequate replacement ready to assume the remaining contractual obligations. Or perhaps the owner has a replacement, but in order to assume the remaining obligations and walk onto the project and accept the risks of “cleaning up someone else’s mess,” the replacement is prohibitively expensive. In these scenarios, the termination “medicine” may be worse than the “disease” of maintaining a difficult relationship with an underperforming party.

A second critical decision is whether a client wants to deal with the stress and expense of mediation, arbitration or litigation. Further, the client should be advised to consider termination in the context of its relationship with the lender. Because construction projects are capital intensive, lenders may retain leverage, literally and figuratively, over significant project details. Making a unilateral decision without considering the lender is rarely a good idea.

Materiality and Termination For Cause

The law generally disfavors termination. Termination is a drastic remedy and the law has developed several hurdles before a party can justify terminating a contract for cause. First, the breach must be material. Second, the breach must be not be excused. Third, the breach must have been neither cured nor waived.

Many modern construction contracts contain “breach conversion” provisions. These powerful devices convert breaches from breach of contract claims into claims for relief under the contract. Breach conversion clauses may address common issues such as changes, owner’s misrepresentation of site conditions or suspension of work.

Not all breaches are material. While a material breach may provide grounds for a for cause termination, defining the outer limits of materiality is notoriously complicated. Hopefully the contract documents are detailed enough to provide specific guidance regarding triggering events, cure provisions and compensation. Contractual termination clauses are usually the starting point of the analysis.

Most standard form contracts appoint the architect or another design professional as the “Initial Decision Maker” pursuant to their construction administration responsibilities. The Initial Decision Maker essentially acts as the earliest referee of the formal dispute process. They may be forced to consider for cause grounds for terminations including defective work, excessive delays, the non-payment of subs or insufficient labor on-site. Another example may be determining when a work stoppage amounts to abandonment. Nothing can be more frustrating than a work-stoppage when a project is already behind. However, clients should be counseled that a court may not agree that a given work stoppage amounts to abandonment.

The stakes of deciding to terminate a contract due to a material breach are high. If an owner makes the wrong decision, they can open themselves up to significant liability. It goes without saying that an owner’s wrongful failure to pay is itself a material breach. Wrongful termination can lead to the discharged party receiving lost profits and other damages. In many jurisdictions, a bad faith termination can lead to extracontractual damages.

The Right to Cure

Even when a breach has occurred, most standard contract documents will provide important limitations on the right to terminate. One of the most significant limitations is the right of a breaching party to cure any material breaches capable of being remedied.

The right to cure provides the breaching party with the opportunity to address their mistakes. Sometimes this isn’t practical for logistical reasons, but the legal principle is important. For example, most jurisdictions won’t let a landlord evict a residential tenant without notice of default and other legal safeguards developed over time. The same basic concept applies to construction contracts. The right to cure is a common law concept grounded in the equitable principle that notice is an element of fairness and can promote the informal resolution of disputes.

A “cure notice” must be given by the non-breaching party. There are only limited exceptions to this general rule, including when a material breach clearly cannot be cured in time. Most standard form construction contracts will clearly specify that a cure notice must be given by the non-breaching party prior to termination. Independent of the explicit contractual language, courts usually find that unless expressly waived, a right to cure is implied in every construction contract as a matter of law.

The cure notice must adequately apprise the breaching party of the specific failures which, if not remedied, may lead to termination.

Providing cure notice is an essential prerequisite to a valid termination. If the contractor fails to cure or otherwise provide adequate assurances that it will do so within a reasonable period, the architect of record may certify that sufficient cause exists for termination.

But wait, there’s more. Waiver, mitigation and other defenses will be the topic of Part II of this series.  

Author Patrick McKnight is an associate in the Litigation Department of Fox Rothschild LLP. He can be reached at pmcknight@foxrothschild.com.