Dispute Avoidance for LEED Projects

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In this final LEED-focused post (see post #1 and post #2), we consider dispute avoidance in the context of green-building construction contracts.  Like all projects, disputes often arise when expectations are not met. LEED projects are no different.  Parties are best served and disputes avoided when obligations and contingencies are laid out ahead of time.  For example, the AIA has adopted a guide and contract language to address and avoid disputes in this specialized context.  See AIA D503 (collecting the various Sustainable Project (SP) agreements including owner-architect, architect-consultant, owner-contractor, contractor-subcontractor).  Note that the AIA does not endorse any particular certification and its documents can be tailored regardless of the certification system selected. Below are some key contractual considerations related to disputes on green projects through the lens of owners, contractors, and architects:


(1) Define Consequences. A mutual waiver of consequential damages provision is common in construction contracts. But for green projects, it is important to define what those consequential (and non-recoverable items) are. For example, not achieving a certain threshold of energy savings, spending more on operational costs than anticipated, missed financial or tax incentives, or disappointing improvements to employee production might fit the definition.  In the event these items are intended to avoid the waiver and are recoverable, deciding ahead of time how to measure them (which could be difficult to prove) may be a prudent course as well.


(2) Limit Liability. Generally a green-building project can only be designed or built or operated with the intention of meeting sustainable goals. Other parties must perform their expected obligations and other events must fall in place as well (e.g. contractors must have access to certain materials, efficient operation & maintenance must be executed as planned, and the authorities must interpret standards and approve the design). Likewise, as noted above the costs or damages of not meeting the expected green goal can be difficult to quantify. In light of of these types of risks, contracting parties may consider include a limitation of liability with a defined maximum.


(3) Avoid Guarantees. Similarly to #2 because project participants cannot guarantee the performance of others, contractors and designers on green-building contract should make it clear that achieving the project objective depends on events outside of any one contracting party's control.

(4) Attend to Confidentiality. Confidentiality provisions must be tailored to ensure the authority-review process does not run afoul of the terms. Authorities approving sustainable projects need to have access to and the right to reproduce and display project filings. Such reproduction and disclosure may be disallowed under typical design contracts.

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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts.  She is an associate at Pierce Atwood, LLP in Providence, Rhode Island.  She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Connecticut Court Upholds Arbitrators Decision that AIA A201 General Conditions Incorporated by Reference Satisfies the Connecticut Home Improvement Act Requirements

The plaintiffs in Paul Ippolito et al. v. Olympic Construction, LLC (AC 37437) are homeowners whose house suffered water damage resulting from a storm.  Consequently, the plaintiffs entered into a contract with the defendant to repair the damage to their home.  The contract entered into was AIA Document A133 - Standard Form of Agreement between Owner and Construction Manager as Constructor Where the Basis of Payment is the Cost of the Work plus a Fee with a Guaranteed Maximum Price.  AIA A201 – General Conditions of the Contract for Construction was also incorporated into the executed contract through reference.  Contained within the contract was the provision that all disputes arising out of the agreement would be subject to arbitration in accordance with AAA’s Construction Industry Arbitration Rules. At some point during construction operations, another storm further damaged the plaintiff’s home and plaintiffs terminated the contract with the defendant.  The defendant filed a claim for contractually mandated arbitration in order to recover its lost profits for work it had not been allowed to complete under the contract.  

The plaintiff’s defense at arbitration was that the contract was unenforceable against them because it did not comply with certain statutory requirements of Connecticut’s Home Improvement Act (HIA).  The HIA (through the Home Solicitation Sales Act) requires clear notice of the owner’s cancellation rights in the contract as well as a defined start date and completion date.  The plaintiffs claimed that the contract contained neither of these provisions.  The arbitrator found for the defendant and awarded it lost profits based upon the plaintiff’s breach of duty. The plaintiffs moved to vacate the arbitration award in Superior Court claiming the award violated public policy of the state because it ran counter to the HIA and in turn, the arbitrator had manifestly disregarded the law.  The Superior Court found for the defendant and granted the defendant’s motion to confirm the arbitrator’s award. The plaintiffs appealed.

The Appellate Court of Connecticut began its review of the arbitrator’s award by examining the plaintiff’s claim that even though the contract did contain the required notice of cancellation, its location in the contract made it deficient. The statute requires that the cancellation notice be in proximity to the signature of the owner and that there be a captioned notice of cancellation attached to the contact. The plaintiff claimed that the provision was “buried” on page thirty-eight of the thirty-nine page 201 General Conditions attachment. The Appellate Court agreed with the arbitrator’s finding that the contract’s notice of cancellation complied in substance with the requirements of the HIA because A201 had been incorporated by reference in a contract line item directly above  the plaintiff’s signature.  

The Appellate Court next reviewed the plaintiff’s claim that there was no statutorily required start and completion date. The arbitrator found that, “[t]he General Conditions state in section 8.1.2: ` [t]he date of commencement of the Work is the date established in the agreement.' Section 2.3.1.1 of the agreement states: `For purposes of Section 8.1.2 of A201-2007, the date of commencement of the Work shall mean the date of commencement of the Construction Phase.' In the following section 2.3.1.2, it states, `The Construction Phase shall commence upon the Owner's acceptance of the Construction Manager's Guaranteed Maximum Price proposal or the Owner's issuance of a Notice to Proceed, whichever occurs earlier.' The completion date for the contract is defined in Section 9.8 of the General Conditions.[8] In this matter, the start dates and the completion date can be readily adduced by looking at the entire contract. . . ."  The Appellate Court stated that even if there were some “explicit, well defined, and dominant public policy” of enforcing the start and completion date requirement of the HIA, in this instance, it would fail because the current contract does not violate the requirement. 

Finally, the Appellate Court agreed with both the arbitrator and Superior Court’s findings that the contract deviated from the strict requirements of the HIA’s notice of cancellation only in a minor and technical manner and that the contract did in fact contain a starting and completion date. Accordingly, the court found that the plaintiffs failed to prove that arbitrator “ignored the requirements of a well-defined, explicit, and clearly applicable law” and affirmed the Superior Court’s decision. 

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based out of Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com.

Agreements to Arbitrate Are Simple, Right?

Ira M. Schulman, Partner, Pepper Hamilton LLP

The construction industry has been a leader in the use of arbitration to resolve disputes. In the past 30 years, it is fair to say that arbitration has outpaced litigation as the dominant method of dispute resolution. The protracted time for a construction case to get to trial and the attendant cost and expense has led the construction bar away from the courthouse and into the arbitration room. It not unusual for a lawyer bringing a construction case to court to receive a frosty reception from the judge, whose first remark is often akin to “why are you not in arbitration?” In other words, sitting through a construction trial is not among the court’s favorite pastimes.

The decision to arbitrate is made most typically, although not exclusively, by the parties’ agreement. The American Institute of Architects’ templates of construction agreements include an arbitration option wherein the parties agree that all disputes arising out of the agreement shall be determined in an arbitration to be administered pursuant to the Construction Industry Rules of the American Arbitration Association. These rules, well known to construction lawyers, provide for the orderly administration of an arbitration. Most construction lawyers, out of either lassitude or ignorance, pay scant, if any, attention to the arbitration clause. This is a mistake, perhaps a significant one, that can affect the outcome of the arbitration in numerous ways that cannot be predicted when the underlying contract is signed.

The arbitration clause is not a holy scripture that came down from Mount Sinai and cannot be altered or amended. Arbitration clauses get amended all the time, and it is up to you to decide how best to modify the standard arbitration agreement.

In addition to my law practice at Pepper Hamilton LLP, I have served as an arbitrator for the American Arbitration Association since 1987 and have presided over numerous cases both as a sole arbitrator and a member or chair of an arbitration panel. My experience has taught me that the prudent negotiation of an arbitration clause is as important to an arbitration as jury selection and jury charges are to litigation. Here is some advice:

1. Who can demand arbitration? The standard arbitration clause allows either party to initiate an arbitration. If that is not what you want, the arbitration clause should be amended. For example, an owner may want to have an exclusive option on whether a dispute will be arbitrated or arbitration will only be allowed for disputes under a particular dollar threshold.

2. Who will the parties be? The American Institute of Architects’ templates, not surprisingly, protect architects from being joined as parties to arbitrations unless they consent. This protection often leads to a situation where the owner and general contractor are in one arbitration and the owner and architect are in a separate arbitration. This arrangement frequently results in inconsistent results and very unhappy owners. If the thought of this keeps you or your client awake at night, modify your arbitration clause to allow for liberal consolidation so that all disputes arising from one project are determined in one arbitration. 

3. Who will be the arbitrator(s)? Unless your arbitration clause addresses this issue, your arbitrator will be selected by mutual agreement of the parties or, failing that, by administrative appointment. Too frequently, arbitration panels consist of all lawyers. Before the contract is signed, ensure that one arbitrator will be a contractor or design professional — or you may exclude lawyers altogether. If your adversary is very well-known in town and you or your client are less well-known or not known at all, you should require that none of the arbitrators can be from the local jurisdiction. It is appropriate to require that arbitrator(s) have a minimum number of years of experience in their specialty.

4. How many arbitrators? Absent express agreement, the number of arbitrators who will hear your case is determined by the entity that administers the arbitration. The American Arbitration Association uses a $1 million threshold. If the claim is equal or less than the threshold, one arbitrator is assigned; if greater, three arbitrators are assigned. Why should you be concerned? A few reasons: given the arbitrator’s extremely wide latitude in his/her management of the case, casting your lot with one arbitrator can be an extremely risky proposition. If you or your client successfully alienates a solo arbitrator, your case is in deep trouble. For that reason, many counsel insist on three-member panels. On the other hand, the costs of a three-member panel can easily surpass $10,000 per day, excluding the arbitrators’ incidental expenses, which can include meals and lodging in a swanky hotel.

5. Where will the arbitration be held? Arbitration clauses are often silent on this issue. Do not leave this point to the discretion of the administering agency. Clearly state where the arbitration must be held. Remember that requiring your arbitration to be held in New York City could have you traveling to Staten Island. You are better to state the venue as New York County.

6. How much discovery will be permitted? One of the perceived advantages to arbitration is that the money-burning discovery so common in litigation is nowhere to be seen. Discovery in litigation can take too long and can be too expensive. However, are you certain that your case would not benefit from modest discovery? For example, allowing each side to take two fact witness depositions and a deposition of each expert witness, where each deposition does not exceed seven hours, may be a prudent use of resources.

7. What rules of evidence will govern? One of the nasty surprises that may await a party in arbitration is the haphazard application of the rules of evidence. The American Arbitration Association encourages arbitrators to accept evidence that will foster an understanding of the dispute. Unfortunately, some arbitrators allow everything into the record with the refrain of “I’ll take it for what it’s worth,” while other arbitrators are far more restrictive.

The arbitration clause is the place to take control of this issue. For example, the clause could read, “the Rules of Evidence shall be as set forth in the Federal Rules of Civil Procedure except that hearsay testimony may be admitted but the absence of the opportunity to cross-examine the declarant shall be considered in determining the weight to be afforded to the proposed testimony or document.” In reading the rules of the American Arbitration Association, it is surprising that arbitrators are not required to exclude evidence on the grounds of privilege, e.g., attorney-client or settlement discussions. The risk of having an adverse inference drawn against your case because of your justified refusal to produce a privileged document can easily be dealt with in the arbitration clause.

8. How long will the arbitration take? Clients are often disappointed or outright angry over the length of time to complete an arbitration. After all, one of the major selling points of this form of dispute resolution is its relative speed compared to litigation. Unfortunately, due to scheduling conflicts, especially with a panel of three arbitrators, arbitrations seldom proceed from start to finish in consecutive days. Rather, there are often gaps between hearing days lasting days, weeks or, in some cases, months. The arbitration clause is a good place to set express deadlines. For example, the clause could state that “the parties agree that the Arbitration shall be completed in not more than ## days measured from the appointment of the arbitrator(s).” This clause will assist the administering entity in selecting arbitrator(s) who can meet this commitment.

9. Attorney’s Fees and Costs. Absent an agreement to the contrary or controlling statute, the “American Rule” provides that each side bears its own legal fees. The arbitration clause is a good place to provide for a mandatory award of attorney’s fees in favor of the prevailing party. Of course, if you or your client is likely to be the respondent in the arbitration, you may wish to omit this clause. As for the costs of the arbitration — which may well include arbitrator compensation (which in complex cases can run into the six figures) — I often include the provision that “The costs and fees of the arbitration, including arbitrator compensation shall be borne as incurred and the arbitrator(s) are without power to apportion them.”

10. Modification of Award. The rules of the American Arbitration Association only allow an arbitrator to modify the award if there is a computational error or other similar imperfection. The arbitrator may not revisit any of his/her substantive conclusions. You could allow a party to request the arbitrator to revisit the merits of the award, especially where the arbitration is conducted before one arbitrator who may simply have swung and missed. The clause should include a tight time frame for this request and, to avoid having the other side incur needless legal fees, that party should not be required to respond to the modification request unless the arbitrator directs it.

The above ten points are far from exhaustive, but they should encourage you or your attorney to pay closer attention to boilerplate arbitration clauses.

Article originally posted March 31, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Amount in Controversy Not a Barrier to Federal Court Review of Arbitration Award

In Pershing, LLC v. Kiebach, 2016 WL 1375874 (5th Cir. April 6, 2016), the 5th Circuit considered an interlocutory appeal whether the district court properly exercised jurisdiction over a case that involved an arbitration award of only $10,000.  The 5th Circuit "adopting the better reasoned approach" concluded yes.

The underlying matter concerned an alleged Ponzi scheme.  Investors (Kiebach and others) claimed that a clearing broker agent of Pershing failed to disclose adverse financial information causing them $80 million in damages.  After a two week hearing, a Financial Industry Regulatory Authority ("FINRA") panel found against the investors' claims, but awarded them $10,000 in compensation for "certain arbitration-related expenses." Pershing filed a motion to confirm the arbitration award in federal court pursuant to the Federal Arbitration Act ("FAA").  The investors moved to dismiss because, although the parties were diverse, the amount in controversy was only $10,000, not the threshold amount of greater than $75,000.

Noting that federal courts diverge, the 5th Circuit observed that the "courts that have confronted this issue generally follow one of two approaches—the award approach or the demand approach."  As the name would suggest, the "award approach" determines the amount in controversy based on the "underlying arbitration award regardless of the amount sought."  In contrast, the "demand approach" ties the amount in controversy to "amount sought in the underlying arbitration." Based on the Investors' arbitration demand of $80 million, the district court had decided that the $75,000 amount in controversy was met.  The 5th Circuit agreed.

The 5th Circuit's rationale relied three points.  "First, the demand approach recognizes the true scope of the controversy between the parties."  The Court observed that the Investors were likely opposing the confirmation of the award because they were not satisfied with $10,000 on their original $80 million claim.  Second, "the demand approach avoids the application of two conflicting jurisdictional tests for the same controversy." Essentially using the award approach would result in two different jurisdictional outcomes at the beginning of the arbitration and at the end.  In other words, a motion to compel arbitration, based on the amount claimed (if more than $75,000), could be heard by the court.  But then, for the exact same case, the motion to confirm the later arbitration award (if ultimately less than $75,000) could not be heard by the court.  This dichotomy is irrational and would possibly promote "gamesmanship" of filing motions for arbitration at the start of the case in order to "to preserve their right to a federal forum for review of the eventual award."  The third rationale for using demand approach was that the jurisdictional outcome would be the same had the case been arbitrated or litigated. 

The concurring opinion pointed out that while the demand approach was appropriate in this case, it was not "necessary or advisable to adopt any such general approach" for all cases going forward.  Rather the concurring judge believed the better approach was to take each matter on a case-by-case basis on its facts.

You’re Holding Me Up: My Week Spent Back on a Jobsite

“Who’s this guy?”

That’s the look I got from some folks and it’s a look I knew all too well. I flashed it many times as an onsite project engineer and project manager.  On one particular jobsite I was on, we would joke about the starched white shirt/pressed jeans guys who would be posted up in the trailer conference room occasionally for matters that were above our pay grade.  For the first time a few weeks ago, I was one of those guys as I spent my first prolonged period of time on a large jobsite since becoming an attorney. 

I was sent to the South to a large industrial project that was just reaching critical mass of construction operations with over 700 tradesmen onsite and multiple shifts running 7 days a week.  As I walked onsite and into the trailer complex, the intensity and buzz of the site was palpable, and it surprised me how much I missed that aspect of construction.  My role for the week was to simply begin compiling facts in order to status certain contracts for the owner.  I did this through collecting documents and interviews with the owner’s supervisory field staff.  At first, I had some difficulty in my new role as a passive observer rather than a proactive participant in the actual building operations. I found myself at times having to suppress the construction manager remnants of my brain when process and future operational concerns were being discussed.  I reminded myself that I was no longer a field guy and in my current capacity, I needed  to dial it back to stick to the task at hand of information gathering, not getting into fervent discussions of panel attachment details and efficient trade sequencing.

Through the contract document review I conducted prior to arriving onsite, I knew the contractual relationships and who might be in trouble.  The office I was placed in was located next to the large general conference room where marathon coordination meetings were taking place and I worked with the door open in order to better understand the project.  Knowing who was in the crosshairs, there were times when I winced at things said from an owner standpoint, and at other times when subcontractors were speaking I wanted to yell out the door, ‘SOMEONE WRITE THAT DOWN! WE’LL NEED THAT LATER!”

By the end of the week, I had slipped back into the comfortable rhythm of a jobsite, something that is missing in an office environment.  There are times of the day that have certain feels to them; the sacrosanct coffee break, the quiet, almost peaceful lull of lunch, and wrap up time in the late afternoon as the shadows get longer.  A few days, I found myself out on the deck watching the tradesmen file out of the gate and thought wistfully of my time spent onsite and how I might want to get back into it.  Then I would snap back with the reality of the monumental task and the crushing and all-consuming pressure this team would experience over the next year in order to complete the project on time. Accordingly, I quickly remembered why I made the decision to go to law school.  I found that jobsites and their intensity are a nice place to visit, but me and my starched shirts had a plane to catch to get back to the office to start reviewing documents and begin writing.

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The author, Brendan Carter, is a contributor to The Dispute Resolver and a former Student Division Liaison to the Forum on Construction Law.  He is an attorney and a Senior Consultant with Navigant’s Global Construction Practice based out of Boston, MA.  He may be contacted at 617.748.8311 or brendan.carter@navigant.com.

Guest Post: Schedule Errors -- To Correct or Not to Correct? by Fritz T. Marth, PE, CFCC, Senior Managing Consultant at GREYHAWK

The Dispute Resolver is proud to offer the following guest post by Fritz T. Marth, PE, CFCC, Senior Managing Consultant at GREYHAWK.  We are grateful to Fritz for his contribution and insightful post.  Please click here to learn more about Fritz and GREYHAWK.

Schedule Errors – To Correct or Not to Correct?

By Fritz T. Marth, PE, CFCC

Senior Managing Consultant at GREYHAWK

The forensic analysis of critical path delays to project milestones, as part of claims and litigation, initially involves the assessment of the baseline schedule.  While there is often a temptation to “correct” critical path method schedules prior to or during the schedule analysis process, one should always think twice before doing so.  It is best to remember the old adage that, “no good deed goes unpunished.”  No matter how genuine the desire to perform an accurate and objective analysis may be, that genuineness will be challenged anytime changes to contemporaneous project documents, including schedules, are made after the fact.  That is not to say that there are not very legitimate reasons for corrections to a schedule, or any other project document for that matter; however, many times these corrections can be addressed by way of explanation rather than by way of change.

For example, when clear cases of improper sequencing occur, such as a schedule indicating a wall being constructed before its footing is placed, the temptation to correct exists.  This makes sense, especially if the original critical path progresses through the wall, and then moves into something other than the scheduled footing.  In that case, a good argument could be made that that critical path is in error, and would actually be increased in duration since proper sequencing would require footing placement before wall construction.  At this point in the analysis however, the analyst should stop and ask themselves some questions, such as:

• Going forward in time on the project (taking advantage of the benefit of hindsight), was the critical path, or the actual work, in fact influenced as a result of this sequencing error?

• Will addressing this sequencing error as simply resulting in a de facto schedule impact provide a more understandable and accurate analysis than making an upfront change to the schedule which could affect the schedule “downstream,” in a way that would never have occurred?

If the answer to the first question is “no” or the answer to the second question “yes,” the error is likely better addressed by explanation than by change.  In doing so, full acknowledgement of the error is made, the effect of the error accounted for, and any arguments about the credibility of “making changes to the plan after the fact” avoided.  The more objective the analysis is the more credible the analysis is, and any changes made by an analyst necessarily introduce subjectivity.  Finally, one should always be mindful that when performing a schedule analysis without the benefit of having access to the scheduler, what may appear as an obvious error, may in fact not be one.

Division One Events for Annual Forum Meeting in Nashville -- April 27-30, 2016

Division 1 has four events scheduled for the upcoming meeting in Nashville.

1. Division 1 Planning Retreat – Wednesday, April 27th, 9:00 AM to 12:00 PM

Every year D1 holds a planning retreat to review what we have accomplished, brainstorm, and plan for the coming year.  This retreat is open to everyone.  Whether you are a seasoned veteran or a first time attendee, please come to the planning retreat if you are interested in becoming more involved in D1.

2. Practicum on “Advocacy at Depositions” – Wednesday, April 27th, 2:00 to 5:00 PM

We have a terrific panel for our third practicum.  To access the flyer with details about this program and the speakers, please click on the following link:  Practicum on "Advocacy at Depositions". This event is designed to be suitable for both younger attorneys and more seasoned veterans who want to learn more about the art of advocacy.  The registration for this event is separate from that for the Annual Meeting.  Please click the link here for the registration.

3. D1/D13 Social Event, BB King’s Blues Club, 162 2nd Avenue North, Nashville, TN – Thursday, April 28th, 7:30 PM

Following the Welcome Reception at the Annual Meeting, please join us for a casual, fun filled night of hearty appetizers, drinks, music, and good company. The mixer will be in a private room overlooking the river in the Riverfront Dining Room and at 9:00 pm the BB King's Blues Club All-Star Band will perform. Price per person is $60 a ticket and includes 2 drinks. Please click the link here to view the invitation and details.

4. D1 Breakfast Program – Friday, April 29th, 8:00 AM to 9:00 AM

Please join us on Friday morning for a panel discussion entitled “Developing and Presenting Expert Testimony:  The Long View.”


Additional Information:
                            

PDF Document:

2016 Annual Meeting Brochure

   

For more information on discounted pricing, please contact Tamara.Harrington@americanbar.org.

For hotel reservations at the Omni http://www.omnihotels.com/hotels/nashville/meetings/aba-forum-on-construction-law

OCIP Liability Insurer Required to Indemnify Florida Contractor for $23M in Property Damage Arising Out of Defective Subcontractor Work

Jeffery R. Mullen, Associate, Pepper Hamilton LLP

Pavarini Construction Co. v. Ace American Insurance Co., 2015 U.S. Dist. LEXIS 151247 (S.D. Fla. Oct. 29, 2015)

This action arose out of a construction project to build a 63-story luxury condominium tower located in Miami, Florida (“Project”). Pavarini Construction Co. (“Pavarini”) was the general contractor for the construction of the Project.  Pavarini hired a subcontractor for the installation of the concrete masonry unit walls and certain reinforcing steel, and a second subcontractor for the supply and installation of reinforcing steel within the cast-in-place concrete columns, beams, and sheer walls. The work performed by both of these subcontractors was deficient. A significant amount of reinforcing steel was either omitted entirely or improperly installed, including within important concrete structural elements, resulting in destabilization throughout the building. This, in turn, caused stucco debonding and cracking on the walls of the building, worsening cracking of cast-in-place concrete elements, and cracking in the mechanical penthouse enclosure on the roof, which led to water infiltration.

In December of 2010, upon becoming aware of the deficiency, the owner served Pavarini with a formal demand to repair all of the damage. Pavarini completed the work, incurring more than $25 million in costs relating to the remediation effort, including amounts paid to: consultants to investigate the damage and design a plan of remediation; install hurricane netting to prevent bodily injury and additional property damage; install a structural steel exoskeleton and a metal panel façade to provide the required structural support in the absence of functional steel beam;, and repair the mechanical penthouse enclosure on the roof.

Pavarini sought indemnification through the Project’s Owner Controlled Insurance Program (“OCIP”) designed to provide the owner, Pavarini and its subcontractors with uniform insurance coverage for claims of property damage and bodily injury. The OCIP included a commercial general liability policy issued by American Home Assurance Company (“American Home”) containing a $2 million per occurrence limit, and a first-layer umbrella policy issued by ACE American Insurance Company (“ACE”) containing a $25 million per occurrence limit. American Home ultimately acknowledged coverage, but ACE refused to pay for any costs associated with the repairs. After accounting for the $2 million recovered from the American Home policy and related salvage efforts, Pavarini brought suit against ACE seeking over $23 million in damages.

The parties filed cross-motions for summary judgment on, among other issues, whether the damage caused by the defective work of Pavarini’s subcontractors was covered under the policy. While the amount was undisputed, the parties disputed the nature and character of the loss. Pavarini claimed that none of the costs included the repair of defective work itself; rather all repairs were of damage to otherwise non-defective building components. ACE countered that much of the repair effort amounted to a de facto repair of the defectively installed steel.

The Court agreed with Pavarini, holding that the property damage caused by the subcontractors’ defective work to other property was covered under the policy.

The policy defined “property damage” as “all physical injury to tangible property, including all resulting loss of use of that property,” and included “[l]oss of use of tangible property that is not physically injured.” The policy excluded from coverage, in relevant part, “[p]roperty damage to ‘your work’ arising out of it or any part of it and included in the products-completed operations hazard.” This exclusion is known as the “your work” exclusion.  However, the “your work” exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Thus, the policy provided coverage for damage to the completed Project caused by subcontractors’ negligent work, but did not provide coverage for the repair of the defective subcontractor work itself.

The question before the Court, therefore, was whether the subcontractors’ defective work caused covered “property damage.” Answering in the affirmative, the Court held that the complete replacement of defective subcontractor work may be covered when necessary to effectively repair ongoing damage to otherwise non-defective work. The Court found that because the subcontractors’ defective work caused cracking in the stucco, collapse of the penthouse enclosure, and cracking in the critical concrete structural elements, Pavarini was entitled to coverage for the repair of that non-defective work. And the Court found that in order to adequately repair the non-defective Project components, the building had to be stabilized. Even if the predominant objective of the repair effort was to fix the instability caused by the subcontractors’ defective work, the Court reasoned that the same effort was required to put an end to the ongoing damage to otherwise non-defective property, e.g., damage to stucco, the penthouse enclosure and critical concrete structural elements.

Consequently, the Court entered partial summary judgment in favor of Pavarini, holding that ACE was contractually required to reimburse Pavarini for the costs incurred.

Article originally posted March 14, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

In Massachusetts, Arbitration Agreement Cannot Change Standard of Review

In Katz Nannis & Solomon, P.C. v. Levine, the Supreme Judicial Court of Massachusetts concluded that parties to an arbitration agreement cannot change the statutory standard of judicial review. 


The underlying dispute involved shareholders in an accounting firm. The subject agreement delineated the shareholders' professional association and relationship.  When three of the shareholders determined to terminate the fourth, the ousted shareholder challenged the involuntarily termination under the agreement.  At the arbitration, the award favored the three shareholders with the determination that the fourth was properly terminated.  The award was confirmed in Superior Court and the motion for new trial and relief from judgment was denied.  The shareholder appealed.

The shareholder's challenge to the arbitrator's award and the confirmation of the award was that the arbitrator misinterpreted the agreement.  And because the arbitration clause of the agreement  provided for judicial review of an award to determine whether there was a "material, gross and flagrant error" by the arbitrator, the shareholder argued that the court could consider the merits of his claim. "He reasons that arbitration is strictly a creature of contract, that the aim of the [Massachusetts Arbitration Act (MAA)] is to enforce the parties' contractual agreement to arbitrate, and that, therefore, the parties' agreed-upon standard of judicial review should be enforced."


The Katz Court disagreed.   It recounted that the MAA requires "[u]pon application of a party, the court shall confirm" an arbitration award unless "grounds are urged for vacating or modifying or correcting the award" as provided in §§ 12 and 13. M.G. L. c. 251, § 11. Per § 12, the court shall vacate an award if it "was procured by corruption, fraud or other undue means," or "the arbitrators exceeded their powers." G. L. c. 251, § 12 (a) (1), (3). 


As for the contractual argument--that the parties have a right to decide their own terms--the Court referred to the seminal case Hall St. Assocs., L.L.C. v. Matell, Inc.  In Hall St, the Supreme Court of the United States, held that under the Federal Arbitration Act "the statutory grounds are the exclusive grounds for judicial review and parties are unable to contract otherwise."  That said, the Court also held that the states can reach different conclusions.  In Massachusetts, however, the Court determined that following Hall Street was the proper result.

Nevada Supreme Court Finds Waiver of Right to Arbitrate Based on Separate, But Related Litigation

The Nevada Supreme Court recently ruled that a party defendant waived its right to compel arbitration due to its litigation conduct in a separate, but related litigation.  The court also clarified Nevada jurisprudence regarding whether the court or arbitrator should decide if a party waived its right to compel arbitration by that party’s litigation activities.  While not a construction case, Nevada courts might apply the same principles in pending construction matters, so the case is instructive.

Principal Investments, Inc. v. Harrison, 2016 WL 166011 (Nev. 2016), concerned a class action for fraud against a payday loan company and its process server related to default judgments the company obtained in prior litigations using affidavits of service allegedly falsified by the process server.  The loan company defendant sought to compel the class action plaintiffs to arbitrate their claims based on arbitration provisions in the loan documents.

After discussing the general criteria Nevada courts apply to determine whether the court or the arbitrator should decide waiver, the court determined that courts presumptively should decide issues of waiver based on litigation activities, “unless the arbitration agreement clearly commits the question to the arbitrator.”  Id. at *1.  While the loan agreements at issue provided that issues regarding the validity, scope, enforceability, and applicability of the arbitration clauses were subject to arbitration, the court did not find “clear and unmistakable intent” by the parties to arbitrate issues of waiver based on litigation activities.  Id. at *7. 

Regarding the merits of the waiver, the court found that the loan company’s litigation activities in the prior litigations in which the company obtained the default judgments against the plaintiffs waived the company’s right to demand arbitration of the plaintiffs’ current claims.  The court acknowledged prior jurisprudence and that “only prior litigation of the same legal issues as those the party now wants to arbitrate results in waiver of the right to arbitrate.”  Id. at *8.  However, the court found that “[t]he claims the named plaintiffs have asserted in district court arise of, and are integrally related to the litigation Rapid Cash conducted in justice court.”  Id. at *9.  The court also stated the arbitration agreements “should not be applied to sanctify a fraud upon the court allegedly committed by the party who itself elected a litigation forum for its claim.”  Id.

A copy of the decision is linked here.

Under Construction -- Paper, Online, or Both? The Forum wants to hear from you!

Survey: http://svy.mk/1SLxY94

Last year, the Governing Committee approved publication in paper of Under Construction, the ABA Forum on Construction Law's newsletter, for 1 year (3 paper editions).

The Governing Committee will be considering whether Under Construction should remain in paper or be published only online.  

The Forum would like to hear from its members as to how they would like to receive Under Construction. The survey consists of 10 questions and will take you 5 minutes or less to complete.  

Under Construction is always looking for contributions from its members.  In fact, in the Spring 2016 edition, the Under Construction editors challenged each Division to submit something for each of the 3 editions of Under Construction.  

Division 1 submitted articles for both the Winter 2016 edition (Brendan Carter and Daniel Kapner) and Spring Edition (Dan Valentine and Jim Cohen).  The Valentine/Cohen article was a compilation of their series originally published on The Dispute Resolver!  

Thank you for your time and feedback!

Tom Dunn
Associate Editor, Under Construction 
rtdunn@PierceAtwood.com

Division 1 Social Event: BB King's Blues Club Nashville (4/28/2016 at 7:30PM)

Following the Welcome Reception at the Annual Meeting, please join us for a casual, fun filled night of hearty appetizers, drinks, music, and good company. The mixer will be in a private room overlooking the river in the Riverfront Dining Room and at 9:00 pm the BB King's Blues Club All-Star Band will perform.

Price per person is $60 a ticket and includes 2 drinks. Please click the link below to view the invitation and details.

http://sendomatic.com/udmC2

We look forward to seeing you there!!

Advocacy at Deposition: Division 1's Advocacy Workshop (4/27/2016, Nashville, TN)

YOUNG LAWYERS CONSTRUCTION PRACTICUM – Advocacy at Deposition

April 27, 2016; 2:00 P.M. – 5:00 P.M.

Many construction cases are either won or lost during the deposition phase of discovery. Depositions provide an opportunity to not only learn about your opponent’s case, but also to establish the key facts you will need for dispositive motions and/or trial and to evaluate your clients and opponents testimonial demeanor. Please join us for a practicum with a team of nationally-recognized construction attorneys who will discuss the art of advocacy when taking and defending discovery depositions.

Topics will include:

• Preparing your client for deposition.

• Preparing to take the deposition of an adverse witness.

• “The Deposition Dance” – how to avoid using your outline as a crutch so you get what you need from a witness.

• Taking and defending Rule 30(b)(6) depositions.

• The ethical and legal boundaries relating to defending depositions.

• Special considerations for expert depositions.

• Closing the loop – What to do after the deposition has been concluded.

Speakers:

Leadership Circle: John Vento, Trenam Law, Tampa, Florida

Division 1: Rob Ruesch, Verrill Dana, LLP, Portland, Maine

YLD: Tamara Lindsay, Coates Rose, New Orleans, LA

Presented By: Division 1 – Litigation and Dispute Resolution; Young Lawyers Division; and the Forum Leadership Circle.

SEPARATE REGISTRATION FEE: $50/PERSON

Brochure: http://bit.ly/1R5qLim 
Register: http://bit.ly/1Kq0NEJ