Eric Grasberger
Eric Grasberger is a partner of Stoel Rives LLP practicing in the Construction and Design group. Eric’s practice focuses on development and construction law, including development risk analysis and risk shifting, contract drafting and negotiating, insurance review and analysis, construction defect claims, delay and impact claims, lien and bond claims, and public contracts, bid disputes and public improvement exemptions. He has represented numerous private and public owners and developers, as well as contractors, in all facets of development and construction law. He is a frequent lecturer to the development industry and the Oregon Bar. Eric joined the firm in 1991. Eric is Co-Chair of Stoel Rives Sustainable Real Estate Development Team and Chair of Stoel Rives Construction and Design Section.
Adopting Strategies to Minimize Liability Exposure
On Wednesday, February 29, 2012, Sean Gay will speak at a seminar sponsored by HalfMoon LLC entitled “Minimizing Engineering Liability Exposure.” Mr. Gay will speak about adopting strategies to minimize liability exposure. The seminar will be held at the Doubletree Hotel, 1000 NE Multnomah Street, Portland, Oregon from 8:30 a.m. to 4:15 p.m.
Click here to learn more and to register online.
The Increasing Importance of Performance Bonds
There are now 25 states in the U.S. that hold that construction defects are not an “occurrence” and are therefore not covered under commercial general liability policies insuring contractors. Couple this troubling statistic with the ever increasing number of policy exclusions and limitations, and we begin to realize that in many situations the contractor’s insurance policy is inadequate (or non-existent) protection against defects.
The importance of performance bonds as security to pay for construction defects is therefore growing. While some sureties who sell the bonds will tell you that bonds merely guarantee completion, and do not insure against latent defects, the language of the typical bond defies this position.
Bonds plainly state that they guarantee each and every obligation of the contractor under the contract. Those obligations usually include the duty to perform work according to the plans and specifications, the standard of care, and without defect or nonconformity. This author has not seen a bond that attempts to carve out construction defects from its coverage. And bonds do not have the host of exclusions or limited coverage grants that plague the value of insurance policies. By the same token, bonds are not perfect and owners should consider the following to get the most protection from a bond:
First, the bond duration should extend at least as long as the warranty period (typically one year from completion but sometimes longer) and for as many years thereafter as possible, up to the statute of repose period in the state in which the project is located. Because construction defects often appear years after completion, the bond duration is critical. You may pay more for a bond with a longer duration, but if the bond is needed, you should be paying less for the unreliable insurance carried by the contractor.
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Dispute resolution clauses: getting the prenup right before you say "I do."
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Before using AIA forms or any other agreement to begin a project, owners should review and revise those forms to ensure that they contain appropriate provisions governing dispute resolution. Otherwise, you may be stuck suing different parties in different forums for the same set of construction and design defects, you may be unable to recover the costs of litigation if you prevail, or the cost may be too high because you did not select an economical arbitration service.
Arbitration
The choice between litigating in arbitration or litigating in court is complex, and you should consider that choice carefully in each contract. However, arbitration generally saves time and is procedurally simpler. Arbitration also allows you to avoid a jury trial, which may be tremendously beneficial to parties trying to focus attention on defects and away from irrelevant or unfairly prejudicial matters.
In court, any reference to a defendant’s insurance coverage is possible grounds for a mistrial, while in arbitration, most arbitrators are fully aware whether coverage likely exists. The awareness of insurance coverage is particularly important in construction and design defect cases. Owners require designers and contractors to obtain coverage precisely because they want to be compensated for defects, and want the referee resolving their claim to consider that coverage. Preserving your ability to consider insurance coverage is another factor favoring the choice of arbitration over court.
Consolidated arbitration
On most construction jobs, whether commercial or residential, there will be more than one party potentially responsible for a defect. Therefore, your dispute resolution clause must allow you to force different parties into one arbitration proceeding for claims arising from the same or similar defects on the same site.
If you do not require consolidation of related claims, you may end up in more than one arbitration over the same set of defects. This not only increases legal costs associated with litigation, but may produce two different results. An arbitrator in one arbitration proceeding may not feel compelled by the holdings of another arbitrator, even if they are hearing cases arising out of the same set of defects. The arbitrator hearing your claim against the designer may hold that, though the building is defective, it is not due to design defects. Another arbitrator hearing your claim against the contractor on the same building may agree that the building is defective but that the defects are not due to the contractor. In theory, you could fail to collect in both cases.
Attorney fees
Be sure to consider a clause which awards attorney fees to the prevailing party. An attorney fee clause is a double-edged sword. You want it when you have a strong case and are likely to prevail; you want to avoid it when you are not likely to prevail. Of course, at the time of contracting, you have no idea what litigation position you may be in some day, making it hard to decide if you want the clause or not. Many parties who feel they have an economic advantage over the other party to the contract opt for no attorney fee clause, assuming they can outlast their opponent in a litigation battle. Other parties feel that attorney fee clauses encourage litigation because they give the potential plaintiff a belief that its recovery will be that much larger. Finally, owners in particular should consider that most states’ lien statutes give designers and contractors a prevailing party attorney fee right in cases where the designer or contractor are suing for additional compensation (which is the most common claim by those parties). If the owner does not have an attorney fee clause in the contract allowing the owner to collect fees in cases where the owner is plaintiff (the most common being construction defects and delay claims), then the contractual relationship between the parties is unequal. If the owner wants to avoid attorney fees for both sides, it needs to include in its contract an affirmative waiver by the designers and contractors of the attorney fees rights bestowed by lien statutes or other statutes.
Subcontractors and sub-consultants
The agreement between you and your contractor or designer is not an agreement between you and your contractor’s subcontractors or designer’s sub-consultants. So, for example, requiring your contractor to agree to consolidated arbitration will not mean you can force the subcontractors to consolidate if their agreement with the contractor does not require them to. Review subcontracts and agreements with sub-consultants to ensure that those agreements require the parties to agree to consolidate.
Arbitration service providers
There are many different organizations that provide arbitration services. You can compare them by fee structure, the quality of the mediators and arbitrators on their panel, and the procedural rules governing the arbitration. While standard form AIA contracts designate the American Arbitration Service as the default provider, many parties opt for smaller local services with lower fees and good panels.
OSHA Creep
OSHA compliance recently became harder and costlier, and may continue to do so, thanks to several developments at the federal and state level. (Click here for a prior post on OSHA reform.)
You may go to prison if you discipline or terminate an employee who might be worried about an unsafe working condition—even though your employee had not bothered to tell you about his concern. That is what the current version of the Robert C. Byrd Miner Safety and Health Act of 2010 (H.R. 5663) provides.
The Byrd Act, not yet law, would prohibit firing or discriminating against an employee who refuses to perform the his duties if he “has a reasonable apprehension that performing such duties would result in serious injury to, or serious impairment of the health of, the employee or other employees.” Employers should wonder how they will know whether their employees have “reasonable apprehensions”—the Act does not require the employee to voice his apprehension for this provision to protect him from discrimination for failing to do his work. If the Act becomes law, an employer who fires an employee because that employee is not performing may find itself faced with a complaint.
The Byrd Act has not moved since July 29, 2010, when it was placed on the Union Calendar. Depending on the results of the recent elections, it may not move at all.
If your business has an effective noise protection program in place, that may not protect you from OSHA penalties.
The U.S. Occupational Safety and Health Administration recently proposed adopting a new interpretation of the word “feasible” as it is used in certain sections of the General Industry and Construction Occupational Noise Exposure standards (sections 1910.95(b)(1) and 1926.52(b)).
Feasible, which currently means that a measure is both capable of being done and that the costs of implementing the measure are less than the cost of an effective hearing conservation program, would only mean capable of being done. If you have avoided certain measures because they were not economically feasible, and if OSHA determines that they were capable of being done, your program will not be in compliance.
For example, if your employees are exposed to a loud workplace but you require them to wear effective ear protection—and they do—this will not be good enough. If OSHA decides that redesigning your workplace with expensive sound-absorbing baffles is capable of being done, you have to do it. Even if it would be no more effective than your current program.
Instead of allowing a cost-benefit analysis, the Administration would consider administrative or engineering controls economically feasible when the cost of implementing those controls will “not threaten the employer’s ability to remain in business.” So, if OSHA decides those sound-absorbing baffles won’t threaten your ability to remain in business, they are economically feasible. Oddly, though the Administration argues that its proposal restores the “plain meaning” of feasible to its enforcement policies by eliminating cost-benefit analyses, it did not state how it derived its proposed economic viability standard from that plain meaning.
Continue Reading...Bond. Performance Bond.
Performance bonds—insurance-like arrangements in which a surety (the bonding company) contractually agrees to pay for the performance of a principal (the contractor) to an obligee (the owner) in case the principal fails to perform the obligations of its contract—should be used more often in construction agreements to provide owners with a source of funds to cover defective work in a project.
Currently, owners typically require contractors to obtain insurance policies with the hope that such policies cover defects in the work they perform for the owner. Though owners are willing to spend a lot of money, time, and effort in obtaining these policies, insurers continue to make revisions to their policies to limit, and sometimes prevent, coverage for these defects.
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Performance bonds may provide better protection to an owner. Typically, the bond provides funds to pay for repair of defective work that may not be covered by insurance as part of the bond’s guarantee of the faithful performance of the contract by the contractor.
Unlike insurance policies, performance bonds provide coverage only for the owner’s project—if an owner discovers a defect in the contractor’s work, the owner will not have to worry whether another owner’s claim against the contractor for another defective project will reduce the coverage available under the contractor’s bond. The performance bond’s recovery pool belongs to the owner for the specific project it is drafted to cover.
Not so Ahead of Schedule: OSHA Reform
Contributor: Louis A. Ferreira
Congress has proposed legislation that would amend the 
Occupational Safety and Health Act of 1970 to increase both civil and criminal penalties, expand coverage, and create new obligations for employers. Congress has not acted recently on the bill, named the “Protecting America's Workers Act," but employers should expect action sometime in the new year.
Willful violations of OSHA that result in the death of a worker would be a felony punishable by up to 10 years in prison, while willful violations resulting in serious bodily injury would be a felony punishable by up to five years in prison. Currently, the criminal penalty for a willful violations resulting in death is imprisonment for 1 year. There is no criminal penalty under the existing act for a serious bodily injury resulting from a willful violation. In addition, the maximum civil penalties in all OSHA violation categories would increase, and would be adjusted periodically according to the Consumer Price Index.
Oregon-OSHA administers its own regulations for most employers in the state but adopts standards and penalties at least as stringent as federal OSHA. In other words, if federal OSHA standards are changed, these impacts will be enforced in Oregon in short order. Employers should be concerned about the scope of these changes because like most legislation, the devil is in the details of how the law is changed. For instance, a willful violation of an OSHA standard does not necessarily require an intentional decision to violate the regulation. A willful violation is defined to exist where an employer or supervisor “recklessly” disregards the requirements of a regulation. Knowledge of the regulation is usually not required it the employer or supervisor should have known of the regulation or standard.
Additionally, employers would be prohibited from
- adopting or implementing policies or practices that discourage reporting work-related injuries or illnesses, or that discriminate or provide adverse action against any employee reporting such injury or illness; and
- reducing wages or employee benefits while employees participate in or aid workplace inspections
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You Are a Project Owner or Developer Who Wants to Build a Green Project? So, What Do You Actually Put in Your Contracts?
Despite the explosion of articles, seminars and webinars on green building and development during the last year or so, there is a dearth of information in the development world regarding what project owners and developers who do want to build a green project should actually put in their design and construction contracts.
Here is what I think is important regarding this subject:
General Green Building Certification Goal. The project owner first must decide in general what green building goal it wants to achieve. LEED certification (from the US Green Building Council), at a particular certification level (general, silver, gold, platinum), is an obvious option. But there are other general green building certifications, too, such as Green Globes (Green Building Initiative) and SBTool07 (International Initiative For a Sustainable Built Environment), as examples. The owner should make this basic decision early on, based on good information and analysis and the advice and recommendations of design and green building consultants, as applicable.
Industry-Specific Green Building Certification Goal. Deciding on an overall green building goal such as a LEED certification is not the only certification goal a project owner should consider, however. There also is a growing number of industry-specific certifications that the owner should evaluate, depending on the nature of the project and the owner’s business. For example, there are certifications available for health facilities (Practice Greenhealth), restaurants (Green Restaurant Association) and hotels (Hotel Pure Green). How important an industry-specific certification of this type is to an owner is a question to be addressed at the start of the design process.
Tax and Other Governmental Incentives Goal. Another element of green building goals to be considered is tax and other governmental incentives relating to green building. Particularly in Oregon and under new federal stimulus legislation, there may be tax credits, grants and other public sector incentives for green, sustainable and energy efficient construction that can be of substantial benefit to a project. However, these incentives must be identified as project goals early in a project’s design in order to ensure that the owner is able to take advantage of them.
Making Green Building Goals Explicit. Once an owner has sorted through its optional goals for LEED or other general certification, for industry-specific certification and for tax and other governmental incentives, these goals should be expressly set out in the owner’s design and construction contracts. Otherwise, the owner’s architect and contractor will not have any contractual obligations to achieve the owner’s green building goals. Typical form contracts, including 2007 American Institute of Architects (“AIA”) forms of contract, include minimal references to these kinds of obligations and do not include language in which to make the goals explicit.
Continue Reading...Negligence Claims Take Another Twist in Oregon
Just when you thought it was safe to go back into the water, the Oregon Court of Appeals strikes again with another iteration of the “economic loss doctrine” which defines when parties can sue each other in negligence for construction defects. In Abraham v. Henry (September 2, 2009) the Court held that parties to a contract can sue each other in negligence if a rule, code or standard “independent of the contract” has been violated. A prime source for independent rules, held the Court, is the Oregon Building Code. From now on, we can expect to see plaintiffs including in their complaints that one or more provisions of the Oregon Building Code have been violated. It will be easy to find such violations in most construction defect claims.
The prior standard, enunciated in the Jones v. Emerald case, held that there must be a “special relationship” between the contracting parties in order to support a negligence claim. No one really knew what a special relationship was, but most believed that alleging in the complaint that the owner relied on the contractor’s expertise was sufficient to create such a relationship and thus a right to sue in negligence. Abraham may have changed that belief by pointing out that, at least in that case, there was nothing “special” about the arms-length owner/contractor relationship, and, with or without reliance on the “expertise” of the contractor, each party was acting on its own behalf and for its own benefit.
Other decisions from Oregon courts support the argument that the economic loss doctrine does not bar negligence claims if there is physical property damage, but this argument was not made or at least not addressed by the Abraham court.
The principal reason – if not the only reason – why the economic loss rule is relevant is that Oregon’s statute of limitations for breach of contract is six years from the date of breach (which, at the latest, is usually the date of substantial completion or failure to honor extended warranties). For claims discovered and/or brought after six years, you must be able to assert a negligence theory for the claim to be viable, because the negligence period runs two years from the date of discovery of the claim (as opposed to the date of breach), capped by the 10 year statute of repose (which states that all claims must be brought regardless of discovery within 10 years from substantial completion). Thus, if you cannot assert a negligence claim, you may have no other claim to assert.
The vast amount of time and fees generated in litigating statute of limitations issues in Oregon construction cases is fueled by (1) disparate limitations periods for breach and negligence claims, (2) disparate limitations periods for claims against designers versus contractors, and (3) the every changing – and arguably inconsistent – decisions from Oregon courts on what the rules of the game really are. Oregon needs a “Construction Defect Reform Act” with one limitations period for all claims against all parties on a construction project, governed by a discovery rule and capped by a statute of respose, with a clear statutory answer to the economic loss rule. Until then, uncertainty and high legal fees will continue to be the norm.
The Risk of Builders Risk
Contractors and owners obtain builders risk policies to protect themselves from risks associated with construction. But a lack of care in understanding and negotiating the provision of the construction agreement governing the builders-risk policy and the policy itself may lead the parties to expose themselves to needless and significant liability.
What owners and general contractors should do to protect themselves
If a construction contract requires the owner or the general contractor to obtain a builders risk policy—and it should—then that party should in fact obtain the policy. This may seem painfully obvious, but sometimes parties do not obtain required policies.
Courts have held, unsurprisingly, that a construction contract calling for a builders-risk policy means what it says. If the party whom the contract required to obtain a builders-risk policy does not obtain a policy, that party assumes the risk of loss that ought to have been covered by the policy. So, if a construction agreement requires, say, the owner to obtain a builders-risk policy, the owner should obtain the policy, and the other parties relying upon the policy should confirm the existence of the policy and its terms.
The Builders-Risk Policy Should Allow for the Construction Contract’s Mutual Waiver of Subrogation
Construction contracts frequently include a clause in which the owner and the contractor, both covered by the builders-risk policy, waive their right of subrogation against each other regarding any damages covered by that policy. The owner should not be able to sue the contractor for a loss if the owner has already obtained builders-risk insurance that would make him whole (or vice versa)—the mutual waiver of subrogation prevents the owner or the contractor from recovering twice.
However, if the builders-risk policy itself contains a provision preventing the parties from waiving subrogation, the execution of the construction contract may violate the policy conditions and might prevent recovery under the builders-risk policy.
As the owner and contractor negotiate the construction contract and the builders-risk insuring agreement, they need to pay attention to the provisions in each agreement governing subrogation. Broadly, they need to pay attention to the effect that each agreement has on the other, and should ensure that the builders-risk policy does not prevent the parties from waiving their subrogation rights. Moreover, they need to pay attention to the interaction between a builders-risk policy and any property insurance policy the owner may have (see below). The waiver of subrogation should apply to claims brought under the property policy for a few years after termination of the builders-risk policy.
The Construction Contract Should Specify When and under What Conditions the Owner Can Terminate the Builders-Risk Policy
Builders-risk policies are, as their name suggests, designed to cover risk arising from building. Once the structure is built, though, the builders-risk policy usually terminates. Builders-risk policies also typically terminate on the occurrence of a number of other conditions.
For example, the builders-risk policy may end when the equipment in a plant is first energized, on the theory that once you fire up the plant, it is no longer under construction but is operating as a business and therefore presents different insurable risks.
Once builder-risk insurance terminates, usually the owner’s property insurance kicks in. Property insurance, however, does not usually protect the contractor because the contractor is not a named insured under that policy, and it will not protect against all the events that a builders-risk policy would. If an insurable event occurs that would have been covered by the builders-risk policy after the policy has been terminated, there may be no coverage, possibly causing the parties to argue about whether the policy was properly terminated. If the owner terminates the builders-risk policy without telling the general contractor—and yes, this does happen—the parties will then argue whether the termination actually occurred.
Simply, unexpected termination of a builders-risk policy can ruin your day. The term of a builders-risk policy, then, is a critical point to negotiate and to stick to. Owners should not terminate a builders-risk policy early, and contractors should ask for a provision in the policy requiring the owner to give them notice before termination of the policy so that the contractor can arrange for adequate coverage elsewhere.
New Oregon statute shortens period for asserting building defect claims on "large" commercial projects.
On July 14, 2009, Oregon Governor Ted Kulongoski signed HB 2434 passed in June by the Oregon Legislative Assembly. Although a chapter number has not yet been assigned to the new act, the law will go into effect for building defect claims that arise on or after January 1, 2010.
As addressed in prior Legal Updates from Stoel Rives’ Development Law Group, HB 2434 reduces from ten years to six years after substantial completion the maximum time period during which an owner of a "large commercial building" can assert claims against those who performed design, planning, surveying, architecture, engineering, construction, repair, or construction supervision or inspection of or for the building.
As defined in the statute, the term "large commercial building" includes but is not limited to:
- rental residential structures of more than four stories
- mixed-use projects
- commercial structures that cost more than $250,000 to construct
- motels, hotels, nursing homes, hospitals and recreational facilities
- commercial structures with a ground area over 10,000 square feet or a height over 20 feet
- commercial rental units in a larger structure, if the unit has a ground area of over 12,000 square feet or a height over 20 feet
The term "large commercial buildings" does not include publicly-owned buildings or condominium buildings.
One concern for affected building owners and developers is simply the shortening of the period from ten years to six years after substantial completion during which the owner or developer can pursue a defect claim of its own against the designer or contractor of the building.
A second concern, however, is that building owners and developers may end up with legal obligations to a purchaser or tenant regarding building defects for a longer period than the six years after substantial completion during which the owner or developer can assert the claim against the building’s designer or contractor. In this way, a building owner or developer could have a multi-year exposure to getting "caught in a squeeze" by having a defect claim asserted against it by a buyer or tenant yet having no right to assert that claim against the parties that designed and constructed the building.
Owners and developers of "large commercial buildings" in Oregon should consider modifying the claims, warranty, correction of defects, and statute of limitations provisions in their purchase and sale agreements, leases, and construction and design contracts to respond to the changes in Oregon law made by HB 2434.
If you have any questions about the issues of this posting, please contact James A. Zehren, a member of the Construction & Design Section of the Development Law Group in the Portland office of Stoel Rives LLP, at jazehren@stoel.com or 503-294-9616.
