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.
 

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.

• The time period for considering an employer’s history of violations—including for the classification of repeat violations—increased from three years to five, and an employer cited for any high gravity serious, willful, repeat, or failure-to-abate violation in the past five years will receive a 10 percent increase in its penalty. 
• An area director now has discretion to separately cite high gravity serious violations related to standards and hazards in the SVEP with individual penalties, rather than grouping them; similarly, final penalties are now calculated serially rather than together, increasing the final penalty. 
• The Administration adopted a gravity-based penalty structure for serious violations, ranging from $3,000 to $7,000.
• The penalty reduction for employers with fewer than 250 employees decreased.
• The 10 percent reduction for employers with a strategic partnership agreement has been eliminated.

The Administration has also recommended that Oregon OSHA increase its penalties, historically among the lowest in the country. Oregon OSHA is obliging.

Oregon OSHA will propose significant increases to its penalty structure in December. Proposed changes include increasing the difference between base penalties for small and larger businesses, reducing and possibly eliminating a decrease in base penalties for an employer’s immediate correction of violations, reducing the reduction for a lower-than-average injury rate, and adjusting the calculation of base penalties to increase the penalties for serious violations. For a list of links regarding the OR OSHA public forum on penalty structures, see here.

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.

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.

(More generally, and for similar reasons, design defects are becoming harder to insure. A bond allows an owner to come closer to guaranteeing the owner’s design objectives than insurance policies do. Owners should consider obtaining performance bonds to guarantee design contracts as well.)

There are disadvantages to performance bonds. Bonds are only good for the period that the owner requires and pays for. A CGL insurance policy may provide coverage for damage that occurs during the policy’s period, regardless of when the insured makes a claim for coverage. On the other hand, if a performance bond expired last year but the owner discovers a defect today that was caused during the term of the bond, the bond will not provide coverage.

Still, owners should consider requiring performance bonds to provide extra protection to their projects. They usually cost the owner between .5 and 2.0 percent of the contract price for each year that the bond is effective. The term of the bond typically ends either upon completion of construction or, more commonly, at the end of the contract warranty period (one or two years after completion), though owners should extend the bond for additional years if they want bond protection for latent construction defects.

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

Under the new law, an employee would be allowed to

• refrain from performing certain duties if that employee has reason to believe the performance would result in serious injury to him or herself; and

• meet with the Department of Labor before the issuance of citations and to participate in settlement negotiations by making a statement to the parties involved in those negotiations, if that employee has sustained a work-related injury or illness that is the subject of an investigation.

Identical bills are being considered in the House of Representatives and the Senate (where Oregon Senator Jeff Merkley is a cosponsor). The bills have not moved out of congressional committees, but stay tuned.

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.