Tamara Boeck
Tamara Boeck is a member of Stoel Rives' Construction and Design group. Tami focuses her practice on representing clients in the areas of construction law and litigation, and she provides risk management advice relating to construction development projects from concept through dispute.
Keep an Eye on sb 474 in California: Sweeping Edits will Eliminate Traditional Indemnity Rights and Obligations, as well as AIE's in Commercial Construction Contracts
Indemnity and additional insurance provisions in commercial construction contracts may no longer be an “arm’s-length” negotiation in California. Dramatic changes are proposed in sb 474 (2011). We most recently saw this type of legislative intrusion directing contract language in the residential construction context with the significant modifications of Civil Code section 2728 a few years ago. The current proposed legislation likewise dramatically changes the traditional model of commercial construction contracts and risk-shifting amongst the parties for California projects, and it applies broadly to all commercial construction contracts, including public contracts.
The language of the present text of sb 474 would – effective for any contract executed on or after 1-1-2012 – bar the usual risk allocation in the indemnity provisions and requirements for additional insured endorsements in developer to general contractor/lower tiers, and from the general contractor to any lower-tier subcontractor/vendor. It is significant to note that the new language would eliminate the application of section 2782.5 (developer and general contractor negotiations on risk allocation) after 1-1-2012 through proposed section 2782(2). While the prohibition would not apply to “amendments” to contracts existing prior to 1-1-2012, it would apply to virtually all commercial construction contracts after that date with few exceptions, including all “design construction, alteration, renovation, repair or maintenance” arising out of a wide variety of construction activities. These activities encompass work in the green and alternative energy realms as well, where risk allocation is sensitive due to the inherent emerging nature of the technology involved in the project. Under the proposed statute, however, any provision between the parties written in conflict with the law would be void as against public policy and unenforceable.
In substance: no blanket indemnity provisions allocating the risk (historically called a Type I provision in California) would be valid. Only provisions that narrow the indemnity/contribution to the harm caused by the fault of the indemnifying party would be permitted. Importantly, the proposed statute would also prohibit the common requirement of AIE coverage in favor of the developer/general contractor to the extent such requirements seek coverage for the scope of the prohibited indemnity.
Furthermore, if the property on which the construction is performed is in California, this law would apply regardless of any choice-of-law provision or place of execution of the contract.
The proposed language impacts developers and general contractors in very practical ways. Naturally, all contracts and subcontracts, as well as all insurance provisions, will have to be modified if this legislation passes. Insurance policy requirements, scope of coverage and risk management considerations will have to be re-evaluated in light of the elimination of historic requirements. Once a claim is made, however, the real result will be that the developer/general contractor will bear the full burden of responding to and defending the claims when they arise. No longer will a simple tender under a Type I be effective to bring everyone closer to the table for an early resolution. And there will be no tenders to all AIE insurers requesting a full defense and indemnity under their policies with an expectation of a cooperative defense. Instead, we should expect that the developer/general contractors and their insurers will be primary and first have to front the defense expenses for any claims and suits until it is – if it is – proven that the actual fault or violation was caused by the indemnifying party. Typically, this means that there will be rare recovery through early resolution without much litigation firsthand. The apparent goal of this litigation is to finger-point and shift the blame to other parties to avoid indemnification and contribution to the requesting party, along with the fee reimbursement obligations. Even then the catch-22 may be what recovery will or can be had on the cross-claims that seek indemnity and contribution without a final factual finding of the indemnitor’s liability, which naturally leads to more litigation (the costs of which “chase” may not be recoverable without adequate contract language). While claims of “fairness” abound in the promotion of the proposed text, we know from experience that this type of language generates litigation and an existing problem is made worse. These problems will be exponential if there are burning limits policies on the projects as well as limited insurance resources.
Have You Updated Your Mechanic's Lien Procedures in California?
Now that the holiday frenzy has wound down, many have overlooked the necessity of updating their mechanic’s lien procedures in California. Effective January 1, 2011, prevailing California law imposes new requirements and notice procedures for effective lien actions on mechanic’s lien claimants. These changes immediately affect the preparation, service, and recordation of mechanic’s lien claims. California Civil Code § 3084(a)(6)-(7) will mandate that a valid claim of lien, also known as a mechanic’s lien, must contain the following information in addition to what the law currently prescribes:
• Particular language in 10-point boldface type entitled “Notice of Mechanic’s Lien” as set forth precisely in the statute, and
• Affidavit of proof of service on the owner or reputed owner (and construction lender or original contractor in some cases, but best practices suggest that providing notice to all categories may provide an increased opportunity for payment).
If you have been using old forms, or even current commercially prepared forms, you should verify that they will not be outdated come January 1. The law makes clear that a failure to meet the requirements would cause the mechanic’s lien to be unenforceable as a matter of law. Your counsel should make certain that any preprinted form or custom form captures the new requirements of the Civil Code.
Further, the amendments affect the recordation of a lis pendens for a suit to foreclose a mechanic’s lien. The filing, which was previously performed as “good practice,” is legally mandatory beginning January 1, 2011 under Civil Code § 3146. The lis pendens must be recorded within 20 days after filing of the foreclosure action, and best practices dictate that counsel should record it immediately after the action is filed to preserve priority. You can find the legislation here.
Adding an "O" and "F" to the DB process
The design-build (DB) process is no longer a novelty. In the past ten years, contractors and engineers have fine-tuned the DB project delivery approach, utilizing it to build bigger and better structures at reduced costs.
As the demand for public infrastructure continues to increase and the funds to pay for public infrastructure continues to decrease, a “new” process is gaining momentum in the construction industry in the states (it’s been around for awhile outside of the US). We are starting to see more projects that add an “O” and “F” to the DB acronym.
The DBOF process involves a public-private partnership whereby the private entity designs, builds, operates, and finances a facility. In return, the public entity pays fees throughout the life of the project, often extending 30 years.
When done correctly, the DBOF process can be a win-win for all parties. However, public and private entities should be aware of the issues that can arise with these agreements. Among other things, these issues include the following:
1. Legal challenges related to the public entities ability to pursue such a project delivery approach under the law.
2. Potential opposition from unions.
3. Lack of competition in the bidding arena because only a few entities perform such work.
4. Risks related to the financial demise of the private company.
5. High transaction costs related to the complex nature of these arrangements.
A Rose by any Other Name.... But Are You Really Insured?
Do you think you have adequate insurance protection for your project under an “additional insured endorsement” to another entity’s policy? Or through a “wrap” policy, known as either an Owner’s Controlled Insurance Policy (OCIP) or Contractor’s Controlled Insurance Policy (CCIP), because you are listed as “an insured”? Perhaps not under more recent policies. Check the latest policy language carefully, and you may not like what you find. Many recent insurance policies now include limiting language that restricts the self-insured retention (SIR) provision to payments made only by “The Named Insured,” e.g., “Payments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention. Satisfaction of the self-insured retention as a condition precedent to our liability applies regardless of insolvency or bankruptcy by you.” This past year we have noted a few published decisions that have supported such limiting policy language, allowing an insurer to restrict and ultimately refuse to accept SIR payments from any other insured but “the Named Insured.” What is the result of that interpretation if “The Named Insured” is M.I.A.? The policy is never triggered, thereby precluding coverage and the benefits of the policy to all other insureds. The potential effect on risk management and business protection for your project make those policies worthy of a second look.
Be careful what you ask for Idaho
In the last two decades, the Idaho State Legislature has authorized design-build contracting for many different types of public projects. It appears that the Legislature will continue this trend for highway projects. In February, a House committee voted to print a bill that would allow the Idaho Transportation Department (IDT) to award design-build contracts for highway projects. A similar measure nearly became law last year.
For the most part, the Legislature’s acceptance of the design-build process is good thing. Several years ago, I worked for a commercial contractor. In 2001, I visited our largest project at that time -- a $500 M design-build facility in California. When I asked the project lead whether he liked design-build projects, he was quick to praise the process. He believed that design-build projects equated to fast results, decreased change orders, and less litigation. To him, it was a no-brainer. Many of my colleagues agree.
Since then, I have been involved with several design-build and design-bid-build projects. Although some design-build projects have been successful, that’s not always the case. The moment an owner enters into a design-build contract, it loses something that can be very important to a successful construction project: control. This lack of control – which is caused in large part by undefined design requirements – can lead to significant cost overruns and delays.
To avoid such results, owners should focus on two important actions: careful planning and diligent execution. On the topic of planning, design-build owners should spend significant time defining the project requirements. The design-build contract documents must include, among other things, detailed project design criteria, program requirements, performance specifications, and deliverables. Absent such defined requirements, design-builders are free to run wild.
Professional execution of the plan is equally important. Owners must prudently monitor the design-builder’s work. Too often, owners in design-build projects overlook this task, believing that such role is limited in design-build projects. In fact, the opposite is true. Because the design-builder has more flexibility in design-build projects, owners must arduously monitor the budget and schedule.
Design-build projects present many benefits. IDT, however, should know that it will not be less work for them. The key is for IDT to clearly define the project programs and performance requirements before the contracts are signed, and to monitor the design-builder’s compliance with these requirements throughout the project.
But I already paid for that! So you have a mechanic's lien; now what? (Part 2)
Four Practical Points for Avoiding and Responding to Construction Liens
Step 1: Who’s healthy in 2010?
Within the bounds of the Fair Credit and Reporting Act and any state obligations, it is imperative for both owners and general contractors to understand the financial fortitude of the parties doing the work. If you don’t obtain the bonds to protect the project, you need to be aware of what you can do to protect your rights. While you cannot request a complete financial audit, good due diligence will save you time, energy, money, and headaches in the future. Keep an eye out and an ear to the ground for any questionable items or rumblings related to the trades. Has anyone complained of “slow-pay” issues? Are there any “marks” against the contractor on any registration or licensing entity with the state? How timely is the contractor in meeting and agreeing to the terms you proposed (discussed below) that have active and proactive involvement for ensuring that the project remains clear of liens? Where is the contractor’s facility? Will it be condemned because it’s so rundown or has that “almost vacant” look, or is everything shiny and “new,” which in this economy could reflect an overleveraged or overextended trade contractor just waiting to fold if that next job doesn’t come through? While these items alone cannot “tell” you the contractor’s financial status, do not race past any yellow flags – the red ones are just behind it waving in the wind. These precautions are as true for the owner, who can get sideswiped by the general contractor or any of the lower-tier trades or suppliers.
Step 2: Is it time to update your contracts and specifically your right of inspection, payment, and mechanic’s lien provisions?
Do you know what your contract allows you to do at the beginning of the contract term or during the project to avoid liens? Do you have a list of the trades and suppliers (at least the major ones if not everyone) in the contract or within 30 days of its execution? Is your state a “preliminary notice” state such as California or Nevada, or a “surprise” state such as Idaho? Is your contract an “open-book” agreement? Can you communicate with lower-tier trades at any time? Do you have payment provisions relating to timing of payment for lower-tier trades or suppliers in your prime agreement? Do you require a sworn statement for the work performed for prior payment applications and a listing of the trades? Do you have joint pay or direct pay provisions if you have any concern whether those trades might be paid? Can you require waiver and lien releases with each payment (as permitted by law, of course)? Are you allowed to offset payments if you do discover there are some financial or payment concerns?
Step 3: Do you check in on the status of the work?
It is important to both monitor the work to keep up on the status and to communicate with the trades and suppliers on a regular basis to make sure they are being paid. While a few trades may promptly bring a slow pay or non-pay to the owner ’s or general contractor’s attention, many others in this economy will not until the very last minute out of pressure from the nonpaying party or fears of “not playing along” and not getting future work. The key is to allow the owner or general contractor to discover any issue early in the process – early enough so that any money can get to the right party and not the party that disappears with the dollars.
Step 4: Someone’s filing a claim; what do I do?!
There are times when something may slip past you despite the best-laid plans. Do you have a checklist action plan? Does everyone know what to do and what information and documents are required? Many times these claims arise at the most inopportune times and create a “fire drill” atmosphere. Avoid the confusion and rush, and know what you need to get done in your state to avoid a lien on the property or obtain the prompt removal of the lien if one has already been filed. The more information you have in advance, the better decisions you will make during the process and the less money it will cost you to address the issue.
But I already paid for that! So you have a mechanic's lien; now what? (Part 1)
Your project is coming along fine, despite the economy. You’ve weathered the squalls of bids, design changes, agency approval, and credit (mercifully), and now even construction completion is looking good. You can see the finish line through the haze on the horizon, and you’re fairly pleased with how you have pulled everything together with what has been a long haul through the system. You’re in the home stretch. You’re closing down the last items and payment obligations to ensure everything will get done. You didn’t even have to spend much money on legal fees in drafting the contract or during construction (that alone is reason to cheer for your department’s budget). You may just go on a “road show” to tout your expertise about how projects should be run. And then....
You receive a call from your project manager letting you know that a subcontractor says it wasn’t paid and will file a mechanic’s lien in five days if it doesn’t get a check. Well, how could that be? You have a record of payments to the general contractor, but you cannot find a release for those payments. You get two more calls from unpaid trades.... Yet, you feel somewhat confident; after all, the contract says the general contractor “is responsible” and you have that record showing you did pay him. It’s his responsibility to pay all the people he contracted with, right? Well, yes and no (of course!) is the legal answer your construction lawyer will likely give you.
Unfortunately, this scenario is becoming all too common in this lingering depressed construction environment. Tight bids, job or trade failures, and an ailing economy have trapped many owners and general contractors, causing them to potentially pay twice for work they thought was already “clear” and paid for.
Although each state’s laws on mechanic’s liens govern each party’s obligations and rights, in my next post I will provide you with some simple, general guidelines that owners and general contractors should keep in mind at the beginning of each project to help protect against the possibility of such a double payment.
LEED Decertification
If you think LEED certification of a building is a one-time deal, think again.
USGBC’s latest version of LEED (version 3) establishes several new changes to LEED certification. Two of those changes are particularly significant. First, USGBC now requires building owners to submit operational performance data on a recurring basis as part of the LEED certification process. Building owners must provide the data for a period of at least five years. Second, and perhaps more important, LEED v.3 gives USGBC the right to decertify projects.
According to the USGBC, building owners can comply with this new data disclosure requirements in one of three ways:
1. Recertify the project on a two-year cycle using LEED for Existing Buildings: Operations & Maintenance;
2. Provide energy and water usage data on an on-going basis annually; or
3. Sign a release that authorizes USGBC to access the building’s energy and water usage data directly from the building’s utility provider.
As to decertification, LEED v.3 provides that certification "may be revoked" from any LEED project upon the USGBC's determination that a building does not comply with several minimum requirements, including environmental law and data disclosure requirements.
The impact of USGBC’s new enforcement right is unknown at this time. Indeed, USGBC has not yet decertified a project. However, one thing is clear: this new system of decertification may put your green investment at risk. Owners should have their attorneys draft contract provisions to protect against these risks during the design, construction, and post-construction stages of a project
The Green Building Bailout
Can green buildings save the economy? Maybe that’s a stretch, but green buildings do play a significant role in the country’s GDP. By 2010, the value of green building construction is projected to be $60 billion. Perhaps more important in these times, the government is recognizing that greening our schools, homes, and office buildings could put thousands of Americans back to work. According to the United States Green Building Council (“USGBC”), President Obama’s economic stimulus plan provides several billions of dollars for (1) modernization of public schools, with preferences or requirements for green improvement projects; (2) green improvements of federal buildings and developments; and (3) block grant funds for states, localities, and tribes for energy efficiency projects. (http://communicate.usgbc.org/newsletters/USGBC_Announcement/01-09.html.)
Given the public money flowing into green building, owners, contractors, and designers would be remiss in ignoring this opportunity.
Green buildings present a great opportunity, but it’s important to remember that this relatively new industry brings its own sets of challenges. To ensure maximum communication between project participants and a successful green project, green building contracts should:
- Clearly delineate each party’s role and responsibility in producing the green outcome or certification desired; wherever possible, the green “outcome” should be reduced to clear, objective and quantifiable standards.
- Require an integrated design process, which brings together all project participants early and often; and
- Mandate projects participants to develop procurement schedules for all green materials being placed into the facility.
