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Fall 2011 ATTORNEYS AT LAW www.eckertseamans.com l [email protected]

Construction Law

Dual shop operations require careful planning and implementation In This Issue… As construction contractors seek to replenish universally abhorred by unions, there is Page 1 their backlog in a struggling economy, many nothing improper about it when done correctly. Dual shop operations require are looking into forming separate union and However, lawful double-breasting requires careful planning & non-union companies to perform the same type careful attention to detail. Mistakes are common implementation of work in the same geographic area. This and a failure to properly establish and maintain An overview of practice is known as “double-breasting.” There a legitimate double-breasting operation can clauses are a number of advantages to the practice of prove to be extremely costly. double-breasting, so long as it is done correctly. Page 3 If the double-breasted operation is not properly Litigation history of a Double-breasting allows the contractor established, with the dual shops kept completely contractor as a factor in maximum flexibility to bid larger union projects, legally separate, the National Labor Relations public procurement while competing for non-union jobs free from Board will treat the union and non-union Page 4 collective bargaining restrictions. Although this companies as one entity and, accordingly, Be mindful of who you hire: practice of maintaining “dual shops” is continued on page 3 New GAO decision underscores potential conflict of interest problems with retaining former federal An overview of indemnity clauses agency employees When contractors and subcontractors review and “Non-Indemnifying Parties” or Page 5 construction , they usually focus on the “Indemnitees” and “Indemnitors” is a clause To owners and general clauses most near and dear: (1) Price: How entitled “Indemnity.” Many contractors and contractors: Before much do I get paid?; (2) Payment: When do I subcontractors, by the time they get to that termination, review the bond get paid and is my payment dependent on the term, will either not read it or start to read it next party up the food chain getting paid (a and then stop halfway through. This is a Waivers of consequential damages “pay if paid” or “pay when paid” clause)?; and , but a mistake that is only realized if an (3) Scope: What is my contractual scope of accident or claim arises. It is at that time that Page 6 work and which of the specification sections this clause can have substantial, unintended United States Supreme Court and drawings are in my scope? consequences, such as putting the company Emphatically Affirms Federal at risk for a claim when the company bears Policy Favoring Arbitration Almost always tucked near the end of the no responsibility other than the fact that the Construction Law Group News , replete with long run-on sentences and work related to the accident was in its scope. defined terms such as “Indemnifying Parties” continued on page 2

PITTSBURGH, PA • BOSTON, MA • CHARLESTON, WV • HARRISBURG, PA • PHILADELPHIA, PA RICHMOND, VA • SOUTHPOINTE, PA • WASHINGTON, DC • WHITE PLAINS, NY • WILMINGTON, DE An overview of indemnity clauses “ (continued) Indemnity is defined as the obligation resting on one

What should a prudent contractor do? First party to make good a loss or damage another party and foremost, it should read the Indemnity has incurred. The scope of indemnity obligations clause and attempt to understand the runs the gamut from claims for personal injury and exposure and risk it would be agreeing to accept if it signs the contract. If the property damage to claims for money damages… contractor has any doubt or concerns, it should consult its counsel or, at a minimum, With that in mind, the three general Types of the indemnitee, either active or passive, its insurance broker. A competent insurance of indemnity clauses are: would bar indemnification from the broker should be experienced in indemnity indemnitor regardless of whether the clauses and should know, at a minimum, if Type 1 Indemnity Clause indemnitor may also have been a cause the risk posed by the indemnity clause is “ of the indemnitee’s liability. covered by the insurance required to be A Type 1 indemnity clause provides provided under the contract. “expressly and unequivocally” that the indemnitor will indemnify the indemnitee Once the Type of indemnity clause is determined, some principles to apply are as Here are some practical pointers for for, among other things, the “negligence follows. Avoid Type 1 clauses, if at all contractors and subcontractors to consider of the indemnitee,” and the indemnitee is possible. Type 1 clauses put your company when making that initial determination if indemnified whether its liability arises from at great risk to be responsible for damages they need assistance in analyzing the clause its active or concurrent negligence. Stated if anything occurs, even if it has no or, if they cannot negotiate the clause, more simply, one party will indemnify responsibility. Under a Type 1 clause, your whether they should even sign the contract. another party regardless of whether the party being indemnified was itself actively company could find itself indemnifying a party that caused the damage, even though Indemnity is defined as the obligation responsible for the damage. This means your company was not at fault. Type 2 resting on one party to make good a loss that the party that caused the injury is clauses are more palatable but, if at all or damage another party has incurred. potentially being indemnified by a party possible, do your best to negotiate to achieve The scope of indemnity obligations runs that had no role in the injury. a Type 3 clause. Under a Type 3 clause, if the the gamut from claims for personal injury indemnitee bears any responsibility for the and property damage to claims for money Type 2 Indemnity Clause loss, there is generally no indemnity. damages (consequential, incidental and A Type 2 clause requires the indemnitor other types of damages) from any to indemnify the indemnitee for his or her If this does not seem complicated enough, conceivable event or . passive negligence, but not for active it is also important to know that a number negligence. Examples of Type 2 clauses of states have “anti-indemnity” statutes The various form contracts—AIA, EJCDC are: a clause providing for indemnity for which outlaw Type 1 clauses. Crafty and Consensus DOCS—all contain different the indemnitee’s liability “howsoever same attorneys will try to circumvent these indemnity clauses, and the types of may be caused” or “regardless of statutes by way of terms that attempt to clauses, and their breadth and scope vary responsibility for negligence” or “arising eliminate these statutory protections by widely depending on the craftiness of the from the use of the premises, facilities or compelling the contractor or subcontractor drafters and the perceived leverage of the services of [the indemnitee]” or “which to agree to waive them or by providing party offering the contract. might arise in connection with the agreed that another state’s laws (a state without work” or “from any and all claims for such “anti-indemnity” statutes) applies. Many courts have generally categorized damages to any person or property by Depending on the state and its “anti- indemnity clauses by one of three Types: reason of the use of said leased property.” indemnity” statute, these terms may “Type 1”; “Type 2”; and “Type 3.” In a Type 2 clause, an indemnitee will be or may not be enforceable. For purposes of this overview, this indemnified only if it was at most a passive categorization is useful in providing a cause of the damage, but will not be A final thought is to be sure that the primer to contractors and subcontractors indemnified if it was an active cause of the insurance coverage provided in the about indemnity clauses. damage. Thus, unlike a Type 1 clause, if insurance certificate corresponds with the the indemnified party did not directly cause indemnity you have agreed to provide. So there is no misunderstanding at the the damage, it will be indemnified. Many a contractor, when an accident outset, an “indemnitor” is the party that occurs, has found its carrier denying is agreeing to indemnify another party Type 3 Indemnity Clause insurance coverage, or reserving its rights and the “indemnitee” is the party that is This type of indemnity clause requires the to deny insurance coverage, because the getting the benefit of the indemnity. Also indemnitor to indemnify the indemnitee for policy did not an onerous indemnity “active negligence” refers to an event or the indemnitee’s liabilities caused by the clause. In the case of a catastrophic occurrence that caused the damage in indemnitor, but does not require that the accident, this can put the company at risk. which the indemnitee was directly involved indemnitor indemnify the indemnitee for or played some role. “Passive negligence” the indemnitee’s liabilities that were caused Scott D. Cessar is where the indemnitee did not play a role other than by the indemnitor. Under a Construction Law Group and/or was not a cause of the damage. Type 3 clause, any negligence on the part

2 CONSTRUCTION LAW REPORT

Litigation history of a contractor as a factor in public procurement

Construction projects can be fertile grounds for disputes and litigation. This raises the “ issue of whether to hire a contractor with a history of filing lawsuits. In the private sector, an owner can simply decline to hire A contractor should carefully consider whether such a contractor. However, public owners a dispute with a public owner is worth litigation, are usually obligated by competitive bidding laws to hire the “lowest responsible especially if there is a chance of more work with bidder.” Thus, their ability to bypass a the same owner. litigious, but otherwise qualified, low bidder is somewhat unclear.

In Triton Services, Inc. v. Talawanda City School District, Ohio’s intermediate appeals court provided helpful guidance to public owners when the low bidder has a “ questionable litigation history. Triton was partly based on the prior lawsuit brought could execute the contract properly.” the apparent low bidder for the HVAC by Triton against the school district. Furthermore, the appeals court stated that portion of a new high school project for Triton, in turn, filed a lawsuit that asked whether a bidder is “responsible” will differ the Talawanda School District. The school the court to declare that it was the lowest for any given project, and that a school district had worked with Triton before, in responsible bidder, and to prevent the district’s discretion is “subject to a fluid, 2007, on an elementary school project. In school district from awarding the contract abuse-of-discretion standard.” Based on fact, Triton sued the school district after to anyone else. After was the facts presented to the trial court, the the parties disputed Triton’s scope of work. presented at a hearing, the trial court appeals court found that Triton “did not The lawsuit was ultimately settled for denied Triton’s requested relief, and show by clear and convincing evidence that “about 90 percent” of what Triton sought. Triton appealed. the school board abused its discretion.”

In the bid at issue, the school district The appeals court agreed with the trial The lesson of Triton, thus, is that, at least became concerned when it learned that court’s decision and set forth a flexible under Ohio law, a contractor’s litigation Triton failed to include glycol in the cost of standard for public owners to follow. The history may later have consequences in its bid. This omission was estimated to add court stated that “[t]he term ‘responsible’ public procurement. Consequently, a between $50,000 and $75,000 to the cost is not limited to a bidder’s financial contractor should carefully consider of Triton’s work. Triton contended that the condition, but pertains to many other whether a dispute with a public owner is glycol was omitted because it was confused characteristics of the bidder, such as its worth litigation, especially if there is a about whether it was part of Triton’s scope general ability and to carry on chance of more work with the same owner. of work. the work, its equipment and facilities, its promptness, conduct and performance on Jacob C. McCrea The school district rejected Triton’s bid on previous contracts, its suitability to the Construction Law Group the grounds that Triton was not a particular task, and other qualities that “responsible bidder,” which was at least would help determine whether or not it

Dual shop operations require careful planning & implementation (continued)

will impose liability on the union company Unions can be expected to aggressively or maintaining a dual shop to determine for violating the National Labor Relation challenge contractors that choose to whether such practices are appropriate Act’s prohibitions against interfering with operate a dual shop and will place and permissible for your business. We have employees’ collective bargaining rights and heightened scrutiny on dual shop represented a number of contractors over refusing to collectively bargain with the operations. Existing collective bargaining the years in the establishment and union. Such liability could result in awards agreements may already contain legally maintenance of dual shops. of back pay, fund contributions, interest, enforceable clauses aimed specifically at attorneys’ fees, , and/or defeating such efforts. It is important to Timothy D. Berkebile other non-monetary remedies to the union. obtain legal advice when acquiring, forming Construction Law Group

3 Be mindful of who you hire: New GAO decision underscores potential conflict of interest problems with retaining former federal agency employees When it comes to bidding construction conducted an investigation and determined documents suggested the $700 million was projects, even a small advantage can yield that Mr. Kenrick’s employment with CDM mandatory, Mr. Kenrick was able to relay big returns. This is particularly true of did not present a conflict. to CBY that a lower-priced proposal might federal projects, where the morass of be received more favorably. statutory and regulatory acronyms—FAR, The GAO, however, found that the ACE DFARS, EFARS, CICA and more—is enough failed to conduct a meaningful conflicts The GAO found that the solicitation misled to make a contractor’s head spin. check. In his role at the HPO, Mr. Kenrick contractors into believing that price would Companies that routinely compete for had access to sensitive, non-public not be a factor in the evaluation process. federal contracts may consider hiring information concerning the permanent Significantly, however, price only became someone specializing in the federal pumps project. He routinely discussed a factor because of the inside information procurement process. A former employee matters such as costs and risks of the possessed by Kenrick. of the Army Corps of Engineers (ACE) or project, performance requirements and other agency may be able to give proposal evaluations, including how In addition to these conflicts of interest, invaluable guidance to navigate the rocks individual proposals were evaluated in the the GAO found that the ACE failed to take and shoals of federal construction first phase of the solicitation. There was no adequate measures to fully review and contracting. Be cautious, however, as a evidence that Mr. Kenrick was sequestered understand the details of CBY’s proposal. recent decision from the Government from the project during his time at the In particular, the ACE failed to critically Accountability Office warns of the potential HPO, and the ACE did not attempt to examine CBY’s decision to use a pile conflicts of interest such hiring may cause. determine whether he was sequestered method to build the foundation of the after he became employed by CDM. pump system. Essentially, the ACE In Appeal of PCCP Constructors, B-405036 Indeed, all evidence revealed during the accepted CBY’s blanket statements that its (GAO 2011), the GAO addressed a protest GAO’s assessment suggested that he foundation complied with the solicitation of two unsuccessful bidders for a provided sensitive information to CDM. “with little or no independent evaluation design/build contract to construct The GAO determined, therefore, that the of the supporting materials in CBY’s permanent canal closures and pumps risk of an organizational conflict of interest supporting documentation volume.” The near Lake Pontchartrain, Louisiana. The was high. GAO noted that testimony from the head permanent pump project was set to replace officer at the ACE stated that, there was, a temporary pump system that is essential The conflict of interest manifested itself at most, a “five-minute discussion” of to flood control in New Orleans. After a most particularly in CBY’s price for its CBY’s foundation approach. In the end, two-phase solicitation process, which proposal. During bidding, a “build-to- the conflicts of interest and the established that the winning proposal budget” process was used, by which the questionable evaluation methods were would be selected on the basis of the ACE set a budget of $700 million for the just too much — the GAO directed the “best value” to the government, CBY project and essentially asked contractors to ACE to receive a new set of bids and to Design Builders, a Joint Venture of three provide the most “bang for the buck.” The evaluate those bids fairly. contracting partners, was awarded the contractor that submitted a proposal that project for a price of $675 million. maximized the value to the government It would be improper to conclude that the at the $700 million price point would be GAO’s decision means that the hiring of In submitting its bid, the managing partner awarded the contract. All publicly available former federal agency officials will present of the CBY Joint Venture, CDM, was documents indicated that $700 million a problem. And, as noted above, retaining employing a gentleman named Richmond was the price for the project, and all such individuals can greatly benefit a Kendrick who, until August 31, 2010, was contractors, save one, submitted a bid for contractor. Given the GAO’s scrutiny of the Chief of Program Execution of the that amount. the Army Corps of Engineers’ decision, Hurricane Protection Office (HPO) for the however, other federal agencies may ACE. Mr. Kendrick held the most senior The lone exception was CBY, which impose more stringent conflict civilian position at the HPO and had full submitted a bid for $25 million less than requirements. In considering hiring policies, authority for management decisions, the amount stated by the ACE’s solicitation. therefore, a prudent contractor should including the permanent pump project. In the debriefing following the award, the weigh the significant gains of adding a Corps noted that this proposal offered “an former federal employee against the Under the Federal Acquisition Regulations, advantage in price” and that the two losing potential for disqualifying conflicts of federal agencies are to avoid, neutralize, or contractor’s bids did not “support a $25M interest or, if it does hire such an mitigate potential conflicts of interest so as premium.” CBY lowered its price, however, individual, to consider walling him or her to prevent an unfair competitive advantage because of the inside information provided off on any implicated projects that would to any contractor. FAR 9.504. Conflicts of by Mr. Kenrick. The GAO noted that result in an appearance of impropriety. interest are evaluated on a case-by-case Mr. Kenrick had access to internal ACE basis, and when an agency conducts a documents, emails and meetings in which Matthew J. Whipple meaningful investigation into whether a the build-to-budget was discussed, and in Construction Law Group conflict exists, the GAO generally will not which the acceptability of lower priced second-guess it. The ACE claimed to have proposals was broached. Although all public

4 CONSTRUCTION LAW REPORT

To owners and general contractors: Before termination, review the bond

Terminating a defaulting contractor or Paragraph 3 of the bond required three The court agreed, and dismissed subcontractor is an unfortunate, but all too preconditions to the surety’s liability, Stonington’s claims against National Fire. frequent, necessity for owners and general including: contractors. When this occurs, a surety is This is only the latest of a number of obligated by the terms of a performance a. The owner’s proper notification to and decisions that instruct that satisfying each bond to perform the contract of the request for a conference with the condition set out in Paragraph 3 is departing contractor. But a number of contractor and surety; necessary to trigger surety liability. Absent recent decisions make it clear that owners unique circumstances—such as a state and general contractors cannot take such b. the owner’s proper declaration of a statute or agency regulation that override coverage for granted. Strict compliance contractor default and former the bond terms—recovery will be barred with the terms of the bond is essential— termination after the expiration of without an owner’s strict compliance with including advising the surety of the intent 20 days after initial notification; and the terms of a performance bond. to declare a default and terminate the contractor’s employment and—before hiring c. the owner’s agreement to pay the Because of the ubiquity of AIA forms in the a replacement—giving the surety the balance of the contract price to the surety industry, all bond obligees—whether opportunity to perform. surety or the replacement contractor owners or general contractors dealing with in accordance with the terms of the subcontractors—would be well-served by One of the most recent courts to confront original contract. a careful examination of any bond terms this issue was the federal district court of that impose notice obligations or other Connecticut in Stonington Water Street National Fire argued that Stonington’s obligations on an owner considering Assoc., LLC v. Hodess Bldg. Co., in which failure to notify the surety that the termination and then to carefully follow an owner filed suit against a surety for the contractor had abandoned the project them, even if they seem redundant. To surety’s refusal to perform its obligations and Stonington’s unilateral hiring of a do otherwise is to risk the loss of the under the terms of a standard AIA A312 replacement contractor was a breach of protection of the bond. performance bond. The surety, National Paragraph 3, and that these failures to Fire Insurance Co., sought dismissal of the comply with Paragraph 3 relieved National Audrey K. Kwak suit, arguing that Stonington, the owner Fire of any liability under the bond. Construction Law Group and bond obligee, had failed to comply with certain conditions set out in the bond. Waivers of consequential damages In the vast majority of construction costs, however, the possibilities of or relating to this Contract. This disputes, monetary damages are at the compensable damages are potentially mutual waiver includes: heart of the matter. In breach of contract limitless. Thus, in the absence of an 1. damages incurred by the Owner cases, these damages can range from the exhaustive list of consequential damages, for rental expenses, for losses of basic—“direct or general” damages—to the suffice it to say that lost profits are typically use, income, profit, financing, more complex—“indirect or consequential” considered to be the most common—and business and reputation, and for damages—and their effects can be crippling most costly—example of consequential loss of management or employee to even the most profitable businesses. This damages in a construction dispute. productivity or of the services of being the case, and to avoid the added risk such persons; and of potentially costly litigation or arbitration Modern courts and arbitration panels proceedings, those savvy parties to a generally do not disfavor limitation of 2. damages incurred by the construction contract—whether owner, liability clauses that relieve the contracting Contractor for principal office contractor or sub—should attempt to parties from liability for consequential expenses including the establish, at the outset, how much damages and, in fact, such provisions compensation of personnel compensation must be paid, and under what have become rather standard within the stationed there, for losses of circumstances, if the contract is breached. industry. For instance, the American financing, business and reputation, Institute of Architects’ (AIAs’) Standard and for loss of profit except In today’s construction industry, it has Form of General Conditions of the Contract anticipated profit arising directly become increasingly common for parties to for Construction (AIA A201-2007)— from the Work. contractually manage their risk in regard to commonly considered to be one of the “indirect or consequential” damages. As most influential forms in the industry— This mutual waiver is applicable, compared to “direct or general” damages, contains the following provision: without limitation, to all consequential which are those damages that flow naturally damages due to either party’s from a breach of the contract, consequential § 15.1.6 CLAIMS FOR termination … damages are those damages that, while not CONSEQUENTIAL DAMAGES flowing directly from the alleged breach, are AIA Document A201-2007 § 15.1.6. incident to that breach. These damages can The Contractor and Owner waive Significantly, absent fraud or include lost profits, finance charges, damage Claims against each other for continued on page 6 to reputation and additional home office consequential damages arising out of

5 Waivers of consequential damages (continued) , provisions such as this arbitration panel with the opportunity to consequential damages for this purpose. are likely to be binding on the parties to adjudicate or dismiss part or all of a Indeed, by skillful drafting, setting forth the contract. construction damages claim at an early specifically the consequential damages to stage in the case. This is more likely to be waived, many of the uncertainties Beyond the obvious benefit of minimizing occur where the scope of consequential regarding the awarding of damages that a party’s risk exposure, in some damages is clearly defined within the terms cause some courts and arbitration panels circumstances, mutual waivers of of the contract. For this reason, those to resist or prolong making decisions as to consequential damages can also offer parties who are contemplating entering into consequential damages are eliminated. the increased advantage of lessening the a construction contract should consider cost of lengthy litigation or arbitration having their legal counsel review the Thomas P. Kemp, Jr. proceedings by providing the court or contract’s language as it relates to Litigation and Construction Groups

United States Supreme Court Emphatically Affirms Federal Policy Favoring Arbitration

On November 7, 2011, the U. S. Supreme Each claim revolved around allegations that litigation, and the inefficiency, expense and Court handed down a per curiam opinion in KPMG failed to apply proper auditing risks attendant to litigating related claims KPMG LLP v. Cocchi, et al., No. 10-1521, a standards. The Florida courts refused to in different forums. case arising from the fallout of the massive compel arbitration because the negligent fraud perpetrated by Bernard Madoff. The and statutory claims The case and the principle involved have nineteen plaintiffs had invested in a trio of did not arise under or derive from KPMG’s great utility to those in the construction limited partnerships known as the Rye obligations under the auditing agreement. industry, where agreements to arbitrate are Funds, which were heavily invested with The parties agreed that any claims that widespread and litigation involving multiple Madoff. The defendants were the Rye were derivative of the fund manager’s parties is commonplace. Where some but Funds, the fund manager, and KPMG, the rights under the auditing agreement were not all parties and claims are subject to fund manager’s auditor. KPMG’s auditing subject to the agreement to arbitrate. arbitration, parties may use an arbitration agreement with the fund manager clause to gain tactical advantage, to find a contained a clause mandating arbitration of The Supreme Court reversed and forum more favorable to their position, to all claims relating to the services provided remanded the case to the Florida courts, increase the risks attendant to litigating by KPMG thereunder. finding that the “emphatic federal policy claims against the client or, to extricate in favor of arbitral dispute resolution” themselves completely from time- KPMG was sued on four theories, including mandates that courts compel arbitration consuming, expensive litigation. claims arising under the Florida Deceptive of any claim which is subject to a binding and Unfair Trade Practices Act, negligent arbitration agreement. This rule is Cornelius “Neil” O’Brien misrepresentation, professional inflexible, depriving courts of any discretion Alternate Dispute Resolution, Construction, malpractice, and breach of fiduciary duty. to weigh concerns over piecemeal Litigation and Public Transit Groups Construction Law Group News Awards Speaking Negotiating the Critical Clauses in the Industry The Best Lawyers in America 2011® At the firm's annual CLE seminar in August, Form Documents. Scott D. Cessar’s Christopher R. Opalinski, Commercial Scott D. Cessar led a panel discussion of presentation was “Damages: Limitation on Litigation and Litigation – Construction; Eckert attorneys – including Christopher R. Damages and Waivers of Consequential Scott D. Cessar, Litigation – Construction Opalinski, Mark A. Willard and Cornelius Damages Delays, Liquidated Damages and No Damages for Delay.” Additions J. O’Brien – all who have considerable experience in alternative dispute resolution Thomas P. Kemp, Jr. joined the Construction Other as both advocates and as neutrals. They Law Group as an associate attorney. Prior to Christopher R. Opalinski and Scott D. discussed best practices and procedures in joining Eckert Seamans, he served as a law Cessar visited a client in Mendoza, ADR and on issues in the forefront in ADR. clerk to the Honorable Nora Barry Fischer in the Argentina, where they spoke to the engineers United States District Court for the Western and attorneys in an interactive discussion on On November 3, 2011, in five cities across the District of Pennsylvania. Tom earned his J.D., construction law issues. They then traveled country, the ABA Forum on the Construction cum laude, from the University of Cincinnati to Buenos Aires where they met with another Industry presented THE Construction College of Law and his undergraduate degree client and attended its 40th year anniversary Contracts Program: Understanding and from the University of Notre Dame. celebration.

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The information in this publication is for the purpose of informing and educating our clients about various aspects of the law and is not intended to be used as legal advice. If you have questions concerning any of the topics, please contact your Eckert Seamans attorney. Eckert Seamans Cherin & Mellott, LLC. All rights reserved © 2011.