CONSTRUCTION LAW REVIEW April 2005 DOES STUFF “JUST HAPPEN”? In a legitimate effort to understand why they often get into legal trouble and how they might avoid it, clients have asked us to step back and tell them why construction claims and disputes come about. While it is true that some construction claims and disputes come about because nobody could have predicted the problem in advance, such as unsuitable soil or poor performance by an established subcontractor, our answer often surprises our clients. Contents: Most construction claims and disputes occur because of imperfect busi- Does Stuff “Just Happen”? 1 ness practices that allow issues to go unaddressed in the preconstruction and contract negotiation phase, and then manifest themselves during Announcements 3 the course of a construction project. While everyone is justifiably wary of too much paperwork and bureaucracy in the fast-paced world of com- Case and Legislative mercial construction, it is manifestly true that most of the disputes we Updates By State 3 handle for our clients could have, and should have, been identified early California 3 in the project – but were not because the client did not have a process designed to capture and deal with the issue in a rational manner. Florida 3 Some clients, for example, do not have effective control over the contract Georgia 4 documents (and ancillary forms such as surety bonds, change order forms, lien waiver forms, etc.) that are used by the company, particularly North Carolina 4 where there are multiple offices across the country. Frequently a variety South Carolina 5 of forms are used by different people, and those forms are completed and negotiated by different people, depending on who is in charge of a Mark Your Calendar 5 particular project. There is often a complete absence of control over the legal and contractual risks that are being documented in the contract, Current Focus: and little or no oversight with respect to the finished product. The Effect of Tort Reform on Construction Litigation 5 In this regard, problems arise when haphazard attention is paid to risks and scope issues that ought to be dealt with and addressed in the same In the News 7 proactive manner throughout the company. For example, on one particular project a client decided to have the site work contractor “buy” the site or soils on an unclassified basis, even though the typical method employed by the company was to purchase this work on a classified basis. True to form, the scope documents (including the drawings and specifications) indicated that there would be no extras for unforeseen soil conditions. However, because there was no oversight of contract preparation, the standard form agreement was pulled out and used – an agreement that contained express rights on the part of the site contractor to get extra www.alston.com compensation for unforeseen soil conditions. As a result, when the contractor decided that its purchase of the site on an unclassified basis was a poor decision, it pursued a claim due to the ambiguity created by the conflicting provisions in the contract. The forms and documents received during the course of a project are even more problematic. Surety bonds and certificates of insurance are often received, but never reviewed by the insurance broker, in-house counsel or anyone else who can identify problems and defects in those documents. Lien waivers are received, but infrequently checked to determine whether the correct form has been used, whether language has been altered, etc. Change orders are imperfectly drafted and signed at the field level, where careful attention to complicated items is required, leaving issues to be debated later that should have been resolved by the change order itself. When there is an absence of internal procedures for the processing and review of these kinds of documents, errors are common. In one case, a client required and paid for surety bonds, but did not actually receive them. This fact did not become apparent until it was time to call upon the surety because no single person was assigned the task of making sure the surety bonds were actually received on a timely basis. In another case, a client was angered over a subcontractor’s sudden assertion of a delay claim when there had been no notice or discussion of delay issues with this subcontractor. When the subcontractor’s records were pulled, it was apparent that the subcontractor had been consistently paid by the contractor’s accounting department despite the fact that it had submitted lien and claim waiver forms that had an important notation typed into them: “All claims for delay are excluded from this waiver” – thus making the waiver absolutely useless in the prevention of “end of the project” claims. The same lack of attention to strong internal procedures applies to problems that develop in the field during construction. For example, when a construction defect issue begins to develop on a project, a company without an established procedure for dealing with the issue is likely to run into the following problem experienced by yet another client. When the construction defect issue first became a disputed item, the project manager hired an “expert” engineer to review the issue and produce a short letter report, all without consultation with the company’s in-house or outside counsel. This letter report was then used as a basis for a series of accusatory letters to the design firm indicating that the defect was created by a design issue. Once the matter went into litigation, and a true expert was retained to review the matter, it was revealed that the defect was attributable to poor workmanship by the trade contrac- tor. At that point, the client was faced with a host of evidence that it had generated that was contrary to the position it was taking in the litigation, all because the response to the defect problem was not coordinated through senior management and legal counsel. As is evident from the above examples, having strong, established internal controls and procedures is the centerpiece of any effort to avoid construction claims and disputes. These controls and procedures will identify and deal with most of the issues that are “foreseeable,” and thereby limit a company’s litigation misery to matters that are truly unforeseeable and not subject to elimination through proactive business management and practices. – Brook A. Clark 2 3 ANNOUNCEMENT The Construction and Government Contracts Group of Alston & Bird LLP is pleased to announce that two members of the group, Jeffrey A. Belkin and Brian K. Fielden, have been elected partners in the firm, effective January 1, 2005. CASE UPDATES California Subcontractor’s Structural Engineer Does Not Owe Duty of Care to Owner and General Contractor in Connection With Design of Retaining Wall In Weseloh Family Ltd. Partnership v. K.L. Wessel Constr., the California Court of Appeals ruled that a subcontractor’s structural engineer could not be held liable to the owner or general contractor in negligence because it owed them no duty of care. A retaining wall, which was designed by the engineer, failed and the owner and general contractor brought suit in negligence. The engineer was not in contractual privity with the owner or general contractor; instead, it had a contract with the general contractor’s retaining wall subcontractor. It had also not directly supervised construction of the retaining wall. The appellate court considered these facts, as well as various policy factors, and affirmed summary judgment for the engineer on the ground that the owner and general contractor did not meet their burden of showing that the engineer owed them a duty of care. The court did not create a general rule for all cases; rather, its ruling was limited to the facts of the case, holding that the owner and general contractor did not meet their burden of showing that a duty existed based on the evidence presented. 125 Cal. App. 4th 152 (2004) Florida Court Had No Authority to Order Severe Sanctions for Failure to Pay an Ordered Increase in a Lien Transfer Bond In Smith Original Homes, Inc. v. Carpet King Carpets, Inc., a Florida appellate court confronted, for the first time, a Florida court’s power to impose sanctions for failing to comply with a court order to increase the amount of security for a lien transfer bond under Fla. Stat. § 713.24(3). In this case, the defendant deposited cash with the court to transfer the plaintiff’s lien to the deposited security, as allowed by § 713.24. The defendant, however, failed to comply with the court’s order requiring that it increase the amount of the security by $28,000, claiming that compliance was impossible since it was no longer an ongoing entity. The court granted the plaintiff’s motion for sanctions, struck the defendant’s pleadings, and entered judgment for the plaintiff. The appellate court reversed, holding that there is no express statutory authority for sanc- tions for failure to pay an ordered increase in a lien transfer bond; even if such 2 3 authority did exist, the trial court made no findings of “willful disregard, gross indifference, or deliberate callousness” that would be necessary to warrant such severe sanctions. 2005 WL 415082 Georgia Contractor’s “Decision” Under a Dispute Resolution Provision is Binding on Subcontractor In Holt & Holt, Inc. v. Choate Constr. Co., the Georgia Court of Appeals enforced a dispute resolution provision under a subcontract, which provided that a contractor’s “decision” as to claims and disputes between the contractor and subcontractor would be “final and binding,” unless the subcontractor commenced arbitration proceedings within 30 days after receipt of notice of the contractor’s decision.