OP-ED: Learn to Identify Red Flags and Green Lights

October 29, 2015

By Darien Loiselle

So you survived the downturn, construction has taken off, and you are up to your proverbial earlobes in activity. There are more projects than you can execute, and not enough qualified individuals. How do you confront this boom, and ensure that your projects are profitable and successful? Here are some key issues to weigh and balance as you consider whether to choose the next big job.

Know thy owner

We all know the old phrase – 80 percent of your work is repeat work. But many old clients are no longer in the field, and new owners have arrived. Can you tell if this owner is a good fit? Conduct a detailed interview with the owner’s team, and take time to understand its program and longterm objectives. Do the homework – perform your own Internet searches, evaluate credit history, perform background checks. Check out reviews with previous partnering relationships. I know this is not always practical, but there are ways to do it. And ensure that the money is available to complete all the work. You have the right to be paid for your work.

Build your best team

This is easier said than done, I know. But don’t tackle new challenges with an untested team. It’s better to pass on new assignments than risk a distressed project. You need to not only develop the resources internally, but also develop the relationships externally. Meet subcontractors and discuss goals and expectations before the next project. Ensure that the subcontractor is giving you a qualified team, and ensure that your team collaborates well with the subcontractor teams.

Evaluate project delivery methods

Don’t be afraid to be creative. Hard bids will continue to be a delivery method for some time. But consider other options for winwin ideas between owner and contractor, including savings and incentive clauses where owner and constructor share benefits of value. This creates excitement, and incentives can be a relationship builder for the next project. These new delivery methods require some planning, but often create value for both owner and contractor beyond the bottom line.

Dust off that old contract

The world has changed, and so too should your contracts. The Legislature meets no less than every two years, and new case law rolls out each day. It does not take long – review your forms with your management and legal teams,and ensure you are doing everything you can up front to manage risk and ensure payment.

Darien Loiselle is a construction attorney in the Portland office of regional law firm Schwabe, Williamson & Wyatt. He represents owners, general contractors, designers, engineers and specialty contractors. Contact him at 503-796-2069 or dloiselle@schwabe.com

Originally published in Daily Journal of Commerce on October 28, 2015.

Government Contractors, Beware the Ever-Tightening Contract Enforcement

October 15, 2015

By Jeremy T. Vermilyea

In the years leading up to the Great Recession, commercial construction work was plentiful. Federal, state and local government coffers were flush with tax receipts; and the bounty of work meant that contractors had strong leverage in negotiating contracts, changes and claims.

The recession and its aftermath changed all that. The dearth of both commercial and public work shifted the balance of power in contract negotiations so that owners were much more able – and willing – to impose much more restrictive payment, insurance, notice and other requirements.

Even though the recession has ended, government owners in particular have continued these restrictive – some might say Draconian – practices. Contractors who perform work on government projects would be wise to recognize these contract provisions and practices, and to prepare accordingly, in preparing bids or proposals, selecting and managing subcontractors, and managing their operations during the course of construction. Failure to be mindful of the “gotchas” in a public works contract can leave contractors performing extra work without compensation, eating their internal costs for delays caused by others, or facing liquidated damages in circumstances where the owner previously gave routine time extensions.

Courts in both Oregon and Washington have adopted a rule of “strict adherence” when it comes to the interpretation of contract terms. This comes into play most often when a contractor is requested or directed to perform extra work, but does not seek or obtain a change order or contract modification exactly as required by the contract, either because it is not documented correctly or it is not submitted in a timely manner. Traditionally, contracting parties would “work it out” at the end of a project, even if there was a dispute over scope or amount. That practice is largely a thing of the past. Now, if the change is not properly documented, an owner can refuse to pay for the work, unless the owner has somehow waived the contract requirement. This puts the onus on the contractor to make sure it carefully follows the contract procedures to be paid for such changes.

Public owners are imposing increasingly strict rules on contractors in other ways as well. For example, some owners have begun imposing record retention requirements that mandate that a contractor keep all records related to a given project in a particular way, or waive any claims related to the project. In and of itself, this is not problematic; contractors have always had the obligation as well as the practical need to keep records of their work. However, some owners have gone a step further and are now requiring that prime contractors take affirmative steps to ensure that all of their subcontractors, sub-subs, and suppliers also adhere to the required record-keeping rules. That means that the prime contractor is now potentially in the business of monitoring its subcontractors’ internal business practices. The consequences of failing to do so can be that the contractor’s right to be paid for disputed items could be waived, even for meritorious claims, simply because a subcontractor did not properly keep records that may or may not be related to the disputed claims.

Another example of public owners’ stricter – some might say unreasonable – approach to contract operations is a recent notice issued by the Oregon Department of Transportation in which the agency notified contractors that it would no longer issue extensions of time to complete paving projects at the end of the construction season. In other words, when the paving season ends, ODOT will begin to assess liquidated damages, even in circumstances where ODOT acknowledges it has routinely granted contract time extensions to allow paving work to be completed the following spring to avoid the potential for paving work being performed during adverse weather.

For contractors working for government agencies, these trends mean a few things. First, contractors need to know and understand how risk-shifting, notice and payment provisions will work in practice when bidding or proposing on work so they can account for the costs and risks they will be undertaking.

Next, contractors should have well-trained personnel who carefully document and communicate all events for which delay or change notices may be needed to ensure that all contract requirements are strictly adhered to.

Finally, contractors should not expect an agency will continue to act reasonably simply because “that’s how it’s always been done.” Public owners have been signaling for some time that they intend to require strict adherence to contract language, whether reasonable or not. Prudent contractors would do well to listen.

Jeremy T. Vermilyea is a shareholder with with Schwabe, Williamson & Wyatt, representing contractors, developers, design professionals and other members of the construction industry.

Originally published in DJC Oregon on August 26, 2015

Court: Poorly Drafted Indemnity Clauses May Still Be ‎Partially Enforceable

August 31, 2015

By Stephanie Holmberg, Attorney

One of the most important risk-shifting provisions in a construction agreement also tends to be one of the most confusing:  the indemnity provision. While the basic concept of contractual indemnity is simple enough to understand – for example, one party obligates itself to pay for damages incurred by the other party under certain circumstances – it gets more confusing when there are statutes governing its effect.  In Oregon, the statute that governs indemnity provisions in construction agreements is ORS 30.140, and its interpretation has been subject to a long history of legal analysis.  This article discusses the most recent court decision regarding the purpose and effect of that statute.

Last month, in Montara Owners Association v. La Noue Dev. LLC, the Oregon Supreme Court decided that poorly-drafted indemnity clauses are still partially enforceable if they can be limited so they comply with the indemnity statute.  In other words, courts will not disallow an entire indemnity clause simply because part of the indemnity clause is overbroad and impermissible.

In this case, a homeowners association sued a general contractor and developer for damages caused by design and construction defects in a townhome complex. The contractor then sued several of its subcontractors who performed work on the project. Before trial, the contractor settled with the homeowners association and all but three of the subcontractors.  It was a dispute with one of those subcontractors that gave rise to the Oregon Supreme Court decision.

The contractor made a claim against the subcontractor seeking to enforce an indemnity provision in the subcontract between the parties. The indemnity clause in question required the subcontractor to indemnify the contractor for multiple horrors, “whether or not caused in part by [contractor], [its] employees or agents, but ‎excepting that caused by the sole negligence of [contractor], [its] employees or ‎agents‎.”

The trial court determined that the indemnity provision violated Oregon’s indemnity statute, ORS 30.140. The statute has two parts. The first subsection bars overbroad indemnity provisions – those that require one party to indemnify another party for damage “caused in whole or in part by the negligence of the indemnitee.” In this case, both the contractor and subcontractor agreed that the indemnity clause was overbroad and violated the first part of the statute.

However, the parties disagreed over the effect of the second subsection of the law. That subsection provides that the statute “does not affect any provision in a construction agreement” that requires indemnity where the injury or damage arises out of the fault of the indemnitor. The contractor argued the second subsection of ORS 30.140 is an exception to the first subsection.  The subcontractor took the opposite position and argued that ORS 30.140 sets out two mutually-exclusive categories or construction agreement indemnification provisions – one of which is enforceable, the other of which is unenforceable.

On appeal, the Oregon Court of Appeals reversed the trial court’s decision because it agreed with the contractor that ORS 30.140(2) acts as an exception to ORS 30.140(1). In other words, even though an indemnity provision is void under ORS 30.140(1) because it is overly broad, it may still be enforceable and hold the indemnifying party accountable for injuries or damages that result from its own fault.

The subcontractor next asked the Oregon Supreme Court to weigh in. The Court ultimately upheld the Court of Appeals’ decision and ruled the indemnity clause at issue to be partially enforceable.

The Court reasoned that, “By including the phrase ‘[e]xcept to the extent provided under subsection (2)” in subsection (1), the Legislature intended that the subsections would overlap rather than be mutually exclusive.”  The Court decided that unenforceable parts of an indemnity clause can be severed, and the remainder of a given clause can be enforced.  The Court also concluded that “the legislature intended that a subcontractor remain liable for the subcontractor’s negligence even though subsection (1) protects the subcontractor from having to indemnify a general contractor for the general contractor’s negligence.”

Oregon courts have now definitively spoken regarding the effect of these two subsections of ORS 30.140:  an indemnity provision in a construction agreement that requires both parties to be liable to the other for their own fault will be enforced regardless of whether another part of the indemnity provision attempts to require more.  In other words, if you break it, you buy it.  But if the other person breaks it, you are not required to pay for it.

What this decision also means is that parties to a construction agreement should pay careful attention to the language in an indemnity provision.  Regardless of whether it includes some parts that may be unenforceable, depending on the remainder of the text, the provision may still pass legal scrutiny and obligate your company to indemnify.  The best practice is to have your attorney review the indemnity provision so you have a clear understanding of your company’s exposure.

Stephanie Holmberg is an associate with Schwabe, Williamson & Wyatt. She practices in its construction and design group. Contact her at 503-796-2953 or at sholmberg@schwabe.com.

As published in the Daily Journal of Commerce, July 22, 2015.

Is Your Subcontractor an ‘Independent Contractor’? Generals Could Be At Risk If Workers Are Misclassified.

August 24, 2015

By Jeremy Vermilyea, Attorney

The DOL now says carpenters, construction workers and electricians may be misclassified as independent contractors, and that most workers are employees.

Builders, general contractors, architects, engineers and others in the construction industry often use independent contractors in their work. But is the “independent contractor” you’re using really an independent contractor, or could they be considered your employee? And why should you care?

There is a common misperception that engaging a subcontractor and labeling them an “independent contractor” or having them sign an independent contractor agreement is all a business has to do.

Another common misperception is that satisfying L&I’s seven-factor test for determining whether a business must pay workers’ compensation premiums is all a business has to do.

Unfortunately, these steps, while advisable, are not enough to prevent or minimize a business’s risks.

Apart from workers’ compensation laws, businesses must comply with state and federal laws on minimum wage, overtime, record-keeping, income and payroll tax withholdings, and breaks.

Generally, if a business hires an employee, then the business must comply with these laws, and must pay them minimum wage, pay them overtime for any hours worked over 40 hours in a week, keep records of the time they work and the pay they receive, ensure that they receive meal and rest breaks, and withhold some of their pay for taxes.

These requirements generally don’t apply if a business engages someone who is an independent contractor.

Determining whether someone is an independent contractor or an employee under these laws was often confusing, in part because different tests applied for different laws, and different agencies enforce those laws. These tests often boiled down to whether a business had control over the person and their work, often called the “right to control” test.

Over the past few years, however, the focus has shifted away from questions of control and to an “economic realities” or “economic dependence” test. The Washington Supreme Court in 2012 made this change. Questions of whether, under Washington law, a worker has to be paid minimum wage and overtime, a worker has to be provided rest and meal breaks, and an employer has to keep more careful track of time worked and amounts paid are now answered by determining whether the worker is economically dependent on the business.

Shifting ‘economic realities’

In 2014, the Washington Supreme Court applied this “economic realities” test to the question of joint employers, finding that the employees of a business’s subcontractor’s subcontractor could also be considered the employees of the top-level business, despite the subcontractor layers.

Last month, the U.S. Department of Labor also made this shift. The DOL enforces the federal minimum wage and overtime laws. In new guidance, it announced that it will use an “economic realities” test to determine whether those laws apply to a worker. You can read the guidance at tinyurl.com/DOL-Misclass.

The DOL used the construction industry as an example, explaining that carpenters, construction workers and electricians may be misclassified as independent contractors. The DOL warned that under its new interpretation, “most workers are employees,” and not independent contractors.

The DOL’s new guidance doesn’t necessarily change how businesses in Washington characterize relationships with workers as employees or independent contractors (given the 2012 change in Washington state law). But it still poses a risk to Washington businesses. The DOL, which enforces federal wage laws, frequently conducts more audits of businesses than L&I, which enforces state wage laws.

The DOL’s announcement of this shift signals a likely focus on this issue in audits. And whenever the DOL or another enforcement agency announces it will focus on something, lawyers representing employees usually take notice.

Why do contractors and building professionals care? If a business or its subcontractor engages a worker on an independent contractor basis and the DOL (or another agency) determines that characterization is incorrect, the business faces several risks, including:

  • Payment of additional wages if the worker was not paid minimum wage or overtime
  • Payment of penalties for not paying those wages in the past
  • Liability for income and payroll tax withholdings on the pay to the worker, plus possible interest and penalties
  • Liability for contributions to employee benefit plans, including health plans and pension or retirement plans, plus possible penalties for late contributions

Misclassification risks

Two things compound the potential risks for businesses.

First, a business rarely engages a single person as an “independent contractor” in a particular role or context — often a business will engage many “independent contractors” doing the same thing (framers, siding installers, electricians, plumbers, painters, etc.). So if a business is found to have misclassified one worker, this often affects groups of similar workers, multiplying the risk and leading to expensive class-action litigation.

Second, the DOL and IRS share information about suspected misclassifications, and the DOL and L&I do the same thing. The risk is not just that one enforcement agency will reclassify a worker or group of workers, but that multiple agencies will do so. The potential impact could devastate a business.

So what should contractors, architects, engineers and building professionals do? Identifying and addressing these risks is typically a three-step process:

1. Identify all independent contractor relationships. This includes any person or entity that was paid and issued a 1099, even if that entity is a business with its own employees or subcontractors. The entity structure is often ignored in making these determinations.

2. Evaluate those relationships under the state and federal tests. Include every person working on a project or job site, even if the business’s relationship with that person is indirect or through one or more subcontractor relationships. Though the tests are similar, and now hinge strongly on economic dependence, the tests differ. So it might be possible that a person is an employee under L&I’s test for payment of workers’ comp premiums but is an independent contractor for purposes of wage and hour laws or employee benefits.

3. Recharacterize relationships that are truly employee relationships and not independent contractor relationships. In some circumstances, this may involve making some back payments to avoid enforcement penalties.

In addition, businesses should evaluate their contracts with their subcontractors to minimize their risk.

The independent contractor/employee issue continues to evolve, and this evolution has not been in businesses’ favor. Businesses that use independent contractors regularly or on a widespread basis face potential risks and costs. Taking preventative steps now could help eliminate or reduce significant liability later.

Jeremy T. Vermilyea is a shareholder with with Schwabe, Williamson & Wyatt, representing contractors, developers, design professionals and other members of the construction industry.

As published in the Daily Journal of Commerce, August 13, 2015.

Ending a Contract? Now You Don’t Have to Prove There Was Good Cause To Do So

August 20, 2015

By Joe Stockton, Associate

  • A high court ruled last week that the termination for convenience provision trumps the covenants of good faith and fair dealing.

Common understanding in the construction industry has long been that owner or contractor could not terminate a contract for convenience unless it had good cause, sent an abundance of written notice, and provided an opportunity to cure — similar standards to terminating for default. That was the rule, until last week.

On Aug. 10, the state Court of Appeals found that “good faith” and “fair dealing” will no longer restrict the use of an express and unambiguous termination for convenience provision. Deference is given to the negotiated terms and the intent of the parties.

The facts of the case were simple, as the enforcement of a single contract provision was in question. SAK & Associates (subcontractor) entered into a fixed-sum contract with Ferguson Construction (general contractor) to provide concrete materials and paving services for the construction of hangars at an airport.

Ferguson terminated SAK from the project after three months of work, citing a provision of the subcontract that the “contractor may, after providing subcontractor with written notice, terminate (without prejudice to any right or remedy to contractor) the subcontract, or any part of it, for its own convenience and require subcontractor to immediately stop work.”

The provision further stated that the contractor shall be liable only for the “work actually performed in an amount proportionate to the total subcontract price.”

Pursuant to that provision, Ferguson provided written notice of termination and paid SAK approximately $181,000 for its work performed. SAK subsequently sued for the subcontract balance, claiming that Ferguson breached the subcontract for terminating without good cause.

The trial court dismissed the case and SAK appealed. At issue was whether the termination for convenience provision was an invalid illusory promise; or if the clause is limited by the doctrine of good faith and fair dealing. The appellate court disagreed on both counts, upholding Ferguson’s termination and the freedom to contract.

Before addressing the legal issues, the court recognized that although termination for convenience clauses are customary in standard construction contracts from groups such as the AIA and AGC, there is a dearth of law interpreting such provisions between private parties.

Turning to the legal analysis, the court first defined an illusory promise as when the promisor’s performance is entirely within his discretion or control, in which case the provision is unenforceable for not being supported by consideration.

However, Washington courts do not give effect to interpretations that would render contract obligations illusory.

The court then explained that, generally, termination provisions cannot be illusory if they can be exercised only upon the occurrence of specified conditions, such as providing written notice.

Moreover, the court noted it is well settled that partial performance provides adequate consideration to enforce an otherwise illusory termination provision. In this case, SAK performed and was compensated for over three months of work. The court relied upon that partial performance to find that the termination for convenience provision was not illusory.

It is unclear if the result would have changed had SAK not commenced work before termination.

Moving to the next issue, citing just a single case, the court found that the covenants of good faith and fair dealing do not trump an express termination for convenience provision. The negotiated terms and intent of the parties must prevail. Here, the parties negotiated that Ferguson would have the right to terminate the subcontract for any reason upon written notice and proportional payment of the contract price. Ferguson acted accordingly. The court therefore enforced the provision, while refusing to assess Ferguson’s subjective reasons for termination or the quality of SAK’s work on the project.

The implications of the court’s decision are significant: Termination for convenience provisions will be enforced as bargained for by the parties. Owners and general contractors should use this case as an example of how one can terminate for convenience in confidence and with reduced liability concerns for failing to show good cause or an opportunity to cure.

General contractors and subcontractors on the other side of the table should now negotiate aggressively to limit the application of termination for convenience provisions, with increased procedural and payment obligations.

As published in the Daily Journal of Commerce, August 20, 2015.

Creating A Blueprint For Patent Walls In Green Construction

August 11, 2015

By Priya Sinha Cloutier, Attorney

In the first of this three part series, clean tech, or green construction, was defined as construction that reduces or minimizes the environmental impact in building construction, operation and use. That article also discussed the importance of building intellectual property walls, and especially with patents, to protect inventions from being incorporated into projects by unlicensed users. Equally important is knowing the patents that may prevent a company from incorporating patented technology for which it has no license. Patent rights can shape an industry; consequently, companies must develop patent strategies. Patents for green construction encompass everything from building materials, to software for optimizing various processes, to green energy systems, amongst others.

Examples of patents in green construction

US Patent No. 8,317,917 (the “’917 Patent”), issued on November 27, 2012 teaches a process to produce green cements by using materials such as Ca2SiO4, Al2O2, TiO2, and spent wash, an industrial waste, under low temperatures. By using industrial waste, the cost to reduce overall waste is decreased. Further, the ’917 Patent goes on to explain that the green cements produced reduces a significant amount of the CO2generated during the process by adsorbing the CO2.

US Patent No. 8,355,995 (the ’995 Patent), issued on January 15, 2013, teaches a computer-implemented method for managing a green housing community construction. The method includes computer-implemented modules that will: coordinate the preparation of a site for green housing community construction; process the acquisition of existing housing for the site, wherein the existing housing is acquired below assessed value, and the existing housing is slated for demolition; scheduling the transfer of the existing housing to the site; and managing the remodeling of the existing housing at the site to form the green housing community, wherein the green housing community is remodeled to meet one or more green building standards or policies, and the remodeling includes adding common exterior design elements to the existing housing to provide an appearance of continuity within the green housing community.

US Patent No. 9,010,959 (the ’959 Patent), issued on April 21, 2015, teaches a system and method for generating artificial light for interior or exterior illumination by employing various combinations of solar photovoltaic-generated power and conventional power to directly power LED or other light sources. One embodiment of this system provides a virtual skylight that illuminates interior structures and spaces with the benefits of illumination provided by a conventional skylight but without the disadvantages. A direct connection between a solar photovoltaic cell and the LED or other light-producing source eliminates complex and costly circuitry in both interior and exterior applications. The system is configured to provide, alternatively, solar PV power and/or conventional power needed for artificial illumination at a desired optimum threshold intensity.

Important considerations in patent strategy

Strategic thinking is the key to building a patent wall of protection for those in the green construction industry. In cases of head-to-head competition with core products, green building professionals must consider such issues as product design, information and timing as they relate to patent rights. Competition arising out of patent rights has long been thought of as a matter of protecting major technological breakthroughs that would lead to radical innovations in the market. However, lesser innovations may also become important when buyers value a particular kind of innovation that may not otherwise be a core technology.

In some cases, green building professionals may want to prevent others from using innovation but not want to spend resources in the patent process. This innovation may be for a non-core technology that the green tech professional may want to incorporate in minor projects or simply prevent competitors from using. Green building professionals may be able to outwit competitors by strategically disclosing innovations they may not want to otherwise protect. Such disclosures can be made in technical bulletins, technical papers, conference posters, or marketing material. Once the disclosure is made it may be considered prior art against a competitor preventing a patent from issuing. And, under the America Invents Act of 2013, such disclosures might be used to challenge issued patents. However, such strategic disclosures also prevent competitors from utilizing patent protection. In order for this strategy to work, however, competitor technology and industry technology must be carefully monitored. Of course, it must be kept in mind that there is always the risk that the strategic disclosure is not sufficient to prevent a patent for issuing. This may happen when insufficient or different technology is disclosed in the technical publication.

The timing of patent applications in also an important decision. The key trade-off lies between the disclosure of technical knowledge and the assurance of protection through patents.   Products with short life cycles may generate most of their returns before a patent is granted. If such products are counterfeited during this period, patent holders face difficulties in claiming their real economic losses in court as opposed to patent infringement occurring after a patent’s grant. For that reason, secrecy may be more effective than the patent process for technology products with short life cycles.

In order to use patents to build intellectual property walls, green building professionals must determine the core technologies they want to protect and the life span of those technologies, and the core technologies of their competitors. Once that is done, green building professionals can layout their blueprint for building strong intellectual property walls.

Priya Sinha Cloutier is an intellectual property lawyer with Schwabe, Williamson & Wyatt, a Pacific Northwest regional law firm. She focuses her practice on the procurement and enforcement of domestic and international patents, trademarks and copyrights. Ms. Cloutier can be reached at 206-407-1559 or pcloutier@schwabe.com.

As published in Inside Counsel, August 3, 2015

A New Wrinkle Affecting Construction Defect Battles

June 9, 2015

By William Ohle, Attorney

“Indemnity” is one of those legal words that probably make you glad you didn’t go to law school (assuming you didn’t). And if you ever run into it, you hire someone else to deal with it. To be clear, what I’m discussing here is common law indemnity, specifically in construction defect cases, and not in the insurance context, which is a whole other can of worms.

Common law indemnity is a very old concept dating back to jolly old England and inherited by the American courts. It was originally intended to ease the burden imposed by another common law rule, joint liability. In that instance, if the joint negligence of two parties combined to cause injury to a third, each of the two negligent parties were individually on the hook for the entire amount of the damage. If one of the negligent parties ended up paying the entire amount but wasn’t the one “primarily” or “actively” at fault, it could seek indemnity from the other negligent party to recover what was paid. As you can imagine, this is a very vague standard, and individual cases often got messy. It is also an all-or-nothing proposition: At the end of the day, one of the two jointly negligent parties ends up paying the entire amount.

While joint liability and common law indemnity may have worked in olden days, the complexity of modern life made it at best unmanageable and at worst unfair, especially in construction defect cases that often involve numerous designers and subcontractors along with the general contractor. As a result, Oregon, and every other state, adopted a system of comparative fault, which allows a judge, jury or arbitrator to allocate percentages of fault among multiple negligent parties. The total damage amount is then divided proportionally among the liable parties based on their respective percentage. The law was enacted in 1971 and did not expressly abolish joint liability at the time. However, the law has since been amended a number of times, and eventually joint liability was abolished in 1995.

Finally, earlier this year, the Oregon Supreme Court ruled that the old notion of common law indemnity is not consistent with the comparative fault system and abolished indemnity between liable parties subject to comparative fault allocations.

In the case of Eclectic Investment LLC v. Jackson County, both a contractor and the county were sued by a landowner for damage to its property when an excavated slope failed in a rainstorm. While under the comparative fault scheme, both the contractor and county were found to be only marginally negligent, 4 percent and 7 percent respectively, and the owner more than 50 percent responsible, the county sought indemnity against the contractor for its defense costs and attorneys’ fees. It argued that between the two, the county’s involvement in permitting the excavation was only secondary or passive to the contractor’s actual earth work.

The Oregon Supreme Court rejected the county’s argument and reasoned that where the jury had determined the percentages of fault under comparative fault, the county was not defending a claim of joint liability with the contractor, but only its individual liability based on its own negligence. Thus, the contractor owed nothing to the county, and common law indemnity, in the context of comparative fault, served no purpose.

The full consequences of the court’s ruling will likely take years to be seen, but in the short term, common law indemnity is no longer a means to “share the pain” of a lawsuit with another potentially liable party if that party’s liability can be allocated under comparative fault.

Bill Ohle is an attorney in the Portland office of Schwabe, Williamson & Wyatt, and represents business and design professionals in the construction industry. Contact him at 503-796-2414 or wohle@schwabe.com.

Think You Have Solid Project Documentation? Think Again.‎

April 22, 2015

By Jeremy Vermilyea, attorney

The construction industry has undergone a sea change over the last 15 years.  I wrote a column in this space back then about the rise of technology and the coming age of “paperless” projects, and the potential impacts that change would have on the industry.  In that piece, which the DJC published in January 2003, I posed a number of potential issues related to the cost of technology, the security of data, and the nature of the third-party provider.

In large measure those questions have been put to rest.  In the intervening 12 years, technology has improved by leaps and bounds.  Where we used to communicate by “snail mail” and then fax machines, we now communicate via email and PDF documents.  We have the ability to scan hard copies using software programs that have amazing optical character recognition capabilities.  And we have dramatically decreased the amount of physical space that is required to hold all the records from a construction project.  All of these advances lead to cost savings and efficiencies in managing construction projects.

Yet, while we have reduced the amount of physical paper, we have dramatically increased the amount of sheer data that is generated on a given project.  This increase is, in large measure, due to the substitution of emails and text messages for phone conversations.  So how does this affect contractors when they end up in disputes on projects?

On the one hand, the increased use, in particular, of email to communicate has resulted in many “agreements” being memorialized that would previously have been made on telephone calls.  These discussions were often forgotten or mis-remembered, leading to a battle over whose memory of the agreement was better.  When those discussions and agreements – over scope changes, time extensions, material substitutions, and the like – are communicated via email it can be much easier to track what the actual “deal” was on a given issue. 

However, an email exchange is still no substitute for a formal contract communication.  Informal communication can lead to misunderstanding, emotional reactions that may not be warranted, and beliefs about agreements that may or may not have ultimately been reached.  That is particularly true when the terms and conditions of a contract require particular types of notice to be documented and delivered in particular ways, such as on a formal change order request delivered to, and accepted by, a person with actual authority to bind the other side to a change in the contract.  Failure to follow the contract, and thinking that an informal communication is “good enough,” can lead to a major problem in the event of a dispute later in the project.

The reliance on technology can also lead to a false sense of security.  Too many times, I have been told by clients that they agreed with the other side about some important issue, and they are sure there is an email covering the subject, only to find that the email doesn’t exist, or that the discussion doesn’t quite fit with the client’s memory. 

The best practice is to always convert these “informal” discussions to formal contract documents.  If the discussion involves a change in scope, with price and time implications, it should be converted to a formal change order or change request.  If the contractor is being delayed as the result of a circumstance beyond its control, a formal notice of delay and possible cost impacts should be prepared and sent. 

In other words, the informal electronic communications that we have come to rely so heavily on should be used to supplement formal contract communications.  They should not be seen as a substitute for those important documents, which ultimately form part of the contract itself. 

Prudent members of the construction industry should have clear and well-communicated policies in place for the use of electronic communications, including when an issue has risen to the level that it needs a formal document that is prescribed in the contract documents.  Taking a proactive approach, and recognizing that email is a tool, but not a panacea for all potential issues that may arise on a project, can result in much cleaner contract documentation and a reduction in claims, disputes, and can eliminate the need to pay your friendly attorney a visit at the end of the project.

Jeremy Vermilyea is a shareholder with the law firm of Schwabe, Williamson & Wyatt, and a co-chair of its construction and design practice group. He has nearly 20 years of experience advising construction businesses throughout the Northwest. Email him at jvermilyea@schwabe.com, or follow his latest tweets @NWConstLaw.

When a Handshake Isn’t Enough

March 26, 2015

By David Anderson, attorney

construction handshakeThe construction industry is entering an exciting new season with numerous projects hatching throughout the city. Those projects will begin with great enthusiasm, with many agreements made by merely a handshake and each party’s sincere commitment to the deal. A thoughtful written contract is nonetheless essential to these agreements between even the most ethical parties, because litigation is the product of ambiguity – what was really agreed upon? – and money.

Contracts are not solely defensive. They provide a road map so that parties can quickly resolve any misunderstandings or disputes that may arise. Construction contracts should contain essential terms that record each party’s promises and also terms that tell the parties what to do when the unexpected occurs. How should a change be handled? Who is responsible for what kinds of delays? How will the parties know when a contract has been performed fully? When is the right to payment earned? How will the parties communicate? And how will disputes be resolved between the parties?

Essential terms

If the parties cannot agree on the scope of work and the amount of money that is to be paid for that work, there is a problem. Although defining those two terms should be a basic component of a construction contract, parties do not always clearly define the amount of money that should be paid for the scope of work.

If those terms are not clearly defined, a dispute will arise. It should be self-evident that contracting parties should know the scope of work and amount to be paid for that work. But this frequently occurs when parties are accustomed to doing business with each other and are lulled into a sense of complacency. That informality has benefits, but it also carries risks.

Management terms

Management terms help to identify how to handle unexpected events over the course of the contract. Change order instructions and advance agreements regarding delays provide the parties with a process for knowing how the essential terms have been modified based on events or circumstances unforeseen at the time of contracting.

As with the essential terms of scope and payment, strictly complying with contractual change order procedures can seem unnecessarily cumbersome, particularly when the contracting parties know and are comfortable with each other. However, the gains associated with cutting corners on complying with a change order procedure can be quickly lost when the parties realize that they did not share an understanding with respect to a particular change order.

Payment processes defined in the contract provide additional help managing the contract. This is an area where statutory gap fillers respecting the timing for payment are mandatory. However, if the payment processes are reduced to writing, contractual management is easier. Plus, the parties can tailor the payment processes to their own business practices by directing payment to a specific office location, invoices to the attention of a specific person, and the necessary protections related to lien waivers.

Finally, an often litigated management issue is how the parties should know that the project is completed. It is not uncommon for a contractor or owner to dispute whether a project is completed. The parties in that event often sweep the dispute under the rug after some back and forth and then move on without agreeing that the project has been completed.

As a consequence, an owner may hold some retainage that is due and elect not to pursue a claim for incomplete performance. The contractor might elect not to seek retainage and simply walk away from the project. This is a problematic standoff between the owner and contractor.

The parties in such a problematic standoff may think that by simply walking away from the dispute, they saved headaches and money. But the date of completion triggers other deadlines, such as the time that a claim for defective performance can be asserted. By walking away from the project without identifying completion conclusively, a contractor may lose the benefit of protection of the applicable statutes of limitation and repose. A contractual term calling for a third party to decide when the project is complete can avoid the problematic standoff.

Dispute resolution terms

When there is no dispute, it can be easier for parties to accept a dispute resolution procedure that saves money and time. When the dispute has already popped up, parties are prone to focus on asserting their view of court-sanctioned rights. Therefore, dispute resolution terms selecting mandatory mediation or arbitration of disputes can lead to a more efficient dispute resolution between the parties in appropriate circumstances. Likewise, there is no presumed right for a prevailing party in litigation to recover attorney fees, but the parties can contract for such a right.

Whether to incorporate an attorney fee provision into a contract is, like all of the other optional contractual terms outlined, a case-specific decision that requires consultation with an expert. Planning in advance of a project can protect important rights and preserve business relationships by reaching agreements in advance of a dispute erupting if that planning is done with appropriate assistance.

David Anderson is an attorney with the law firm of Schwabe, Williamson & Wyatt. He practices in the firm’s litigation and construction groups. Contact him at 503-796-2456 or at danderson@schwabe.com.

As published Daily Journal of Commerce, March 23, 2015

You’re in a lawsuit? Now what?‎

February 25, 2015

By Jeremy Vermilyea, attorney

Construction contracting is an adversarial process. Three principal players, multiple contractual relationships and profit motives can and often do lead to conflicts. These conflicts generally center around issues of money, time and scope. The advent of alternative delivery methods, increased focus on the importance of relationships, and better understanding of the costs of dispute resolution have reduced the number and extent of disputes on construction projects, but they still arise.

When disputes occur, clients are often shocked at the cost and time it takes to ‎get to ‎resolution. In order to make informed business decisions, it is important to ask the right questions to understand the true value of an opportunity to resolve a dispute early. Failing to adequately evaluate a case can cost needless time and money, and lead to an unsatisfying result.

1. What does the contract say? Construction disputes are, generally speaking, contract disputes. Yet parties often forget to look there first to answer key questions. The contract is your best guide to answer questions about scope, delays, how changes will be compensated, whether claims have been waived or not, and myriad other issues. A good contract will address those questions and help you make the first assessment about your case.

2. Are there prevailing party attorney fees? Fees can and often do drive decision-making in construction litigation. That is particularly so in “smaller” disputes, where the cost of litigating can outpace the “value” of a case. The case can quickly become more about winning to recover fees, rather than about the merits. Conversely, a dispute without attorney fees at issue is much less “valuable” for either side, because win or lose, each side will have to eat its fees. The incentive to continue the fight may therefore be much less.

Prevailing party attorney fees in Oregon are allowable in two basic scenarios: either the parties have agreed via contract that the prevailing party is entitled to recover its attorney fees, or there is a statute, such as a lien statute, that expressly grants the right to recover those fees. Understanding how the contract works as well as whether there are any applicable statutes is key to incorporating fees into the decision-making process.

3. Where is the case filed? Is the dispute in state or federal court? Is it in your local county or is it in the remote location of your project? The forum and venue of your dispute can have a significant impact on the cost of the dispute. If you are located in Portland, but the project, all the subcontractors (potential witnesses), the opposing party and the owner are located in Medford, you will spend a lot on travel to conduct discovery in the case. If the contract or applicable statute requires that the dispute proceedings take place in the remote location, it will likely increase costs even further.

4. Who are the opposing parties and opposing counsel? Oregon’s construction industry is relatively small, as is the construction bar. Over time we all get to know each other, either through direct contact or by reputation. How a contractor and its attorney approach disputes will impact the cost, length and overall value of the dispute. In any case, each party can only control, at most, half of the equation.

You can assess your case, you can determine your own costs, and you can ultimately decide what, if anything, you are willing to do to resolve the case. But the other side may assess the case differently, or not at all, or may have unknown pressures that drive it to different conclusions about the value of the case. These and other factors can make the case more difficult and more costly, and they are largely out of your control.

This is one of the most frustrating things that litigants confront – the disbelief that the other side doesn’t “get it,” or won’t be reasonable. It is important to remember that you only have a full understanding of and control over your own part of the case. Attempting to understand or control the unknowable or uncontrollable is an exercise in frustration and will often push the parties further from potential resolution.

5. How complex is the case and how much is at stake? These two concepts are both separate and intertwined. They each contribute to the effort it takes to litigate a case and the cost to get to resolution. A simple payment dispute is likely less complicated and less costly than a multi-party dispute involving schedule delays and scope disputes. Those cases will involve more expansive discovery as well as the need for experts. Having a good understanding of the issues and what it will take to assess the facts will assist the decision-makers when it comes time for important decisions, such as whether and when to attempt to settle, or whether to take the case through a trial or arbitration hearing.

6. How much will it cost to litigate? Trying to forecast litigation costs is a very tricky business because so many factors are beyond one party’s control. However, experienced attorneys are generally able to give rough estimates early on, and those estimates can be refined as the case evolves. All the factors discussed here, and more, go into the development of a litigation forecast. These budgets are by their nature imprecise, but they can give an important general understanding of the cost of litigating, which in turn helps with the overall evaluation of the case.

These are certainly not all of the factors that a contractor, or any litigant, should review when evaluating whether to pursue, or how to defend, a dispute, or whether to settle if an opportunity presents itself. They can, however, be an important part of your first steps. In any litigation scenario, these and other factors should be discussed with your attorney so you can collectively make informed business decisions about how to proceed.

Jeremy Vermilyea is a shareholder with the law firm of Schwabe, Williamson & Wyatt, and a co-chairman of its construction and design practice group. He has nearly 20 years of experience advising construction businesses throughout the Northwest. Contact him at jvermilyea@schwabe.com, or follow him on Twitter – @NWConstLaw.

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