Construction Contract Clauses, Part 7 – Indemnification and Insured Contract Coverage

Posted by: Hilger Hammond On: 10th October 2017 | no responses.

By: Mark A. Rysberg

Indemnification provisions frequently appear in construction and commercial contracts. They operate to shift risk from the party being provided indemnification to the party providing indemnification. The principle behind such risk shifting is to shift potential risks onto the party or parties that are best able to prevent, mitigate, or insure those risks. In that respect, indemnity provisions do not necessarily need to be a source of disagreement during contract negotiation.

Consider, for example, indemnification provisions that require one party to indemnify and defend other parties from the risks relating to personal injury and property damage. At first blush, the party who is to provide such indemnity may feel that they should not assume those risks. However, agreeing to a well-drafted provision requiring indemnification for personal injury or property damage can be a benefit to all of the parties—including the party providing the indemnity. Here is how that can occur.

Most general liability policies include insured contract coverage. What that does is provide coverage for certain losses arising from the contractual agreement to indemnify a third-party. In the example above, if a claim for personal injury or property damage was asserted against an indemnified party, the indemnified party could in turn assert an indemnity claim which may trigger coverage under the indemnifying party’s general liability policy. In that scenario, the transfer of risk has ultimately allowed the contracting parties to shift the risk onto an insurer. The end result is the possibility of insurance coverage coupled with the probability being reduced that the contracting parties find themselves litigating their respective liability so they may instead focus on completing the construction project.

Properly negotiated and drafted, indemnification provisions are tools which can shift risk potential to an insurer and reduce the chances of liability litigation, benefiting all of the parties.

Mark Rysberg practices in the areas of construction law and commercial litigation having represented clients involved in the construction industry with complex matters before numerous state courts, state appellate courts, federal trial courts, federal bankruptcy courts, and federal appellate courts.

If you enjoyed this article, you might also like “Waiver of Claims for Insured Losses.”

 

Changes to the 2017 AIA A201 General Conditions: Section 1.1.8 on Initial Decision Maker

Posted by: Hilger Hammond On: 9th October 2017 | no responses.

By Steve Hilger

This is part 1 of a 15-part series on the changes to the AIA A201 General Conditions. This part deals with section 1.1.8.

In the 2017 changes, particularly section 1.1.8, there are some fairly significant changes to the Initial Decision Maker clause. The changes are as follows:

 

 

 

 

 

First, in my humble opinion, the whole Initial Decision Maker process is a bad idea. It usually ends up, by default, being the Architect under section 15.2.1 because people generally do not change the language and select a third-party. So, you basically have the fox guarding the chicken coop. The Architect, as the Initial Decision Maker, has a lot of control over the outcome of the dispute.

This scenario was attempted to be worked out by the language that “the Initial Decision Maker shall not show partiality to the Owner or Contractor…” but that does not fix the problem. How do you deal with a breach of this provision?

In addition, the second clause of the change provides that the Initial Decision Maker shall not be liable for the results or for the interpretations or decisions rendered in good faith. Here again, this is a demonstration of how the AIA documents protect Architects. There is no reason why the Architect should be shielded from responsibility regarding a contractual decision made as an Initial Decision Maker. There is also a question as to whether the second clause is even enforceable. You cannot release yourself from liability for negligence in advance. Nevertheless, without a crystal ball, this clause is probably going to be enforced.

My general recommendation is to strike everything in the AIA A201 General Conditions that has anything to do with the Initial Decision Maker process.

Steve Hilger is an attorney and partner at Hilger Hammond, PC.   In Steve’s practice, he is routinely involved in extensive contract preparation and review including contracts in the construction industry, material purchase orders, vendor agreements, documents involving the Uniform Commercial Code, licensing agreements, and multiple other commercial contracts and related documents. You can reach Steve at sahilger@hilgerhammond.com.

 

Do I Really Need to Create Corporate Minutes?

Posted by: Hilger Hammond On: 6th September 2017 | no responses.

By Ben Hammond

From time to time I get asked this question from small business owners. My response is typically a question along these lines, “How attached are you to your boat?”

This might sound like a strange response, and it certainly does not apply in all circumstances, but the point is that the failure to follow corporate formalities could result in losing the corporate shield of liability – resulting in personal liability for a claim – and thus a sudden decrease in ownership of personal toys, or worse.

Generally speaking, shareholders are not liable for corporate obligations. MCL 450.1317(4). Over time the phrase “piercing the corporate veil” has evolved to mean that this corporate shield from liability can be erased.

Typically, the courts focus on five factors to determine if a shareholder should be held personally liable for a claim. These factors are:

(1) a failure to follow sufficient corporate formalities beyond the initial filing of the articles of incorporation;

(2) severe undercapitalization;

(3) the corporate entity was used as a device to achieve fraud;

(4) a pervasive failure to document transactions between the owners as individuals and the corporation; and

(5) a general failure to keep financial records of the corporation separate from those of the individual shareholders.

Keeping proper corporate records is not just a good idea to prevent liability, it is also required under the law. The Michigan Business Corporation Act requires corporations to keep:

(1) books and records of account and

(2) minutes of the proceedings of its shareholders, board (and executive committee if your company has one).

Corporate record-keeping is typically on the bottom of the list when facing the demands of any given day. However, it is important to note that maintaining corporate records is a factor the court considers when determining if you will be personally liable for company debts, and is required by Michigan law.

For assistance with your corporate records, contact Hilger Hammond at (616) 458-3600.

 

Language You Need for an Enforceable Arbitration Clause

Posted by: Hilger Hammond On: 14th August 2017 | no responses.

By Stephen A. Hilger

This is Part 2 in a 20-part series of articles dealing with issues of arbitration in the construction industry. 

Arbitration is voluntary

Absent a statute to the contrary, arbitration is a voluntary, contractual process. A court will not require parties to arbitrate complex construction disputes without an enforceable arbitration clause in their contract. If you do not have an enforceable arbitration clause, you will not be able to compel your adversary to arbitrate, nor can your adversary force you to arbitrate unless you jointly negotiate a separate post-contract arbitration agreement.

So how do you get to an enforceable arbitration clause? You need to include specific buzzwords in your contract.

Arbitration must be mandatory

To compel parties to arbitrate, arbitration must be mandatory. Words such as “may arbitrate” or “might arbitrate” will not create that mandatory status. Typically, the language “shall arbitrate” must be in the agreement in some form.

Define what claims are presented to arbitration

The contract clause needs to outline what claims are subject to the arbitration agreement. Most arbitration clauses include all claims arising out of the contract.

The Award must be final & binding

The arbitration clause must also contain language that the decision of the arbitrator is final and binding on the parties. Without that language, the arbitration Award is merely advisory and not enforceable.

The Award must be enforceable in a court of competent jurisdiction

The arbitration clause must contain language that the arbitration award is enforceable in a court of competent jurisdiction. Otherwise, a court does not have the obligation to enforce it.

Without these four fundamental items, under the laws of most states, the parties will not be able to compel arbitration.

Other considerations

There are many other issues which should also be dealt with in an arbitration clause, not the least of which include:

  • The selection of the arbitrator(s)
  •  The number of arbitrators
  •  The arbitrator’s experience level
  •  Whether the arbitrator must be an attorney
  •  Use of discovery
  •  Which rules apply
  •  Location of the proceeding
  •  Whether third parties may be joined
  •  Whether mediation is a condition of arbitration

The absence of these items will not defeat arbitration as a dispute resolution process.

In general, whenever I review arbitration clauses, I insist that they cover all disputes in any way arising out of the contract, and that the arbitration is mandatory, final, binding, and enforceable in a court of competent jurisdiction. I also attempt to deal in some way with the non-compulsory issues.

Attorney Stephen Hilger is engaged in complex commercial litigation with an emphasis on construction law, has tried many cases in multiple state courts, and has appeared in several state courts of appeal, the Michigan Supreme Court, United States District Courts, United States District Courts of Appeal, the United States Supreme Court on cert, and multiple arbitration tribunals across the country.

If found this article to be informative, you may also be interested in Part 1 “Construction Disputes: Arbitration or Litigation”

Construction Disputes: Arbitration or Litigation?

Posted by: Hilger Hammond On: 9th August 2017 | no responses.

By Stephen A. Hilger

This is Part 1 in a 20-part series of articles dealing with issues of arbitration in the construction industry.

The question of whether to arbitrate or litigate disputes comes up fairly frequently in the construction industry. From my humble perspective, with respect to construction disputes, there are very few circumstances where I would choose litigation over arbitration. Why?

Choice of Decision Maker

With arbitration, in general, you pick the decision maker(s) as opposed to being assigned a judge through a blind draw in the court system. That level of arbitrator selection may range from picking from a list under the American Arbitration Association Rules to hand picking a blue-ribbon panel of arbitrators or even a single arbitrator through private arbitration. If you are assigned a judge through the courts, you may end up with a judge who does criminal proceedings in the morning, divorce proceedings before lunch, and then handles your complex construction law dispute in the afternoon, in 15-minute increments, along with multiple other disputes in what looks to an outsider like a giant cattle call. Unless your contract provides otherwise, you may also be in the unlucky position to try your complex construction disputes to a jury.

Control of Schedule

If you choose litigation over arbitration, you have very little control over your schedule. The judge may impose a schedule which you are bound to follow regardless of the circumstances of either the case or your personal life. You may also be unlucky enough to end up on a rocket docket where the court accelerates your proceeding through the court system. By contrast, in arbitration, you generally pick the date of the hearing, within reason. Absent any obvious delay tactics, an arbitrator is much more likely to work with your schedule.

Location of Hearing

To some extent, you control where the hearing will take place.

Control of Proceeding

To some extent, you control the proceedings.

Timing of Decision

The decision of which approach to use is generally made at the contract negotiation level, while the parties still love each other and before they become embroiled in a nasty disagreement.

Fast Resolution

In arbitration, there is generally no appeal. While a party can attempt to vacate the award, that process is very seldom granted. Accordingly, there is a quicker end to the dispute.

Less Expense

Arbitration can be quicker and less expensive unless the arbitrator allows the process to get out of hand. While you have to pay arbitrators, and you do not pay judges, in the balance, you will likely still be better off in arbitration.

Decision Maker with Experience in Construction

No one can expect a trial judge to be an expert in construction law. A seasoned arbitrator-attorney, who has practiced construction law for many years, is much more likely to understand the subtle nuances of the many aspects of construction law. The likelihood is that a seasoned arbitrator will give a better, more correct decision. As a result, arbitration affords better control over the process and the outcome.

All of these factors need to be taken into consideration when deciding whether to arbitrate or litigate a dispute.

Attorney Stephen Hilger is engaged in complex commercial litigation with an emphasis on construction law, has tried many cases in multiple state courts, and has appeared in several state courts of appeal, the Michigan Supreme Court, United States District Courts, United States District Courts of Appeal, the United States Supreme Court on cert, and multiple arbitration tribunals across the country.

Engineer Loses Claim for Coverage as an Additional Insured

Posted by: Hilger Hammond On: 10th July 2017 | no responses.

By Aileen Leipprandt

Being an additional insured on someone else’s insurance policy does not guaranty protection. Such was the lesson learned by an engineering firm in Orchard Hiltz & McCliment Inc. v Phoenix Ins. Co. and Federated Mutual Ins. Co., (U.S. 6th Circuit Court of Appeals, Jan. 2017).

In Orchard Hiltz, the Village of Dexter hired the design firm, Orchard Hiltz & McCliment (OHM), to oversee upgrades to Dexter’s wastewater treatment plan. While contractors were removing a lid on a digester tank, sparks from a torch ignited methane gas causing an explosion. One worker was killed and another was injured. The injured worker and the family of the deceased worker sued OHM in state court, claiming that OHM breached the standard of care by failing to ensure that the contractors followed the plans and specifications and by failing to ensure that the contractors implemented safety measures. OHM’s professional liability insurance carrier, XL Specialty Ins., provided a defense to OHM in that state court case.

Separately, OHM sued the general liability insurance carriers of the prime contractor and subcontractor in federal court. OHM asked the federal court to rule that the insurers owed OHM a duty of defense and indemnity in the state court personal injury cases because OHM was as an additional insured on the contractors’ commercial general liability insurance policies. The additional insured endorsement of both policies, however, contained a “Professional Services Exclusion” which excluded coverage for injuries arising out of the performance of any professional services. The court denied coverage to OHM, ruling that the exclusion eliminated coverage. OHM appealed.

The Sixth Circuit Court of Appeals interpreted the Professional Services Exclusion broadly, ruling that the contractors’ general CGL policies never intended to cover professional negligence claims; therefore, OHM had to look to its own professional liability carrier. Furthermore, even though OHM disputed it owed the safety duties claimed by the injured workers, if the injured workers proved that OHM was negligent in providing professional services, the Professional Services Exclusion in the additional insured endorsement would eliminate coverage. The court reiterated that it is the “nature of the underlying allegations of liability” that “governs the question of coverage, not the scope of OHM’s responsibilities under its contract with Dexter.”

Being an additional insured is one of many important tools in managing risk. The OHM case underscores the importance of understanding the scope and limitations of additional insured coverage so that you can determine whether coverage aligns with your expectations.

 

Construction Contract Clauses, Part 6 – Waiver of Claims for Insured Losses

Posted by: Hilger Hammond On: 29th June 2017 | no responses.

By: Mark A. Rysberg

Many insurance sections of construction contracts contain language whereby the parties involved in the construction project waive all claims against all other parties involved in the project for insurable losses such as property damage and personal injuries.

Owner and Contractor waive all rights against each other and their respective officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them for all losses and damages caused by, arising out of or resulting from any of the perils or causes of loss covered by such policies and any other property insurance applicable to the Work; and, in addition, waive all such rights against Subcontractors and Engineer, and all other individuals or entities identified in the Supplementary Conditions as loss payees (and the officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of them) under such policies for losses and damages so caused.

These clauses are good for all of the parties involved as they eliminate disputes and shift the risk of loss onto the parties’ respective insurance carriers. Contractors and subcontractors should work with their insurance agents and attorneys to understand these provisions, as well as, to properly shift insurable risks onto third-parties through the acquisition of appropriate insurance coverages.

If you enjoyed this article, you may also like Construction Contract Clauses, Part 5 – Conversion Clauses.”

Construction Contract Clauses, Part 5 – Conversion Clauses

Posted by: Hilger Hammond On: 29th June 2017 | no responses.

By: Mark A. Rysberg

A conversion clause arises in the context of contract termination. There are generally two types of termination; termination for cause and for convenience. Each type of termination differs with respect to the basis for termination, as well as the limitations on payment rights the terminated party retains post-termination. A conversion clause operates to convert a wrongful termination into a termination for convenience. The following is an example of a conversion clause.

If it is determined, by litigation, arbitration or otherwise, that termination for default was unjustified for any reason, the termination shall be deemed a termination of convenience and Subcontractor’s remedies shall be limited to those provided for as a termination of convenience.

In a practical sense, these clauses protect a party that terminates a contract for cause by nullifying the effect of a possible wrongful termination. The exposure for damages is, in turn, limited to the amount that is required to be paid as if the contract had been terminated for convenience.

Typically, the amount owed for a termination for convenience will be much less than the damages for a wrongful termination as the termination provisions in a contract will typically limit the amount owed in a termination for convenience situation to the amount of the work properly performed at the time of termination. In contrast, damages for a wrongful termination could include lost profits on the entire contract irrespective of whether the work was performed.

Contractors and subcontractors that have both upstream and downstream relationships should be on the lookout for these types of clauses. When they are encountered in an upstream contract, they should be included in any downstream contracts covering portions of that scope of work. The reason being is to eliminate the possibility of being faced with a wrongful termination claim by a lower-tier contractor while simultaneously having recovery limited in a claim against an upstream contractor. A best practice would be to review each contract you are presented with and coordinate the terms therein with the terms of any contract you in turn issue downstream.

If you enjoyed this article, you may also like “Construction Contract Clauses, Part 4 – Express Trust Clauses.”

 

Construction Contract Clauses, Part 4 – Express Trust Clauses

Posted by: Hilger Hammond On: 29th June 2017 | no responses.

By: Mark A. Rysberg

An express trust clause can be used in a construction contract to create a trust over payments received by a contractor or subcontractor. The effect of establishing a trust is that it creates property rights in construction project payments and obligates the contractor receiving such payments to fulfill the fiduciary duty of using the trust funds to pay the named beneficiaries. The following is an example of an express trust clause:

All payments made by Contractor to Subcontractor shall be held in trust for the benefit of the Contractor and those persons having contracted with Subcontractor to provide materials or labor to the project.

 

These clauses can act as a sword or shield depending on the situation. In scenarios involving non-payment downstream, an express trust clause can provide the named beneficiaries (owners, contractors, subcontractors, and suppliers) with additional claims that can be asserted against a trustee that has received payment but failed to in turn issue payment downstream. These clauses can also protect all of the parties from claims asserted by unrelated creditors and bankruptcy trustees that may attempt to take the funds.

In short, if you run across an express trust clause you need to have a clear understanding of what your obligations may be. To that end, having contracts reviewed before execution and discussing these issues with legal counsel is an important step in protecting yourself.

If you enjoyed this article, you might also like “Construction Contract Clauses, Part 3 – Site Investigation Clauses.”

AIA 2017 – What’s New About The Old?

Posted by: Hilger Hammond On: 21st June 2017 | no responses.

By Aileen Leipprandt

In April 2017, the American Institute of Architects (AIA) released the 2017 editions of its flagship agreements, including the Owner-Contractor Agreement (A101), Owner-Contractor Agreement, Cost Plus a GMP (A-102), the General Conditions of Contract (A201) and the Contractor-Subcontractor Agreement (A401).  Significantly, AIA also created a new comprehensive insurance and bonds Exhibit (Exhibit A) to be used with these agreements.

Some interesting changes to note:

  • Liquidated Damages. Liquidated Damages are now expressly identified with a new provision.  In prior revisions, LDs were merely suggested in a “prompt” as an insertion. Furthermore, the Owner is not required to file a Claim to impose liquidated damages.  Prior AIA versions were silent on whether Owner was required to file a formal claim; courts addressing the question reached differing results.
  • Captive Insurance Costs.  Contractor must obtain Owner’s prior approval of Contractor’s costs for insurance provided through a captive insurer owned or controlled by Contractor.
  • Allocation of GMP.  Adopting a revision commonly made by the parties, if a GMP is given, allocation of the GMP does not constitute a separate GMP for each individual line item on the Schedule of Values.
  • Termination Fee.  Where the Owner terminates the agreement for convenience, Contractor may be entitled to a termination fee.  Prior AIA versions were silent as to such fee.
  • BIM Reliance. Use or reliance upon a BIM model without establishing protocols for such use is not at the relying party’s sole risk, without liability to others.
  • Communication Protocol.  Communication protocol is loosened so that the Owner and Contractor can communicate directly, so long as the Architect is included in communications that relate to the Architect’s services.  In prior revisions, Owner and Contractor were forced to communicate only through the Architect.
  • Weather Delays.  Delays caused by weather, so long as properly documented, are now expressly included in the “force majeure” provision as a basis for extension of Contract Time.
  • Overhaul of Insurance.  The bulk of insurance provisions have been stripped from A201 General Conditions and now appear in the new 2017 Exhibit A – Insurance and Bonds. And, the insurance requirements are much more detailed, specifying particular coverages that are required (e.g., professional and pollution liability and UAV liability) and expressly forbidding certain common restrictions on contractor’s coverages.

What didn’t change?  Indemnification, warranty and waiver of consequential damages provisions remain largely intact.

Want to learn more about the new AIA-2017 documents?  Attend the West Michigan Construction Industry Forum on October 19, 2017.