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.

Construction Contract Clauses, Part 3 – Site Investigation Clauses

Posted by: Hilger Hammond On: 13th June 2017 | no responses.

By: Mark A. Rysberg

A site investigation clause is a provision in a construction contract that indicates that one of the parties has made an inspection of the property, project, or location where certain services, labor, or material will be provided, and that the party making the inspection is satisfied that performance will be possible given the circumstances. The following is an example of a site investigation clause:

Each contractor shall examine the construction site and area and compare its findings with the Drawing and Specification and shall inform and satisfy itself as to all matters necessary for carrying out the work; including but not limited to, general working conditions, labor and equipment requirements, accessibility, condition of the premises, obstructions, drainage conditions, actual levels, excavating, filling, etc. The Contractor shall investigate all conditions as to character of the site and character of existing structures at or adjacent to the site, and the character and extent of the Owner’s and other Contractors’ operations in the area, and in connection with the project, and shall take all such matters into account in submitting its bid. No allowance or extra payment will be subsequently made because of any such items or conditions occasioned by the Contractor’s failure to make such comparison and examination or on account of interferences from the Owner’s, Construction Manager’s and other Contractors’ activities, or by reason of any error or oversight on the Contractor’s part.

The purpose of a site investigation clause is to prevent claims for unforeseen site conditions. However, there are many limitations on site investigation clauses.

However, issues may arise when conditions that were not, or could not have been, revealed based on the information available. For example, there are circumstances where an owner would be contracting with a general contractor for performance of various services which would include excavation to build a foundation of a structure. Typically, an owner would provide some sub-surface soil data, but either the data or the contract would carry with it a disclaimer that the general contractor, then as a bidder, would be obligated to make its own investigation as to what the underground site conditions were. But, the extent that a bidder can make such investigations is limited to a review of the subsurface data provided by the owner as a bidder will typically not be permitted to perform additional subsurface testing. In that and similar situations, a bidder’s risk based on a site conditions clause will likely be limited to the physical observations available at the site and the data contained in any documents provided by the owner.

In other words, these clauses do not require a bidder to perform an exhaustive investigation into the site conditions. Rather, bidders should consider visiting the site, review all site condition data provided in the bidding documents, and consult with their counsel to evaluate whether a site conditions clause may be negotiated to more fairly define the scope of the representations contained therein.

If you enjoyed reading this article, you might also like “Construction Contract Clauses Part 2  – Flow-Through Provisions.”

Minding Your Zoning Ps & Qs

Posted by: Hilger Hammond On: 17th May 2017 | no responses.

By Aileen Leipprandt

Some say it’s better to beg forgiveness than ask permission. That’s not the case when it comes to complying with zoning ordinances, as recently learned by defendants in a zoning enforcement action brought by the Village of Pentwater.

In Village of Pentwater v Bates, (March 2017), Bates bought a 12×12 storage shed and moved it to an 8-acre wooded, vacant parcel in the Village of Pentwater. Bates initially claimed that village officials said they didn’t need a permit to place the shed on the parcel. Later, the zoning administrator informed Bates that because the parcel was within a single family residential zone, the shed was permitted only if it was an accessory building to a residential structure. Bates responded that they intended to build a house on the parcel. They then received a zoning permit to build a house. Thereafter, however, Bates abandoned any immediate plans to build the home.

The Village demanded that Bates remove the building because it violated the zoning ordinance. When Bates refused, the Village filed suit seeking a court order that the shed be removed. The trial court agreed with the Village and ordered Bates to remove the shed. Bates appealed arguing that the zoning ordinance constituted an unconstitutional delegation of power to the Village because the ordinance prohibited activities that posed no significant harm to the community. They argued that allowing their small storage shed on a large wooded parcel within the Village would not offend neighbors or stymie future residential development.

The appellate court rejected Bates argument, ruling that the issue was not whether the building posed a threat of harm to the community but rather, whether Bates could overcome the presumption that the ordinance was reasonable. The appellate court deemed it reasonable for the Village to limit construction of accessory buildings to preserve the residential nature of the area. Furthermore, the ordinance was not an arbitrary restriction on the Bateses property interest because the ordinance applied uniformly to all parcels and because the ordinance allowed construction of a shed, so long as the building was accessory to a main building.

Bottom line? Be attentive to zoning requirements and obtain all required approvals. A strategy based upon begging forgiveness may backfire, resulting in costly litigation or perhaps worse, a tear down.

Labor Under the Federal Miller Act: The Known Unknown

Posted by: Hilger Hammond On: 25th April 2017 | no responses.

By Daniel Hatch

Here’s what we know. On federal projects, the Miller Act requires prime contractors to furnish a payment bond “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person.” The Act authorizes “every person that furnished labor or material in carrying out work provided for in a contract” who has “a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond.”

Further, we know that the Act is “highly remedial in nature” and “entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects.” However, while liberally construed in favor of subcontractors, the Miller Act is not without limit.

Beyond notice, timeliness, and venue requirements, which are all necessary elements to state a prima facie claim for relief under the Miller Act, many forget to analyze the obvious: whether the subcontractor performed “labor” within the purview of the Miller Act. Despite the ostensibly inclusive language in the Miller Act requiring a bond for the protection of all persons supplying labor and materials in carrying out the work, several federal courts have imposed limits on the types of work constituting “labor” on construction projects.

To have a viable claim for unpaid work under the Miller Act, the subcontractor’s work must: (1) be performed “in the prosecution of work provided for in a contract for which a payment bond is furnished”; and (2) qualify as “labor” within the meaning of the Miller Act.

Work is performed in the prosecution of the contract when it is within the original scope of work for the project. Generally, the majority of federal courts, including the Sixth Circuit for us Michiganders, agree that neither warranty work nor corrective work satisfy this element.

Assuming the work is performed in the prosecution of the contract, the work must also qualify as “labor” which is not further defined in the Miller Act. The United States District Court for the South Division of Ohio first addressed the definition of labor under the Act in 1982 holding that, while case law interpreting the term is relatively sparse, labor must include physical toil.

Today, there is still no bright line test used to determine what constitutes labor under the Miller Act. The Eighth Circuit was the first federal appellate court to address the issue holding that labor must include some physical work and not work solely involving “technical and professional skill and judgment.” Thereafter, the Fourth Circuit expanded on the Eighth Circuit’s decision holding that labor includes professional supervisory work to the extent it “involves superintending, supervision, or inspection at the job site.”

Albeit, labor may better be defined by way of what does not qualify rather than what does. Here are some examples of work that was not considered labor under the Miller Act:

Project Administration. “Living on the job site and performing routine office maintenance [e.g., cleaning of the office and bathrooms, negotiating new contracts, determining bid amounts and change orders, preparing bid proposals, negotiating and signing new subcontracts and purchase orders] is not enough to constitute labor that went towards completing the construction job.

Contract Administration. “Paying invoices, reviewing proposals, and supervising hiring are clerical or administrative tasks which, even if performed at the job site, do not involve the physical toil or manual work necessary to bring them within the scope of the Miller Act.”

Lesson Learned: Federal courts are adopting an increasingly narrow definition of “labor” under the Miller Act. Don’t forget to analyze whether the subcontractor performed work provided for in the contract that qualifies as labor when assessing a Miller Act claim.

Court Enforces Subcontractor’s Demand for Arbitration of General Contractor’s Claim

Posted by: Hilger Hammond On: 11th April 2017 | no responses.

By Aileen Leipprandt

The Court of Appeals recently enforced an arbitration agreement between a contractor and its subcontractor in a dispute involving indemnity and insurance coverage for a claim by subcontractor’s injured worker. (Spence Bros. v Kirby Steel, March 2017). In this case, the general contractor, Spence Brothers, was the project manager overseeing the University of Michigan’s expansion of the Crisler Arena. Spence subcontracted with Kirby Steel to provide structural and metal work. Spence’s letter accepting Kirby’s proposal directed Kirby to list Spence as an additional insured. The parties’ subcontract contained a standard indemnity clause requiring Kirby to defend and indemnify Spence against all losses. The subcontract also required that Kirby’s insurance policy name Spence as a named insured.

During the project, an employee of Kirby suffered injuries when he fell from a ladder. The employee sued Spence Brothers. Spence demanded that Kirby defend and indemnify Spence, but Kirby’s insurer refused such coverage because Spence was only an additional insured under its policy. Spence then sued Kirby for breach of the subcontract for failing to name Spence as a named insured and for failing to defend Spence. Kirby asked the trial court to dismiss Spence’s claim because the subcontract required arbitration. The trial court refused Kirby’s request and instead granted summary disposition in favor of Spence, ruling that Kirby breached its insurance coverage and indemnification obligations under the subcontract.

Kirby appealed arguing that the trial court made a mistake by ignoring the plain terms of the arbitration provision. The Court of Appeals agreed with Kirby, reversed the lower court’s ruling, and ordered the matter to arbitration. The appellate court observed that the subcontract unambiguously required arbitration of all claims and disputes related to the subcontract. This broad language clearly reflected the parties’ shared intention to submit any matters related to the subcontract to arbitration.

Captive Insurance Changes for 2017

Posted by: Hilger Hammond On: 4th April 2017 | no responses.

By: Mark A. Rysberg

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law. Proponents and sponsors of captive insurance structures often refer to the tax benefits of I.R.C. Section 831(b), which allows eligible insurance companies to make an election to be taxed only the company’s taxable investment income. In effect, the 831(b) election allows such insurance companies to collect a set amount of insurance premium without having to pay tax on said premiums. Effective January 1, 2017, insurance companies electing taxation under 831(b) can collect up to $2.2 million in insurance premiums while being taxed only on the taxable income generated from the collection and retention of such premiums. This increase expands the benefits and opportunities available for companies that can implement a captive insurance aspect into their risk management strategies by, among other things, increasing the amount of otherwise potentially taxable income and leverage that money into expanding into coverage lines that may otherwise not be available.
Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Captive Insurance Structures Designed for Different Needs, Goals and Funding Abilities

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

By: Mark A. Rysberg

Captive insurance entities can be structured in a variety of ways depending on the participant’s needs, goals, and funding abilities. The following are some of the more common structures that can be used.

Pure Captive
In this model, a captive insurance company is typically a wholly-owned subsidiary of a parent company. These captives are usually closely controlled by the parent company and are generally used by companies that have insurance and risk management needs that are significant enough to justify the financial costs of being solely responsible for the captive’s operational costs. Companies that consider forming a pure captive generally do so to improve risk management and to maximize the benefits of I.R.C. 831(b) election thereby sheltering up to $2.2 million in taxes.

Group or Association Captive
These captives are formed to provide captive insurance solutions to several members composed of trade association members or companies engaged in the same industry. This model can allow groups of smaller companies that have similar risk profiles to pool their insurance needs and resources to improve their risk management efforts at lower possible costs than traditional risk transfer vehicles.

This form of captive is typically selected by users that may not have the capital resources to participate in a traditional captive insurance program. To that end, insurance companies provide access to captive facilities by requiring users to provide collateral to mitigate risk to the rent-a-captive.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.

Captive Insurance and Risk Retention

Posted by: Hilger Hammond On: 24th February 2017 | no responses.

By: Mark A. Rysberg

The concept behind captive insurance companies is based on the principle that rewards are derived from the assumption and retention of risk. Traditional insurance vehicles purchased through third-party agents is directed at shifting definable risks onto insurance companies that assume such risks based on weighing the statistical probability that, when viewed in the aggregate, the costs to the insurance company for paying claims will be less than the premiums the insurance company charges for assuming those risks. In that sense, insurance companies operate on the business model that they generate revenue, and ultimately profit, by assuming risk. A captive insurance company operates on a similar principle with the main difference being that rewards are the result of retaining risks by the parent company rather than shifting those risks to traditional insurance companies. In short, captive insurance companies are formed as part of a risk management strategy to take advantage of the economic benefits derived from risk retention. One of the more notable benefits of captive insurance models relates to the tax benefits provided to so-called micro captives. Under I.R.C. Section 831(b), micro captives can elect to only be taxed on investment income and avoid tax on income derived from the collection of up to $2.2 million in insurance premiums. As a result, incorporating captive insurance concepts as part of a risk management strategy can provide opportunities to go beyond simply planning for catastrophic and non-catastrophic losses.

To offset the retention of risk, captive insurance companies are formed.

Mark A. Rysberg is a construction lawyer who maintains a local and national practice representing owners, contractors, subcontractors, and suppliers on a variety of issues affecting all aspects of the construction industry.