Have you ever said: “I don’t have a contract with the architect yet.  I only signed a proposal.

I’ve heard this statement or something similar from clients multiple times over the years.  They are usually surprised to find out, however, that if they signed a proposal then they already have a contract.  Here’s some advice for owners and contractors: do not sign proposals from design professionals unless you have them reviewed by counsel!

caution 2

Many design professional proposals contain unfavorable terms and conditions that result in an owner or contractor waiving important legal rights and remedies.  For instance, proposals often contain provisions limiting the design professional’s liability or requiring the owner or contractor to indemnify the design professional from any claims.  Also, proposals often exclude any mention of insurance or ownership of the work product.

Many times, Owners and contractors sign these proposals thinking that they are simply locking in a price for a scope of services, and that the parties will sign a more formal agreement later to establish other terms.  But once a proposal is signed, the parties have a contract.  At that point, the design professional may refuse to sign another agreement.  And if problems arise later on, an owner or contractor may find they have very little recourse.

Let me share a real life story to illustrate my point.  A general contractor’s work required the services of a geotechnical engineer for a new phase of a project, so one of the contractor’s project superintendents called the engineer to get pricing for the engineer’s services.  The engineer faxed its pricing for the services on its standard proposal form (which included the engineer’s standard terms and conditions) to the job trailer.  The superintendent signed and returned the proposal, and the engineer performed the services.

A few months after the project was complete, a large slab in an area of the project began to heave and crack, and ultimately had to be completely replaced.  The cause – the geotechnical engineer’s negligence in performing its services.  The cost of replacing the slab exceeded $1 million but the contractor’s efforts to recover that amount from the engineer were unsuccessful.  Why?  Because hidden within a paragraph of the engineer’s standard terms and conditions was language limiting the engineer’s liability to a very nominal amount.

Even though no one really contested that the damages were caused by the engineer’s negligence, the court enforced the limitation of liability provision, and the contractor and its carrier were the parties were stuck with the repair costs.

So the next time you get a proposal from a design professional, have it reviewed by a lawyer familiar with construction law who can appreciate the potential impact of any terms and conditions in the proposal.  It may slow the process down slightly, but it will be worth it in the long run.

Recently, the largest single ransomware attack to date occurred when ransomware known as WannaCry attacked companies around the world.  These companies will likely not know the extent of the damage caused by this attack for months, if not years.  WannaCry is just one of several ransomware threats that companies face.

Ransomware either prevents a user from accessing their computer or their files until a ransom is paid to the hackers.  Ransomware can infect a system in various ways, and hackers are becoming more and more creative about ways to deceive  an employee into unknowingly infecting a company’s network.

Cybersecurity

Contractors are not immune to ransomware (or other cyberattacks).  A successful ransomware attack on a contractor’s network would likely shut down the contractor’s operations on its projects for a period of time.

No access to email or any documents until the contractor pays the ransom (which will likely have to be paid in bitcoin, which would probably present its own challenges).  And even then, some hackers would not release the files back to the contractor even after the ransom was paid.  Think of the impact that this would have on a contractor’s business operations.  No bids could be submitted and every project would be delayed.

The business impact would be catastrophic.  There are insurance professionals that can help address potential business interruption damages.  But what about liability for project delays due to a ransomware attack?  Would the delays be excusable under the contractor’s contracts?  Most likely not.

Force Majeure

Many contracts contain a force majeure clause that addresses various events that would be considered excusable delays, or in some contracts, these events give one or both parties the right to suspend the work or terminate the contract.  Most force majeure clauses are not broad enough, however, to cover a ransomware attack.

This means that contractors would potentially be responsible for damages on every project that is delayed by a ransomware attack.  Depending on the terms of the contract and the owner’s course of action, the contractor could be faced with significant liquidated damages, its work being supplemented, or its contract being terminated.

The Wannacry attack will like only embolden hackers who seek to use ransomware to extort money from companies.  Contractors should make sure that the force majeure clauses in their future contracts include ransomware attacks and other cyberattacks in the list of events that are excusable delays.  And then hope that you never need to rely on it in the future.

 

Part 1 discussed how choosing the right mediator and watching for the right time can improve your chances for a successful construction mediation.  Here are additional thoughts on how to increase your odds for a successful mediation.

  • Prepare yourself and your mediator.  Many mediators ask parties for pre-mediation submissions, but too often parties provide very little information to the mediator.  If you have selected the right mediator, he or she will want to try and understand the case background, legal issues, damage claims, etc. before the mediation.  Help the mediator be prepared to help you.  Give them information on the claims, disputed fact issues, and critical legal issues. Also, prepare yourself for the mediation.  Before going to the mediation, parties and their counsel should make sure they have, at a minimum: (a) copies of relevant documents, deposition testimony, and important cases; (b) a strategy for how to approach the mediation, including prioritizing areas where concessions can be made; (c) thoroughly analyzed potential acceptable resolutions and identified potential obstacles that may have to be dealt with; and (d) a reality check conversation between the party and their counsel (see below) to discuss how to maximize the strengths of your case and minimize the weaknesses.  Keep in mind that there will not be time to review a large number of documents with the mediator.   So proper preparation will allow you to hone in on the key documents and areas of the case that will likely be relevant to the settlement negotiations.   Prior to the mediation, parties and counsel should discuss the mediation strategy and potential settlement positions.  If the only discussion parties and their counsel have had about the mediation is the location and time, then they’re not prepared.
  • Have a reality check conversation.  It is rare to find a dispute where the liability and damage issues are so clear-cut that it could be termed a “slam dunk” for one of the parties.  Yet, that’s what some clients want to hear from their attorney.  And sometimes, any mention by an attorney that there may be a weakness in some part of the case is met with an angry response from clients asking, “whose side are you on?”.  If an attorney avoids having tough conversations or tries to sugar coat things for a client because they think that’s what the client wants to hear, then the attorney is doing the client no favors. This approach is the perfect recipe for frustration at mediation because not only will the mediator be telling the client why the other party thinks they should win on some (or most likely all) issues, the mediator may also point out areas of weakness and question how the attorney and client plan to address those issues.   No client likes surprises.  If the first time a client hears about a potential weakness in a claim or defense is at mediation, then a resolution will be difficult, if not impossible, to achieve.  That’s why before mediation, lawyers and clients need to have a honest conversation about the strengths and weaknesses of the case.  If a client has hired the right attorney, he or she will have analyzed the strengths and weaknesses of the case and be prepared to have this conversation.

Construction contracts routinely require parties to mediate as a prerequisite to arbitration or litigation.  Even if the contract doesn’t require mediation, many judges will still order parties to mediate before going to trial.  While some disputes are resolved in mediation, too many times parties leave the mediation thinking it was a waste of time.  Despite the title, I’m not suggesting that there is a formula that will always guarantee a successful mediation, but there are things that will increase your odds for success.

  • Select the right mediator.  Just because someone is an experienced, good mediator doesn’t make them the right mediator for every dispute.  For a construction dispute, your chances of reaching a resolution increase if you have a mediator that understands construction industry concepts and construction law.  If a lawyer has to spend a lot of time during the mediation educating the mediator on construction industry concepts or construction law issues, the chances of settling the case go way down.  Too often, mediators who do not have a lot of experience with construction matters want to skip over the legal merits and simply jump to telling the parties how expensive it’s going to be if they don’t settle the case.  Or occasionally, I’ve mediated with a former judge whose resume says they have experience with construction cases, only to learn at mediation that their experience is minimal, so they spend their time telling their best trial horror stories to try and scare the parties into settling.  While these approaches may occasionally get cases settled, it usually only frustrates the parties and the lawyers. So when you select a mediator for a construction case, find someone that understands construction industry concepts and construction law.  Even if it’s someone in a different location and you have to pay for a plane ticket, in the long run it will be worth it.
  • Watch for the mediation sweet spot.  Mediation is more likely to be successful if both parties have enough information about their case and their opponent’s case, but still have enough work left to do in the case to incentivize the parties to try and resolve it. There is no scientific formula for finding the sweet spot, but it’s critical that you begin watching early on to see when the window might open.  If you mediate before you have enough information, people will be hesitant to settle for fear they are paying to much or giving up too much.  Or if an insurance carrier is involved for one or more parties, adjusters may have a checklist of information that has to be provided before they can authorize settlement.  If you wait until late in the case, however, then parties have often spent so much in attorneys’ fees and costs that it impacts how parties evaluate every offer and it becomes an impediment to reaching a resolution.  So look for the mediation sweet spot and it will increase your chances of resolving the dispute.