Many agreements contain a long definitions section or numerous defined terms scattered throughout the agreement.  This is especially true of contracts in the construction industry. 

Definitions are used to help make an agreement more readable.  Who wants to read, “all applicable federal, state, and local laws, statutes, regulations, and codes that govern the project, including, but not limited to blah, blah, blah……” over and over again when it can just be defined as “Applicable Laws.”

But definitions can also expand liability or, in some cases, limit liability unintentionally.

Look at indemnity provisions for instance.

There is usually a laundry list of parties defined as “Indemnitees.”   All of the “Indemnities” are entitled to be indemnified and defended for claims covered by the indemnity, and they usually are named as additional insureds on certain insurance policies.

One situation where this can create a problem is when the architect is included in the definition of “Indemnitees.”

A broadly drafted indemnity provision can potentially result in the contractor being required to indemnify the architect for certain claims that are prohibited by Chapter 130 of the Texas Civil Practice and Remedies Code.

Even though the statute would make that type of indemnity void and unenforceable, time and resources would have to be spent having the provision declared void and unenforceable.

Another type of agreement where definitions are often used and are very important is a settlement agreement.

Let me share a real life example with you of a case my firm got involved in after definitions in a settlement agreement caused a problem.

“Parent Company” was sued over a debt, and as the case progressed the plaintiff also sued some officers and affiliates of the Parent Company.

The case settled and the settlement terms required the Parent Company to pay a certain amount over a period of time with the plaintiff agreeing to dismiss the lawsuit against all of the defendants.

The original version of the settlement agreement included a definitions section that had a separate definition for each of the defendants along the lines of  “Parent Company,” “Affiliate 1,” “Affiliate 2,” “Officer 1,” “Officer 2,” and “Officer 3,”

The payment provision, however, only required the Parent Company to make settlement payments.

Throughout the settlement agreement each time the defendants were referenced, all of the defined names were listed, which made the agreement longer and a bit cumbersome at times.

When the settlement agreement was almost finalized, the plaintiff’s attorney redefined the Parent Company to include all of the defined terms for the officers and affiliates to shorten and simplify the agreement.  The other provisions of the settlement agreement remained unchanged.

The defendants and their attorney agreed to the revision and the settlement agreement was signed.  After approximately half of the settlement payments were made, the Parent Company experienced financial problems and stopped making the settlement payments.

The plaintiff filed suit against the individual officers and the affiliates to recover the remaining settlement payments.

Even though the officers and affiliates had never intended to be responsible for the settlement payments, they ended up being responsible because the “Parent Company” was responsible for the payments under the agreement and each of the officers and affiliates had been incorporated into the definition of the Parent Company.

The lesson:

Don’t just skim over the definitions in any of your agreements.  Read them carefully and ask yourself if each of the people or entities listed really need to be included in light of the obligations or liabilities that are associated with the defined terms.

The same is true of definitions related to applicable laws, indemnified claims, and many other issues that are sometimes grouped together and defined.

Using definitions can be convenient, but unless they are carefully reviewed, they can also lead to future unintended consequences.

Internet scams.  You’ve seen them in your inbox.

The foreign citizen who has inherited several million dollars from a relative in the United States, and they want you to help them get the money.

If you forward an email enough times you’ll get paid or get a free laptop.  No unknown person in a foreign country needs your help with an inheritance and no one is going to send you a free laptop because you forwarded an email to 20 of your friends.

When it comes to internet scams, the old adage rings true: if it looks to good to be true, it probably is.  Common sense should be enough to help people avoid these scams, but some people want this unbelievable scenario to be true so much that they convince themselves they have stumbled on King Solomon’s mine.

So what do internet scams have to do with construction?  Because if you are an owner or contractor, you would do well to remember that, “if it looks too good to be true, it probably is.”

Too many projects have been derailed by someone accepting a bid that could have potentially qualified as an internet scam.   When it comes to reviewing bids, listen to your common sense.

If you’re an owner and three contractors’ bids are within a few percent of each other and a fourth contractor’s bid is 30 % less than the others, then common sense tells you that you should ask some hard questions.

If you’re a general contractor and a subcontractor’s bid comes in 20% lower than other subcontractors bidding on that scope of work then you should wonder what makes them able to get materials and provide labor at such cheaper prices.

If a bid looks too good to be true, then it usually is.

I understand the pressure to get the best price possible for a project.  But an unusually low bid from a contractor or subcontractor should cause red flags to go up.

Did they overlook a scope of work?  Are they properly staffing the project?  Were they able to secure materials at a better price?  Maybe there is a legitimate explanation for why their bid is so much lower.

But if there is no valid explanation, do not be seduced by the voice in your head that says, “So what?  It will be their problem not mine.”

Nothing could be further from the truth.  Accepting an unusually low bid usually leads to one of two scenarios: (1) an avalanche of change order requests for time and/or money; or (2) a failure to complete the work.

Trust me, both on those situations will be your problem instead of just being the contractor’s or subcontractor’s problem.

Over the years I have had owners and contractors who find themselves cleaning up a mess explain that even though the bid was way lower than the other bids, they felt like they would be protected because there was a bond (or similar type comments).

That is a flawed logic.  Providing a bid bond or a performance bond is not a solution to mitigating the risk that comes from accepting an unusually low bid.

While a bond may compensate for damages or pay to complete work, the timing of the project will be catastrophically impacted.  There will be delays, and the delays will likely be significant.

Delays have a ripple effect that can place an entire project at risk.  If an owner or contractor has to get a surety involved it will take time for the surety to investigate and determine how it wants to respond.

In the meantime, subcontractors who were properly performing will move crews to other jobs, and then the schedule is impacted by trying to get them back to the project.  This impacts sequencing and usually compounds the delay problem.

In the end, the damages caused by accepting the unusually low bid will exceed (often significantly exceed) the savings that an owner or contractor hoped to achieve with the low bidder.

I’m not saying that unusually low bids can never be valid because there are different reasons that some bids are higher or lower than others.  The next time you see the unusually low bid, however, do your homework.  Just remember that if it sounds too good to be true, it usually is.

I have been fascinated by robots ever since hearing “danger Will Robinson” over and over on Lost in Space.  What kid hasn’t at some point wished for a robot like Rosie on the Jetsons who would clean your room for you and produce food on demand?

 

Due to developments in robotics, robots are being used more frequently in our world, including the construction industry.

Take “SAM” for example.  SAM is a Semi-Automated Mason being used by a Colorado masonry contractor.  SAM puts mortar on bricks and places them in a wall.  SAM can place around 300-400 bricks an hour, which is about 5 times more than a human.

 

 

There is still a human factor to SAM’s work.  Workers still have to load bricks and mortar, and follow behind SAM to remove excess mortar.  Most importantly, someone has to program SAM for the work on the project.   Without the correct programming, then SAM doesn’t know what work to perform.

Robots in construction are not just be limited to masonry work.   In the next few years you should expect to see robots that can handle more and more tasks on a construction project, especially tasks involving a repetitive process.

So what if something goes wrong?

In SAM”s case, what if the brick wall is improperly constructed?  Would the fact that the work was performed by a robot matter?

From a big picture perspective, probably not.  The owner would still hold the general contractor responsible under the owner/contractor agreement, and the general contractor would still hold the subcontractor responsible.

What may matter though is how you go about establishing that the work was negligently performed, including whether the problem was caused by a human error or a robot malfunction.

A negligence claim requires breach of a legal duty by failing to comply with a standard of care.  In the case of defective work performed by a robot, how would you establish the standard of care and then demonstrate a breach?

This may require evidence addressing the training for individuals programming the robot, the maintenance of the robot, and protocols for updating its software or operating system.

And if the robot was properly programmed, then evidence will be required to show a malfunction of the robot, which may prove difficult months after a project is complete.   Whether the negligently performed work involves human error or a malfunction of the robot, a robotics expert may be necessary to establish the standard of care.

If you are an owner or general contractor and a subcontractor plans to use a robot like SAM or maybe a driverless bobcat for excavation (yes – they exist) then, at a minimum, your contracts should:

  • address protocols for how programming data will be preserved;
  • require daily reports on the operation of the robot; and
  • require reports on the maintenance of the robot throughout the course of the project.

As the use of robots increases in the construction industry, there will be new questions and new issues to address.  Will negligent work by a robot be covered by a commercial general liability policy?   What happens if someone hacks into the robot and intentionally harms the work?

Perhaps we’ll try to tackle those questions sometime in the future.  For now, even though it sounds like something that belongs in a science fiction movie, SAM may be coming a  project near you.

On a traditional design-bid-build project, the design professionals prepare the plans, the owner gives them to the contractor, and the contractor builds the project.  So what happens when the plans are wrong?

[Disclaimer – this video contains profanity.  Just giving you a heads up.]

The answer to that questions depends on where the project is located.

If the project is almost anywhere but Texas, then when the owner gives the plans to the contractor, there is an implied warranty by the owner that the plans are accurate and sufficient for construction of the project.

In Texas though, there is no implied warranty on behalf of the owner that the plans are accurate and sufficient when the plans are given to the contractor.  Unless there is specific language in the contract saying that the owner warrants the accuracy of the plans, then the contractor must proceed at its own risk.

If the plans given to the contractor turn out to be incorrect, the contractor can submit Requests for Information seeking clarification.  This may lead to delays, changes to the plans, and requests for change orders that the contractor did not anticipate at the time it submitted its bid or entered into the contract.

In this situation, a contractor may find itself facing schedule delays, and whether the contractor is entitled to an extension of time will be determined by the other provisions of the contract.  In addition, the contractor may end up incurring significant additional costs that may or may not be recoverable based on the language of the contract.

So how can a contractor avoid a situation where incorrect plans have caused delays and damages that may or may not be recovered?   I’m glad you asked.

The situation is avoided by addressing it in the contract and negotiating a resolution with the owner.  This requires carefully reading the contract.  There are a issues that are frequently seen in construction contracts that can impact the contractor’s rights with respect to incorrect plans.

Pay attention to contract provisions that address:

  • Whether the owner warrants the drawings and specifications;
  • The contractor’s responsibility for reviewing the plans and specifications for errors;
  • Whether the contractor is allowed to rely on the accuracy of information provided by the owner;
  • Whether the contractor is responsible for reviewing the site and satisfying itself as to whether the work can be constructed per the drawings and specifications; and
  • Whether the contractor is entitled to additional time or costs incurred due to incorrect plans.

Most likely, the contractor will discover that most (if not all) of the risk for errors in the plans have been shifted to the contractor.

If this is the case, then during the contract negotiation process the contractor can propose revisions to minimize this risk, including proposing language specifically stating that the owner warrants the accuracy of the plans and specifications.  The owner may not accept the contractor’s proposed revisions, but it should at least provide an opportunity for both parties to discuss the risks associated with incorrect plans and find some resolution that both parties can live with.

 

 

 

 

I once had a teacher who called the word “please” a magic word.  For instance, if you asked to go to the restroom, the response was usually, “what’s the magic word?”   Then you said “please” and got to go the restroom.

This exchange repeated itself numerous times a day as students made various requests.  The word “please” usually worked.  Of course, there were other times when even if you used the word “please,” your request was still denied, which sort of muddied the water as to what was so magic about it to start with.

As it turns out, in construction law, there are also some magic words.  In fact, the recent case of Nu-Build & Associates, Inc. v. Sooners Group, L.P. illustrates this point because in that case, failing to use the magic word “reasonable” caused $3.6 million in damages to disappear.

You read that correctly.  One minute there was an award of $3.6 million in damages, and the next minute – “poof” – the damages were gone.

Here’s what happened.  Nu-Build was the general contractor for a project owned by Sooners Group.  Sooners Group terminated Nu-Build before the project was complete and hired a replacement contractor.   As often happens, a lawsuit followed.

Following a bench trial, the Court awarded Sooners Group $3.6 million in damages for its costs to complete the project after Sooners Group terminated Nu-Build.  On appeal, however, the Court of Appeals reversed the $3.6 million damages awarded to Sooners Group, and the court’s opinion is instructive to construction lawyers.

Here are two important statements from the Court of Appeals that construction lawyers should remember related to recovering damages for the cost of completing a project:

  1. One,  when seeking damages for completion costs, whether based on a contract or a tort, you must establish that the completion costs are reasonable.
  2. Two, proof of the amounts charged and paid are not evidence that the amount is reasonable.

The Court of Appeals determined that Sooners Group had not adduced any evidence at trial that the completion costs were reasonable, therefore, the entire amount was reversed.

Point number 2 seems illogical to owners and contractors who have had to complete a terminated party’s work.   From their perspective, the amounts charged and paid to complete a project or scope of work are inherently reasonable or else they wouldn’t have paid them.  Why would someone intentionally pay unreasonable costs to complete a project?

Despite the appeal of that logic, the law takes a different view.  There has to be evidence that the completion costs were reasonable to support an award of damages.

So what does this mean for construction lawyers?  One thing it means is that careful thought should be given to selecting experts and contractors that can establish that completion costs are reasonable.

And as simple as it sounds, it means making sure your experts literally say the magic word “reasonable” several times.  There’s no way to know for sure, but if one of Sooners Group’s experts had testified that Sooners Group’s $3.6 million in completion costs were reasonable, those damages costs may not have disappeared.