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.

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.

 

 

 

 

When I was (much) younger, I recall hearing a preacher in church one Sunday say (multiple times), “The road to hell is paved with folks with good intentions.”

I had no idea what he meant, but I was pretty sure it was bad.  I want to borrow his words to describe something I’ve noticed about construction projects:  The road to project hell is often paved with folks with good intentions.

In other words, the seeds of many construction disputes and unprofitable projects often begin with good intentions by the people involved.

At the beginning of the project, everyone has good intentions.  I have never represented a client who started a project hoping there would be conflict.

I think most people want to trust the people they do business with (why would you do business with them if you didn’t trust them, right?).  As a result, as a project moves along, participants discuss scope change, payment, pricing, and ordering materials, among other things.

Instructions are given and agreements are made.  However, sometimes the parties do not diligently document the discussion and agreement.

This results in disagreements about what was discussed and agreed to once someone gets around to preparing a document, or worse, it leads to a surprise (some would call it ambush) claim at the end of the project.

Next comes payments being withheld, liens being filed, litigation or arbitration, people having to talk to their lawyer way more than they want to, and you find yourself in project hell.

You’ve probably heard the old saying, “trust but verify.”  When it comes to a construction project, however, you should adopt the approach of:

Trust but Document.

Any time there is a discussion about any type of change or any kind of agreement is made, the main points should be documented immediately.  Technology makes this more achievable than ever before.

Use Smartphones and Tablets

When a discussion takes place onsite, it can be documented quickly and easily with a smartphone or tablet.

  • Smartphones.  Put the terms of a discussion and agreement in an email, which can be copied to all parties participating in the discussion so that they have a chance to speak up immediately if they disagree with any information in the email.  If you don’t have time to type out an email (which should be rare), then use your smartphone to make a quick video or audio recording to record everyone agreeing on what was discussed and what actions will be taken.  It would be very difficult for someone to later deny they agreed to something if you have them on video agreeing with the terms.
  • Tablets. Not only can you use a tablet to prepare a note or email, but certain tablets allow you to write with a stylus.  This allows parties to quickly put the terms of their discussion or agreement in a document (even a prepared form stored on the tablet or in the cloud), and then sign it using it the stylus.

Once you have documented the main points of a discussion, the information can later be included in a change order proposal or change order.  The suggestions above are not the only ways to use technology, but the point is that you should make technology work for you and decrease the number of potential disputes.  TRUST BUT DOCUMENT.  Because remember, the road to project hell is often paved with folks with good intentions.

I recently wrote about the WannaCry ransomware attack that crippled companies around the globe and recommended that cyberattacks be addressed in the force majeure provision of a construction contract.

Last week, there was another global cyberattack that was first believed to be another form of ransomware known as Petya, but it turned out that the attack was something more sinister.

Instead of being ransomware, which (usually) results in the victim getting their files and information back at a later date, experts have concluded that last week’s attack was actually malware that was a “wiper,” which prevents the user from ever accessing their files.  In other words, a hacker that unleashes a “wiper” on a system is not trying to make money by demanding some type of ransom payment for the information – they just want to damage and destroy.

In addition to adding cyberattacks to the force majeure provision, you should also consider including a contractual provision addressing other potential remedies in the event of a cyberattack.   For instance, parties may want to consider a termination provision that is triggered by a cyberattack.

Every project is different, so there is no “one size fits all” approach for addressing a cyberattack in a contractual provision, but here is a framework that you may be able to customize for your project:

Cyberattacks. The term “cyberattack” in this Contract shall mean, “an attempt by hackers to damage or destroy a Party’s computer network or system.”  In addition to any other remedy available under the Contract (including any extension of time under Section _____), either Party may terminate the Contract upon _____ days written notice if either Owner or Contractor is the victim of a cyberattack that: (i) substantially deletes or destroys Owner’s or Contractor’s electronic files related to the Project such that Owner or Contractor are unable to continue performing their obligations under the Contract; or (ii) prevents Owner or Contractor from being able to access their electronic files related to the Project for more than _______ days.  If Owner terminates the Contract under this Section _____, Contractor shall be entitled to recover (insert remedies, i.e., treated as termination for convenience, or payment to Contractor of a termination fee). If Contractor terminates the Contract under this Section _____, then Contractor shall (insert remedies, i.e., limited to payment for properly performed work, or payment to Owner of a termination fee).

Cybersecurity is an issue that is not going away.  Whether you use a provision similar to the one above or draft your own provision, make sure you address the issue in your construction contracts.