Consistent Contract Drafting Will Keep You from Fighting the Same Dispute in Both Arbitration and Litigation

Opinions on arbitration as an alternative to traditional litigation are as varied as there are contractors and lawyers who draft the contracts. There are certainly benefits and drawbacks to both forms of dispute resolution. However, prudent contractors should decide which form is appropriate for the job and make sure all contracts within that project are consistent. Otherwise, you run the risk of having to fight the same battle in both litigation and arbitration at the same time.

Let me provide an example on the importance of consistency in dispute resolution forums. You’re the general contractor on a project, and the owner insists on an arbitration clause in your contract whereby all disputes between you and the owner will be sent to arbitration. You aren’t particularly a fan of arbitration, but it was a big deal to the owner, so you went along with it. With the prime contract in place, you execute contracts with all the subcontractors that are needed to bring this project to life. Since these contracts are for smaller dollar amounts, they are simpler, more form-based, and do not include arbitration agreements. So far, this probably sounds like a pretty common scenario. However, by this point, the potential for problems has already been created.

Things are going well on the project until the electrical contractors make a mistake (sorry to pick on the electricians in this hypothetical). They are willing to fix their mistake, but it has added 3 weeks to the project. They also blame the mistake on an ambiguity in the engineer’s plans and have requested a significant change order on the pricing for this correction. Unfortunately, by the time this mistake has been corrected and is ready for inspection, the engineer has gotten extremely busy and cannot make it to the project site for the inspection for another 2 weeks.

Then bad weather delays inspection by another week. All of a sudden, the project is 6 weeks off schedule. The owner is upset at the delay, you’re mad at the electrical contractors for getting the project off schedule, and the electricians are not happy because you’ve withheld payments because of their delay (which they blame on the engineer). Before you know it, you’ve been sued by the electrical contractor for payments, and the owner has begun arbitration proceedings to recover delay damages. You’d like to consolidate these disputes into one case–however, the owner has a valid arbitration clause and refuses to go into traditional litigation, and you have no basis to force the subcontractor out of court and into arbitration. So you’re left fighting two battles at twice the cost, twice the time, and twice the headache.

At some point, every contractor will have a project that involves both upstream and downstream disputes similar to this hypothetical scenario. So how can a builder avoid being torn in two directions? The key is through good planning at the contracting stage. Have a careful eye to the dispute resolution forums in your contracts. If the contract is silent on this issue, then that means any dispute will be traditionally litigated through the courts. If there is a valid arbitration agreement, then that is where any disputes will likely be determined.

To prevent being dragged into both arbitration and litigation at the same time, make sure all your contracts on a project are consistent on the dispute resolution forum. If one contract has an arbitration clause, make sure all your contracts contain a similar provision. Conversely, if the "upstream contract" makes no mention of arbitration (meaning litigation would be the dispute resolution forum), keep your "downstream contracts" silent as well.

As with any construction project, the key is good advance planning. Adding a little forethought to your contract will help avoid being torn in two directions later should disputes arise.

Recent Andorran Bridge Collapse Should Make Contractors Double Check Risk-Shifting Contract Provisions

Question: If/when a catastrophic accident hits your job site, what is your immediate response? What if the accident happens to your subcontractor or a third party, then how do you respond (or does it make a difference)?

Unfortunately, construction crews in the tiny Pyrenees principality of Andorra are now having that conversation. Recently, five workers died and six more were injured when they fell 50 feet as bridgework they were on collapsed.

This tragic accident serves as an obvious reminder that safety should always remain job #1. However, it should also be a wake-up call to contractors to make sure their risk-shifting and risk management is up to date.

If or when that catastrophic accident hits your job site, your contract documents–believe it or not–should be one of the first things you look at. In fact, they may be the thing that guides your next move. Why? Because they will be probably be the documents that determine if you or some other party will be responsible for the defense and indemnification of the injured worker’s claims.

Most construction contracts contain some sort of risk shifting provision, whether it be an indemnification clause, a limitation of liability provision, or an additional insured requirement. Prudent contractors include these in their favor in anticipation of a catastrophic accident. These contractual provisions essentially shift potential liability away from you and place the risk of loss on another party.

When a serious construction injury occurs, rest assured that every company remotely connected to the accident site will be brought into the claim and, perhaps, into litigation. Before this happens, contractors should carefully analyze their contract documents to determine if another party owes them indemnity or if a third party’s insurance will cover them. Conversely, contractors should determine whether they owe indemnity or insurance to a third party.

Shifting the defense and indemnification for a claim to a third party, particularly in catastrophic accident situations, can result in significant savings (depending on a contractor’s own insurance). It could lead to the savings of a deductible, a large self-insured retention amount, and even premiums. All of a sudden, those seemingly mundane deal points are worth a whole lot. But these provisions must be explicitly stated in the contract documents.

The tragic Andorran bridge collapse should remind contractors to be vigilant in their contract negotiations and not to ignore risk shifting mechanisms such as indemnity clauses and additional insured provisions. Just like any construction project, proper planning and attention to detail will pay off down the road when your company is dealt a curve ball.

An Ounce of Prevention Beats a Pound of Cure: Why Every Contractor Should Pay Close Attention to Personnel Policies

"Have the design plans been approved by the architect or engineer?"

"Is financing in place?"

"What are the codes that have to be complied with?"

These are among the many questions that are asked before almost any construction project begins. And prudent contractors make sure they have the answers in advance, so they don’t run into any uncertainties down the road.

While most contractors make sure they know the answers to those construction-related questions, what about questions concerning their own business.

"What happens to accrued vacation pay when an employee voluntarily leaves?"

"What is the policy for reporting and investigating sexual harassment?"

"What kind of employee behavior is grounds for immediate termination?"

If you had to scratch your head and think about the answers to these questions, then your company could be exposing itself to needless risk that could largely be avoided.

Given the high number of layoffs and reductions in force the construction industry has faced in the last 18 months, there are ample opportunities for former employees (or current ones) to try and squeeze out a few more dollars with claims or threats of litigation. Maybe they didn’t use all their vacation time and now feel they should be compensated for it. Or maybe they feel that a few off-color jokes around the water cooler actually arose to sexual harassment. With the right policies and practices in place, a lot of these headaches can be minimized.

Every employer, whether in the construction industry or otherwise, should have an employee handbook in place that lays out the company’s policies and procedures. It lets employees know what they can expect out of their employer, but it also lets them know exactly what is expected out of them. And it helps prevent the gray areas from which disputes often arise.

Many contractors allow employees to use company vehicles. What happens when your employee stops by the bar on the way home while driving a company van? Should an accident ever happen, you can rest assured the claimant will be looking at the name on the side of the van first. You may not be able to completely eliminate potential headaches, but with appropriate alcohol and drug policies in place, you can at least mitigate them and minimize your potential liability.

What about overtime–are employees entitled to it even if it was not approved in advance? What if you did not even know the employee was working overtime until they submitted their hours? This is another matter that can be addressed by having clear policies in place in an employee handbook that both employer and employee can reference.

These are just two of the many employment issues that affect contractors in a real, tangible way. Having policies in place via an employee handbook doesn’t just save time in trying to determine what the company policy actually is (often times after the fact), it also saves money. If you have a policy that employees forfeit any accrued vacation pay upon termination of employment (voluntary or otherwise), you will know exactly how to respond when a former employees seeks payment for the two weeks of unused vacation he left behind.

It’s no secret that the last 18 months have been difficult on the construction industry, and contractors are looking for any ways they can find to save costs. In personnel and employment matters, prevention and good planning are the keys. The old adage really is true–an ounce of prevention beats a pound of cure.

OSHA Keeps an Eagle Eye on Texas

Workplace safety should be the at the top of the priority list for every industry, but the construction industry should give it even more importance because of the often times dangerous nature of the business. Worker protection is a worthy goal in and of itself, but there are, of course, other advantages to injury prevention. Lower insurance premiums, fewer missed work days (and hence, increased productivity), and employee morale are all side benefits of a safe workplace.

And so is OSHA compliance. OSHA has recently increased the number of inspectors in Texas in an effort to bolster construction site safety compliance. To do so, it has brought in inspectors from outside of Texas.

OSHA announced that it is focusing on Texas because the state has the highest rate of construction site fatalities. As many companies have learned the hard way, OSHA violations can be quite costly. For example, in May 2009, the organization issued citations to a Dallas-area company for one repeat and two willful violations. The proposed penalties totaled $60,000. (The investigation was prompted by a workplace fatality, which is likely to bring litigation and significantly increased costs beyond OSHA fines.)

Attention to workplace safety should permeate every business in the construction industry. A culture of safety should be instilled from day 1 with every employee. It begins with the implementation of policies and employee training. It continues with daily vigilance on safety issues in the office and on job sites. And it is brought full circle with an intolerance for poor practices.

Fortunately, the overall trend in safety has shown steady improvement. Since OSHA was created in 1971, occupational deaths have been cut by 62% and injuries have declined by 42%. More recently, the AGC announced the results of a new analysis that found construction safety incidents dropped 38% over the last ten years and the construction fatality rate declined 47 percent since 1998, the year the federal government switched to a safety oversight approach known as "collaborative safety."

There are countless legal issues that could be discussed in the context of workplace safety, but the one that stands above them all has less to do with a courtroom and more to do with avoiding a very unpleasant conversation with a wife, mother, or parent. For that reason alone, the quest for a safe workplace is a battle worth fighting every day.

What the Construction Industry Can Learn from the Healthcare Reform Debate

It has been impossible lately to turn on the television or radio, much less the news, without getting an earful about the healthcare reform debate. Regardless of how you personally feel about the reform, there are two important lessons that can be learned from this debate–and neither have anything to do with healthcare!

One of the initial complaints about the proposed healthcare legislation was that members of Congress had not even read the 1000+ page bill and did not know its provisions. What does this have to do with construction? Unfortunately, quite a bit. Just like many Congressmen were not initially very informed of many of the intricacies of the healthcare bill, many contractors and builders are not fully aware of all the terms of the contracts they enter.

Throughout my practice, I have seen numerous instances where I have asked parties whether certain clauses were in their contracts and they simply did not know. I can tell you from experience that it is very difficult for a contractor to manage liabilities and risk on their projects–not to mention payments–if they do not have a thorough understanding of the binding contracts they sign.

Sometimes construction contracts can be fairly lengthy, and often they contain quite a bit of boilerplate language. They may even "look" similar to the hundred other contracts you have signed. But contractors should read every contract thoroughly before entering into it, because that document will govern any disputes that arise later.

Another lesson to be learned from the healthcare debate–misinformation can be costly. For every accurate report on the healthcare bill and the discussions surrounding it, there is probably at least one inaccurate report. Similarly, contractors often have misunderstandings about their contracts. In addition to being familiar with the terms of their contracts, every contractor should know whether all the clauses in their contracts are actually enforceable before signing. For example, Texas law has some very specific requirements about indemnity clauses, and if those requirements are not met, the indemnity clause will not be enforceable. The contract language itself may be clear enough, but if it does not meet these technical requirements, it is worthless. The same goes for liquidated damage provisions; poor contract drafting that does not meet certain criteria could void these provisions as well. Being accurately informed about the validity of your contractual obligations is key.

Regardless of one’s feelings on healthcare reform, it is unquestioned that the proposed bills would bind the country’s healthcare industry to certain standards and requirements and it would involve substantial amounts of money. That sounds a lot like construction contracts. This may sound like basic common sense, but it is very true in this industry–an ounce of prevention beats a pound of cure. Familiarity with your contracts and knowing their enforceability before signing is the best way to position your company to minimize its liability, shift risk, and ensure prompt payments.

Risk Managers Beware: Third-Party Notice of Suit Insufficient to Trigger Insurer's Duty to Defend and Indemnify

Insurance issues tend to go hand-in-hand with most construction projects. From contractual indemnity and additional insured provisions to workers comp issues, contractors must be as well-versed in insurance as they are in bricks and mortar. When coverage decisions can potentially mean the difference in thousands or even millions of dollars of liability, getting things right with insurance is imperative.

For this reason, a recent decision out of the Fort Worth Court of Appeals, Jenkins v. State and County Mutual Fire Insurance Co., 2009 WL 1650071, should inspire a healthy fear in all construction risk managers. In short, the court strengthened an insurance company’s ability to deny defense and indemnity to an insured based on who provided notice to the insurer of a lawsuit.

In Jenkins, the plaintiff was injured when a tank skid fell off a truck. The plaintiff sued the owner of the truck and its driver (among others). The owner and other defendants (except the driver) were served and promptly forwarded the suit to their insurer, who took over their defense. The plaintiff was unable to personally serve the driver and eventually served him by publication, which was allowed under the rules of civil procedure. The plaintiff’s attorney then advised the insurer (that presumably would have provided coverage to all the defendants, including the driver) of the service by publication and forwarded the suit papers. As such, the insurer had actual knowledge of the suit against its insured driver, even though the driver himself never notified the insurer of the suit and never requested defense and indemnity.

A default judgment was eventually entered against the driver and a jury later found that the driver was solely responsible for the plaintiff’s injuries. The plaintiff tried to collect from the insurer, but the insurer denied that it owed coverage because the driver failed to comply with the policy’s notice-of-suit condition. The plaintiff argued that the insurer had actual knowledge of the suit and therefore waived the notice-of-suit provision. The trial court agreed with the insurer that it did not owe coverage, and the case was appealed.

The Fort Worth Court of Appeals upheld the trial court’s decision that the insurer did not owe coverage. The court noted the rule that an insurer has no duty to defend or indemnify an insured unless the insured forwards suit papers and requests a defense in compliance with the policy’s notice-of-suit conditions. The mere awareness of a claim or suit does not impose a duty on the insurer to defend under the policy; there is no unilateral duty to act unless and until the insured (including additional insureds) first requests a defense.

In short, the court ruled that an insurer has no duty to defend and no liability under a policy unless and until the insured in question (and not a third party) complies with the notice-of-suit conditions and demands a defense. This is true even when the insurer knows that the insured has been sued and served and when the insurer actually defends other insureds in the same litigation. Because the driver himself (i.e. insured) did not make a claim for defense and indemnity, the insurer did not owe him coverage.

To be certain, this decision was a harsh application of very technical requirements of an insurance policy. But it was in line with supreme court precedent and it now represents the law.

While Jenkins was not a construction case per se, the decision will nevertheless have ramifications in the construction industry. Most construction litigation that invokes insurance also involves claims for indemnity and additional insured status. Based on a strict application of the Jenkins decision, it may not be enough to simply tender a case for defense and indemnity to the party from which the indemnity flows. This would be the case even if their insurer is aware of the litigation. The more prudent approach would be to make the tender directly to the carrier.

The same applies to employees who are covered by the same policy as their employer and who are sued individually alongside their employer. In fact, individual employees are often sued along with their employer in construction accident lawsuits. For the employee to receive a defense, they should personally notify the insurer of the suit and request defense and indemnity. The employee should not just hand the suit to his employer and assume everything will be taken care of.

The lesson to be learned from the Jenkins ruling is simple yet important. Because the duty to defend and indemnify does not begin until an insured complies with the notice-of-suit condition, insureds should be absolutely certain that they comply with the notice requirement to the letter to avoid the risk of accidentally forfeiting coverage.

Wage & Overtime Claims: When Builders Must Wear the HR Manager (Hard)Hat

Just as any construction project has many parts that must be effectively executed to achieve the end product, every construction company has many components that it must manage to ensure success. One of the more important ones is personnel/human resources. At the end of the day, all the nice equipment, financing, and contracts don’t mean much if there are no skilled trades and craftsmen on the ground to bring a project to life.

The world’s leading HR management organization, SHRM (Society for Resource Management) recently published a study that about 72 percent of employees across the nation said they work through lunch, while 70 percent reported working beyond a 40-hour workweek. Only 21 percent of the people polled cited pressure from supervisors as the reason for this. To the contrary, 52 percent claimed the extra work was because of "self-imposed pressure," while 44 percent cited "meeting project or performance goals."

Discussions about overtime and extra work may, on its face, seem a little out of place for a construction industry that has been hit hard financially in the last 18 months and seen plenty of layoffs. Recently, however, there have been trickles of encouraging economic news ("green sprouts," as Fed Chairman Ben Bernanke has called them), and we know that the industry will pick up at some point. The SHRM survey and the construction industry layoffs all beg the question of what will companies do when they face increased workloads with decreased workforces? Put another way, should you worry when employees start working that extra time to meet project and performance goals?

The Fair Labor Standards Act (29 U.S.C. 201, et seq.) is the starting point for many wage and pay claims. At its most basic level, the FLSA requires employers to pay a minimum wage to employees for each hour of work. As a general rule, all job-related activity or time is included in "hours worked," unless specifically excluded by the Act. Non-exempt employees generally are to be paid overtime at not less than 1½ times the regular rate for all work time in excess of 40 hours per week.

Sounds simple enough, right? It gets a little trickier. What all exactly is considered "hours worked"? What if the employee works extra time without approval? Is driving to a job site considered "hours worked"? What about down time waiting for other contractors to finish their portion of a project? Are employees still on the clock under these circumstances?

If an employee voluntarily works extra hours, that time is considered "hours worked" and must be compensated. The reason for the extra work is not important–what matters is whether the employer knew or had reason to know the employee was working extra.

Whether waiting time is "on the clock" is a more fact intensive issue–it is a question of whether the employee was engaged to wait or waiting to be engaged (generally speaking, engaged to wait = hours worked; waiting to be engaged...not typically hours worked).

If an employee is not able to effectively use waiting time for his own purposes, it generally belongs to and is controlled by the employer. Under this scenario, the employee is "engaged to wait." This is the case even if they are just chatting with co-workers, reading a book, or working a crossword puzzle. Periods of being engaged to wait are typically shorter in duration, and the waiting is an integral part of the job (imagine a truck driver waiting while his trailer is being unloaded).

Additionally, an employee who is required to remain on call on the employer's premises or so close that he cannot use the time effectively for his own purposes is working while "on call." An employee who is not required to remain on the employer's premises but is merely required to leave word at his home or with company officials where he may be reached is not working while on call.

Of the other side of the coin, periods during which an employee is completely relieved from duty and which are long enough to enable him to use the time effectively for his own purposes are not "hours worked."

An employee who travels from home before his regular workday and returns to his home at the end of the workday is engaged in ordinary home to work travel which is a normal incident of employment. This is true whether he works at a fixed location or at different job sites. Normal travel from home to work is not worktime.

However, time spent by an employee in travel as part of his principal activity, such as travel from job site to job site during the workday, must be counted as hours worked. Where an employee is required to report at a meeting place to receive instructions or to perform other work there, or to pick up and to carry tools, the travel from the designated place to the work place is part of the day's work, and must be counted as hours worked regardless of contract, custom, or practice. If an employee normally finishes his work on the premises at 5 p.m. and is sent to another job which he finishes at 8 p.m. and is required to return to his employer's premises arriving at 9 p.m., all of the time is working time. However, if the employee goes home instead of returning to his employer's premises, the travel after 8 p.m. is home-to-work travel and is not hours worked.

At some point, construction companies (and hence, construction workers) will be doing more work with fewer people because of recent downsizings. These examples are just a few of the situations that are commonly encountered in routine wage and hour determinations. It is important to get these matters right, because mistakes in this area can be very costly. Employees can bring an action for the compensation and overtime that they earned, and they are entitled to attorney’s fees. This is certainly one area where an ounce of prevention is much better than a pound of cure.