To help construction companies minimize the potential for legal disputes,
Construction Executive asked leading experts for their advice on a broad array of construction andbusiness-related issues, including liability for achieving specified LEED and green building requirements; best practices when drafting contract documents; the impact of new Environmental Protection Agency (
EPA) regulations; and considerations when forming a new business entity.
Christopher Wright
Partner
Watt, Tieder, Hoffar & Fitzgerald, L.L.P.
While each contract is different, generally a contractor that installs specified materials in the manner or method required by the design documents furnished by the owner/architect will not be liable if, in the final certification process, the materials and methods do not lead to the desired LEED certification or green code requirements. Under the owner’s implied warranty of the adequacy and accuracy of the plans and specifications, the contractor should be safe and free of responsibility. Application of the standard implied warranty should result in the owner and the designer bearing the risks associated with a failure of the specified materials and methods to achieve the desired level of sustainability.
Because this is an emerging area, and how the courts will apply the owner’s implied warranty to green cases is not yet established, the best way for contractors to prevent the risk of unwanted liability for a building that does not achieve the desired LEED rating or meet green code requirements is to insert an express provision in the contract terms and conditions or add an addendum on the green requirements applicable to the project that clearly defines and limits the contractor’s risk. The extra time in contract drafting will help prevent an unwanted claim at the end of the project.
Kenneth W. Cobleigh
Managing Director and Counsel, AIA Contract Documents
American Institute of Architects
Contract disputes often result when one party has differing expectations about the performance obligations of the other party. Written contracts that describe, at a minimum, the scope of work or services, the payment terms and conditions, the project timeline, the insurance considerations, the terms associated with correction of work, and the terms associated with changes in scope of work or services are critical to ensuring each party has a clear understanding of its obligations and the other party’s expectations.
When each of these contractual points is memorialized clearly, in plain language understandable to both parties, the potential for contract disputes is greatly reduced. In this sense, shorter contracts are not always better contracts. Contract documents should be sufficiently detailed so important information regarding each party’s obligations and expectations is not omitted or written vaguely. Also, it is important the roles and responsibilities described in the owner-contractor agreement be coordinated with the terms of the contractor-subcontractor and owner-architect agreements.
Construction industry organizations, such as the
American Institute of Architects, developed standard form contract documents that address these contractual points with widely recognized, tested and accepted language. By repeatedly using coordinated standard form contract documents, parties will develop and share a clear understanding of their roles and responsibilities. This shared understanding also helps streamline contract review and negotiations by allowing the parties to focus on modifications to the contract rather than the standard terms and conditions.
Robert C. Chambers
Managing Partner
Smith, Currie & Hancock LLP
EPA regulations are only one of an often overlapping and confusing maze of federal, state and local laws and regulations addressing the environmental aspects of a construction project. With respect to environmental issues, contractors must be aware of four major concerns.
- Exposure to multiple enforcement actions. An erosion problem can lead to action by the local government agency in charge of construction permitting, as well as investigations for impact on state waters and federally regulated waters or wetlands. It is extremely frustrating for a contractor to have to answer to multiple governmental agencies, which seem at times to have conflicting rules and regulations, yet each has the ability to assess penalties and fines.
- Numerous areas of regulation. Many areas of challenging environmental regulation exist on construction projects, including stormwater, air quality, hazardous materials, workers’ exposure (which spills over into the topic of jobsite safety) and construction waste disposal. Any one of these can create a monumental problem if not handled correctly. The first step in minimizing environmental challenges is a thorough pre-construction evaluation of both the project and the contract documents. An environmental risk allocation/indemnification provision is necessary to minimize environmental dangers for contractors. It should include a broad general indemnification for any environmental problems that exist onsite prior to construction. A contractor should only be responsible for its actions.
- Inadequate representation onsite. A significant danger of mismanaging compliance exists if a contractor fails to appoint a key individual to deal with environmental issues on a project. This person must take responsibility for being familiar with applicable federal, state and local environmental (and safety) laws, as well as oversee the contractor’s compliance with all pertinent regulations. Having a response plan in place and a person responsible for implementing that plan will minimize the contractor’s risk to legal actions caused by many environmental compliance requirements.
- Permitting delays. Delays in getting appropriate permitting can add years to a construction project. A contractor must fully understand whether the public agency is assuming the risks of its permitting efforts, or trying to shift them to the contractor through clever contracting clauses. If the agency is dumping the permitting delay risk on the bidders, a reasonable contractor can either advise the agency during the pre-bidding comment period that the clauses are too onerous or include a significant contingency and remain vigilant throughout the project. Also, avoid lump sum bids for remediation or restoration work. The intangible risks may outweigh even the wildest guess at a contingency.
Frederic L. Smith, Jr.
Partner
Bradley Arant Boult Cummings LLP
Corporations and LLCs will provide personal liability protection. The primary differences among a subchapter C corporation, a subchapter S corporation and an LLC relate to taxation and operational flexibility.
An S corporation does not pay income tax. Instead, items of income and loss flow through to the shareholders. A C corporation pays income tax and the shareholders are taxed again when the corporation distributes earnings.
With the tax benefits of an S corporation come restrictions on ownership. S corporations are limited to 100 shareholders and only U.S. individuals and certain types of trusts may be shareholders (with certain exceptions). In an S corporation, all shareholders must have the same economic rights. In a C corporation, there is no limit on the number or identity of owners or the classes of stock with different economic rights.
An LLC receives flow-through tax treatment like an S corporation. However, an LLC is not subject to the same restrictions on ownership. In an LLC, there are no limits on the number or types of owners or the classes of ownership interests. Members of an LLC can have different economic rights. LLCs also offer a more flexible management structure that is determined primarily by the members in their operating agreement.