ANTICIPATING, RESPONDING TO AND LITIGATING THE CATASTROPHIC FAILURE
ANTICIPATING, RESPONDING TO AND LITIGATING THE CATASTROPHIC FAILURE
AMERICAN BAR ASSOCIATION
FORUM ON THE CONSTRUCTION INDUSTRY
Guess Who’s Coming to Town?
Stadiums, Arenas, Malls and More:
The Community Impact Project
Anticipating, Responding to and
Litigating the Catastrophic Failure
Fred D. Wilshusen
Thomas, Feldman & Wilshusen, L.L.P.
9400 NCX Tower
9400 North Central Expressway, Suite 900
Dallas, Texas 75231
April 26-27, 2001
The Fairmont Hotel, New Orleans, LA
©2001 American Bar Association
Reprinted with Permission
All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
When one watches the videotape of a catastrophic failure on a construction project he or she is struck by how quickly months of work can be undone in a period often lasting no more than a few seconds. The next thought that comes to mind is the magnitude of the calamity and the effort it will take to restore order to the project. Undoubtedly these emotions and reactions are vastly magnified for the actual observers who see their work product and work environment shattered in a few moments. Add in thoughts of narrowly escaping death or serious trauma, fear of personal liability, financial destruction of one's business and the size and difficulty of the task that lies ahead and it is enough to make the most hardened construction superintendent go weak in the knees.
This paper will examine anticipating, responding to and litigating the catastrophic failure. Since the average construction project is filled with small and modest failures, a catastrophic failure is, in one sense, simply a big version of what construction attorneys are used to dealing with on a regular basis. Therefore, in some ways the ideas in this paper are no different from the strategies attorneys regularly use to cope with project issues. However, the enormity of the problems mean that there are qualitative as well as quantitative differences between the catastrophic failure and other more mundane project setbacks. Suggestions are set forth below for handling a project failure at each stage where action can bring results - before it occurs, immediately after the event, and when litigation arises.
Anticipating a project disaster need not dominate project planning. There are many other project priorities. However, a little planning can lead to improved handling of a major project failure.
Three planning suggestions will be considered. First, develop a strategy to govern the administration of a project that will improve the odds of recovering from a cataclysmic setback. Second, assess the risk sharing or risk shifting goals of the party and how to achieve these with its legal arsenal. Third, develop a scheduling response for accurately determining the status of the project at the time of the failure.
The greatest problem arising out of the catastrophic failure is the degeneration of the project participants into an attitude of "me against the world." This undermines any semblance of a team spirit. Whereas smaller failures can have an aggregate impact that is almost as devastating, a large project catastrophe shocks all project participants immediately into a highly defensive mood.
The deterioration of a cooperative attitude likely multiplies the harmful results of a major failure. It also multiplies these injuries for everyone involved. Claimants see their labor productivity collapse and their cash flow wither. The general contractor sees project control slip away. Insurers and potentially liable parties see damages mount and feel the wall at their backs.
Claimants and defendants alike, if far-sighted, should welcome efforts to maintain focus on the project and reduce in-fighting. Although there may be other more vocalized goals ("Get the project back on schedule!"), any successful strategy for coping with a disaster will attempt to diffuse the adversarial posturing that invades the project after a calamity. This strategy affects the other two areas of the anticipation stage. For example, some contract clauses can unify diverse claimants or, at least, reduce their conflict. Likewise, successful scheduling strategy can help reduce conflict.
Further, the goal of conflict reduction should affect the response and litigation stages after a project disaster. There are other strategies that are at odds with this goal such as shifting risk, maximizing a claim recovery or reducing potential damages. These may encourage division rather than reduce it. However, at each stage of dealing with a project catastrophe the strategy of reducing conflict and maintaining unity should leave its fingerprints.
The legal arsenal available to the attorney anticipating a catastrophic failure is, with some modifications, similar to that which is regularly used to deal with other construction problems. Those clauses include: "no damage for delay" 1; indemnity 2; additional insured 3; notice 4; liquidation 5; suspension 6; and arbitration 7. It is beyond the scope of this article to cover these various clauses in extensive detail. Nevertheless, the presence of contractual protections are so integral to the strategy for coping with a catastrophic failure that they will be touched on briefly in turn.
It should be noted that clauses, such as the liquidation and suspension clauses, actively advance the project strategy of reducing adversarial posturing. Others such as the no damage for delay clause serve the entirely different function of forcing project risk downstream with little or no consideration of fairness. As with all projects, the participants serve two competing masters; namely, successfully advancing the project and successfully advancing their own self interest. Therefore, in the contracting stage the goal of maintaining team unity may be advanced by some contract provisions and undermined by others.
Where applicable, modifications will be suggested to tighten up contractual protections in the event of a traumatic project event.
a. No Damage for Delay Clause
The starting point of analyzing any significant project failure is that a contractor is entitled to recover damages from a contractee for losses due to delay and hindrance of work if it proves (1) that its work was delayed or hindered, (2) that it suffered damages because of the delay or hindrance, and (3) that the contractee was responsible for the act or omission which caused the delay or hindrance. 8
However, the presence of a no damage for delay clause can act as a bar to the claimant’s recovery. 9 The no damage for delay clause yields practical as well as legal benefits. It can intimidate the unsophisticated claimant into forsaking its claim entirely or accepting a reduced settlement from the other party. For claimants who pursue legal representation, it can cause the attorney to undervalue the potential delay claim and discourage the client from an aggressive pursuit of it.
From a legal standpoint, however, the no damage for delay clause is of substantially less value when there is a catastrophic failure on a project. There are a number of well known exceptions that prevent the application of the no damage for delay clause: (a) delay resulting from active interference; (b) unreasonable delay and (c) delays not within the contemplation of the parties when the agreement was made. 10 These fit well a scenario where disaster strikes on a project.
For one, a catastrophic failure can be categorized as "active interference." A massive construction failure barring a particular claimant’s work would appear to be a direct interference. 11 It could also be termed a denial of site access.
If the reconstruction period lasts long enough, the delay could constitute an unreasonable one and justify an abandonment of the project. For those states recognizing the "not within the contemplation of the parties" exception, a devastating failure is precisely the type of event that no one anticipates on a construction project. 12
Finally a catastrophic failure can qualify as a cardinal change, and therefore, constitute a claim wholly outside of the original contract protected by the no damage for delay clause. 13
One possible approach for strengthening the no damage for damage clause is to combine it with "pay if paid" concepts. An example of such a clause is as follows:
In the event that Subcontractor’s performance of the Work is delayed or interfered with, for any reason and for any period of time, by acts or omissions of Owner, Contractor or other subcontractors, Subcontractor may request an extension of time for performance of the Work, and shall not be entitled to any increase in the Subcontract price or to damages or additional compensation as a consequence of such delays or interference, except to the extent that the Contract Documents entitle Contractor to compensation for such delays, and then only to the extent of any amounts that Contractor may, on behalf of Subcontractor, actually receive from Owner for such delays, which receipt shall be a condition precedent to any recovery by Subcontractor.
Although courts are hesitant to enforce a forfeiture of contract rights, many will if the pay if paid clause is drafted properly. 14
Does the fact that it is combined with a no damage for delay clause make it susceptible to the same exceptions as the no damage for delay clause itself? Arguably, it is serving the same function as the no damage for delay clause and would simply be another method of excusing the breach of contract by the general contractor. However, some courts have drawn a distinction between conditions precedent and exculpatory clauses and enforce them differently. 15
A no damage for delay clause is designed to minimize dispute, but there is no corresponding gain in project unity. This tool may decrease litigiousness on a project and to that extent, will decrease finger pointing and blame casting. Nevertheless, it is not a device that fosters a team spirit or a sense of project unity.
b. Liquidation Clause
On the other hand, a liquidation clause is an excellent tool for reducing conflict within the team while maintaining a degree of fairness in the process.
One of the major problems for a general contractor following a project disaster is playing the party in the middle. With the owner, the general contractor tries to minimize any appearance of delay or blame it on the owner. With subcontractors, the general contractor will attempt to hold a tight leash and lay the groundwork for holding each subcontractor liable. This leads to inconsistent facts and in litigation, the possibility of inconsistent findings of liability.
One way to significantly reduce this concern is to have a liquidating agreement in the subcontracts. A subcontract can act as a liquidation agreement. 16 The liquidation agreement is a "form of a settlement agreement in which a dispute between two parties with contractual privity is liquidated (settled) on terms delineating the rights, responsibilities and procedures for presenting a pass through claim to a third party and allocating the costs expended and benefits received when doing so." 17 Drafting a liquidation agreement after the claims event yields a more satisfactory agreement as the parties are fully knowledgeable of the pertinent issues to be dealt with in the agreement. However, it is unlikely that a project full of wronged subcontractors will universally agree to a liquidation clause that puts the general contractor in control of the presentation of the case and its potential liability. By placing it in the subcontract, the general contractor is in a better position to control its fate. Further, the general contractor can always negotiate additional terms for the liquidation agreement after the dispute arises.
The liquidation agreement also deals with another major tactical problem facing participants in a project catastrophe - the high costs of litigation among numerous parties. Placing one party squarely in control of the presentation of the case streamlines the process.
Subcontractors may resist a liquidation agreement on the basis of distrust that the general contractor would vigorously pursue their claims rights. 18 In addition, the subcontractor may not want to sacrifice its right to bring an independent claim against the general contractor.
However, a subcontractor may have some reasons for agreeing to a liquidation clause, at least on a complex project. First, in the event of a project wide failure, it may be difficult to join all the relevant parties into one suit. The party best able to do that is the general contractor. It has both upstream and downstream privity with most of the relevant participants. Secondly, the bane of a subcontractor’s claim in a multi-party suit, is the extremely high cost of litigation. Only a very large subcontractor’s claim can justify the kind of fees and expenses incurred in a vigorously fought multi-party suit.
Further, a liquidation agreement places a burden on the general contractor to pursue the contractor’s claim. Absent a liquidation clause or similar commitment, it is not guaranteed that the general contractor will align itself with the subcontractors. Particularly if the general contractor has vigorous risk-shifting clauses in its subcontract, it may choose to stand behind such legal protections and against the claimant subcontractors, while bargaining for preferred treatment by the insurer responsible for the construction failure.
Although the liquidation concept is normally a claims route between subcontractors and the owner, the concept can also be applied to claims against other third parties, such as another subcontractor.
c. Indemnity and Additional Insured
The pivotal clauses in a catastrophic failure will be the indemnity, additional insured and insurance clauses. A contractual indemnity clause backed by a requirement to be included as additional insured on the various downstream parties’ commercial general liability policies will be the fundamental protection for any upstream party in the event of a catastrophic failure.
Likewise, for the downstream party, any attempt to press a broad form indemnity clause downward covering the sole negligence of the upstream parties should be resisted. Needless to say, in the event of a catastrophe, there will be fingers pointed in several directions. No party will be anxious to carry the full liability despite having been only partially negligent. Summary judgments regarding these particular clauses will possibly drive and even determine in great part the outcome of complex litigation coming from a catastrophic failure.
These risk shifting clauses can consolidate the defense of claims in the hands of fewer parties. However, when the transfer of risk does not appear to be a fair allocation of responsibility, it will undermine unity and even lead to litigation.
There are all manner of notice provisions in the typical construction contract. Those pertinent to this issue are deadlines for claiming an extension of time and for alleging and documenting a claim for additional costs. A claimant who fails to abide by such notice provisions do so at their own risk. 19
The notice provision helps weed out significant claims through the course of a project, particularly where a series of small problems aggregate into a large claim by a disgruntled subcontractor.
Unfortunately when there is a catastrophic accident, the notice provisions can backfire. Because there is an obvious impact event, various claimants scramble to review their contracts, and these provisions can provoke a letter writing contest. This unfortunately plays into the hands of the insurance company which is defending against liability for the construction failure. There is no better ammunition for an insurance company than a series of post-disaster letters where project participants all blame each other for the state of the project.
The general contractor may wish to forestall such a letter writing contest by notifying the various subcontractors that it waives the requirement of issue specific notices and will, instead, conduct a group collection of claims to pass through to the insurer. This will help diffuse the adversarial environment on the construction project. It will also reduce the amount of evidence that the insurer will have available to attempt to justify offsets in its liability and non-payment of otherwise valid claims.
When there is a catastrophic failure at a construction site, some suspension is inevitable. At the very least, a suspension will occur to allow engineers and analysts to assess the damage and determine what areas are safe for workers. In addition, a suspension will be necessary at least for the portion of the project where the failure occurred. Often this will be a large portion of the project where work was being performed previously.
Unlike termination, suspension has a limited history in the common law. 20 A suspension supported only by common law right would give rise to a serious question of whether there was a material breach on the project. It could constitute an unreasonable delay justifying an abandonment. Or, it could be interpreted as a denial of site access to the subcontractors. 21
A suspension is imposed from upstream. The owner, facing a serious delay on its high profile project most likely due to an unexcused delay, will probably be unsympathetic to issues of controlling costs through any significant suspension. Any suspension will probably be imposed by the general contractor on its subcontractors. As discussed later, many costs are suffered by pressuring subcontractors to work in confined areas with significant overlapping of trades caused by the work restrictions following the disaster. A well-timed suspension could significantly reduce these costs and all the attendant project team tensions that are created in those conditions.
Arbitration is not well suited for mass multi-party disputes. The problem is that if there is no provision for consolidation or joinder of various proceedings, then any party can block such a unified proceeding. 22 This is a problem in any construction dispute. However, it is particularly nettlesome in a catastrophic failure with so many parties affected.
If arbitration is to be the dispute resolution method of choice, the general contractor must include in all subcontracts joinder and consolidation provisions that will allow all pertinent parties to be included in the proceeding. There should also be a requirement that all subcontractors include similar provisions with their downstream contractors. Unfortunately, this is difficult to police, and there is a significant possibility that a sub-subcontractor or supplier will be responsible for the catastrophic failure. In that event, the key party involved may not even be part of the proceeding in which delays, impacts and other damages are considered. To protect against this possibility, the general contractor may want to provide for arbitration or litigation at its sole discretion.
a. Concurrent delays
The overriding factual concern for project participants in the event of a project catastrophe is whether the delays and impacts caused by the catastrophe are concurrent with delays and impacts due to other causes. Concurrent delays are two or more sources of impact to a construction project bringing about delays to the overall project schedule and completion time.
While a catastrophic failure, such as a death or severe property damage, will almost certainly cause some loss in project time and contribute to impacts felt by various trades, the presence of concurrent delays might be shown to have an equal effect thereby providing a complete defense or, at least, shared liability for financial impacts. Examples of such concurrent delays would be a general contractor improperly scheduling out of sequence work or a subcontractor performing less efficiently than it was contractually obligated to.
Depending upon one's relationship to the catastrophic event, the concept of "concurrent delay" may prove to be either an ally or an obstacle in fashioning a response to the event.
The greatest problem for the party that will probably be held liable for the catastrophic failure is the obvious delay the catastrophe caused to the project. Those facing liability for the catastrophe will be keenly aware of the possibility of diluting damages by showing concurrent delays wherever possible. If an independent cause of delay can be shown to have occurred prior to or at the time of the event, such as a delay claimant's noncompliance with the project schedule or failure to perform some other contractual requirement, the delays associated with the catastrophe might be diminished.
Demonstrating the presence of concurrent delay will reduce the claimant’s damages to the delays caused solely by the catastrophe. 23 Proof of concurrent delays not only can reduce potential damages for the guilty party, it can create a serious proof problem for the claimant. When two or more parties share responsibility for delays caused to a project, these parties may not recover delay damages unless the delays can be apportioned between the parties. 24 Thus, where one is seeking delay damages against another, the former must generally be able to present to the finder of fact the link between the latter's conduct and the critical path delay while relating the critical path delay to the extended project completion. 25 This means untangling the delay for which the claimant seeks recovery from the delays it allegedly caused itself. If the claimant is not able to apportion the damages caused by the distinct delays then it will be denied any recovery. 26
A community impact project is a ripe target for delays because of its size, complexity and the time sensitive nature of such projects. Because of these factors, there is a significant likelihood of multiple delays. Consequently, when a catastrophic event occurs it is more important than ever to resolve what the status of the project schedule and completion is at the time of the critical event. There is no other way to untangle the delays caused by the catastrophe from other concurrent delays on the project.
b. Regular Schedule Updates
The best way to establish accurately the status of the project at the time of a catastrophe is to have an accurate set of historical schedules to compare with a progress audit shortly after the critical event occurs. The first requirement is to have a set of schedules that are periodically updated reflecting the changing circumstances on the project. A monthly schedule update should be sufficient. The schedule update should be checked to reflect that the percentage completions indicated are accurate. In addition, the actual start and finish dates of individual schedule items should be checked against actual project progress. This will leave an accurate trail of the status of project float and the progress of the various trades as measured against the current schedule.
c. Avoid overly strict scheduling methodology
It is important to note that this type of project tracking does not need to be unduly burdensome for the contractor. When schedule methodology passes a certain degree of complexity it stops being meaningful for the average superintendent or contractor, and the schedule ceases to be an effective project management tool. In addition, if the scheduling process becomes unduly complicated the actual verification of the schedule information becomes less likely because of the overwhelming detail involved. Checking the accuracy of the schedule should not usually involve more than determining on a monthly basis that the indicated percentage completion and start and finish dates of the major components of the construction do reflect actual fact.
d.Provide for a pre-arranged scheduling neutral in the event of a catastrophic failure.
The purpose of developing accurate historical scheduling information is to have a data base against which to check the actual impact of a project catastrophe. If scheduling information up through the catastrophic event is accurate, it should be a fairly straightforward matter to develop a recovery schedule that reflects the actual impact of the catastrophic event on the project.
However, the scheduling process is driven by the human element. When a catastrophe occurs, although the majority of participants see it as the disaster it is, other more opportunistic parties may see it as a chance to hide prior delays or develop claims. Those in control of the scheduling of the project are potentially driven by their own priorities rather than the simple objective hunt for the truth. Consequently, the rescheduling of the project after a disaster can sow instant confusion as to what the status of the project was prior to the disaster and what impact the disastrous event actually had on subsequent project events.
Experience dictates that a highly accurate rendering of the status of the project at the time of the project failure is the single most critical event that can stave off unending, expensive litigation and clarify the potential damages that must be borne by the parties held liable.
One avenue for injecting greater certainty into the process is to provide for the appointment of a neutral in the event of a catastrophic event. The two goals of the neutral would be a timely assessment of the status of the project at the time of the failure and a timely preparation of a workable recovery program.
The neutral would serve primarily in the role of a referee. The general contractor would stay in control of the manner and means of completing the project. However, any recovery schedule developed by the general contractor would be subject to the neutral’s overall approval. The neutral’s determinations would be binding and would constitute prima facia evidence of the status of the project at the time of the project failure.
Such an approach would significantly minimize the litigation expenses that arise out of critical project setbacks. By establishing with some certainty what the nature of project progress was at the time of the disaster and by establishing the schedule that will be used following that event, a great deal of confusion will be removed from the litigation process. The litigation could then focus on the issue of liability rather than being derailed in a hunt for information that was subject to being readily established at the time of the event.
In evaluating the recovery schedule, the neutral should follow certain guidelines. First, there should be a strong connection between the recovery schedule and the original schedule. Despite the serious nature of the catastrophic event, rarely does it undermine all or even a majority of the preceding work. It simply has a very significant impact on the critical path. Secondly, the recovery schedule should be based on reasonable adjustments to preceding schedules. In the event that there are adjustments to the logic from the former schedules, there should be a meaningful explanation as to why those adjustments were necessary to carry out a recovery plan.
To be really effective, the findings of the neutral should be binding on subcontractors as well as the general contractor and owner. This would require a flow-down clause or a similar project neutral provision that subcontractors are equally bound by the determinations of the neutral. Although the typical subcontract includes provisions that bind the subcontractor to performance of the schedule, they do not necessarily bind the subcontractor to the evidentiary effect of the schedule. Hence, the subcontractor can challenge the accuracy of the schedule information if it is not so bound.
This approach would advance the strategy of reducing adversarial competition on the project after a catastrophe. Claimants who are reasonably secure that damages facts are established are less likely to try and create those facts with a letter writing campaign or other divisive tactics.
The dust has settled, the severely or mortally injured have been cared for, the appropriate press releases have been delivered, everyone has taken a deep breath and is beginning to assess the task that lays ahead. This is the time to respond to the devastating occurrence which has shattered the community’s excited anticipation for its new arena, stadium or other facility.
This is the time at which facts will be preserved or made that will control future litigation. It is also the time at which the magnitude of future disputes is still subject to some control.
The owner, general contractor, subcontractor and insurer face similar issues although they have different concerns and priorities. In general, all parties have a stake in getting the project back on schedule while controlling the delays and the delay related damages. There is also a common concern of gathering and preserving evidence. However, look behind the platitudes, and each project participant often has a different response they want to pursue immediately after a project failure. In addition, when reviewed dispassionately, sometimes the typical response by one or more of the project participants actually increases the damages that result from the critical event. Indeed, the participants’ instincts are the least trustworthy during this time frame as they are dominated by short term concerns rather than the project’s or their own long term welfare. The potential response of the owner, general contractor, subcontractor and insurance company will be reviewed at this point.
a. Unexcused delay
In all likelihood when there is a project failure, it will constitute an unexcused delay by the general contractor, often caused by one of its subcontractors or their suppliers. Whereas the nature of other parties’ responses are fluid based upon the unique facts of each circumstance, the owner will usually be in a position of facing a severe delay for which it has no fault whatsoever. Therefore, the owner’s goal is clear. Define the delay for purposes of calculating future liquidated damages or offsetting other impact claims made by the contractor. This is particularly so in the case of concurrent delays that would minimize the potential impact from the critical event. Because the owner has clarity at this point in the process, of all the participants, it has the best chance of acting decisively and achieving its goal. Unfortunately the shattering realization that its high profile project is now a public relations disaster and most likely will not be available for its scheduled sporting or other events, overwhelms the owner and undermines a systematic response.
b. Define Delay Quickly
As noted above, there may be parties in the process that do not want to accurately define the status of the project’s progress. Notable among these are contractors who are behind at the time of the failure and those most likely responsible for the catastrophe. This is the single greatest factor in preventing the owner from getting accurate information.
First, historic project schedules may not accurately reflect the start and finish dates of actual work completed prior to the critical event. Secondly, the stated progress of various contractors may be bloated by front end loading on pay applications. The status of project float may not be accurately reflected. In addition, significant logic changes in the schedules prior to the critical event or in the recovery schedule following the critical event can undermine the usefulness of those schedules as comparative tools. If they are based on different logic, they may well not be comparable to each other. Finally, the owner may not have the necessary skills to accurately define the project’s current status. The owner must overcome these various obstacles.
Whether it needs to hire a scheduling expert, construction manager, delay claim specialist or other person to assist, the owner must dedicate itself to defining the precise nature of the project completion at the time of the critical event. This can be done quite simply by marking a set of existing plans indicating actual completion on the project. In addition, thorough photographic evidence with a video camera or still photographs lends significant support to future testimony as to what the actual project completion was at the time of the critical event.
It is also essential for the owner to ensure that the recovery schedule developed by the general contractor reasonably builds off of preceding project schedules. One way to ensure these owner goals is the use of a project neutral as discussed above. However, this will often not be in place. That should not prevent an owner from protecting its interests. The key to the owner’s reaction is that it should be timely and should incorporate the necessary scheduling and construction expertise.
a. In the Middle
The typical position of the general contractor in a project catastrophe will be as the party in the middle. The challenge for the general contractor is to steer a course that will protect it from unwarranted liability while maintaining the necessary project unity to recover the project schedule. The general contractor’s primary tools will be the contract clauses it has with the parties most directly involved with the project failure.
b. Skeletons in the Closet
The one exception is when the general contractor’s project administration prior to the critical event has arguably created significant delays on the project. In that event, the project failure can be an unexpected opportunity for the general contractor to shift the risk for substantial delays to other parties. This of course would not work but for the highly undefined nature of construction delays. As the general contractor is in control of the rescheduling and project recovery process, it has the ability to protect its interests with particular vigilance in the post failure period.
Unfortunately, this encourages the types of conduct that create a claims atmosphere on the project. A typical approach for a general contractor trying to cover its own suspected delays would be to accelerate performance by bludgeoning the subcontractors with demands that they properly man the job. Needless to say, the subcontractors will respond with letters of their own, and the project environment will quickly deteriorate.
c. Subs will Settle Cheap
If for some reason the general contractor is facing significant liability that cannot be shifted or insured against, it should keep in mind certain opportunities available only in the immediate aftermath of the failure. Specifically, hard cash up front can buy releases and cooperation not usually available later in the project. In the shock following a project failure, subcontractors will often be willing for a relatively modest cash settlement to release all delay and impact claims. Experience shows that subcontractors substantially underestimate the actual impact or acceleration costs they will experience later in the project.
If liability if likely, the general contractor should not overlook a possibility to mitigate damages that seems risky but could pay substantial dividends. Pay to demobilize the project in the post disaster period to minimize soft damages. Allow the project schedule to recover, and then bring the subcontractors back at the same point in the schedule where they were prior to the failure.
There is no question that if this strategy would work, it would substantially decrease potential damages. This is particularly so regarding the types of soft damages that occur when trades are stacked and work done under extraordinarily unproductive circumstances as occurs when working around a collapsed project site.
However, there are numerous risks in this approach. Primary among them are losing the subcontractor’s interest to other competing projects. In addition, when skilled labor is becoming increasingly scarce, there is a serious possibility that critical laborers will be lost to the subcontractor and to competing projects during a two or three month demobilization. If that happens, the soft cost damages would no longer look as serious. The project might never recover at all if sufficient skilled labor cannot be returned to the project when it was ready to be remobilized.
e. Avoid Foolish Errors
The shock of a project failure leads to conduct that would not be thinkable in another context. Above all else, the project participants must demonstrate, outwardly, a respect for the welfare of any who were injured or killed during the project disaster. Actions, such as continuing to work, or pursuing other practical project-related activities in close proximity to a serious or fatal injury are simply an invitation for substantial punitive damages in subsequent litigation. Even if it means wasting significant, scheduled work, it is essential that the project reflect a respect for any who were victims of the disaster. Any other course of conduct is simply inviting a second disaster - one in the courtroom as opposed to one on the project.
The typical subcontractor claimant faces a series of notice issues following a project failure. The first, and often, the most difficult to resolve is how to give notice of a claim that is certain to occur but incapable of being calculated. The general strategy is to give the notice without attempting to calculate the possible future damages that will occur. The very best that can be accomplished is a description of the types of damages that may be incurred without committing to any amount claimed.
However, notice provisions will often place a time deadline for making such claims which is only a short time after the information required is learned. Is the claimant obligated to make a calculation of damages on a monthly basis? How soon after the completion of the project is the claimant required to send its calculation of damages to the general contractor? Experience shows that the claimant will consistently underestimate its claim when projecting into the future or attempting a calculation in the middle of the project. The claimant should make every attempt to avoid making a final calculation until the end of the project when all data is available.
In addition to the notice of claim, the claimant should never fail to make a timely and proper request for extension of time for the performance of its work. This is a prima facia element for an acceleration claim. 27
Another notice to be given would be to the claimant’s commercial general liability carrier. Even for those with a remote connection to the event, the staggering losses involved justify giving immediate notice to the carrier who would potentially be liable should the claimant be at fault. Placing the carrier on notice avoids any possible issue of waiver should an unexpected theory arise to allege liability of the subcontractor. 28
b. Expect a letter writing campaign
One event to be anticipated is the letter writing campaign that inevitably follows a construction catastrophe. This happens for several reasons. One reason is that everyone is immediately on notice of the possibility of substantial injury and wants to protect themselves. A second reason is that potential claimants want to give any contractually required notices. A third reason is that it is not unusual for trades to become stacked in small work areas after a large portion of a project is made off-limits by a disaster. This breeds the type of interference that causes the various subcontractors to point fingers and allege fault against their fellow tradesmen. The result is a letter writing war that is unleashed among project participants.
Inevitably the letters of complaint are so localized or so generalized that they do not serve much purpose in preserving future claims. In addition, on a troubled project, the last thing a claimant needs is the administrative nightmare of having to preserve in writing every error encountered as well as having to respond to every accusatory letter received. One suggestion is to handle all letter writing once a week. It consolidates the entire administrative problem and reduces the drag on productive time for the claimant. It also allows a one week overview of circumstances and gives a broader perspective to any notice letter being sent.
c. "Me against the world"
The best description of the psychology of project participants after a catastrophe is that it is "me against the world." The result of this mindset is that subcontractors end up competing for limited space while the general contractor demands that the subcontractors increase their labor to keep up with the schedule. One strategy that yields results for subcontractors is to increase labor on the project quickly after it recommences, and get to work areas first. Doing so places the onus on other trades to work around the materials that such subcontractor has already installed. It also has a tendency to keep the general contractor’s target off of that particular subcontractor. Inevitably a general contractor will blame one or two trades for the problems they face and focus their energy on those particular companies. By getting to project locations first with extra labor, the subcontractor keeps the general contractor’s target aimed at other subcontractors rather than themselves. The extra cost of the additional labor will be small compared to the expense of following out-of-sequence trades and fighting a belligerent general contractor.
d. Hire a claims consultant
The tendency for subcontractors when a project failure has occurred is to handle the claims process by themselves. When a project catastrophe occurs, the chance of substantial claims are so high that subcontractors should resist this impulse and hire a claims consultant. There are several good reasons for this approach.
First, subcontractors usually underestimate the labor inefficiency they suffer after a major delaying event. Second, the magnitude of a catastrophe on a community impact project is so large, and the number of parties involved are so significant, those who delay will find the good claims consultants are no longer available for hiring. Third, a claims consultant will give the claimant an accurate view of what really is involved in the case when strategy decisions are made about participation in the litigation. Waiting to hire a claims consultant until the middle of litigation seriously disrupts the subcontractor’s ability to develop a litigation strategy consistent with the actual claim being pursued.
In addition, the general contractor’s regular releases for monthly progress payments become a tool to negotiate subcontractors’ unresolved and unreserved impact claims accruing during the period following the failure. A typical release for a monthly progress payment includes a release of all claims for labor or materials furnished up through the date through which payment is being made. This is usually the end of the preceding month. Knowledgeable subcontractors, in the face of a substantial unresolved claim, will expressly reserve their impact claims in the partial release. However, many subcontractors do not state such a reservation. Ultimately, when the impact claim becomes a priority issue, the subcontractor may have signed six or more monthly progress releases without any reservation of rights. The argument shifts to whether the release included the impact claims as well as the labor and materials being furnished for the preceding months.
A release is generally treated as a type of contract, and like any other contract, must be supported by valuable consideration. 29 However, any consideration, however slight in amount, is sufficient if accepted by the person giving the release. 30
Often hundreds of thousands of dollars have changed hands to support a release of all claims occurring during the various monthly pay application periods. The argument is that this consideration supports the release for all claims during the month. This argument fails if the impact claim is undisputed or if the impact claim is distinct and independent from the progress payment claim being paid.
The general rule is that payment and acceptance of a portion of a liquidated and undisputed amount of indebtedness, even if viewed by both parties as full payment of the debt owed, is inadequate as consideration for the release of the whole amount. 31 Thus, if the whole claim is undisputed, payment of a portion cannot supply consideration for a release of the whole. Therefore, if the impact is undisputed, payment for monthly labor and materials will not support a release for those claims.
However, if a single claim is partially undisputed, and partially disputed, a payment of the undisputed portion provides valid consideration for the release of the disputed remainder. 32 The dispute must be a bona fide dispute. 33 Consequently, if the impact claim and monthly progress billing represent a single claim, then the consideration for the progress payment will supply consideration for the release of the impact claim.
A good argument can be made that impact claims are distinct and independent from the monthly labor and material claims. It is true that a significant portion of the impact claims are for loss of labor productivity which is reflected on a month-by-month basis as labor is furnished. However, the monthly progress payments are based upon a contract price that does not reflect those impacts. Therefore, in billing for a particular percentage of work achieved, the impacts are not reflected in the billing. Indeed, the very calculation of an impact claim makes it appear to be distinct. It is calculated in a different manner than the monthly progress payments. Experts are often hired to make those calculations. The impact claim involves different evidence for proof than the evidence that proves a progress billing. It is presented in a different fashion to the upstream party. If the impact claim is a distinct and independent disputed claim, then payment for the undisputed monthly progress payments will not be consideration for a release of the impact claim. 34
One challenging issue is whether there is coverage under the appropriate insurance policies for the "soft" damages that arise out of a catastrophic failure on a project. The various impact costs arising from delays and hindrances, acceleration, loss of labor productivity, increased material costs and other related damages can amount to millions of dollars. A central question is whether or not those damages were triggered by "property damage."
a. "Property Damage"
Courts in a majority of jurisdictions recognize coverage for claims arising out of the types of impact damages encountered with a catastrophic failure. 35 Many courts have construed commercial general liability policies to exclude coverage for damages arising out of faulty workmanship, especially when a claim for damages is made for costs to repair or replace the insured's "own work." 36 Yet, where a claim against a contractor is made for damages caused by an accident rather than by defective workmanship, coverage is usually available. 37
In addition, "property damage" may be found under a loss of use of property that was not physically injured. 38 The fact that the damages in question are solely economic does not take them outside of the coverage of the policy. 39 The loss of use damages will include the cost of correcting the defect. 40
One caveat, however, to the ability to recover damages for "loss of use" is the "impaired property" exclusion contained in most CGL policies. "The effect of the 'impaired property' exclusion is to bar coverage for loss of use claims (1) when the loss was solely caused by the insured's failure to provide work of the quality or performance capabilities called for by the contract and (2) when there has been no physical injury to property other than the insured's work itself." 41
b. Investigate potential alliances
The insurance company like many owners are not present on the construction project and have few reliable witnesses to guide them regarding the facts that have occurred. It may be to the insurance company’s benefit to use settlement money to create an alliance with a party that is capable of carrying the insurance company’s defense. If liability is fairly clear, the insurance company’s priority is to reduce its potential damages. The general contractor will have its own claim that it is anxious to cover. A settlement with the general contractor may yield excellent witnesses and good defenses by way of the general contractor’s exculpatory clauses. The insurance company should not overlook the benefits that can be achieved by striking a timely alliance with one of the project participants.
How much do you want to spend?
A fundamental question that every party faces arising out of a project catastrophe is how much they want to spend on the resulting litigation. The answer to this question drives many other decisions in the case. First, expert fees can be extremely high in a complex impact claim case. If the party decides to minimize costs, it could lead to handling the litigation with no expert assistance or to restricting the expert’s participation in the claims process.
The decision will also affect whether counsel participates vigorously in the litigation. There will be a large number of depositions taken. Many parties will choose to have their counsel skip all but the most important depositions. Although this conserves costs, it also has the effect of telegraphing to every other party that the claimant is not taking the case seriously or expecting a serious result from it.
For claimants, the most important issue is whether the claim is small or large. A small claim will encourage the party to take a low profile in any litigation. If the claim is large, the decision is more difficult. Should the claimant participate fully in the depositions being taken? The case will probably be over millions of dollars as the various insurance companies attempt to sort through liability for the repair costs and direct and consequential damages. Even a large claimant would represent only a fraction of the value being fought over by the parties ultimately liable for the various costs.
In addition, the battle over those costs will involve a large number of issues that have little or nothing to do with the claimant’s case. Unlike many impact cases, the fact that the catastrophe occurred provides evidence of breach and causation. Developing the evidence necessary to prove claimant’s case is not as challenging as in many impact cases. Although scheduling and progress issues are relevant, there are many discovery matters that simply have nothing to do with proving the claimant’s case.
One possibility for the smaller claimants is to band together and hire a single counsel to handle depositions and other matters that could be very time consuming and expensive if handled by individual claimants. Of course, there is the chance of conflict. However, in the case of small claimants, the costs of litigation overwhelm any concern that their relatively small claim will be impacted by another party with a small claim.
How do You Want to Handle Discovery?
Without doubt, the litigation will be teeming with parties. Any possibilities for streamlining discovery should be considered at the beginning of the case. All parties can participate in having the case documents bar-coded and scanned onto compact discs. In addition, a structured pre-trial order with voluntary disclosure of basic information by the various parties involved can avoid the mountains of discovery documents that invade counsel’s discovery files. Agreements regarding the timing, location and duration of depositions can eliminate many scheduling issues.
Ask for Summary Jury Trial
Catastrophic failure cases seem ideal for the use of the summary jury trial as an alternative dispute resolution procedure. It not only can serve as a discovery device but also as a means for every party to test run the basics of its case in front of a mock jury.
Joint Defense Agreements
Although there may be twenty or more parties in such litigation, they probably will break down into a series of three or four large alliances. The need for joint defense agreements is greater than ever in these particular cases. Significant communications, including privileged strategy decisions and other work product, is exchanged throughout the course of the case. It is necessary to maintain the various alliances and avoid unnecessary side battles. Therefore, the need to clarify the circumstances under which communications are being made and the basis under which they should retain their confidentiality is greater than ever.
No counsel should overlook the possible benefit of taking affidavits from key participants shortly after a project failure. Such statements are often discoverable and help counsel’s opponent. Nevertheless, it locks key witnesses into favorable positions before they can have an opportunity to rethink their position at a later date.
Cooperate or Attack
Interestingly, every party will probably face the question of whether to align themselves with others or go it alone. The general contractor can align itself with the various subcontractor claimants and pursue the responsible party and their insurance. However, this means avoiding battle with subcontractors over other potential delaying events.
The insurance company, on the other hand, could chose to settle with the general contractor and form an alliance. It could use the general contractor’s testimony and exculpatory contract clauses as a shield to protect it from substantial soft costs liability from claimants.
Likewise, subcontractors could chose to present their claims as a team along with the general contractor and rely on the devastating nature of the project failure to justify their case. Or, they could look to the numerous other delaying events that occur on any large construction project and attack the general contractor on a package of delaying events as the basis of its impact claim.
Legal advantage and intellectual honesty do not always go hand in hand in these decisions. The simple advice is to stick with the facts honestly believed and let liability fall where it may. Such advice is easy to give, but much harder to follow in a highly complex legal setting where corporate survival may be at stake.
A catastrophic failure will always be traumatic, unnerve the participants and destabilize the project. None of these results can be avoided. However, experience shows that certain strategies may reduce the pain of a project catastrophe.
First, take steps both before, during and after the project failure to minimize the adversarial atmosphere which naturally occurs after the event. This can be accomplished through contract provisions, the use of neutrals, and with administrative steps following the event.
Second, determine the state of the project progress as of the date prior to the accident. Although this can be accomplished without any prior planning, it will be achieved with greater certainty and efficiency if steps to plan for a project catastrophe are taken. For example, a contract provision providing for a scheduling neutral will avoid many of the pitfalls which undermine evidence gathering and lead to litigation.
Third, as difficult as it is with a glaring failure in front of the eyes, think long term about reducing soft damages on the project. One idea is to aggressively use demobilization to reduce the millions of dollars of soft costs impacts that can occur and the corresponding litigation expenses that arise out of those battles. Another is to use up-front settlement money to buy the peace and cooperation of the project participants.
Every catastrophic failure will have unique circumstances that require a customized reaction. However, certain problems can be expected after most failures. Planning for those problems and reacting quickly to them can reduce some of the major headaches encountered after a catastrophic failure.
1. Sample "No Damage For Delay" Clause:
"No payment or compensation of any kind shall be made by the Contractor to the Subcontractor for damages because of delay in the progress of the Work from any cause."
2. Sample "Indemnity" Clause:
"The Subcontractor shall indemnify and hold harmless the Owner and Contractor and all their agents and employees from and against all claims, damages, losses, and expenses, including attorney’s fees, arising out of or resulting from the performance of the Subcontractor’s work whether it is caused in part or in whole by the negligence of Owner or Contractor.
3. Sample "Additional Insured" Clause:
"Where the schedule indicates, by the insertion of limits opposite the kind of insurance, that such kinds of insurance will be carried by Subcontractor, Subcontractor shall file certificates of such insurance with the Contractor before starting work on the job. Contractor shall be named as an additional insured in any and all policies mentioned hereinabove. Upon the request from the Contractor, the Owner shall also be named as an additional insured on the policies mentioned hereinabove. Such certificates shall show the amounts and limits of liability as above stated of polices in force and dates of expirations of policies and shall also contain an agreement by the insurance carrier indicating that no policy will be canceled prior to the expiration date shown without first giving the Contractor ten days written notice."
4. Sample "Notice" Clause:
"Subcontractor shall immediately notify Contractor of any circumstance which may affect the times and sequences in the schedule, and shall make all requests of extensions of time, in writing, to Contractor sufficiently in advance to allow Contractor to forward the requests in compliance with the Contract Documents."
5. Sample "Liquidation" Clause:
"Subcontractor agrees to submit all claims against Contractor. Contractor shall submit such claims to Owner and prosecute same. Subcontractor shall cooperate and assist in the preparation and prosecution of all such claims, and shall pay or reimburse Contractor for all expenses and costs, including, but not restricted to, costs of litigation incurred by Contractor in connection with the preparation and prosecution of such claims. Subcontractor expressly consents to be bound to Contractor to the extent that Contractor is bound to Owner by all decisions and determinations made in accordance with any procedure for the resolution of claims expressly provided for in the Contract Documents, whether or not Subcontractor is a party to any such proceeding."
6. Sample "Suspension" Clause:
"If Owner for any cause stops or suspends the work under the General Contract, or if Contractor for any cause stops or suspends the work hereunder, Contractor may order Subcontractor to stop or suspend work hereunder and for such stoppage or suspension Contractor shall not be liable to Subcontractor in any way, but shall pay Subcontractor for such work as Subcontractor shall have done before the work was stopped or suspended."
7. Sample "Arbitration" Clause:
"All claims, disputes, and other matters in question arising out of, or relating to, this Subcontract or the breach thereof, shall be decided by arbitration in the same manner and under the same procedure as provided in the Contract Documents with respect to disputes between Owner and Contractor, except that a decision by Architect shall not be a condition precedent to arbitration. . . ."
8. Shintech, Inc. v. Group Constructors, Inc., 688 S.W.2d 144, 148 (Tex.App.—Houston [14th Dist.] 1985, no writ).
9. See e.g., Christiansen Bros., Inc. v. State, 90 Wash. 2d 872, 586 P.2d 840 (1978); Western Eng’rs, Inc. v. State Rd. Comm’n, 20 Utah 2d 294, 437 P.2d 216 (1968); Wes-Julian Constr. Corp. v. Commonwealth, 351 Mass. 588, 223 N.E.2d 72 (1967).
10. BRAMBLE & CALLAHAN, CONSTRUCTION DELAY CLAIMS § 2.43 (1987); Annotation, Validity and Construction of "No Damage" Clause with Respect to Delay in Building or Construction Contract, 74 A.L.R.3d 187, 213 (1987)
11. See, Johnson v. State, 5 A.D.2d 919, 172 N.Y.S.2d 41 (1958).
12. United States Steel Corp. v. Missouri Pac. R.R. Co. , 668 F.2d 435,438 (8th Cir. 1982); A. Kaplen & Son, Ltd. v. Housing Authority, 126 A.2d 13, 16 (N.J. Super, 1956); Sheehan v. City of Pittsburgh, 213 Pa. Super. 133, 62 A. 642 (1905); Phoenix Contractors, Inc. v. General Motors Corp. 135 Mich. App. 787, 355 N.W.2d 673 (1984).
13. Air-A-Plane Corp. v. United States, 408 F.2d 1030 (Ct. Cl. 1969) ("fundamental alteration of the scope of the contact breaches the contract and entitles the contractor to damages").
14. David R. Hendrick, John I. Spangler, III and Robert D. Wedge, Battling for the Bucks: The Great Contingency Payment Clause Debate, 16 THE CONSTRUCTION LAWYER, 12 (July 1996).
15. A.H.A. Gen’l Constr., Inc. v. New York City Hous. Auth., 92 N.Y.2d 20, 669 N.E.2d 368, reargument denied, 92 N.Y.2d 920, 703 N.E.2d 273 (1998) (notice provisions were conditions precedent not exculpatory clauses); also see, Green Int’l, Inc. v. Solis, 951 S.W.2d 384, 386-87 (Tex. 1997)(no damage for delay clause enforceable under condition where release and broad form indemnity clause would not be enforceable - does not operate to shift risk in an extraordinary way).
16. Schiavone Constr. Co., v. Triborough Bridge and Tunnel Auth., 619 N.Y.S.2d 117 (N.Y. App. Div. 1994).
17. Carl A. Calvert and Carl F. Ingwalson, Jr., Pass Through Claims and Liquidating Agreements, 18 THE CONSTRUCTION LAWYER 29 (October 1998).
18. Id. at 33.
19. A.H.A. Gen’l Constr., Inc. v. New York City Hous. Auth., 92 N.Y.2d 20, 699 N.E.2d 368, reargument denied, 92 N.Y.2d 920, 703 N.E.2d 273 (1998)(notice deadline found to be condition precedent); Standard Elec. Serv. Corp. v. Gahanna-Jefferson Pub. Sch., 1998 Ohio App. LEXIS 3905 (Ohio Ct. App. Aug. 25, 1998)(obligation to make claim within 21 days after occurrence found binding and claim not timely filed).
20. Justin Sweet, SWEET ON CONSTRUCTION INDUSTRY CONTRACTS 403 (1997).
21. Id. at 401-02.
22. Bateman Constr. Co., Inc. v. Haitsuka Bros., 77 Haw. 481, 889 P.2d 58 (Hawaii 1995).
23. Frank B. Kelso, II v. Kirk Bros. Mechanical Contractors, Inc. , 16 F.3d 1173, 1177 (Fed. Cir. 1994); Blinderman Constr. Co., Inc. v. United States, 695 F.2d 552, 559 (Fed. Cir. 1982).
24. Frank B. Kelso, II v. Kirk Bros. Mechanical Contractors, Inc., 16 F.3d at 1177; Coath & Goss, Inc. v. United States, 101 Ct. Cl. 702 (1944).
25. Peter M. Kutil and Andrew D. Ness, Concurrent Delay: The Challenge to Unravel Competing Causes of Delay, 17 THE CONSTRUCTION LAWYER 18 (October 1997).
26. William F. Klingensmith, Inc. v. United States 731 F.2d 805, 809 (Fed. Cir. 1984).
27. Steven G.M. Stein, 2 CONSTRUCTION LAW §6.12 (2000).
28. Olin Corp. v. Ins. Co. of North America, 966 F.2d 718 (2nd Cir. 1992).
29. Bank One, Tex. N.A. v. Taylor, 970 F.2d 16, 22 (5th Cir. 1992), cert. denied, 508 U.S. 906 (1993).
30. Torchia v. Aetna Cas. and Sur. Co., 804 S.W.2d 219, 223 (Tex. App.—El Paso 1991, writ denied).
31. Kellogg v. Iowa State Traveling Men’s Ass’n, 239 Iowa 196, 213-14, 29 N.W.2d 559, 568-69 (1947).
32. Modern Dust Bag Co., Inc. v. Commercial Trust Co., 34 Del. Ch. 354, 357-58, 104 A.2d 378, 380 (1954).
33. Annotation, Payment of Undisputed Amount or Liability as Discharge of Disputed Amount or Liability, 112 A.L.R. 1219 (1938).
34. Walker v. Ellinghausen, 309 P.2d 1058,1060 (Okla. 1957); Nat’l Container Corp. v. Regal Corrugated Box Co., 383 Pa. 499, 506-07, 119 A.2d 270, 273-74 (195).
35. See e.g., Western World Ins. Co. v. H.D. Engineering Design and Erection, 419 N.W.2d 630 (Minn. App. 1988); Aetna Casualty & Surety Co. v. Gen. Time Corp. 704 F.2d 80, 83 (2nd Cir. 1983).
36. See Bor-Son Building Corp. v. Employers Commercial Union Insurance Company of America, 323 N.W.2d 58 (Minn. 1982); Alverson v. Northwestern National Casualty Co., 559 N.W.2d 234 (S.D. 1997).
37. Jeffrey W. Stempel, A Mixed Bag for Chicken Little: Analyzing Year 2000 Claims and Insurance Coverage, 48 Emory L.J. 169 (1999).
38. A T & T v. Conn. Light & Power Co., 470 F. Supp. 105, 106 (D. Conn. 1979).
39. Gibralter Casualty v. Sergeant & Lundy, 574 N.E.2d 664 (Ill. App. 1990).
41. Standard Fire Insurance Co. v. Chester-O'Donley & Assoc., Inc., 972 S.W.2d 1 (Tenn. Ct. App. 1998).