Division 7 Website: www.americanbar.org/groups/construction_industry/

divisions.html

In This Issue

Message from the Chair .............1 The Litigatable Lift ......................1 Extended Warranties in Bonded Contracts ....................................4

Tips for the Design Professional When Owner Terminates GC…...6

Member Spotlight…………………….8

A Special Collaboration of Divisions 7 and 11 of the ABA Forum

on Construction Law

Insurance,

Surety & Liens

The Litigatable Lift

By: Andrea Woods Nabholz Construction Services

One of my first tasks as in-house counsel for a general contractor (GC) was to negotiate a supply and installation contract with one of the world’s leading vertical transportation providers. I quickly learned that negotiating in a limited or sole-source supplier market could be a huge disadvantage. If the negotiation stalled, my new employer was not going to be impressed.

Open and frank dialog between the GC and supplier, a willingness to draft

language to fit the concerns, the project, and good rapport with the supplier were

important to the negotiation. Ultimately, however, the more critical steps toward

(Continued on page 2)

As we all know, one of the most gratifying benefits of membership in the Forum

is the opportunity it gives us to work together and to learn from one another. This

issue of the Division 7 Newsletter is an example, featuring three collaborative

articles by members of Division 7 and Division 11 (In-House Counsel). In typical

Forum fashion, when the call went out for articles for this joint effort, members of

both Divisions promptly responded with excellent ideas and timely articles.

(Continued on page 4)

Tim Ford Jamie Peterson Michael Clark Carl Circo

Message from Divisions 7 and 11

November 2016

2

a successful negotiation occurred before the negotiation commenced by learning more about the supplier and its

business.

If I wanted the supplier to understand and appreciate the GC’s reality, I needed to do the same for the supplier.

Increasing my familiarity with the supplier provided new insight and “opportunities to leverage advantage.”1 Simple

online searches presented helpful information about the supplier’s potential exposures. For example, U.S.

Consumer Product Safety Commission data estimated in 2014 that 24,007 injuries resulting from elevators and

escalators were treated in hospital emergency departments.2 According to numerous law firm websites offering their

services to the public, elevator injuries resulted from mis-leveling (not stopping at proper floor level), door failures

(defective sliding doors), sudden starts, stops, or changes in speed and over-acceleration.3 Injuries to the spine and

joint injuries, as well as impact-related injuries from being thrown within the elevator cab accounted for some hefty

verdicts.4 One building owner’s elevator lawsuit included claims for lost productivity, lost profits, and business

interruption costs.5 Users also reported emotional anxiety relating to use of elevators to access their offices.6 There

was much for me to learn about the elevator industry to gain even a rudimentary understanding of what their main

objectives would be during the negotiation.

In the beginning, the points of contention could have been predicted by even the least seasoned construction law

practitioner. They included indemnity, waiver of consequential damages, schedule, and refusal to engage in

alternative dispute resolution. Anything broader than a limited form indemnity agreement would not be accepted.

Changes to the schedule were critical to the supplier, and damage waivers and alternative dispute resolution

language was resolved by incorporating contractual obligations that mirrored the obligations between owner and the

GC. “Due to the sequential nature of our work, site conditions that we do not control but rely on others to complete

before we can perform our work, and the complexities of a construction project, an agreeable force majeure and

damages clause is important in our contracts,” says Khanh Josephson, Sr. Commercial Counsel at KONE , one of

the leading global vertical transportation providers.

The GC’s right to offset amounts owed by the supplier against amounts held or payable to the supplier on other

projects came into play as the negotiation progressed and became contentious. The supplier rejected the offset

provision outright due to challenges with their internal administrative accounting system. With revenue for the top

3 elevator and escalator suppliers in 2015 exceeding $30 billion,7 I could imagine their difficulties with adjusting for

an offset. Especially important to my client after the 2008 economic slide, I no longer had the authority to remove

this language without CFO approval. However, we reached an agreement on the offset section, identifying supplier-

defined regional markets within which the GC could offset.

Other points of contention warranted attention because they were of importance to the project owner. Delays on

installing an elevator spells loss of use and a plethora of damages. Astronomical delay costs can be calculated in

minutes by the CFO of a large health system or major retailer. This is a big issue for owners, so it’s a big issue for

GCs. I learned from the GC’s project manager that the supplier was late installing an elevator in a downtown office

building resulting in an accelerated work schedule to complete the project on time. Tactful discussion about this

recent situation with the supplier allowed the supplier to better understand the GC’s perspective and develop

language addressing both parties’ concerns. We addressed delay concerns by tightening the supplier’s notice

obligations so our team could timely and justifiably present requests for time extensions under its contract with the

owner.

With more information about the range of liability exposures faced by the supplier, I was able to acknowledge the

supplier’s highest areas of risk and focus on strengthening other areas of interest to the GC and owner. For instance,

we agreed on segregating the maintenance agreement from the initial construction contract. With this approach,

risks relating to maintenance, such as pricing, insurance, warranties, scope of work, frequency of visits, and

documentation are more easily managed and transferred.8 With maintenance as a primary area for claims, this

approach was more beneficial for the GC.

(The Litigable Lift Continued from page 1)

3

(The Litigable Lift Continued from page 2)

Although it did not make sense for this negotiation, if the project owner would have been large enough, it could have

considered independent consolidation of purchase orders to reduce cost and strengthen its position on maintenance

agreement conditions.9 This can create a “mutual dependency”10 in the long-term that is beneficial to the owner and

supplier. A large owner could contract with a limited or sole source supplier in this manner and remove the obstacles

resulting from the GC’s bargaining position.

Understanding the supplier’s market strategy is also helpful. If expanding in an identified market territory is the

supplier’s primary goal,11 offering introductions and access to the general contractor’s project decision makers in a

new territory can motivate supplier sales representatives to put additional pressure on their contract administrators to

soften on a point of contention. A recent Harvard Business Review article identified “Bring[ing] New Value to Your

Supplier” as the number one way to “rebalance the power equation and turn a purely commercial transaction into a

strategic partnership.” Potential new value can be a powerful motivator and can bring the account back to the scale

of a personal relationship, something more easily understood and maintained. In this case, re-establishing a

relationship in one of the GC’s growing territories improved the GC’s position during the negotiation.

When the negotiation began to seem like a battle of wills, I struggled to remember that a limited or sole-source supply

market can offer some benefits. Time is often saved and administrative costs reduced by contacting, vetting, and

negotiating with a single supplier.12 Admittedly, I also needed to succeed to impress my new employer.

The lesson learned was that negotiating an agreement in a limited or sole-source market doesn’t have to make you

throw up your hands in defeat. To the contrary, it can be an opportunity to think outside the box and fine-tune the

strengths your client possesses.

The lesson learned was that negotiating an agreement in a limited or sole-source market doesn’t have to make you

throw up your hands in defeat. To the contrary, it can be an opportunity to think outside the box and fine-tune the

strengths your client possesses.

Footnotes

1 Supply Market Analysis, Guidance Note General 2, National Public Procurement Policy Unit, (2005), http://etenders.gov.ie/Media/Default/SiteContent/

LegislationGuides/23.%20Supply%20Market%20Analysis.pdf.

2 NEISS Data Highlights – Calendar Year 2014, U.S. Consumer Product Safety Commission, National Electronic Injury Surveillance System, (2015), http://

www.cpsc.gov//Global/Neiss_prod/2014%20Neiss%20data%20highlights.pdf.

3 Top Causes of Elevator Accidents and Lawsuits, www.orlowlaw.com/resources/articles/top-causes-of-elevator-accidents-and-lawsuits (last visited Aug. 17, 2016);

Elevator Accident Lawyers, www.the-injury-lawyer-directory.com/elevator_accidents.html (last visited Aug. 17, 2016); Elevator and Escalator Accidents Lawyer in

New York, www.gairgair.com/elevator-and-escalator-accidents.html (last visited Aug. 17, 2016).

4 Elevator and Escalator Accidents Lawyer in New York, www.gairgair.com/elevator-and-escalator-accidents.html (last visited Aug. 17, 2016).

5 Patrick Danner, Elevators Lead to Lawsuit, (Jan. 19, 2011), www.mysanantonio.com/business/article/Elevators-leadto-a-lawsuit-966445.php.

6 Id.

7 Leading Companies worldwide in the area of elevators and escalators in 2015, based on revenue (in billion U.S. dollars), http://www.statista.com/

statistics/281179/leading-companies-in-the-area-of-elevators-and-escalators-by-revenue/ (2015).

8 Ellie Kelly, How to Find and Contract the Right Elevator Service Company – Part II, (Jan. 16, 2015), http://daytonabusinesslawyers.com/how-to-find-and-contract-

the-right-elevator-service-company-part-ii/.

9 Petros Paranikas, Grace Puma Whiteford, Bob Tevelson and Dan Belz, How to Negotiate with Powerful Suppliers, Harvard Business Review, (July-August 2015),

https://hbr.org/2015/07/how-to-negotiate-with-powerful-suppliers.

10 NEISS Data Highlights- Calendar Year 2014, supra note 2.

11 Paranikas, Whiteford, Tevelson and Belz, supra note 9.

12 Valencia Higuera, The Difference between a Single Source and a Sole Source for a Contract, (2016), http://smallbusiness.chron.com/difference-between-single-

source-sole-source-contract-32618.html.

4

Extended Warranties in Bonded Contracts: Effects on Bond Obligations, Costs and Negotiating Tips

By: Matthew Bryant—Arnstein & Lehr, LLC Ciara C. Young—Kinsley Construction, Inc.

(Message from the Chair from page 1)

D. Creighton Sebra, John Kimon Yiasemides, and Jennifer M. Kanady provide a wonderfully practical and concise

checklist for lawyers representing or working with design professionals on a project in which the owner has made

the drastic decision to terminate the general contractor. Among other things, their Tips for the Design Professional

When the Owner Terminates the General Contractor during a Project covers important insurance and bonding

issues, as well as potential lien problems. Naturally, their recommendations anticipate the probability for litigating

or arbitrating claims. Ultimately, they focus on the design professional’s role in the critical and difficult task of

getting the project back on track.

W. Matthew Bryant and Ciara C. Young combine on another excellent contribution, Extended Warranty in Bonded

Contracts, which deals with performance bond issues of growing significance whenever contracts provide for

warranties beyond the customary one-year period. They review the controlling legal principles that determine the

surety’s obligations and also offer special insights relative to the contractor’s bidding strategy and alternative ways

the project participants may address extended warranties.

In The Litigable Lift, Andrea Woods discusses the special considerations presented by negotiations involving limited

or sole-source market suppliers, such as elevator manufacturers. Not only does this article provide highly specific

tips for handling the special challenges of this situation, but it also illustrates one of the most important lessons for

representing clients who come to projects from different perspectives—the importance of managing the relationship

between contractor and supplier. She explains how to implement an interest-based, problem solving approach to

what otherwise might seem like a stressful negotiating process.

We hope that you enjoy these articles and take away some important practice tips from each of them. And please be

open to the next opportunity that comes your way to collaborate with members of other Divisions.

Extended warranty periods are becoming increasingly common in construction contracts. Contractors can no longer

assume the customary one year warranty or repair/maintenance period. The frequency of 18 month, two year and

even five year warranties is growing. So, what does this mean and how does it impact the construction contract and

any performance bonding obligations?

From bid time, the contractor must be aware of the warranty requirements of the bid documents. On bonded

projects, the duration of the warranty period can substantially impact the bid price and contract sum. Most

performance bonds guarantee performance of all obligations under the contract. The AIA A312 Performance Bond

form provides as follows: “The Contractor and Surety, jointly and severally, bind themselves, their heirs, executors,

administrators, successors and assigns to the Owner for the performance of the Construction Contract, which is

incorporated herein by reference.” Other proprietary bonds are even more unequivocal and expressly state that the

surety is obligated for all extended warranties.

Where a performance bond incorporates the underlying construction contract by reference, the provisions of the

contract become provisions of the bond. For example, in Tudor Development Group, Inc. v. U.S. Fidelity & Guar.

Co., 692 F. Supp. 461 (U.S.D.C. -- M.D. Pa. 1988), the court held that where a plaintiff owner alleged that a

contractor violated a warranty provision contained in the construction contract, the surety could be held responsible

under the terms of the bond it supplied for the construction contract. Id. at 465. See also Sweetwater Apartments,

5

P.A., LLC v. Ware Construction Services, Inc., 2012

WL 3155564 at *5 (U.S.D.C. – M.D. Ala. 2012)

(collecting cases). Similarly, when a contract including

a warranty provision of 18 months, two years, or five

years is incorporated into a performance bond, the

surety guarantees performance of the contract

obligation for the full contract warranty term. The

surety’s obligation normally remains limited by the

penal sum of the bond.

Typically, bond premiums are based on the bond

remaining in place for one year from substantial

completion. However, if the bond needs to stay in

place for two years or more to cover extended

warranties, the bond premium will increase

accordingly. Sureties know that the longer the

contractor’s obligations extend, the more risk the

contractor and the sureties are taking on.

Unfortunately, contractors often just assume a one year

period and fail to ensure the bond pricing used on bid

day or in a negotiated contract covers the applicable

warranty period for the project. If an extended

warranty and the associated additional premium is

missed in a hard bid or a negotiated contract, a

contractor can find itself in the difficult predicament of

either absorbing the costs, or going back to the owner

and telling it that the bond costs will actually be much

more, and asking it to cover the costs.

Contractors can use this knowledge to be creative in the

negotiation process with owners in an effort to be the

low bid and win the work. One option is to provide

alternate pricing at bid time. For example, if the

contract documents require a two year warranty, it may

be beneficial to provide alternate pricing for a one year

warranty. Also, in contrast to extended-term

performance bonds priced on the full contract sum,

owners may be willing to consider separate

maintenance bonds that are typically based on only

10% of the contract sum as the repair or correction of a

portion of the work is expected to be less than the cost

of performing the whole of the contract work. This

could be a value engineering option presented to an

owner desiring the protection of extended warranties.

Also, if the contractor has subcontractor default

insurance, it might be able to persuade an owner to not

require performance bonds for more than the typical

one year, thereby allowing the contractor to provide a

savings to the owner that its competitors may not be

able to provide. With subcontractor default insurance,

a contractor can assure the owner that coverage exists

to allow the contractor to address any deficiencies of

the subcontractors’ work, and that performance bonds

for the duration of the warranties are not necessary.

Owners are seeking longer warranty coverage for the

work they ask contractors to perform. Contractors will

provide the warranties their customers demand.

Sureties will provide performance bonds that cover the

contracts presented to them, at a price. Being aware of

the implications of a warranty beyond the customary

one year duration will allow owners, contractors, and

sureties to consider the amount of assurance

appropriate to guarantee performance of extended

warranty obligations. The assurance needed can then be

priced consistently with the risk undertaken by a surety,

and all the parties can reach an efficient balance of risk

and cost for a guarantee of extended warranty

performance.

6

When a contractor is terminated from a modern day construction project it is almost a virtual guarantee that the

termination will lead to litigation and/or arbitration. The monetary dispute, potential delay and cost over-run claims,

potential payment and performance bond claims, threat of litigation, and other claims and disputes usually dictate

that the aggrieved parties will be prone to include every person that had any project responsibility, including the

design professionals. In the past, design professionals relied heavily on the relationship with the owner and the

economic loss doctrine to avoid claims stemming from a termination of the contactor. However, with the

importance of contractual privity and the application of the economic-loss doctrine waning, claimants have made

significant inroads in developing claims and theories of liability against design professionals. Design professionals

should be on guard during the termination process and below are some practical tips for design professional’s

counsel to consider implementing when this complex situation occurs.

Tips for the project team:

Notify and update key personnel and identify a point person on the project team to contact regarding the project

status, i.e. “your boots on the ground”. Although there will be a lull in between the time the old general

contractor is terminated and the takeover by the new general contractor, there will be on-going issues that should

be addressed in real time.

Take the opportunity to have a detailed, privileged conversation with your point person. Have him/her identify

key issues that led to termination. Identify any issues that may be raised against the design team. Obtain all of

the documents related to the identified issues.

Meet with the project team and address concerns regarding the project’s continuation, explain counsel’s role,

confidentiality, privilege, and the application of litigation holds.

Make sure your project team provides the new general contractor copies of the submittal packages to-date as

soon as possible, and try to ensure that they include in their price the same products that were already approved.

Have your project team begin tracking time for a claim for additional services to the surety that steps in (or

Owner) as there will likely be a prolonged duration for the project, as well as additional services such as the ones

mentioned above to bring the new general contractor on board. These costs were not contemplated by the design

team in its contractual administration costs.

Continue to monitor the project’s progress. Have a point person alert counsel of any new issues or claims that

are allegedly caused by design team.

Tips for preparing for possible litigation:

Meet with company executives to make them aware of your plans and develop a potential list of risks and

exposure once your initial gathering of information is completed.

Consider providing notice of the circumstance to applicable insurance carriers. It is likely that such a termination

is going to result in litigation and although the termination action is between the Owner and the general

contractor the design team is likely to be pulled in.

Retain outside counsel. Counsel experienced with such actions and litigation will be an important resource to

identify issues and guide the next steps.

Tips for the Design Professional when the Owner Terminates the General Contractor During a Project By: Jennifer M. Kanady—FAC Services

D. Creighton Sebra—Morris, Polich & Purdy, LLP

John Kimon Yiasemides—Warner Construction Consultants, Inc.

7

Prepare and issue litigation holds

to project employees and any sub-

consultants in anticipation of

potential litigation. Although a

litigation hold may be issued by

the Owner, it is better to be

proactive. Not only will your

client/Owner appreciate it, if the

design team becomes a party, it

will be required.

Consider entering into a

cooperation agreement/joint

defense agreement with the

Owner, Owner’s Representative,

and/or sub-consultants.

Retain consultants to review

issues identified by a project

point person that may be a source

of a claim against design team,

particularly if items are

mentioned in the former

contractor’s claim or lawsuit.

Experts could include a technical

expert (on a design-related failure

issue), a scheduling/delay expert

(on prolongation and delay

issues), or a cost expert

(particularly if costs appear

disproportionate to issue(s)

raised).

Tips for Working with the Owner

in the re-bid process:

Review previous scope items that

were argued by the prior general

contractor to ensure coverage by

the new general contractor. The

Owner will appreciate the

exercise of not having to make

the same argument twice for

scope items; such as: if the

sprinkler heads were supposed to

be centered on the tiles per the

specifications. Or if there was a

conflict between plans and

specifications, ensure the new

general contractor does have the

correct items included in its price

to complete the work. These

items may include RFI(s), and

other documents that may have

changed the design, including

contract amendments,

supplemental instructions and

change orders.

Seek to ensure that the warranties

for previous work installed will

be upheld by the new general

contractor. For instance, storm

water pipes which are installed

may need a camera survey before

the general contractor will take on

warranty for the work. There may

be some items the general

contractor will not warrant, but

strive to obtain as many

replacement warranties as

possible. This is especially

important if the old general

contractor is no longer a going

concern.

Suggest that the design team

schedule a thorough review of the

site with the new general

contractor, Owner and/or

Owner’s Representative in order

to establish the expectations of

the parties, especially with

respect to work that has been

constructed incorrectly. As an

example, if concrete steps were

installed defectively, but the

defect is not obvious, the new

general contractor will claim

entitlement to a change order to

correct it. However, if the design

team identifies it prior to the

Owner contracting with the new

general contractor, it can be

factored into the new contract

price.

Avoid warranties, certifications,

and guarantees with respect to

certifications for payments or job

completion progress. Design

professional should attempt to

draft their payment certifications

to read less like warranties and

more like estimates and should

always avoid using the word

inspection. If there is any

additional insured language that

was provided by the general

contractor to the Owner which

included your firm, be sure the

new general contractor has also

included it.

As experience would dictate, it

seems that the first general

contractor/Owner contract gets

more input/review by the Design

Team than the replacement

contractor – try to be aware and

ensure that provisions involving

the design team are in the new

contract such as provisions

related to insurance, payment

application review, RFI/submittal

review and final acceptance.

The new general contractor will

have an extensive exclusions list;

attempt to review it with the

Owner prior to its acceptance by

the Owner.

The re-bid process often goes

quickly, and the Owner may not

actively engage the Designer in

the process. The design team

should insist on being involved,

as they may be able to address

concerns with the Owner and/or

Surety to help prevent them from

cutting scope out or trying to

Value Engineer (VE) the project

to get costs down in a way that is

unacceptable to the design team

for either aesthetic or functional

reasons. The VE process can

cause ripple-effect issues with the

design, especially mechanical

items. Thus, monitoring the

process is important.

Conclusion

Ultimately a design professional’s

ability to manage and overcome the

potential risks associated with

contractor termination is largely

determined by a clearly defined scope

of services, effective communications

and good documentation.

Maintaining good communication

with the owner and all parties as well

as proper project documentation

during the project and termination

process will usually prove invaluable

to the design professional.

8

DIVISION 7 DIVISION 7

IINSURANCENSURANCE, S, SURETYURETY & L& LIENSIENS

www.americanbar.org/groups/construction_industry/divisions.html

DIVISION 7 LEADERSHIPDIVISION 7 LEADERSHIP

CHAIR Timothy C. Ford

Hill, Ward Henderson Tampa, Florida (813) 227.8495

Tim.ford@hwhlaw.com

IMMEDIATE PAST CHAIR

Daniel P. King Frost Brown Todd LLC

Indianapolis, IN (317) 237.3800

dking@fbtlaw.com

STANDING SUBCOMMITTEES Membership

Jason Quintero, Chair jquintero@carltonfields.com

Programming Phil Truax, Chair

ptruax@lwickenslaw.com

Publications

B. Michael Clark, Jr., Chair mclark@srhl-law.com

Technology

Rob Dietz, Co-Chair rdietz@briglialaw.com

V. Samuel Laurin, Co-Chair slaurin@boselaw.com

STEERING COMMITTEE

Joshua Ballance B. Michael Clark Timothy C. Ford

Julia Hunting Daniel P. King

V. Samuel Laurin Troy Miller

Jason Quintero Phil Truax

Governing Committee Liaison Bill Franczek

FORUM STAFF

Tamara Harrington Manager, Forum on the Construction Industry

American Bar Association 312.988.6794

tamara.harrington@americanbar.org

Division Member Spotlight Erin Cannon

Erin is the Manager of Legal Affairs for Giant Cement Holding, Inc. and its

subsidiaries (the “GCHI Group”), the fourth largest cement producer and user of

waste as fuel on the East Coast. As the only attorney for the GCHI Group, her legal

work runs the gamut, including contract negotiation, handling insurance claims,

ensuring corporate compliance, developing internal policies and procedures, and

managing litigation for GCHI and its eight subsidiaries. Erin is engaged with virtually

every department in the GCHI Group, including sales, operations, and human

resources, and works closely with the senior executive and management teams, as

well as with outside counsel.

Prior to attending Howard University School of Law, Erin worked as a project

engineer and senior cost engineer for a large general contractor in Texas. She began

her legal career as a federal law clerk in the US District Court for the Eastern District

of Virginia. After that, she worked on cases related to internal investigations, white

collar crime, and complex commercial litigation at a large law firm in Chicago. From

there she moved to a regional firm where she utilized her background in engineering

and construction management to advise owners, homeowner association boards,

subcontractors, general contractors and design professionals, pursuing or defending

claims related to construction defects.

She likes to say that she picked the “perfect time” to join the Forum, attending the

2013 Mid-Winter Meeting (in the Bahamas) as her very first Forum event. Shortly

thereafter she was selected as a Diversity Fellow and has continuously increased her

involvement in the Forum. Since joining the Forum, Erin has had the opportunity to

assist as a first-time attendee mentor, serve as a steering committee member for

Division 11, and participate in the Diversity Committee as the Division 11 liaison.

In addition to her involvement in the Forum, Erin is a board member for the Diverse

Attorney Pipeline Program, a non-profit corporation formed to combat the continued

and systemic decline of African American and Latina women lawyers in large law

firms. Though she has not yet had the opportunity to present at a Forum event, Erin

was a presenter for the Illinois State Bar Association’s “Construction Contracts: the

Boiler Plate that Gives you Fits” and received the honor of being selected as the

Chicago Lawyer Magazine’s 40 Illinois Attorneys Under Forty to Watch in 2014.

Erin loves to travel, which has become more difficult now that she is a “legal

department of one” and enjoys spending time with her nieces and nephews, watching

sports, and playing with her new boxer puppy, named Floyd.