Clients are always looking for ways to manage costs of legal disputes. With tighter cashflows since the recession, many businesses are understandably asking for budgets and working with their attorneys to find strategies that reduce legal fees and litigation costs.

The American Arbitration Association (AAA) has been under the same pressure to limit costs, particularly with respect to construction-related arbitrations. In response to the growing demand for predictability, the AAA released a new set of rules known as the Supplementary Rules for Fixed Time and Cost Construction Arbitration.

The rules were released in June 2014 and are designed to supplement the Construction Industry Arbitration Rules and Mediation Procedures. The Supplemental Rules work best for cases with discrete issues and limited discovery, and where parties and attorneys can agree on many of the procedural issues without involvement of the administrator or arbitrator.

Key Features of the New Rules.

  • Maximum total fees. The best part about the new rules is the cap on fees. As long as the parties follow the limitations of the rules, there is absolute predictability as to the total amount of arbitration related fees. The maximum fee includes AAA administrative fees and arbitrator fees. It does not include travel-related expenses incurred by the arbitrator or facility-related expenses.
  • Limited parties. The Supplemental Rules apply only to arbitrations involving two parties. The two-party limitation does not apply to a surety, as long as the surety: (a) is represented by the same counsel as its principal; and (b) has not asserted an independent claim against its principal or the other named party.
  • One arbitrator. All arbitrations administered under the Supplementary Rules are limited to one arbitrator.
  • Meet and confer conference. One of the most significant differences between the Construction Industry Rules and the Supplemental Rules is the meet and confer conference (SR-11), which is designed to allow the parties to agree upon procedural and administrative issues such as: the selection of prospective arbitrators; the time, date, and place of the hearing; the number and allocation of hearing days; and document exchange and discovery. If the parties cannot agree on all of the procedural matters and the arbitrator is asked to resolve them, additional fees are charged for the arbitrator’s time.
  • Limitations on duration and hearing days. The Supplemental Rules contain Time/Cost Schedules where the duration of the arbitration and hearing days are limited by the size of the claims. For example, for a claim/counterclaim that is between $500,000 and $1 million, the hearing may not exceed five days and the maximum duration from filing of the arbitration demand to the award is 270 days.
  • Limitations on arbitrator time and compensation. The Supplemental Rules also place limitations on the arbitrator’s hourly fees and study time based upon the size of the claim. Maximum hourly fees range from $250 per hour (for claims less than $250,000) to $350 per hour (for claims above $1million).
  • No post-hearing briefs. Post-hearing briefs are generally not permitted, except upon approval of the arbitrator or agreement of the parties, but additional fees will be charged for the arbitrator’s time.
  • Arbitration award. The arbitrator must issue an award not more than 20 days from the close of the hearings and the award itself is limited to no more than three pages. If the parties request a reasoned award or findings of fact and conclusions of law, the arbitration must be administered under the Regular or Large, Complex Track procedures.

Not Every Case is Right for the New Rules.

If there are multiple legal and factual issues to be addressed or if the dispute involves the use of several fact and expert witnesses on each side, then the new rules should not be used. In fact, even if a case starts as a simple case, but grows in complexity or duration as its proceeds such that the time or hearing days will exceed the maximum, the AAA has the discretion to administrate the arbitration pursuant to the Regular or Large, Complex Case Track procedures, with the standard fees applying.

How to Use the New Rules.

The new rules are optional. Both parties to a dispute must agree to the arbitration being administered under the Supplemental Rules. If you want to use the new rules, or at least want the option to use them in appropriate situations, the best practice is to include an express provision in your contract for the application of the Supplemental Rules to any disputes. This new provision would be added to any existing arbitration provisions, and it would make sense to reference both the Construction Industry Rules as well as the Supplemental Rules.

If you have steered away from using arbitration to resolve disputes because of the escalating costs, now may be a good time to reconsider whether to change your contracts to include an arbitration provision.

If you would like a copy of the new Supplemental Rules or advice on incorporating the rules into your contracts, please click here to email me.

Michael Vitiello

Michael Vitiello

Father’s Day is a good time to reflect on all of the great things that our fathers have done for us and how they have influenced our lives in so many ways.  As I reflected back this year on all of the things I have learned from my dad, I realized that my dad’s life-long love and pride in the construction industry unexpectedly and unknowingly influenced my own career choice as a construction lawyer.

My essay this week on ENR.com is called No Tie on Father’s Day: Daughter’s Tribute to Construction Dad.”   I wrote it with my own personal experiences in mind.  However, since it was posted to the site on Friday, I have heard from several people who have told me that those experiences and feelings were strikingly similar to their own.

So, it seems as though a generation of hard-working construction professionals, like my dad, have passed their love and pride in the industry to their children who are making construction part of their lives in their own way and finding a special way to connect with their fathers.

I am happy to share with you that I will be a contributing editor to ENR’s Viewpoint section offering commentary about legal and risk issues facing the design and construction industries.

My first contribution is titled, “An Uphill Battle Against LEED-Based Codes” where I review my predictions regarding the reception of the International Green Construction Code (IgCC) in the year ahead and the impact that the soon-to-be released version of LEED will have on the relevance of the IgCC. Click here to read the ENR.com article.

I invite you to follow along at ENR.com for future updates. We will also be posting links to those updates here and on our LinkedIn company page.

Thank you for your continued support.

This week Governor Nathan Deal signed Georgia HB 434 which amended the Georgia Lien Law to allow lien claimants to include overhead costs and interest in amounts claimed in mechanic’s and materialman’s liens.

As I discussed in my last post, the changes were sought by contractor groups to overcome a 2012 decision of the Georgia Court of Appeals that specifically held that overhead and administrative costs were not lienable. See 182 Tenth, LLC v. Manhattan Construction Company.

 

Problem solved, right?!  Not exactly.

Unfortunately, the new language potentially causes new problems and case-by-case litigation over whether certain costs are lienable.  This is because the standard now for determining the amount of the lien is “the amount due and owing the lien claimant under the terms of its express or implied contract, subcontract or purchase order.” O.C.G.A. §44-14-361(c).

This change appears to make the lien claimant’s contract the controlling authority on what amounts are lienable rather than looking to statutory definitions or references for that answer.  This would be a significant departure from how the Georgia Lien Law has been interpreted in the past. And, more importantly, it will turn the issue of “what is lienable” into a case-by-case determination.

 

What is “due and owing?”

Here are a few situations that I think will arise as a result of the new statutory language:

  • We now know that interest can be included in the amount of the lien, but at what rate?  The new Lien Law is not clear on that issue.  If the contract contains an interest clause, then presumably the contract rate would apply, but often contracts do not provide for interest on unpaid amounts.  If that is the case, should the general pre-judgment interest rate apply, the rate for commercial accounts, or should the interest rate of the Georgia Prompt Pay Act apply?
  • Another issue that will almost certainly be raised by this new language is whether attorneys’ fees can be included in a lien if the lien claimant’s contract allows recovery of attorneys’ fees.  But, what if the contract allows for recovery of attorneys’ fees only if the lien claimant prevails?
  • Historically, delay damages for extended overhead and idle equipment have not been lienable because these were not labor and materials that were actually incorporated into the project.  However, it is at least arguable now that a lien claimant can include delay damages if its contract allows recovery of delay damages.  However, what if the lien claimant is a subcontractor whose contract provides that the sub recovers delay damages only to the extent that the prime contractor recovers from the owner, but it has not yet been determined that the delay was caused by the owner or that the prime will recover delay damages from the owner?

There is a potential here for contractors to use this new and untested language to inflate or exaggerate the liens by including significant amounts for items that are actually in dispute.  For example, claims for delay damages and attorneys’ fees can outsize contract balances and change orders by exponential amounts.  If this starts to happen, expect owners to take action—either by seeking relief from the courts in the form of penalties or damages for overstated liens, or by lobbying the Georgia Legislature for further amendments to the Georgia Lien Law that provides better guidance as to what items are lienable.

Georgia Lien Law Changes

Georgia Flag

Last year, the Georgia Court of Appeals issued a decision in a case called 182 Tenth, LLC v. Manhattan Construction Company, in which it narrowly defined the scope of costs that could be included in the amounts claimed in a lien.  For contractors, especially prime contractors and construction managers, it was a horrible decision because it effectively eliminated a substantial portion of the amounts that could be included in a lien against an owner.

More specifically, the Court held that various overhead and administrative costs contained in Manhattan’s pay applications, which were part of the contract price, were “unlienable” because they were not labor or materials that actually went into the property.  Those “unlienable” costs included:

  • staff
  • mobilization
  • power
  • safety
  • office supplies
  • small tools
  • temporary road
  • job site copier
  • progress photos
  • job site communications
  • job signage
  • dumpster rentals/pulls
  • unit certifications
  • general liability insurance
  • preconstruction
  • phone/water
  • job site trailer
  • job toilets
  • computers
  • fuel and oil
  • blueprints
  • record drawings
  • postage/courier
  • temporary fence
  • cleanup crew
  • final clean
  • builder’s risk insurance

This year, Georgia contractors lobbied the legislature to change the lien law in order to overcome the limitations imposed by the narrow interpretation of the Court in the Manhattan case.  HB 434 was passed on the last day of the legislative session.  A copy of the version that passed and is on its way to the Governor can be found here.

Georgia HB 434 modifies O.C.G.A. §44-14-361 to include the following language:

 (c) Each special lien specified in subsection (a) of this Code section shall include the amount due and owing the lien claimant under the terms of its express or implied contract, subcontract, or purchase order subject to subsection (e) of Code Section 44-14-361.1.

 (d) Each special lien specified in subsection (a) of this Code section shall include interest on the principal amount due in accordance with Code Section 7-4-2 or 7-4-16.

 Under the new law (after it is signed and goes into effect), contractors should be able to include in lien amounts the costs found “lienable” in the Manhattan case as long as those amounts are due under the terms of the contract.  But, I think the new language will not add clarity or guidance in a situation where the parties dispute whether an amount is “due and owing” under the terms of the contract.

In my next post, I’ll give at least two examples of how this new statutory language will lead to continued uncertainty and further litigation over what can be included in a lien.

North Carolina Lien Law Changes

North Carolina

North Carolina’s legislature made big changes to the state’s lien laws that went into effect this year.  One of the most critical changes—the “Mechanic’s Lien Agent” requirement—became effect on April 1, 2013.

The new law requires project owners or prime contractors to designate a Mechanic’s Lien Agent at the time of contracting and to post the information relating to the Lien Agent at the project site.  Any contractor or supplier that may potentially be a lien claimant must provide the Lien Agent with a preliminary notice of its involvement of the project within 15 days after first beginning work or supplying labor or materials.

To support these new requirements, North Carolina has created an online clearinghouse/filing system called the NC Online Lien Agent System at www.liensnc.com, which became active on April 1st.

My friend and fellow construction lawyer Bryan Scott, who practices with Spilman Thomas & Battle in Winston-Salem, North Carolina, has written two very detailed and practical articles about the new requirements of the North Carolina lien law [click here] and the new NC Online Lien Agent System at www.liensnc.com [click here].

It’s no secret that the construction industry in the Atlanta-metro area has been struggling (on life support) for at least the past three years.  Before the recession, our city and region was thriving on meaty public and private construction projects and construction jobs were plentiful.  When the recession hit, development and construction projects halted.  Private construction all but evaporated, and competition for public construction projects has become fierce—to the point where contractors are taking jobs on razor thin profit margins, just to have work to keep their employees working and their doors open.

Now, the City has negotiated a deal with a private partner—Arthur Blank and the Atlanta Falcons to build a new $1 billion stadium—in which the City will be paying roughly 20% of the cost of the project.  This is the largest single construction project to occur in this area in a long time.  It is, without question, going to boost the local construction industry and bring back some of the construction jobs that have been lost in the past few years.

The Atlanta Business Chronicle reported on the stadium deal today.  A full version of the story can be found here.  For people who are not convinced that this project is a good thing for Atlanta, here are a few points from the article that I think are important:

  • The public contribution for stadium construction is capped at $200 million, which would come from the hotel-motel tax collected by the city — almost exclusively (more than 85 percent) from visitors and tourists, not residents of the city. 
  • The existing hotel-motel tax revenue stream is the sole public funding source for the stadium construction and any risk associated with repayment is carried by the bond holders, not the city. 
  • No property taxes or new taxes of any kind would be paid by or levied on city residents or businesses to fund construction of the new stadium. The city will not serve as a backstop for any debt associated with the construction of a new stadium and this agreement will not affect the city’s bond capacity or credit capacity. 

It’s not every day that a billion dollar construction project comes along, and certainly Atlanta hasn’t seen a project of this magnitude in years.  Hopefully, it will be a catalyst to more development and construction that will lead to steady growth in our local construction industry.

It’s that time of year again when Georgia legislators work to pass the laws that will take effect for 2013-2014.  This year, there are a couple of bills working their way through the chambers that will directly affect construction contractors and construction projects in this State.

HB434

Introduced by Representatives Tom Weldon, Wendall Willard, and Mike Jacobs, HB 434 adds language to the Georgia mechanic’s lien law (O.C.G.A. §14-44-361) that specifically allows a lien holder to include in the lien amount “the amount due and owing…under the terms of its contract, subcontract, or purchase order.”

It also provides that in the absence of a contract, the lien may include amounts for “the unpaid value of the labor, materials, and services provided by the lien claimant for the improvement of real estate.”

HB 434 is currently before the Judiciary Committee.

SB70

Senate Bill 70 allows the Georgia Department of Transportation greater flexibility in using the design-build delivery method for procuring construction related services and expands the use of design-build projects.  The bill allows the DOT to skip over the Request for Qualifications step, and procure a design-build contract simply through a Request for Proposals.  The bill also eliminates some of the restrictions and requirements relating to design-build procurements.

SB 70 passed the Senate unanimously on February 25, 2013 and is now making its way through the House.

Check back for updates on these bills in the final weeks of the legislative session.

Do you know of any other bills pending in the Georgia Legislature that might be of interest to the construction industry?  If so, tell us about it.

The Georgia Solar Energy Solar Association (“GSEA”) hosted its 2013 Policy Forum last week at the Georgia Tech Research Institute.  The program focused on the status of solar markets nationwide and in Georgia, as well as discussions about current Georgia laws and regulations governing energy policy and future changes that would open the markets for solar in the state.

2012 Solar Policy Initiatives

In 2012, GSEA conducted a major campaign with Georgia legislators to pass a bill that would have expressly permitted the use of power purchase agreements (PPAs), solar equipment leases and other types of third-party financing for solar projects.  According to the presenters at the Policy Forum, the solar market will never really open up in Georgia until those financing arrangements are permitted.

The 2012 bill met with steep opposition from Georgia Power and local EMCs because, they claimed, that such transactions violated the state’s Territorial Act, which regulates the utility industry and provides that only registered utility companies can sell power, and assigns territories to those utility companies. (see my 2012 blog post about this issue).  While the 2012 bill ultimately did not pass, it certainly caught the attention of Georgia Power and made the utility companies realize that the Georgia solar industry and its advocates were gaining momentum and support.

2013 Solar Policy Initiatives

GSEA appears to be continuing its course to pursue legislation that will allow PPAs and third-party financing.  A revised version of the 2012 bill has been introduced this year by Senator Buddy Carter as SB 51 2013.   GSEA will also continue to push to raise the cap on the state tax incentives for renewable energy projects.

What stands in the way of these solar policy initiatives? 

According to several panelists, including State Representative Chuck Martin and Georgia Public Service Commissioner Tim Echols, the biggest hurdle to solar-friendly legislation is Georgia’s low power rates.  Georgia and the southeastern states have the lowest electric rates in the country (by a lot in comparison to areas like the northeast).

Here’s why that is important (or at least why legislators and regulators think it’s important):  low power rates are apparently one of Georgia’s competitive advantages in attracting businesses to move to this state—and no one in elected office wants to take any action that could be seen as anti-economic development. 

Commissioner Echols and Representative Martin believe that legislation that opens the market to solar PPAs could create conditions that “run off companies and manufacturers with higher utility rates.”  No elected official wants to be positioned as “anti-business” or “anti-economic development” if the debate is framed in those terms.  But….

Does adding solar power to Georgia mean higher rates?

Georgia Power doesn’t think so.  Georgia Power sought approval to increase its purchase of solar power from independent producers from the current 55MW to 210MW over the next two years.  The program is called the Advanced Solar Initiative Program.

According to Ervan Hancock, a manager of renewable and green strategies for Georgia Power, the reason that Georgia Power is voluntarily seeking to increase its solar purchases is that “it is now economically feasible to add solar to [Georgia Power’s] portfolio.”  Hancock went on to explain that Georgia Power has considered solar and other renewable energy sources for a long time but has never believed—until now—that it could include solar in its portfolio without causing a rate increase to its customers.  The reason Georgia Power believes that solar power can now be added without rate increases is because the costs of equipment have significantly decreased in the last 12-18 months, making the cost of solar power much less expensive.

So, if Georgia Power can add solar power without increasing rates, why do legislators believe that PPAs or solar leases will cause utility rates to go up?

If you’ve never heard of the terms “Design Specification” or “Performance Specification” or you’ve heard of them but don’t know what they mean or why they matter, then you have probably never been involved in a dispute or litigation relating to defective specifications or inadequate designs.

A “Design Specification” sets forth in detail the materials to be employed and the manner in which the work is to be performed. The contractor is required to follow them as one would a road map and without deviation.  A “Performance Specification” describes an end result, an objective or standard to be achieved and leaves the determination of how to reach the result to the contractor

These terms are legal terms that are derived from a long-standing legal concept known as the implied warranty of specifications.  It’s also referred to as the “Spearin Doctrine,” because of a landmark ruling of the U.S. Supreme Court that set out the rule relating to the implied warranty in the context of a government construction contract.  Since that ruling, this doctrine has been adopted by virtually every state and is applied to both public and private construction projects.

Here’s what it says:

“Where one agrees to do for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation because unforeseen difficulties are encountered…But if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.”

United States v. Spearin, 248 U.S. 132 (1918)

In other words, the owner impliedly warrants that if the contractor completes the work in accordance with the owner’s plans and specifications but there is a deficiency or failure, the owner, not the contractor, is responsible.

This is why it matters whether a particular component of the design at issue is determined to be a “design specification” or a “performance specification:”

  • In general, the implied warranty of specifications applies only to design specifications, and not performance specifications
  • There can be exceptions to this general rule where the contractor has some participation in the design or control over the means and methods
  • The determination of whether a particular work item is a design or performance specification is a factually-intensive one and made on a case-by-case basis

Many claims relating to defective specifications or design hinge upon whether the specification at issue was a design or performance specification.

I’ll be discussing the legal significance of design v. performance specifications and factors affecting the allocation of risk of defective specifications in a webinar sponsored by The Construction Specifications Institute.  The webinar is Tuesday, April 3rd at 2:00pm Eastern time and registration is open to anyone.  Click here for more information or to register.

The Good News:

GEFA’s David Godfrey announced at the Georgia Energy Services Coalition meeting on Thursday that the procurement process for the first state performance contracting project in Georgia has begun.  The first project will be at Phillips State Prison in Buford, Georgia.  At first, the timeline looked promising—an ESCO would be selected by July 19th and an investment grade audit would be completed by October.  This was good news considering that prequalified ESCOs were just announced last week.

The Bad News:

However, the performance contract will not be signed until July 2013.  Yes, a full nine months after the energy audit is completed and more than two years after the performance contracting statute came into effect.

The reason given for the lengthy delay between the audit and the contract signing was that  GEFA is financing this project through general obligation bonds.  That means that the project essentially must go through the state budget cycle.  The amount of the project must be submitted to the Georgia Office of Budget Planning by October 2012 in order to be considered and approved by the Governor for the 2013 budget.   According to Godfrey, the contract cannot be signed until the funds have been approved.

So, the state will lose out on the energy savings that could have been generated in the period from October 2012 through until the project is completed sometime after July 2013.  But also, it will be hard for the winning ESCO to accurately forecast prices and costs that far in advance, and with no mechanism built into the agreement for cost escalation, the ESCO will likely have to factor in a contingency (i.e increase the price of the contract to hedge against unknown cost escalations) that otherwise would not be needed if the project were proceeding immediately.  The state may also end up paying more for financing, as interest rates may increase between now and next summer.

The Really Bad News:

There will not be any other performance contracts procured by the state through GEFA until this pilot project is completed and deemed a “success.”  And, Godfrey was noncommittal as to whether this would be the procurement model for all future performance contracts (requiring each one to be approved to be in the following year’s budget).

If this is true, then there will be no other performance contracts solicited until at least late 2013 or early 2014, and if they are also subject to the same budget cycle delays, those projects would not be constructed until 2014 or 2015.   This is a huge disappointment to the ESCO and performance contracting industries, who have moved resources and personnel to Georgia over the last 18 months in anticipation of a growing performance contract market.  It is also a disappointment to the struggling Georgia construction industry, especially when one of the big selling points for the amendment that was passed to allow performance contracting was the creation of jobs in the construction sector.