Will Green Performance Bonds Be a Surety Requirement in 2012? (law note; guest post)

Today’s Law Note is by Guest Blogger Alex Levin for JW Surety, the largest surety bond agency in the country.  When he’s not explaining the functionalities of surety bonds, he covers a variety of topics from construction-related news to eco-friendly building tips.

Green building design and construction is an attempt to conserve natural resources, reduce energy consumption, and protect the environment through reduction of pollutants. Green buildings are constructed with renewable, managed materials and are typically designed to take full advantage of natural light and passive heating and cooling environments.

In 2006, the District of Columbia enacted a local ordinance specifically designed to promote green buildings. The Green Building Act of 2006 becomes effective in 2012 and requires all new construction projects within the District to meet Leadership in Energy and Environmental Design, or LEED, certification standards.

Developed by the U.S. Green Building Council, LEED certification promotes the design, construction and operation of green buildings. There are four levels of certification, from LEED Certified to Silver LEED certification to Gold LEED certification and, at the highest level, Platinum LEED certification.

The District of Columbia was the first city in the US to require that privately constructed buildings meet LEED standards and already contains 24 buildings that are certified as Silver LEED or higher. An additional 150 projects are LEED registered.

The Green Building Act of 2006 did several desirable things for the District of Columbia. It established high-performance building standards for all new construction in the District. It created a green building incentives program to rewarded green construction projects with an expedited documents review process. It requires that properties with green building standards be given priority when the District leases buildings. Unfortunately, the Act also had an unintended consequence. As it is currently written, no structures can be constructed in compliance with the Act.

In routine construction contracts, performance bonds limit the risk that owners incur by using a particular contractor. The contractor buys the performance bond from a surety company, and the bond is issued to the project owner. If the contractor fails to perform, the owner can draw on the bond to hire another contractor to complete the project according to the design specifications. When the contractor does complete the project according to the design specifications, the bond is released and money is returned to the contractor. Performance verification is a simple matter of construction observation and comparison with the project specifications.

With a Green Performance Bond, however, there are multiple problems. Performance certification must come from a third party, such as the US Green Building Council, who would not be a participant in the surety bond. A delay on the part of the government agency could result in missed construction deadlines. To add to this, green standards are constantly changing. A project designed to meet Silver LEED certification requirements at the time construction starts may fall short of the certification requirements that are actually in effect by the time construction is completed.

The greatest hurdle to the Act is that Green Performance Bonds simply do not exist today. Surety companies will not issue such bonds when there are no clear standards for performance verification. [Editor’s Note: For more on the “unicorn” that is the green surety bond, check out Chris Cheatham’s discussion on the illusory bond way back in 2009].

The legal ramifications of this dilemma remain unclear. Will contractors who have been awarded construction contracts scheduled for 2012 be subject to liquidated damages if they are unable to bond and fail to start construction? If surety companies do issue Green Performance Bonds, will the bond be forfeit if LEED certification standards change during construction and the project is not Silver LEED certified? Will delays in certification be held against the contractor when projects are otherwise completed? There are no definitive answers to any of these questions.

The language of the Act is being re-examined, and a public hearing is scheduled for mid December. There is no alternative plan in place should the language of the Act remain unchanged and surety companies decline to issue these specialized performance bonds.

Thoughts, comments, or questions?  Post in the comment section, below.

Photo: (c) coolshots blog via Creative Commons license.

You Cannot Have Your Cake and Eat It, Too! (Estoppel) (law note)

slice of chocolate cake We’ve talked previously about the statute of limitations  here at Construction Law in North Carolina.  A recent North Carolina Court of Appeals case gives a vivid example of one exception to a statute of limitations defense– estoppel. Estoppel is the act of lulling a party into not filing a lawsuit through your actions.  You are then deemed “estopped” from asserting the statute of limitations as a defense. That is, a party cannot use the statute of limitations as a sword to benefit from his own conduct which induced a plaintiff to delay filing suit.  Proof of actual fraud or bad faith is not required; however.  The “basic question” is whether defendant’s actions “have lulled the plaintiff into a false sense of security and so induced [the plaintiff[ not to institute suit in the requisite time period.”  Cleveland Const., Inc. v. Ellis-Don Const., Inc. et al., __ N.C. App. __, 709 S.E.2d 512 (5 April 2011). In that case, the general contractor on a public hospital project, Ellis-Don, asked Cleveland Construction Inc. (CCI), one of its subcontractors, to delay making its own delay claim on the project.  The general contractor sent a letter to CCI  asking it not to sue it in order to present a “unified front” to the State during the State Construction Office’s administrative claims process. The Court found that Ellis-Don affirmatively represented to CCI that it was  pursuing CCI’s claims as part of its overall claim against the State. The Court further found that Ellis-Don affirmatively represented to CCI that CCI should not  initiate a claim because that would jeopardize the success of the total contractor recovery with the State.  As such, Ellis-Don lulled CCI into a false sense of security, as CCI reasonably believed that Ellis-Don would pass through to CCI any proceeds attributable to its claim from Ellis-Don’s settlement with the state.  Ellis-Don was, therefore, equitably estopped from asserting the statute of limitations when CCI later sued Ellis-Don on those same claims.   Here, Ellis-Don tried to benefit from including CCI’s claim in its overall claim at the State Construction Office, and later benefit from CCI’s failure to adhere to the time limits imposed on bringing claims.  The Court held that a contractor cannot have its cake and eat it too.  (After all, too much cake is bad for anyone). Practice Note:  Do not count on the theory of equitable estoppel for untimely claims.  A court could decide you were not reasonable in holding back from initiating legal action, in which case your claim would be denied.   Equitable theories are to prevent injustice, but you cannot and should not rely on them.  Have you ever delayed filing suit on the promises or statements of another party?  Did the Court find the other party was equitably estopped from claiming a statute of limitations defense, or did the Court allow such a claim?  Share your experience in the comments section below.

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Photo:  (c) Dennis Mojado via Creative Commons license.

Why Misery Loves Company (aka Concurrent delay on the Construction Project) (law note)

You know the old saying, “Misery loves company?”  It’s true.  Even in the construction world.

misery license tag

What happens if, while the design team is asleep at the switch, the contractor is also delaying the project, or the owner is dithering about a materials selection?  Since there was more than one cause of the project delay, does that let you off the hook?  Maybe so.

The above scenario is, in its bare-bones basics, an example of concurrent delay.

What is concurrent delay?  Concurrent delay is delay to the critical path of construction, caused at the same time by multiple events not exclusively within the control of one party.  In other words, it is when two or more parties both contribute to the delay of the project.

In such a case, neither may recover damage from each other, unless there is proof of clear apportionment of the delay and expenses.  See Biemann & Rowell Co. v. Donohoe Cos.,147 N.C. App. 239, 245, 556 S.E.2d 1, 5 (2001).

Where both parties contribute to the delay, neither can recover damages, unless there is proof of clear apportionment of the delay and the expense attributable to each party.  In such an instance, the only remedy for both parties may be an extension of time to the contract.

Have you experienced a case where concurrent delays existed on a Project?  Were you able to apportion the delay damages, or did all the culpable parties pay the price?  Share below. 

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Photo: Misery by Molly Helzschlag via Creative Commons license.

The Architect Has No Clothes! (or, why subconsultant contracts matter)

Caesar statute

Everyone is probably familiar with the story the Emperor’s New Clothes.  There, the Emperor is not wearing anything but his birthday suit, and yet everyone is afraid to tell him so.  Today’s lesson is how to avoid being the clothesless fool by making sure you are covered with appropriate contracts with your subconsultants.

Previously we have talked about the need for a written contract on your construction projects.  Usually, the focus is on the contract agreement with the Project Owner.  Just as important, however, is the contract with your subconsultant.

A recent case brought to the attention of the E&O carrier Victor O. Schinnerer demonstrates what can happen when you have a signed contract with the Project Owner, but your subconsultant contract is not yet formalized.

The architect’s subconsultant agreement had been revised by the subconsultant to include the following language: 

Subconsultant’s maximum aggregate liability under this Agreement shall not exceed $250,000.

Having been warned of the dangers of limiting the liability of a subconsultant without having a corresponding limitation in the prime agreement, the architect attempted to further negotiate with the subconsultant. The subconsultant agreed to increase their liability to $500,000 but said “I am told by our legal counsel that based on the work we are doing and the amount of our fee, $500,000 is our limit.  

Work on the project had already started, but the subconsultant was withholding their design documents until they received a signed contract.  At that point, the architect turned to his E&O carrier for advice.

His options were limited at that point, and the architect was left with weighing the risk of a claim in excess of $500,000 versus the risk of a delay claim from the Project Owner if he took time to seek out a new subconsultant.  Essentially, the architect had no clothes.

Keep this lesson in mind the next time you are negotiating with subconsultants about a planned project.  You should ensure that their contract has the same obligations that you have in your contract with the Owner.

Have you experienced a situation where you were contracted to perform, but your subconsultant refused to sign a contract with similar terms? How did you handle it?Drop me a line in the comment section.

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Photo: (c) Mary Harrsch via Flickr/Creative Commons License.

Planning Ahead for Additional Compensation

money for additional services for construction administration

Does your designer contract have provisions in it for additional compensation in the event the construction project takes longer than the parties anticipate?  If you use the AIA 201 (2007) general conditions for the Contractor, it may.  The AIA provisions include:

 

 § 1.1.2 THE CONTRACT

The Contract Documents form the Contract for Construction. The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations or agreements, either written or oral. The Contract may be amended or modified only by a Modification. The Contract Documents shall not be construed to create a contractual relationship of any kind (1) between the Contractor and the Architect or the Architect’s consultants, (2) between the Owner and a Subcontractor or a Sub-subcontractor, (3) between the Owner and the Architect or the Architect’s consultants or (4) between any persons or entities other than the Owner and the Contractor. The Architect shall, however, be entitled to performance and enforcement of obligations under the Contract intended to facilitate performance of the Architect’s duties.

The language that I bolded is very important language.  It may provide a mechanism to recoup additional service fees for extended construction administration services.  Note, however, that I said “may.”

If your fees are based on a set number of construction days, what happens if the project gets extended?  Do you simply go without pay for extra months of CA services?  Do you re-negotiate with the Owner at that time?   You should consider this issue in advance to avoid disputes later on. 

Best practice?  A clause in the Owner-Designer contract that states that additional services compensation will kick in after a certain date,  at a set value per month.  

If you wait until the issue comes up during the final phase of construction, you have much less bargaining power.  You also run the risk of the Owner claiming errors and omissions against you when you present a bill for extra services.  Deal with the issue up front, in much the same way that unit prices for rock overages are provided for upfront in the contractor’s contract. 

Do you have experience with getting additional compensation after construction delays?  What worked best for your company?  Share below. 

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 Photo (c) Freefoto.com via Creative Commons license.

 

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