The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

It is an interesting paradox that construction professionals who devote their lives to building unique structures according to customized plans generally use "cookie cutter" form contracts to govern the duties and obligations of the parties. When a construction dispute arises, most construction professionals and their lawyers will spend many hours scrutinizing the contract documents to analyze their rights. Since so much time is spent evaluating the contract after the dispute, shouldn't there be at least an equal amount of time and thought put into it before the project begins? Instead of standard cookie cutter provisions, doesn't it make sense to think about the risks of the project and clearly define what will happen in the event of a dispute?  I have been preaching this sermon for many years, and recently posted an article on the subject called, Resolve Construction Disputes More Efficiently With Customized ADR Provisions.

A new case in California  (PDF) illustrates the benefit of customized contract provisions related to dispute resolution. The case involved the proposed development of a parcel of property and a contingent lease for a drug store build-out for Rite Aid. Here is the smart part of what happened: the lease agreement did not have the standard "prevailing party" language in the event of a dispute. Instead the lease stated that the prevailing party is entitled to "reasonable expenses," and then listed what the parties meant by that term: attorney fees, court costs, witness and expert fees.

The developer won the case and asked the court to award reasonable expenses including attorney fees and expert witness fees. Rite Aid challenged the developers request for $83,000 for expert witness fees in a motion to tax costs. The trial court denied the motion and Rite Aid appealed the judgment in favor of the developer, including the award of expert witness fees.

The California Court of Appeal affirmed the award of expert witness fees, holding that the the lease expressly called for them as an item of cost. The Court gave deference to the fact that this was a customized provision negotiated by sophisticated parties:

This does not mean-and we do not hold-that expert witness fees are recoverable in every case where "costs" are merely mentioned in a contract. A general cost provision should be interpreted according to the established statutory definition. But where sophisticated parties knowingly and intentionally negotiate a broader standard into their contract-and particularly where, as here, that standard specifically includes "witness and expert fees"-the intent of the parties should be upheld by the court. (Emphasis added.)

In most states, there are other ways to obtain an award of expert witness fees. I wrote about them in a post entitled, Settlement Negotiations: Don't Get Smacked By The Statutory Stick. But statutory awards of expert fees are discretionary awards made by the trial court after certain facts are established to the satisfaction of the judge. This Rite Aid case, on the other hand, provides a blue print for construction professionals who want to clearly define what will happen to the losing party in the event of a dispute rather than hoping for the favorable discretion of the trial court.

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The 800 pound gorilla in every room of contractors or architects contemplating a design-build project is this: how do you pursue a design-build contract that may require some form of joint enterprise with other professionals and protect  your proprietary information at the same time?  Patrick Miller of Baker & Daniels  answers this and other related questions in an outstanding post about  drafting "teaming agreement," which includes the following nine points

1. Choose the Right Business Relationship. The team must figure out – before pursuing a contract with the owner – how it is going to come together. There are three basic options: limited liability companies, joint ventures, and subcontracts. As a general rule, if the plan is to pursue work in a given geographical area (like the State of Illinois), then an LLC is probably best. If it is to pursue a single project, then a joint venture or subcontract will work.

2. Understand the Owner's Contracts. Design-build calls for two parties to sign one agreement. AIA's version of Integrated Project Delivery calls for three parties to sign one agreement. Still another integrated delivery method – CM-At Risk – requires at least three parties to sign at least two agreements. In order to choose the best contractual relationship, the owner will need to consider the sector (public bidding laws may make all three options impossible), the market (a Chicago high rise office building may not be suitable for design-build), and the talent pool (if there are not any qualified design-builders in the immediate area, then once again, design-build may not be best). The teaming agreement should anticipate the proper contractual framework and assign responsibilities accordingly.
3. Put it in Writing. The biggest mistake your company can make in participating on an integrated team is to do it on a handshake. There is too much at stake, and you cannot leave basic terms undefined and important information unprotected (see items 4 through 9, below).
4. Make it Exclusive. If your company is putting forth the time and effort to pursue a project with other firms, it probably doesn't want to find out – after losing the contract – that two of its core team participants are on the winning team. Eliminate this risk by adding an exclusivity provision to your teaming agreement.
5. Make it Confidential. Participating on an integrated team will undoubtedly involve exchanging proprietary design and pricing information. If your company hands this over without restricting its use in a written agreement, then it is likely gone for good. Eliminate this risk by clearly establishing the confidentiality of such information and the penalties for disclosing it to outsiders, especially other teams.
6. Call Your Insurance Broker. With integration comes: 1) an evolving standard of care for the design community; and 2) potential design responsibility for the contractor. Does being part of the team void the architect's errors and omissions coverage? Is the owner unprotected if he or she doesn't have a contract with the architect? The answers are no, so long as the agreements and insurance are updated to accommodate the integrated project delivery model. Contact your insurance broker to confirm that your new arrangement has the proper coverage, and update your teaming agreement accordingly.
7. Check Your Licensing Laws. All states have laws defining what it means to practice "architecture" and "engineering." They also impose harsh penalties for offering to perform these services without a license. And some courts will void contracts where a party offers to perform these services without a license. Check these statutes, contact your State's licensing officials, and include language in your teaming agreement requiring the licensed professionals to be responsible for offering these services.
8. Identify the Team in the Agreement. The agreement should identify each team member and state the member's role: a) in pursuing the contract; and b) after the contract is won. Each identified member must sign the agreement.
9. Spell out the Scope, Time, and Cost. Pursuing design-build and other integrated projects is much more time consuming and expensive than simply negotiating a design contract or bidding on a set of construction drawings. The teaming agreement should contemplate these concerns by explaining the team's objective, how long it will take to meet the objective, and how costs in getting there are to be allocated. It should also deal with distributing stipend proceeds if the owner is offering a stipend.

There has been much written about the legal ramifications and risks associated with design-build contracts. Patrick's practical advice on the benefits of a teaming agreement and his nine points to consider before signing one add valuable insights to the discussion. Teaming agreements should  include provisions to give you the peace of mind to aggressively pursue the work while protecting your proprietary interests, trade secrets, and other competitive advantages.

Carefully drafted agreements are at the core of risk avoidance strategies. Many construction disputes are the result of ambiguous contract provisions or incomplete and unclear  plans and specifications. Ideally,  the design-build project delivery method minimizes conflicts between owners and contractors  by pairing the construction and design professionals on the same team and making them responsible for the design and construction of the project. Teaming agreements, on the other hand, can minimize the disputes that could otherwise arise between the architect and contractor if the terms of the joint enterprise are left unclear. Go team!

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