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Preventing legal problems during construction.

When a company is involved in building a new facility or renovating an old one, there is no substitute for planning ahead. As the building goes up, complex problems are sure to arise during the construction and development stages. There is no better time for risk managers to deal with the multitude of construction risks than the contractual phase of a project.

Delays, cost overruns, change orders, design omissions and errors and other unforeseen conditions are just some of the liability concerns associated with construction projects. These ambiguities and lack of proper coordination prompt disputes and can be the seed of a lawsuit. It is the job of the risk manager to anticipate such problems, and figure ways to prevent them from occurring at the start. There are several options when dealing with construction risks: The risk manager may decide to use indemnification or hold harmless clauses, limitation of liability clauses, or insurance policies to either limit or shift risk. In fact, the risk manager may decide to require the contractor in their agreement to indemnify the risk manager and the engineer.

Yet one important consideration that is usually overlooked in the early planning stages is whether the parties are capable of assuming the risk burden. Does the firm have the proper insurance coverage? Is it financially secure? Are human resources stable? Has the firm successfully completed the design and construction of other projects of similar scope? By contractually assigning risk to entities that cannot assume such a responsibility, the risk manager may be creating a false sense of security.

Developing Contracts

During contract negotiations, terms must be clearly defined to protect the company against future claims. The scope of services and the fees involved should be described in detail, and contracts must stipulate in precise terms the degree of responsibility assumed for each risk and how much risk is shifted to the contractor. It should be made clear, for instance, which subconsultant services the architectural or engineering team will be charged for versus those services the risk manager will provide such as asbestos removal and disposal.

Form contracts may be a good starting point, but there may be a need for agreements to be drafted by an attorney with experience in the construction industry. Liability issues for the design and construction firms' contracts include timeliness of performance, quality of work, responsibility for warranty claims, responsibility for consequential damages, the risk manager's right to terminate for cause or convenience, dispute resolution clauses, insurance coverage and indemnity provisions.

Contract language to support the contractor's indemnity of the engineer should say that the contractor shall indemnify and hold harmless the risk manager and the engineer and their agents and employees from and against all claims, damages, losses and expenses, including attorney's fees, provided that the claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death or to injury or destruction of tangible property.

The claim may also be caused by any negligent act or omission of the contractor, subcontractor or anyone directly or indirectly employed by any of them. In addition, the indemnification obligation shall not be limited in any way by the type of damages, compensation or benefits payable by or for the contractor or any subcontractor under workers' compensation, disability or other employee benefit acts.

One last point concerning contracts is the environment. New complicated liabilities associated with the environment have changed the way construction contracts are written. The potential for asbestos and other hazardous waste on the site is a serious threat that should not be overlooked, particularly when it comes to renovation projects. Risk managers are often responsible for asbestos removal, and any abatement operations should be completed prior to the construction phase of the project. The risk manager should make sure that the contractor is certified, and the contract states who is responsible for claims if the asbestos has not yet been properly removed.

Risk Shifting

The risk manager can shift the risk of loss for both personal injury or property damages by including an insurance requirement in the agreement with the contractor. As one of the terms of agreement, the risk manager should require the general contractor and all subcontractors who perform work on the project to obtain comprehensive general liability insurance with broad form property damage coverage and a contractual liability endorsement. In addition, the contractor should name the engineer and its consultants, including the risk manager, as additional insureds under the contractor's comprehensive general liability policy. The insurance should cover claims and expenses for bodily injury, sickness, disease or death caused by any negligent act or omission of the contractors, subcontractors or anyone directly or indirectly employed by them.

The endorsement included on insurance policies should state that additional insureds will be covered for claims arising out of operations performed by or on behalf of the contractor. If the additional insureds have other insurance, their coverage will be on an excess or contingent basis, and the amount of contractor's liability will not be reduced by the existence of other insurance.

Yet once the plans, specifications and contracts are in place and the project is underway, the risk manager should see that the contracts are administered properly and the participants are playing by the rules. The construction schedule needs to be closely monitored and any claims and events that may cause delay should be resolved as soon as possible.

Disputes and Interference

Disputes are an inevitable part of every construction project, normally arising over ambiguities in the design drawings and contract documents. Contractors looking for change orders may focus on alleged ambiguities to increase contract revenue. The contractor may file a request for information that the architect may claim is not part of its contractual obligation to review. If the contract is ambiguous, the contractor will argue that it is entitled to a change order.

Other disputes may arise out of the risk manager's company's interference. Take the case in which the risk manager furnishes the contractor with equipment and material to avoid a mark-up. The contractor has specified that it needs the material by a certain date. If the risk manager's company does not deliver by that date, the contractor may claim that it is holding up the construction process. The result is a change in orders and delays to the project.

The high cost of construction and the crucial need to complete projects on schedule demands a timely resolution of disputes. Even the most experienced risk managers, designers and contractors can be confronted with claims that can escalate into litigation.

To avoid what could turn into costly, lengthy and protracted litigation, risk managers should attempt to negotiate a mandatory non-binding mediation provision in both construction and architectural or engineering agreements. The clause should state that all disputes be submitted to non-binding mediation before a summons and complaint can be filed.

An alternative dispute resolution mechanism, such as mediation, reduces legal fees and the duration for dispute resolution. It also affords the parties time for discovery, thereby saving the cost of discovery if ADR is not successful.

Mediation Clause

A standard mediation clause can be put into any contract. If a dispute arises out of a contract and it cannot be settled through direct discussions, the parties can agree to settle the dispute in an amicable manner by mediation under the construction industry mediation rules of the American Arbitration Association before going to arbitration or a judicial forum.

Mediation does not require the extensive preparation that is needed for arbitration or litigation. It is an attempt by an individual, or several individuals, to assist the parties in reaching a settlement by focusing on issues, making recommendations and forging the parties toward resolution. Because the determinations may be non-binding, the mediator cannot impose a settlement, but is often successful in guiding the parties toward achieving their own settlement.

No business can afford to be embroiled in costly and time-consuming litigation that halts and stalls a construction project. The disruptions caused by delays in opening new facilities have substantial impact on the bottom line and can publicly harm the reputation of the owner. The risk manager's best bet is to handle the risks associated with construction and renovation by abiding by the adage: "Forewarned is forearmed." James E. Frankel and Kenneth H. Lazaruk are senior members of the New York office of Shea & Gould's construction industry practice group.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Frankel, James E.; Lazaruk, Kenneth H.
Publication:Risk Management
Date:Nov 1, 1991
Words:1396
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