Inside This Issue:
- General Contractor Liable for Injury to Independent Contractor’s Employee
- Managing Killer Clauses in Construction Contracts: Part II
- Suspension and Debarment: Guilt by Affiliation
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Design Professional – RISK MANAGEMENT WORKSHOPS SCHEDULED
McLean, VA – June 4, 2002
Philadelphia – July 11, 2002
Construction Risk.com with Kent Holland will be presenting risk management workshops in McLean, VA and Philadelphia, PA. The McLean workshop is cosponsored by Wickwire Gavin, P.C. and the Philadelphia workshop will be cosponsored by the law firm of Jacoby Donner, P.C., with attorney Rick Lowe participating as a speaker. Each workshop will cover contract terms and conditions, communication and documentation management (particularly electronic), site safety, and contractor claims management. Three (3) AIA continuing education learning units, including HSW, will be earned. A nominal charge of $39.00 will cover course materials and continental breakfast, and this is reduced to $25 for Zurich insureds. For additional information, including comments by attendees of earlier workshops, plus location addresses and times.
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General Contractor Liable for Injury to Independent
Contractor’s Employee
By: Michelle Rieger, Esq.
For years, general contractors have relied upon the well-settled proposition that a general contractor owes no duty to ensure that an independent contractor performs its work in a safe manner. Elliot Williams Co. v. Diaz, 9 S.W.3d 801, 803 (Tex. 1999); Hoechst-Celanese Corp. v. Mendez, 967 S.W.2d 354, 356 (Tex. 1998). When the general contractor, however, retains control over the manner in which the independent contractor performs his work, he takes on responsibility that he May not ordinarily have and can be held liable for problems created by the independent contractor. Elliot Williams, 9 S.W.3d at 803. Building upon that proposition, the Texas Supreme Court astounded the construction industry when it held the general contractor liable for the death of a subcontractor’s employee in Lee Lewis Constr., Inc. v. Harrison, No. 99-0793, 2000 WL 33666911 (Tex. 2001).
General contractor Lee Lewis Construction, Inc. (“LLC”) signed a contract to remodel the eighth floor of, and add ninth and tenth floors to, a tower owned by Lubbock’s Methodist Hospital. LLC subcontracted the project’s interior glass-glazing work to KK Glass. Jimmy Harrison, an employee of KK Glass, was installing thermal insulation and caulking between the window frames on the tenth floor when he fell to his death. It was undisputed at trial that Harrison’s death would have been prevented had he been using an independent lifeline. Lee Lewis, 2001 WL 33666911 at *1.
Harrison’s wife, two children and parents sued both KK Glass and LLC. Id. at 1. After settling the claims against KK Glass, the Harrisons proceeded to trial against LLC. The jury found LLC was not only negligent, but grossly negligent. Id. The Texas Supreme Court affirmed the court of appeals decision concluding that the evidence was sufficient to show that LLC retained the right to control KK Glass’ fall-protection measures, failed to properly supervise those measures, and thus, was responsible for the death of Jimmy Harrison. Id. at 4.
The Court found the testimony at trial crucial in its decision-making process. LLC’s owner and president testified that LLC’s job superintendent had the responsibility to routinely inspect the ninth and tenth floor addition to the south tower to see to it that the subcontractors and their employees properly utilized fall protection equipment. Id. at *3. Further, LLC’s president personally witnessed and approved KK Glass’ fall protection system. Perhaps most critical, however, was the testimony of LLC’s superintendent that he knew of and did not object to KK Glass’ employees’ failure to use the lifeline that, if used by Harrison, would have prevented his death. These facts, said the Court, were sufficient to show that LLC retained control over the fall-protection system used by KK Glass such that it owed a duty of care to KK Glass’ employees. Id.
Lee Lewis was surprising, not because the Texas Supreme Court announced new principles of law, but rather because LLC did not appear to exercise more than the usual amount of control over the subcontractor than that expected on a large, multi-story construction project. The opinion mentions the subcontract language only in passing, suggesting that a provision or two in the subcontract requiring the subcontractor to maintain safety programs and bear the sole responsibility for injuries to its employees could make a difference. A more thorough reading of the case, however, suggests that the Court did not ignore the language of the subcontract but found that other provisions and the activity on the jobsite outweighed that specific provision.
Lee Lewis Construction, Inc. v. Harrison (Texas Supreme Court)
The subcontract provided that it was the subcontractor’s responsibility to look out for the safety of its own employees. LLC used this language to argue that KK Glass, not LLC, was responsible for Harrison’s safety. The Court did not find the argument persuasive, indicating that the evidence clearly demonstrated that LLC retained the lion’s share of responsibility, both in the contract and on the jobsite:
The general contractor agreed with the owner to be responsible for the safety of its own employees, its independent subcontractors’ employees, and everyone else on the construction site. The general contractor required the subcontractors to agree to adhere to a voluminous, detailed safety manual under penalty of being removed from the project. Although subcontractors agreed to be responsible for the safety of their own employees, the general contractor had the right to monitor their efforts and did so. Contractually and actually, the general contractor had thorough control of safety on the site, which is typical for major construction projects. Id. at 3.
This case teaches several important lessons. If the general contractor decides, either contractually or actually, to undertake responsibility for safety, providing a specific manual, control over maintenance of the safety policies, and policing the actions of subcontractors about the safety devices on the job site, the general contractor should ensure that the subcontractors are, in fact, following the important safety procedures as mandated. General contractors should consider taking the time to review their safety policies, indemnity provisions, and insurance coverage to reduce the risk of loss.
Michelle Rieger
Winstead Sechrest & Minick P.C.
1201 Elm Street, Suite 5400
Dallas, Texas 75270
mrieger@winstead.com
www.winstead.com
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Design-Build Lessons Learned – 2001
Many of you are readers of Design-Build Lessons Learned, a publication authored each year by Mike Loulakis (mloulakis@wickwire.com) of Wickwire Gavin, P.C. that focuses on design-build case law reported upon in courts around the country for a given year. The 7th (2001) Edition of this publication was just released in late March and contains some informative reading for anyone interested in the design-build process. Loulakis, who is one of the country’s leading thinkers on the legal issues related to design-build, provides readers with an understanding of the facts of a case, the legal basis for the decision, and suggestions on practical lessons to be gleaned from it. Design-Build Lessons Learned (2001) is 83 pages in length and in a paperback book form. The retail price of $39.95 is a bargain, particularly when you consider the amount of information that is presented. It can be purchased from a variety of sources, including http://www.amazon.com, the Design-Build Institute of America (www.dbia.org), or A/E/C Training Technologies, LLC (http://www.aectraining.com).
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Managing Killer Clauses: Part II
Pamela R. Tittes – Kellogg
This is the second part of a two part article. The first part was in last month’s issue of this Report. Consider the following basic “killer” clauses, and how they might be managed.
Notice Requirements
You must know your contract. The first step in good contractual risk management is to understand the contract and its requirements. Particularly important is knowing the notice requirements contained in the contract. The easiest way to waive rights to compensation is to fail to provide timely notice as required by the contract for added work, delay, or differing site conditions. Notice requirements exist to allow the owner the opportunity to mitigate its damages resulting from an apparent problem. If notice requirements are not met, this opportunity has effectively been taken away from the owner.
Courts tend to support notice requirements with few exceptions (i.e., exceptions may be granted if the owner was constructively notified or aware of the problem, or if timely notice would have had no impact on the extend of the damages sustained). It is critical that field personnel know the notice requirement for changed conditions! How does your company make the field superintendent aware of notice requirements on his or her job?
Differing Site Conditions
Today’s contracts typically require the contractor to investigate and satisfy itself as to general and local conditions, including patent site conditions; labor and utility availability; normal weather conditions; and the character of equipment and facilities needed to perform the work. This is a much bigger task than looking for water or rock! If a differing site condition is encountered and the contractor has not done its homework, the contractor may be barred from the recovery of additional costs associated with the differing site condition.
If the contractor has completed an adequate site investigation (complete with a written report of findings), the reasonableness of its original estimate can more easily be shown. Reliance on information provided by the owner is often not a prudent approach. Exculpatory language in the contract documents may make recovery for differing site conditions even more difficult (i.e., “The soil report is not a warranty of subsurface conditions, nor is it a part of the contract documents,” or the owner ” … disclaims any responsibility for the accuracy … of soils investigations …”). Exculpatory language may or may not be enforceable, depending on the type of contract and locality; however, it is always better to avoid depending on a court decision when it comes to your bottom line. Failure to take the time to make a detailed site investigation can prove fatal to profits.
No Damage for Delay
If the contract contains a “no damage for delay” clause, then the request for compensation should focus on costs resulting from added time required to accomplish a change. The changes clause can be a contractor’s best friend. The delay clause should only be invoked for non-compensable delays, such as acts of God or strikes. Try not to use the world delay – use changes instead. Job costs segregated by account coding for the specific change causing extra time are indispensable to proving actual damage.
Pay if Paid
If the “pay if paid” clause is invoked, and you experience a delay in payment, you must know the law and your lien rights in the state in which the work is performed. Pay if paid clauses are not enforceable in all states (i.e., California) because they may be considered waivers of the contractor’s lien rights – do you really want to fight this battle? Regardless, never agree to a contractual waiver of lien rights (“no lien contract”) and be sure to file appropriate liens or stop notices in a timely manner. Remember, lien rights must be perfected by a lawsuit if the issue is not resolved early. (Contact your lawyer!) Also, notify the bonding company of non-payment if a payment bond exists for the project.
Changes Clause
Early resolution of problems is ultimately the most cost-effective approach to contractual risk management. And, the best way to accomplish early resolution of issues is to maintain good site records (daily logs, time sheets, cost reports, schedules, etc.) and to keep the lines of communication open between the contracting parties and internal management. This is particularly important in change order management. There is no such thing as too much information.
A contractor does not have to spend new monies on more people and fancier accounting systems to achieve expert change order management practices. It is mostly an exercise involving training the personnel who observe and collect data to track changes. And, it involves improving the communication between field personnel, the company controller, and the project scheduler.
The controller is the forgotten link in expert change order administration. Why? Because he or she is rarely asked by the field superintendent or project manager for labor, equipment, material, profit, and overhead cost codes specifically to capture costs of changes while they are happening. Contemporaneous collection of cost and schedule variances is the most effective tool to change order negotiations – it prevents claims and lawsuits!
Practical Tools to Manage Around Onerous Contract Clauses
1) Again, read the contract. Find ambiguous words such as “may” and have them clarified at both the pre-bid and pre-construction conference. Consider this war story: a contractor lost 60 days of schedule because a steel fabricator walked off the job claiming breach of contract because it hadn’t been paid for steel stored off-site. The contract said “owner may pay for steel stored off-site.” The “may” word was never clarified, to the harm of the entire project.
2) Initiate a standard, company-wide, format for the superintendent’s daily log. In addition to a description of the work performed, the log should include identification of any added work and/or delay, with responsibility, start date, resources impacted, and resolution date documented. Train all superintendents in the proper completion of the log, and be sure the superintendents understand and appreciate the importance of the log to cost recovery. Be sure this log is circulated daily. Circulating and storing the logs in three-ring binders gives management a change to spot problems that are similar to ones they may have encountered on jobs in the past. It forces people to talk about problems. In construction, a company is better off running toward a problem than running away from it.
3) Check legal enforceability; this cannot be stressed enough! Amazingly, some owners will put tough contract clauses into a contract almost to bully and intimidate, knowing they are not enforceable. This violates the concept of partnering. Such clauses found not to be enforceable should be presented to the owner for deletion.
4) Utilize a Disputes Review Board (DRB) whenever possible. A DRB is an administrative response to change order disputes when the parties cannot agree among themselves. The DRB can meet every month or two, and consists of three construction experts, with costs shared among the parties. Their decision can be binding or advisory. They are a low cost, fast way to prevent claims. Their use is becoming common, and the use of a DRB can be negotiated into the contract even after the bid has been awarded. DRB’s work!
5) Turn pre-construction conferences into an advantage. At the pre-con, a contractor needs to show an owner its expertise in managing the contract. This can be accomplished without appearing arrogant. It is done, once again, by:
(a) Asking for clarification of ambiguous contract words.
(b) Identifying the owner representatives who have the authority to make changes in the field.
(c) Suggesting a DRB to settle change order conflicts.
At pre-con, request a procedure whereby cash flow can be maintained for direct costs when the full cost of a change is ongoing and undetermined. Finally, show the owner all the elements of cost that your company uses in its change order pricing formula to prevent any surprises.
In conclusion, contractors today are being called to perform to a higher standard of contract administration, and ignorance is no excuse. Many contractors that are no longer in business were mortally wounded by one bad job that overrode years of profitability. It does not have to be that way. Remember the days (in the recent past) when Safety and Loss Control was not viewed as a profit center? Because of high workers’ compensation, contractors started to manage the problem. The next generation of risk management is now upon us. It is too expensive not to practice good contractual risk management.
Reproduced with permission from CFMA Building Profits, the official publication of the Construction Financial Management Association, Princeton, NJ (http://www.cfma.org)
About the Author: Pamela Tittes is a Principal at Kellogg, LLC. During her 30 years of professional experience, Ms. Tittes has worn many hats, including engineer, owner, contractor, and consultant. ========================================
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Suspension and Debarment – Guilt by Association
By: Simon J. Santiago, Esq.
Suspension and debarment are actions taken by the government to protect the public from doing business with dishonest or unreliable contractors. Under the Federal Acquisition Regulations (“FAR”), a government contractor may be suspended or debarred for, among other things, committing a fraud or criminal offense in obtaining or performing a public contract, violating certain federal or state statutes, or any other serious cause that affects the government contractor’s “present responsibility.”
Although there is no doubt that suspension and debarment can cause serious financial harm to a government contractor’s business, contractors may not know the extent that suspension and debarment affects companies or organizations affiliated with a suspended or debarred contractor. An affiliate who is innocent of any wrongdoing or improper conduct may nevertheless be suspended or debarred by the government under the FAR.
The suspension or debarment of a contractor constitutes suspension or debarment of “all divisions or other organizational elements of the contractor,” unless the suspension or debarment decision is limited by its terms to specific divisions, organizational elements, or commodities. (FAR 9.406-1(b) and 9.407-1(c).) Also, the suspension or debarment decision may be extended to “affiliates” of the contractor, which is defined as follows:
Business concerns, organizations, or individuals are affiliates of each other if, directly or indirectly, (a) either one controls or has the power to control the other, or (b) a third party controls or has the power to control both. (FAR 9.403.)
The issue of whether a business is an affiliate of a contractor will depend on the contractor’s ability to control, either directly or indirectly, the actions of the business in question. Affiliation has nothing to do with the degree of culpability or involvement with the contractor’s wrongful actions or conduct. Rather, it is the mere status of being an affiliate of a suspended or debarred contractor that exposes an affiliate to potential suspension or debarment.
Affiliation has been found based on a business’ organizational relationship with a suspended or debarred contractor. For example, suspension and debarment have been extended to subsidiaries and sister corporations. Also, businesses may be deemed affiliates of each other if a suspended or debarred contractor holds an ownership interest or a corporate position that enables the contractor to control operations in both businesses, such as a majority stockholder or president.
Even if a suspended or debarred contractor does not hold an official title or employment position, or have an ownership interest, a finding of affiliation may be warranted to the extent the contractor has the ability to control or influence management, whether directly or indirectly. For example, in the case of Alexandria Printing and Photo Services, a company was deemed to be affiliated with a debarred contractor because the contractor had loaned buildings, equipment, and working capital to the company on favorable terms; and former employees of the contractor worked for the company. In the case of Balboa Ambulance, Inc., a company and a debarred contractor were found to be affiliates because, among other things, the company’s owners were family members of the contractor and the company used equipment furnished by the contractor. It was determined that the debarred contractor had the ability to exercise sufficient control over company, despite the fact that the contractor held no stock in the company and was not an officer, director, or employee of the company.
Although the government may extend a decision to suspend or debar a contractor to its affiliates, the suspension or debarment of an affiliate is not automatic. Rather, an affiliate must be: (1) specifically named in the notice of suspension or debarment, and (2) given written notice and an opportunity to respond. (FAR 9.406-1(b) and 9.407-1(c).) Indeed, courts have held that notice and an opportunity to respond to a suspension or debarment is a due process right afforded by the Constitution.
One can take measures to protect an affiliate from the taint associated with a suspended or debarred contractor. These measures may include a transfer of the suspended or debarred contractor’s ownership interest, the removal of the suspended or debarred contractor from managerial positions, and the establishment of comprehensive ethics programs. It must be emphasized, however, that these prophylactic and remedial measures do not guarantee that an affiliate will avoid suspension or debarment. The government is generally given discretion to decide whether these measures sufficiently protect the public from future improper conduct.
The effect of suspension and debarment on a contractor’s affiliates offers yet another reason why contractors should avoid any appearance of impropriety when bidding on or performing government contracts. In light of the federal regulations, the financial death knell of suspension and debarment has the potential of resonating throughout a contractor’s affiliated businesses, even though its affiliates may have been innocent of any wrongdoing.
About the author: Simon Santiago is an attorney with the law firm of Wickwire Gavin, P.C., 8100 Boone Blvd., Suite 700, Vienna, VA 22182.; 703-790-8750; http://www.wickwire.com.
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ABOUT THIS NEWSLETTER & A DISCLAIMER
This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for environmental and design professional liability. The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law. Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.
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Copyright 2002, ConstructionRisk.com, LLC
Publisher & Editor: J. Kent Holland, Jr., Esq.
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