Kegler Brown " Construction Law Newsletter

January 2008

In This Issue

Arbitration Under Attack
Integrated Project Delivery: The Future is Now
ConsensusDOCS Offer Collaborative Alternatives
When is a Deal Not a Deal?
Firm News

Arbitration Under Attack

Donald W. Gregory,
Construction Law
Chair

The construction industry traditionally has been receptive to arbitration as a speedy and cost-effective alternative to litigation. However, recent criticisms of arbitration have led major trade association forms like AIA and ConsensusDOCS to give parties a chance to choose either arbitration or litigation by checking a box in the contract form.

Courts also have been hard on arbitration recently, particularly when involving consumers or residential construction. Several recent cases have refused to enforce arbitration provisions, finding them unconscionable in certain circumstances. A contract clause is unconscionable where there is an absence of meaningful choice for the parties, together with draconian contract terms unreasonably favorable for the other party.

A recent Ohio court took this trend further yet when it ruled that, by failing to include in the arbitration provision a notice that the homeowner was waiving its constitutional right to a jury trial, the arbitration clause was unenforceable. Bayes v. Merle’s Metro Builders, 2007-Ohio-7125. If this trend continues, arbitration will no longer be a speedy and cost-effective alternative for consumer disputes and overwhelmed courts will have no one to blame but themselves.

In the interim, entities doing business with consumers should exercise great care to draft arbitration clauses that go to great lengths to explain the significance of the arbitration clause (i.e. waiving a jury trial) and to provide a “level playing field” in the arbitration process, in order to increase the chances the clause will be found enforceable if challenged.

Integrated Project Delivery: The Future is Now

Even supporters of design-build recognize that since design-build participants cannot be identified until bids are received, this often is too late to meaningfully participate in an efficient, integrated design.

Construction players tired of fragmented adversarial and linear relationships who desire a more team-based, collegial approach are now implementing Integrated Project Delivery - IPD.

Technology advances like Building Information Modeling - BIM – in which computer 3-D modeling allows the team to refine the design up-front to minimize delays, conflicts and change orders during construction, have also encouraged the use of an IPD approach. Under IPD, all members of the trusted construction team, owner, designer, contractor and even subcontractors, come together early on to design, budget and ultimately build the Project, frequently with risk and cost savings being equitably shared on an upfront basis. Under IPD, all parties are incentivized to work together for the common good of the Project.

While the IPD process is relatively new and requires a trusted team, many working under this project delivery system report much greater satisfaction, cooperation and savings in time and cost over traditional project delivery systems.

For now, IPD is primarily utilized by sophisticated and involved owners on private work. There is no way to legally utilize this method on Ohio public work at the present time.

ConsensusDOCS Offer Collaborative Alternatives

While IPD and BIM are well under way on complex jobs, contract documents are trying to catch up. The ConsensusDOCS group, consisting of more than two (2) dozen national trade associations representing owners, sureties, contractors and subcontractors, have come together to endorse dozens of contract documents.

Perhaps the most unique is the ConsensusDOCS 300 form designed for a Tri-Party Agreement (designer, owner and contractor) on a collaborative IPD project. In this contract, the parties share project risks and costs savings measured against a Project Target Cost Estimate. The Contractor (and Subcontractors) are to work together with the Architect and Owner to continually bring value through improved quality, cost savings or constructability. All have a common interest in the overall success of the Project.

For more information concerning ConsensusDOCS, go to www.consensusdocs.org.

When is a Deal Not a Deal?

It is common for subcontractors to be told that they “have the job” and to start work before they receive a signed subcontract from the contractor. A recent case out of New York demonstrates the risk of doing so. Jordan Panel Systems v. Turner Construction, 841 N.Y.S. 2d 561 (App. Div. 2007).

In this case, the contractor sent the subcontractor a “term sheet,” which said that while the subcontractor could not withdraw his bid, the contractor reserved the right not to execute the subcontract “pending an internal review and prior approval by the owner where appropriate.”

Later the contractor told the subcontractor he had been awarded the subcontract and to proceed with design development. However, the contractor subsequently told the subcontractor that his involvement was terminated and the work given to a competitor. When the unhappy subcontractor sued, the Court ruled for the contractor saying that the subcontractor voluntarily assumed the risk by beginning work without a signed subcontract.

While this case revolved around a contractor’s not standing behind his oral promises and hiding behind his written disclaimers, subcontractors have been similarly successful when they put disclaimers in their bids. For example, in applying New Jersey law, a subcontractor prevailed when he walked away from his bid because the bid provided that it was for informational purposes only and not a firm offer. Fletcher-Harlee Corp. v. Pote Concrete Contractors, 482 F.3d 247 (3d Cir. 2007).

These cases demonstrate the risk of the legal fine print and the perils that occur when project team members do not keep their commitments to each other.

Firm News

• Don Gregory has been selected by his peers for inclusion in the 25th anniversary edition of The Best Lawyers in America® in the specialty of Construction Law. Selection to Best Lawyers is based on an exhaustive and rigorous peer-review survey comprising more than 2 million confidential evaluations by the top attorneys in the country.

• Don Gregory will be speaking at the Ohio Construction Conference on February 26, 2008, on the new ConsensusDOCS. The Conference will feature renowned speakers and presenters representing the construction industry.

• Mike Madigan will be speaking on Ohio's Fairness in Construction Contracting Act at the Annual Meeting of Flexible Pavements on March 19, 2008.

• The Construction Law group will be hosting a seminar on April 30, 2008, that will focus on “Current Subcontract Issues.” For more information or to register to attend the seminar, please visit www.keglerbrown.com/events.

Credits

Kegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by the Construction Law practice group.

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The Construction Law Newsletter is designed to provide general information about the subjects discussed. It is not meant to be all-inclusive or comprehensive. Kegler Brown is not rendering any legal or professional advice by way of this publication.