Dispute Resolution Clauses

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Dispute resolution clauses in your construction contracts are important. These clauses are the first place a contractor should look to determine the process to resolve a disputes with your customer or contracting party.

In most commercial construction contracts, a dispute resolution clause will require the parties to first participate in mediation. The purpose of mediation is for both parties to try to reach a compromise and settlement of the dispute. The parties hire a mediator, who is generally an attorney or industry professional, and the mediator’s fees are shared equally by the parties. Typically, both parties must agree on who the mediator is unless your contract states otherwise. It is advisable to hire a construction lawyer to work with you to resolve the dispute at this stage. The mediator is there to facilitate a settlement of the dispute. You and your lawyer must be prepared to articulate your side of the dispute to the other side and to the mediator. You will also listen to the other side’s case. A good analogy is that settlement is like wearing a brand new pair of shoes that are tight at first and not comfortable. But as you continue to wear the shoes they will become comfortable. That is to say, nobody likes a settlement or likes wearing uncomfortable shoes, but eventually the settlement or shoes will begin to fit your foot and feel more comfortable. Mediations typically last a full-day because it often takes both parties an entire day before those “shoes,” or a possible settlement, start to feel comfortable and become something that each side can live with.

If the parties are unable to reach a settlement of their dispute at mediation, the next step in commercial construction contracts often is for the parties to arbitrate their dispute. Think of an arbitration as a private trial where the parties hire an arbitrator to act as a private judge. The arbitrator will hear both sides of the dispute and render a decision or what is called an arbitration award. The arbitration award is the arbitrator’s decision in the case and it is typically binding on both parties. There are only limited circumstances in which either party can appeal the arbitrator’s award, which means once the award is issued the case is usually over. It is recommended that you hire a construction lawyer to represent you or your company in a case involving arbitration because they will have specialized knowledge of the procedures involved and the law that applies to a construction dispute.

Regardless of the dispute resolution mechanism provided for by your contract, a construction lawyer is your best advocate to help you navigate the process and facilitate the best outcome.

No Damage for Delay Case Set for Oral Argument Before the Texas Supreme Court

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Mark your Calendars for November 6th as the clock ticks down the time for oral arguments to be heard by the Texas Supreme Court in the appellate court decision that rocked the construction industry last year, Zachry Construction Corporation v. Port of Houston Authority of Harris County, Texas.  In Zachry the Court of Appeals strictly construed a “no damage for delay” clause and refused to apply any of the previously recognized exceptions to the enforceability of no damage for delay clauses because the clause at issue expressly excluded delay damages that arose from “the negligence, breach of contract or other fault of the Port Authority.” The court found that the clause applied because the delay damages arose from a breach of contract. Additionally, the court found that the “other fault” language indicated that the parties contemplated conduct that went beyond mere negligence, and therefore even a specific finding of “arbitrary and capricious conduct, active interference, bad faith, or fraud” would not have saved the contractor from the no damage for delay clause.

Next, the court reversed an award of liquidated damages to the contractor, holding that the contractor had released any claims to the liquidated damages when it executed lien release affidavits.  While the project was ongoing, the owner began withholding liquidated damages from the contractor’s pay applications. The contractor executed lien release affidavits stating that it had no further claims against the owner for the portion of the work listed in the pay applications. The court strictly construed the releases, holding that it released all “claims for breach of contract predicated upon a failure to make payment for work accomplished, billed, and paid—in whole or in part—on a particular payment estimate.”

If you want to watch the oral arguments before the Texas Supreme Court live you can  click here on the morning of Wednesday, November 6th.  There will be another link posted that morning that will direct you to the proceedings.  Arguments will begin at 9:00 a.m.  Each side will be given 20 minutes to make their argument with a ten-minute recess between the arguments.

Be aware that you will need to download Microsoft Silverlight if you want to watch the proceedings live.

All of the Supreme Court pleadings filed in this case are available here. You can also download a copy of the Amicus Curiae Brief filed by Richard Gary Thomas and Fred D. Wilshusen of Thomas, Feldman & Wilshusen.

U.S. Supreme Court Analyzing Forum Selection Clauses in Construction Contracts

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On October 9, 2013 the United States Supreme Court heard oral arguments in Atl. Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, Docket No. 12-929. This case deals with the enforceability of forum selection clauses in construction contracts and, in particular, how federal courts procedurally handle the enforcement of forum selection clauses. Briefing available here.

This case arises out of a payment dispute between a contractor and subcontractor working on a construction project on a military base in Texas. In particular, J-Crew Management, Inc. (“J-Crew”), a subcontractor located in Killeen, Texas entered into a subcontract to provide labor and materials to Atlantic Marine Construction Company, Inc. (“Atlantic Marine”) a Virginia-based general contractor on a construction project located on Fort Hood in Killeen, Texas. The subcontract states all disputes shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division. This type of contract clause is called a “forum selection” clause.

Atlantic Marine did not fully pay J-Crew. J-Crew filed suit against Atlantic Marine in the United States District Court for the Western District of Texas, Austin Division, which is the federal district in which Fort Hood is located. Atlantic Marine moved to have the Court either dismiss or transfer the matter to United States District Court for the Eastern District of Virginia, Norfolk Division pursuant to the forum selection clause in the subcontract.

J-Crew, in response, asked the court to reject the Atlantic Marine’s request for among other reasons, the forum selection clause was unenforceable pursuant to Texas law (§272.001 of the Texas Business and Commerce Code).

§272.001 states as follows:

(a) This section applies only to a contract that is principally for the construction or repair of an improvement to real property located in this state.

(b) If a contract contains a provision making the contract or any conflict arising under the contract subject to another state’s law, litigation in the courts of another state, or arbitration in another state, that provision is voidable by the party obligated by the contract to perform the construction or repair.

However, the Court decided that §272.001 of the Tex Bus. & Comm. Code does not apply in this matter because the land on which Fort Hood sits is a “federal enclave” over which the United States, not Texas, has exclusive jurisdiction.

But, that was not the end of the Court’s analysis. Ultimately, the court rejected the Atlantic Marine’s request to transfer the case to Virginia. The court’s decision was based upon its interpretation of 28 U.S.C. §1391(b)(2), entitled Venue generally and 28 U.S.C.A. §1404(a), entitled Change of Venue. In short, the Court determined that the forum selection clause did not control in which federal district court venue was proper, that venue was proper in the Western District of Texas under §1391 (b)(2) because the project was located in it and that transferring the matter to the Eastern District of Virginia under §1404(a) would not be for the convenience of the parties and witnesses and not be in the interest of justice.

28 U.S.C.A. §1391 (b)(2) states as follows:

A civil action may be brought in a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated.

28 U.S.C.A. §1404(a) states as follows:

For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.

As could be expected, Atlantic Marine disagreed with the ruling and appealed to the United States Court of Appeals for the 5th Circuit. The 5th Circuit agreed with the District Court, so Atlantic Marine has appealed to the United States Supreme Court and asserted that there is disagreement between the Circuits on the issues raised in this matter.

Currently, the Supreme Court is in the process of preparing its ruling. The key issue to be decided by the Supreme Court is whether a forum selection clause can dictate in which forum venue is proper and prevent a federal judge from conducting the venue analysis’ mandated and exercising the discretion authorized by Congress.

While the construction industry and their attorneys are waiting to see how the Supreme Court will rule, contractors and construction attorneys, whether reviewing proposed contracts or deciding where to file suit, should consider the following:

  • That a forum selection contract clause may well force a contractor to be required to assert its rights in a court of a distant and inconvenient location instead of the place where the project and all of the witnesses are located.
  • State laws that make forum selection clauses unenforceable likely will not apply to contracts for construction work on military bases or other installations determined to be federal enclaves.
  • The fact that a federal enclave or base construction project is located in Texas (or some other state) may not preclude the possibility that a federal district court in another state could be a proper venue for a dispute arising out of the project.

Your Duty to Preserve Evidence

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The duty to preserve evidence is a critical duty that contractors must take seriously when they present a claim on a job or if they are facing a claim from a contracting partner. And this duty can arise as early as when the dispute occurs that gives rise to the claim. The duty is intuitive — in other words, it should make sense for a contractor to preserve its entire project file because documents in this file are likely relevant to the claim being prosecuted or being defended. And the duty applies not only to hard copies of documents contained in the project file, but it also applies to all electronic documents such as emails, Word documents, Excel spreadsheets, and CAD files.

Protecting the hard copy file is easy. Set aside the boxes that contain the files and keep them safe and do not allow any part of the file to be destroyed or thrown out for recycling. It is trickier to preserve electronic documents because they may be located on desktop computers, mobile devices, iPads, and more. Consult your construction lawyer on how to wrap your arms around the universe of electronic documents to be preserved. Regarding emails for example, first determine which employees worked on the project at issue and have your IT person save a backup file of those individuals’ emails from their desktop or laptop computer. You should also go to your email server and have your IT person save a backup file of the emails there. The whole idea is to save and preserve the emails so that none of them are destroyed!

When a dispute begins, there is a chance that the dispute will not be resolved and your company may have to file a lawsuit against your contracting partner and resolve the dispute in a court of law. The duty to preserve the project file is triggered as soon as you know a dispute exists and this preservation allows the parties to rely on the project file as evidence in the court case. Your opponent must preserve its entire project file as well and the same duty to preserve applies to them. If you inadvertently destroy a document in the project file, your company could face penalties levied by the judge for failing to preserve evidence in the case. That could be bad! The judge could even strike your legal positions and cause you to lose by default.

So, I urge you to consult with your IT staff to ensure that electronic documents are secure and they cannot be accidentally deleted. If your IT staff has a policy of destroying backup tapes or cds after a certain amount of time, then that policy must be put on hold until the case is concluded. The duty to preserve evidence is very important and your construction lawyer should counsel you on when this duty is triggered and when the duty ends. Your construction case should be focused on winning on your claims and not on whether you failed to preserve the entire project file. The best practice to take away from this blog post is to realize the need to preserve the entire project file when a dispute first arises on the project — whether you are the claimant or the party resisting the claim.

Risk Allocation and Unknown Site Conditions

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Last month, the Texas Supreme Court decided El Paso Field Services, L.P. v. MasTec North America, Inc., enforcing a risk-allocation clause pertaining to unknown site conditions despite a competing due diligence clause.

El Paso hired MasTec to replace a section of pipeline. The contract documents included a survey commissioned by El Paso specifically for the bidding process that identified 280 foreign crossings along the pipeline. Evidence during the case revealed that there were between 274 and 514 additional crossings (the exact number was disputed) that were not identified in the original survey.

The contract required El Paso to exercise due diligence in locating foreign crossings and MasTec to confirm the location of all such crossings. The contract also contained a risk allocation provision by which MasTec represented and warranted that it was fully acquainted with the site conditions and had “made all investigations essential to a full understanding of the difficulties which may be encountered in performing the Work” and that MasTec “assumed full and complete responsibility for any such conditions…”

The Court rejected MasTec’s argument that El Paso failed to exercise due diligence in locating the crossings. Instead, the Court looked to the risk allocation provision by which MasTec represented and warranted that it was fully acquainted with the site conditions and held that MasTec’s obligations were made “notwithstanding” any other representations in the contract documents. Thus, the Court found that the due diligence representations by El Paso had no impact on MasTec’s assumption of risk, and MasTec was responsible for the unknown site conditions.

What Does this Case Mean for You?

First, risk allocation for unknown site conditions should be reviewed and negotiated as seriously as other risk allocation provisions such as indemnity and insurance clauses. In this case, the unknown site conditions resulted in millions of dollars of additional work that had to be paid by someone.

Second, the contract must be considered as a whole. As in this case, the court may look to separate parts of the contract to render an interpretation of the agreement. It is good practice to read the entire contract and its exhibits to locate and compare similar provisions.

In sum, to control the risk of unknown site condition that could affect the cost to perform the work, carefully review not only the risk allocation provision, but the entire contract to ensure that the bids you are making or accepting consider the risk assumed.

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