Drafting Construction Contracts
for Today's Complex Projects
By: Barry B. LePatner, Esq. and Victoria R. Drogin, Esq.
Counsel for corporate, governmental and institutional owners have long been faced with limited choices when deciding on how to structure the architectural, engineering and construction agreements to be used for their clients' new construction projects. These projects include headquarters facilities, hotels, offices, warehouse and distribution centers, shopping malls or the residences for executive clients.
Today's mixed use projects — those that incorporate diverse functions such as a hotels, condominiums, cinemas, stores, and parking — involve complex business objectives that must be woven into the fabric of the agreements for each of the members of the design and construction team. Is there a critical need for the retail and parking facilities to be completed for the holiday shopping season to ensure cash flow for funding the balance of the project? Will a fast track process be needed to commence work on the hotel and apartment tower to secure a management contract with a major hotel company, although the balance of the project can proceed through a general, phased design process? In a renovation project, do the owner's business goals include a need to maintain ongoing operations while construction proceeds on a phased basis? These are only a few of the critical issues that counsel must identify and incorporate into the contract process. Standardized forms currently in use make it next to impossible to address these issues in a workable legal context.
For general counsel at corporations or institutions and law firms that advise clients who do not regularly require construction-related advice, adapting standardized industry forms to a project's special needs has traditionally been the accepted norm. However, the use of such pre-packaged contract formats, which are promulgated by the associations for the architects, engineers, or the construction industry, forces counsel for the owner to either create its own contract structure or adapt the industry forms with riders that often fail to address the inherent weaknesses in such contracts. In turn, these drafting problems have led to a search for better alternatives owing chiefly to a general lack of sophistication or experience with the nuances of this specialized area of the law.
It is widely recognized that even today's seemingly simple construction projects are far more complex than those built even ten years ago. Owners are facing increasing choices in the means and methods of design and construction. The decisions of whether or not to use a construction manager or whether to use a design-build mechanism or the many new variations thereof, for example, can give the most sophisticated executives or university vice-presidents pause.
Furthermore, today's new project agreements must account for a host of new building technologies for structural, electrical, plumbing, heating and air conditioning systems. Add to this the increasingly important need for incorporating advanced security and telecommunications consulting services, to name but a few of the options available, and it is easy to see that the legal agreements needed to protect an owner and separately identify the obligations and liabilities for each project participant should not be left to the unwary.
Hence, most owners and in-house counsel are faced with major questions early in the conceptual stage of their important projects:
- Does the existing team of advisors and counselors possess the experience and sophistication to assist in the business and legal decisions attendant to launching the project?
- Do they have the requisite skills to draft the preliminary documents needed to prepare the requests for proposals that will define the scope and business goals for the project?
- Does in-house counsel have the experience needed to assist in the preparation and negotiation of the requisite contract documents to ensure adequate protection of our multi-million dollar investment in the project?
All too often, the answers to too many of these questions is: No.
Corporate Counsel
For many, if not most projects, the role of an owner's counsel is critical and enormously important. If the project involves leased property, in-house or outside counsel has worked closely with the client to prepare the requisite lease and associated documentation that preceded design and construction of its new premises.
Where a project involves the purchase of property, counsel will have assisted in legal tasks that may encompass such issues as zoning, land use, environmental problems and conveyancing. In addition, counsel will likely have worked closely with the client in its efforts to secure financing for the project, the documentation for which is extremely important, especially where the construction financing is being replaced by a permanent loan upon completion of the work.
As this important legal work nears completion, the owner is contemplating how the project will be designed and constructed. If counsel is well-versed in the actual development of property its continuing efforts on behalf of the owner will be a seamless segue throughout the remainder of the project. If, however, outside counsel's prior experience in these areas is limited in nature, or its experience extends to "marking up" standard form agreements used on a prior, perhaps unrelated project, an immediate series of questions is presented for the law firm's principals to address:
- Will our firm's undertaking of this assignment exceed our experience?
- Is there a partner or principal in our firm that can oversee these matters or are we relegated to assigning this matter to an associate with limited prior experience?
- Do we have the sophistication to advise our clients on the business issues that will impact on the selection and determination of the project structure and the correct type of agreements necessary to address the specific issues raised?
- Will we be able to explain the rationale for our recommended contract provisions in the event of ensuing claims or litigation?
For in-house counsel, this decision-making often takes a different turn. Take the example of the general counsel for an investment firm that embarked on a project to expand its headquarter's offices three years ago. With a clear intention to speed up the contracting process, he asked his outside law firm to review an agreement prepared by his owner's representative retained by the client. The general counsel explained that he had asked the owner's representative to base his draft upon the agreements previously prepared by our law firm for the original project.
Unfortunately, the owner's representative had either misconstrued his assignment or had his own agenda for the project. The draft we reviewed by the firm would have created a highly antagonistic contract negotiation with the project's new Construction Manager. In turn, this would have led to the project being delayed for several additional weeks. After these factors were explained to the general counsel, he authorized the firm to re-structure the agreements to meet the business goals of the client so as to ensure that the contract process would not hold up the anticipated date for commencement (and inevitable completion) of the work.
Increasingly, corporate and in-house counsel have begun to recognize the need and the value of securing specialized expertise in this area of the law. Turning to standardized agreements in today's construction environment has become increasingly risky for owners and their attorneys.
This change has occurred because owners now recognize that each project is unique in that the variables – the special features needed to match the scope with the project delivery system, the combination of consultants to be integrated and coordinated to the phased completion dates for separate stages of many projects – all must be properly defined so that responsibilities and liabilities are properly ascribed to each of the project team members.
At the outset of each project, construction counsel must meet with executives or senior officials of the client and survey their critical needs for project success. This complete investigation calls upon the owner to address a series of goal-oriented questions at the outset of the project.
These questions are directed at the specific business and legal objectives attendant to the successful completion of the project. By identifying these issues, counsel insures that the owner will be provided a series of agreements that contain the requisite provisions that will effect their business goals and requires each participant to buy into the owner's goals as a component of the work, labor and or services to be performed. As a result of this effort, each of the contracts for the individual team members should include the following acknowledgments:
Commitment to Project Goals. The [Team Member] acknowledges that the Owner has established certain business, legal, design and construction objectives for the Project as set forth in Article I of this Agreement (the "Project Goals"), the accomplishment of which shall be critical to the Services to be provided under this Agreement. At all times during the course of the Project, the [Team Member] shall furnish its services and evidence its commitment to the Project Goals by achieving the objectives set forth below:
- To define the program and scope of the Project to accomplish the business objectives of the Owner;
- To design [or construct] the Project such that it will result in an enthusiastic response from each of the different user groups who will occupy the Project as defined in Article __ of the Agreement;
- To fully utilize all available Project areas so as to maximize the usages and benefits defined by the Owner in the Project Goals;
- To meet all schedule and milestone constraints established by the Owner as set forth in Exhibit __;
- To incorporate the Owner's marketing strategies and initiatives into those elements of the Project that must complement and assist such strategies and initiatives; and
- To design [or construct] the Project in conformity with the Project Budget established by the Owner.
Dispute Resolution Framework
A separate and increasingly important role to be played by construction counsel is in the recommendation of the most appropriate forum for resolution of any disputes that may arise during the course of the project. Standard forms of agreement generally refer all disputes to arbitration under the aegis of the American Arbitration Association. Counsel must exercise extreme caution in this area of advising clients.
To be sure, arbitration has many benefits. But, owing to the unique nature of the issues that surround design and construction disputes, for all practical purposes, arbitration should be recommended only upon careful consideration. Project disputes often require joinder of the architect, the contractor and various consultants or subcontractors.
As a result, counsel will quickly find that the limited discovery arbitration permits, as well as the time constraints imposed for the presentation of claims in that forum, may preclude the opportunity to secure a complete analysis of all project documentation in order to fully develop the owner's case. Faced with the complicated decisions that must be made in these critical areas of advising the owner, arbitration of these disputes is not a forum for the inexperienced construction litigator.
Mediation involving construction disputes is another area that can benefit or backfire on the unwary drafter of design and construction agreements. Professional liability carriers for the design team members may strongly prefer mediation as an interim source of dispute resolution in order to avoid the costs of litigation. While this request may appear seemingly innocuous during contract negotiations, the pitfalls of blindly accepting this approach can be disastrous for the unwary owner and its counsel.
Consider the recent $20 million dispute that arose out of the design and construction of a newly-completed airline terminal. The parties had agreed in the contracts that all disputes would be first heard by a dispute resolution board composed of three outside members familiar with the construction process. Unfortunately, the agreement also made findings by the board non-binding, permitting the ultimate resolution to be deferred until concluded by litigation. By intent, this procedure was envisioned to handle disputes during the construction process so as to ensure that no dispute would delay the very tight timetable for completion of the project.
After completion of the project one of the project team members brought a multi-faceted claim covering numerous aspects of the project. A multimedia presentation of the many discrete elements of this claim, made in the context of the mediation procedure required by the contracts, highlighted the fact that the complexity of the issues would tie up the parties for one or more years in a forum where neither was bound by the findings of the dispute panel. Both time and expense would be incurred by all parties as a result of the failure of prior contract counsel to anticipate this possibility in drafting the project agreements.
A multi-million dollar settlement was based, in part, on the recognition by the adversary that the dual dispute resolution format, which required non-binding mediation as a prerequisite, had never anticipated the time delay inherent in resolving this type of dispute.
Conclusion
As the business and legal complexities of the design and construction world become interwoven with the building needs of the corporate, governmental and institutional world, it has become more critical than ever to secure agreements for projects that reflect the realities of the owner's bottom line business issues. In-house corporate counsel, as well as outside counsel for these clients, must become highly sensitized to the need to develop specialized agreements that will both protect the parties and provide the guidance necessary for the successful completion of a client's project.
@ 1999 Barry B. LePatner & Associates LLP. All rights reserved. Disclaimer.
