Category: Construction

Making the Case for Arbitration of Commercial & Construction Disputes

06.29.2023

Clients frequently ask their attorneys whether they should arbitrate their commercial and construction disputes instead of litigating in the court system. This question arises either when drafting the contract or, if the contract contains an arbitration clause, once a claim occurs. Claims that require analysis of complex contracts, government regulations, and technical issues, such as those that arise in the construction, environmental, and energy industries, are well-suited to arbitration.

Parties typically want the quickest and least expensive means to a fair result. This is true even for highly sophisticated businesses where the amount in dispute is high. Arbitration gives parties a high level of control in the dispute resolution process. It is specifically designed to provide an alternative to the onerous and expensive discovery and trial procedures required in litigation. Parties can tailor the discovery and schedule to the needs of the case, which drastically reduces the overall time and cost of reaching resolution.

Arbitration also allows parties to select an arbitrator with specialized knowledge necessary to decide the case, which is especially beneficial in complex cases. Because parties agree to arbitration in their contract, they have control over the process in a way that is not available in litigation. For example, the parties may designate the administrative body and applicable rules, require a three-arbitrator panel for a complex case, name a particular arbitrator, require confidentiality, or dictate the timeframe for the hearing.

The following four factors are key considerations in assessing arbitration:

Expertise of decision-maker – One of the most important benefits of arbitration is the parties’ ability to select the arbitrator. This affords parties an opportunity to designate a decision-maker with specific qualifications and expertise needed to understand the contracts, legal issues, engineering and technical facts, and expert evidence to be presented. The parties can also select someone with strong management skills to handle complex matters or difficult decisions. The benefit is two-fold: Fewer resources are needed to educate the decision-maker in the critical industry background information, and the risk of an unreasonable ruling is reduced.

Timeframe for resolution – The median time to resolution in commercial arbitrations is less than one year, whereas the time to trial in federal court is two to three years.* Because appeal rights in arbitration are limited, the award typically terminates the dispute and the expense. However, after a trial, the case could linger through the appeal process for several more years, thus increasing the expense.

In addition to direct cost saving, decreasing the resolution time creates an indirect cost benefit to industry. Because “time is money,” shaving years off the process results in significant savings that likely can be better used advancing the business than litigating a case. Businesses lose billions of dollars every year because of the inherent delays in the litigation process.^ These losses stem from uncertainty in the outcome, capital set aside as reserves for potential losses, open claims reported to insurers, investors, potential clients and auditors, and loss of employee hours and administrative costs expended in litigation. Arbitration offers an alternative to mitigate and control these costs.

Expense – Arbitration typically costs more upfront than litigation. The parties must pay the administrative costs and arbitrator fees, which vary depending on the time and complexity involved, but generally range from $20,000 for a $100,000 claim to $60,000 for a $1 million claim. The costs are shared among the parties, which decreases the per-party cost in multiparty claims.

However, parties can control the cost of arbitration. Discovery, depositions, and document production in complex cases can come with staggering costs. In arbitration, the rules governing discovery and evidence are less formal. Additionally, discovery is more limited, which encourages a streamlined process and reduces costs and time significantly.

Risks – An often-cited risk of arbitration is the lack of appeal right. An arbitration award can only be vacated on limited grounds of fraud, corruption, misconduct, or where an arbitrator exceeds their power.~ However, if the initial decision-maker has expertise in the industry and law involved, the expectation is that the decision will be a well-reasoned one that the parties can accept.

In contrast, a major risk of litigating a complex commercial dispute is the fact-finder’s lack of understanding of the issues, the escalating potential for nuclear verdicts, and the appellate court’s limited power to correct factual findings.

In sum, arbitration is a good choice for dispute resolution where parties want to control the risk of an unreasonable outcome, reduce the time and expense of the process, and select a decision-maker with special expertise in their industry.

About the author: Mary Anne Wolf is an engineer and attorney. She is on the panel of commercial and construction arbitrators for the American Arbitration Association. Her goal as an arbitrator is to assist parties in managing their case for efficient resolution, give a high level of attention to each party’s position, and achieve a fair result.

References:

* AAA, Measuring the Costs of Delays in Dispute Resolution [online]; Micronomics, (March 2017), Efficiency and Economic Benefits of Dispute Resolution through Arbitration Compared with U.S. District Court Proceedings.

^ Efficiency and Economic Benefits, pp. 4-5, 16-23.

~ La. R.S. 9:4210 (LA Binding Arbitration Act); 9 USCA §10 (FAA).

A Matter of Control: Vicarious Liability in Construction Projects

05.16.2023

Under Louisiana’s comparative fault system, each party in a lawsuit generally is only liable for their own percentage of fault. However, in some instances, a party may be “vicariously” liable for the fault of another party. One example of vicarious liability is an employment relationship, where an employer can be liable for the fault of its employees. On the other hand, vicarious liability generally does not apply when the alleged “employee” is found to be an independent contractor. Whether a worker qualifies as an employee or an independent contractor often becomes an important issue in suits related to construction projects.

The test for determining whether a party is an employee or an independent contractor involves analysis of who has the right to control his or her work. In the construction context, courts distinguish between “operational control” (which suggests an employment relationship) and control as it relates to the results of the work (which suggests an independent contractor relationship). Two recent cases examine this issue and provide examples of how courts analyze the type of control necessary to establish vicarious liability in the construction projects.

In Stonetrust Com. Ins. Co. v. TBT Contracting, Inc. of LA, homeowners hired a general contractor to renovate their home. During the project, an electrical subcontractor was injured after falling through an attic space. It was alleged that the general contractor created a hazard by cutting a hole in the attic and concealing it. The plaintiff sued the general contractor and the homeowner. The court had to determine whether the homeowner could be liable for the subcontractor’s injuries, which would require a finding that the homeowner was vicariously liable for the general contractor’s fault.

The plaintiff argued that the homeowners were particularly involved in the project. It presented evidence to show the homeowners would give suggestions regarding the work to be performed and also directed alterations or additions to the work. The plaintiff argued that this demonstrated control over the general contractor’s work. However, the court disagreed. Despite the homeowners’ level of involvement, the court held that their control was limited to the results of the work, and was not “operational control.” The general contractor therefore was an independent contractor, and the homeowners were not vicariously liable for its acts.

In Baham v. Fisk Elec. Co., a city worker brought suit against a general contractor after suffering injuries from an electrical shock. The worker alleged that the general contractor was vicariously liable for the fault of its subcontractor. While evidence showed the subcontractor relied on the general contractor for the location of its work, the court found that this was not “operational control.” The court observed that general contractors are entitled to exercise supervisory control over its independent contractors to ensure compliance with the contract. It further found that suggestions or instructions given to an independent contractor do not equate to control over the methods or details of the work. Absent such “operational control” vicarious liability could not be imposed.

Though they may be limited to their facts, these cases show courts usually require a showing of more than suggestions or instructions regarding the work to establish the “operational control” necessary to trigger vicarious liability. Absent such a showing, independent contractors usually remain independent.

Case References:

Stonetrust Com. Ins. Co. v. TBT Contracting, Inc. of LA, 2022-0971 (La. App. 1 Cir. 4/14/23), 2023 WL 2947826

Baham v. Fisk Elec. Co., 2022-0551 (La. App. 4 Cir. 3/22/23), 2023 WL 2595253

Fraud or Mistake? And How It Can Effect a Claim Against a Professional Designer.

04.06.2021

All claims against professional designers are perempted (extinguished) under La. R.S. 9:5607 five years after the project is completed with an exception for fraud. In cases of fraud, an otherwise untimely lawsuit can go forward. For this reason, plaintiffs often allege fraud when the claim may be perempted. This scenario was present in the recent First Circuit decision in Markiewicz v. Sun Constr., L.L.C, 2019-1590 (La. App. 1 Cir. 9/18/20), 2020 WL 5587265. The decision helps to explain when a designer’s alleged conduct falls outside of ordinary negligence based upon the standard of care and becomes fraudulent.

Broadly, fraud is designed as “a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other.” La. C.C. art. 1953. Fraudulent intent or intent to deceive is a necessary element of a fraudulent misrepresentation. Therefore, fraud cannot be predicated on a mere mistake or negligence, however gross.

In Markiewicz, the plaintiff homeowners filed a class action lawsuit in 2006 arising from flooding of their neighborhood. Ten years later, plaintiffs added as defendants the engineers involved in the design of the drainage system, including the engineers who prepared the surveys for the development. Absent fraud, the newly added claims would be untimely. Plaintiffs alleged that the engineers fraudulently provided incorrect or misleading survey certificates, despite their knowledge that the certificates were incorrect.

The engineers filed a motion for summary judgment on peremption because more than five years had passed from the completion of their services. The engineers argued that plaintiffs could not prove fraud under facts of the case such that the fraud exception would not apply.

The Markiewicz court ruled for defendants. Although there was a dispute as to whether the engineers’ measurements were erroneous, the court found that plaintiffs failed to prove that the services were fraudulent. The plaintiffs provided no evidence that the engineers were aware of any discrepancy in preparing the surveys or that they knowingly misrepresented the surveys. As such, the court found that the fraud exception did not apply, and plaintiffs’ claims against the engineers were perempted. Through its analysis, the Markiewicz court made clear that labelling allegedly negligent conduct as fraudulent is insufficient to defeat a supported motion. While fraud may be established by circumstantial evidence, including highly suspicious facts and circumstances, the court found the record devoid of such facts.

Insurance: “ACV,” Depreciation, or Both

02.19.2021

In Louisiana, we are all too familiar with natural disasters. Every “hurricane season,” we hope the storm causes only minor inconvenience; but history teaches us to prepare for more. When these storms come, home and business owners inevitably make post-disaster insurance claims to repair the damage. While the specific amount owed for property damage is determined by the terms of the policy, the amount received may be affected by when (and if) the damage is repaired.

An insurer will work with you to identify the “actual cash value” or “ACV” of the damaged property when handling your claim. “ACV” is defined as the cost to repair/replace the damage, less depreciation. Jouve v. State Farm Fire and Cas. Co., 2010-1522 (La.App. 4 Cir. 8/17/11), 74 So.3d 220. Many policies provide that an insurer is not obligated to provide you with more than the “ACV” of the damage, unless and until you actually make repairs. Later, you can recover the depreciation amount once you submit proof that the repairs are complete. Courts have enforced such provisions in many cases, regardless of the type of loss.

So, what happens if you never make the repairs? Simply, the insurance company may never owe the depreciation. In Hackman v. EMC Ins. Co., 07-552 (La.App. 5 Cir. 3/25/08), 984 So.2d 139, the plaintiff’s property was damaged by a fire. The insurer paid the ACV of the loss but withheld depreciation pending repairs. The plaintiff never made the repairs and ultimately sold the property. The Court ruled the plaintiff was not entitled to recover the difference.

Similarly, in Jouve v. State Farm Fire & Cas. Co., supra, the plaintiffs’ home was damaged by wind during Hurricane Katrina. Their insurer paid the ACV of the loss. Thereafter, the plaintiffs sold the home “as is” and sought recovery for the depreciation. The court reviewed the policy and found the plaintiffs’ sale of the home without repairs limited their recovery to ACV.

As with any insurance claim, you should always read your policy before losses occur to ensure you understand its terms and conditions. Maybe add this as an unusual step to your hurricane checklist. As these cases show, your ultimate recovery can be affected by what you do, or do not do, following the loss.

Construction Law: The Limits of Anti-Indemnity in Louisiana

05.01.2018

Louisiana’s anti-indemnity statute applicable to construction contracts, R.S. 9:2780.1, became law in 2011. The statute renders unenforceable any provision in, or collateral to, a construction contract that purports to indemnify or hold harmless a person from liability for its own negligence, or has the effect of doing so. Since the law’s passage, few court decisions have interpreted its seemingly broad language and many questions remain as to the law’s full impact.

The obvious intent of the anti-indemnity law is to avoid shifting liability away from a party at fault to another person. To this end, the language in the statute nullifies any agreement that has “the effect of holding the person at fault harmless.” But what about “limit of liability” provisions? Arguably, such provisions have the effect of holding harmless the party at fault. Does a limit of liability provision, otherwise valid and enforceable under Louisiana law, run afoul of the anti-indemnity statute? After all, those parties with superior bargaining power in construction contracts will seek to insulate themselves from liability to the fullest extent allowed by law, and will look for alternatives to the indemnity provisions that now expressly violate public policy.

One court recently held that R.S. 9:2780.1 does not prohibit a limit of liability provision in a construction contract. In Patriot Contracting, LLC v. Star Insurance Company, (E.D. La. 3/01/2018), the construction contract contained a provision that excluded liability of the architect for good faith decisions made during contract administration. The plaintiff/contractor alleged that the architect was negligent in its contract administration duties and caused it to suffer economic loss. The court dismissed the claim, rejecting the contractor’s argument that the provision violated the anti-indemnity law.

The Patriot court explained that the statute prohibits an indemnity agreement, i.e., where one party agrees to reimburse a second party for damages for which the second party becomes liable to a third party. However, the anti-indemnity law did not impact the provision that excluded the contractor’s right to recover from the architect. Thus, at at least according to one court, parties in construction contracts are still free to include limit of liability provisions.

Mary Anne Wolf is an engineer/attorney with a construction background who represents design professionals, contractors, and others in construction litigation. She also gives seminars on the subject. She enjoys travel, yoga, and encouraging her husband in his gardening and cooking endeavors.

Who’s Left Holding the Bag? Indemnity in Construction Contracts

01.12.2018

The period of time before the contract is signed in one of optimism. After all, few sign a contract expecting problems. But if you do not consider the many “what ifs,” you may be left holding the bag. And this “bag” may include indemnity provisions which could force you respond for the actions of other parties.

Many contracts include “indemnity” or “hold harmless” provisions. Black’s Law Dictionary defines indemnity as “a duty to make good any loss, damage, or liability incurred by another.” Like many states, Louisiana allows one party to agree to pay for the damages caused by the fault of the other, if this intention is sufficiently expressed. However, there are broad statutory exceptions that can nullify the indemnity requirement.

Parties to construction contracts should be careful not to blindly rely upon indemnity provisions because the Louisiana legislature in La. R.S. 9:2780.1 declared invalid any indemnity provision where a party seeks indemnity from another for its own fault.

Despite the broad nullification of certain types of indemnity provisions in construction contracts, current Louisiana law allows a party to be indemnified for its own fault when the other party obtains insurance to cover the risk, and recovered the cost of insurance in the contract price. For example, a general contractor can require a subcontractor to indemnify the general contractor for the general contractor’s fault, as long as the subcontractor obtains insurance for this obligation, and was paid that amount under the contract.

Indemnity obligations are not always as they seem. Even in the pre-contract period of optimism, you may want to contact an attorney so you won’t be left holding the bag.

Chelsea Payne is an associate at Keogh Cox and has been practicing for three years. Her practice mainly relates to construction law and complex litigation. Chelsea enjoys playing tennis and spending time with her family.

Fourth Circuit Brings Clarity to Peremption Statute in Suit Against Design Professional

02.15.2016

The question addressed in MR Pittman Group, LLC versus Plaquemines Parish Government, 2015-0396 (La.App. 4 Cir. 12/2/15) was whether the five-year peremptive period set by La. R.S. 9:5607 displaces Louisiana’s general one-year prescriptive period set by La. C.C. art. 3492, when applied to tort claims against design professionals. Finding a contractor’s claim against the project engineers prescribed, the MR Pittman court held that the one-year prescriptive period governs tort claims against design professionals.

Going Once, Going Twice … A New Alternative to Design-Bid-Build Contracts

11.13.2014

The 2014 Legislative Session brought new possibilities for large construction projects under the Public Contract Law. Generally, a public entity is required to separately hire a design professional to design the project, and let the project out for public bid for the construction work. “Design-build” contracts, in which the public owner contracts with one entity for the design and construction of the facility, are prohibited under Public Contract Law. However, the Legislature has now given public entities another option under the Public Bid Law: Construction Management at Risk Delivery Method (CMAR).

What’s the Delay? Contractor Delay Damages Under the Public Bid Law

11.03.2014

Generally, a provision in a construction contract for private work limiting the contractor’s right to recover additional costs arising from delays outside of the contractor’s control may be enforceable. However, under the Public Bid Law, such a provision has been found to be against public policy. La. R.S. 38:2216 prohibits any public contract provision that purports to waive, release or extinguish the rights of a contractor to recover delay damages if the delay was caused in whole or in part by the acts or omission of the public entity.

Back to the Beginning – Veil Piercing

12.17.2013

The longstanding rule that the analysis for “piercing the corporate veil” of an LLC is substantially the same as the analysis for piercing the veil of corporations has been called into question by the recent Louisiana Supreme Court decision in Ogea v. Travis Merritt and Merrit Construction, LLC, 2013-1085, — So.3d —. In Ogea, the Court addressed “the extent of the limitation of liability afforded to a member of an LLC” and the statutory basis for exceptions to this limited liability.