Letter from the Editor

Welcome to the spring 2018 edition of our Under Construction newsletter. We hope 2018 is off to a good start for you and your company.

We start this issue with an article providing some practical solutions to common legal disputes in construction. Following these tips will hopefully help you with dispute avoidance, mitigation and resolution.

Next we take a look at the commercial operation of drones in construction. Drones are now used for everything, including real estate photography, evaluating and photographing construction or design problems, progress reports, roof inspections and surveying undeveloped land. Increased use of drone technology comes with an increased need for understanding the pertinent regulations and laws surrounding drone use.

In the world of construction, time is money. This is true even when the owner and the contractor are engaged in a dispute. Unfortunately, dispute resolution and litigation–whether in state or federal court, arbitration or any other private resolution system–still move at the pace established when the Federal Rules of Civil Procedure were created generations ago. Our next article discusses early mediation and how this strategy might help resolve disputes more quickly and economically.

We round out this issue with a look at some new laws and court cases. As we move into the second quarter of 2018, we would like to impress upon those with California projects that it may be important to review your California private construction contracts now, if you have not already done so. Our third article reviews a new California law that took effect January 1, 2018 that affects private works construction contracts.

Additionally, the Nevada Supreme Court recently issued a new ruling impacting an HOA’s ability to bring claims on behalf of its members. The Court addressed whether an HOA has standing to represent: 1) owners who have sold their units during litigation; and 2) owners who have purchased their units after litigation has started.

Finally, the construction group at Snell & Wilmer would like to congratulate the success of the American Cancer Society’s (ACS) inaugural Construction vs. Cancer Las Vegas event that was held February 10, 2018. Through the event, ACS was able to create an amazing fun-filled day for over 500 pediatric cancer survivors, their family members and 1,450 guests, as well as raise over $280,000 towards the fight against cancer. Snell & Wilmer is proud to have helped play a small role in making this event possible.

We hope you will find these articles informative and enlightening. Please let us know if you want us to address a specific construction issue in a future newsletter. Enjoy spring!

Regards,
James J. Sienicki

Practical Solutions to Common Legal Disputes in Construction

by Jason Ebe and James J. Sienicki

Tip Sheet for Dispute Avoidance, Mitigation and Resolution:

1. Do Your Due Diligence. Before accepting new work, consider conducting due diligence on the contractor, the design team, the subcontractors, the owner, and the project. Is there a history of success or failure? Is there transparency as to financing? Is the design complete? Are risks being appropriately allocated? As difficult as it may seem to pass on work, taking on a job that will cause you a loss may be worse than not taking the job. The only thing worse than no job is an unprofitable job.
2. Bid and Contract Smartly. Consider utilizing fair and balanced contract documents. If bidding, consider conditioning your bid on using a fair and balanced contract. Understand the terms, including without limitation, the insurance, termination, scope of work, payment, claims, change orders, liquidated damages, schedule, and dispute resolution terms and provisions. Consider negotiating away, if possible, any onerous or unfair terms.
   
   In negotiations, consider adopting terms from industry forms developed and endorsed by industry organizations serving the constituent parties with whom you are negotiating. For example, when negotiating with architects, consider language from the AIA forms. As another example, general contractors and subcontractors may want to consider guidance from the ConsensusDocs forms, which are endorsed by 40 leading construction industry organizations, including AGC and ASA, and represent fair and balanced terms. Remember that there may be terms implied by law that help you such as the duty of good faith and fair dealing, or statutes that help you like a Prompt Payment Act, or case law that may be helpful. Consult a knowledgeable construction attorney in the state where the project will be built.
3. Know and Follow Your Contract. You may want to exercise caution with signing and filing away. Consider referring to it on a regular basis. You may want to review the terms regarding schedule, delays and impacts, changes, and unforeseen conditions, so you can plan your work, perform to your plan, and react when your work doesn’t go according to plan. Equally important are contract provisions flowed down to you through your contract.
4. Communicate and Document. Consider maintaining regular, in-person communications with project participants. Consider attending the project meetings. You may want to consider doccumenting your communications, and documenting your performance (including narratives, photos/video, and contemporaneous job costs), even when work is going according to plan, which may establish a benchmark, and may signal when an issue impacting performance has arisen.
5. Investigate and React to Issues Quickly. Don’t ignore problems, or they may get worse. You may want to consider investigating the situation, evaluating your options, getting help if necessary (see #10), and reacting without delay. But don’t overreact, or you may make the problem worse.
6. Communicate and Document Again. You may want to investigate and determine your position, communicate and document. In person meetings and telephone calls often move the ball faster than written communications, but written confirmation of those communications may be essential. Consider providing the necessary notices, claims, and supporting documentation, and supplement when appropriate. Just a few examples where this step may be critical:
   • The project is behind schedule
   • Actual site or work conditions don’t match the representations in the plans and specifications
   • Someone in the chain orders changes in the work or the schedule without written acknowledgement
   • Performance is hindered or disrupted by another party on the project
   • Payment is delayed by another party on the project
   • Receipt of a default notice, or a suspension of work or termination notice
   • The contractor or owner tenders a claim for defense or indemnity
   • Not receiving what is required by the plans and specifications
   • Receipt of a claim letter or need to prepare a claim letter
7. Don’t Be Salty. Too frequently discussions turn adversarial, with extreme positions and personal attacks. You may want to exercise caution with losing sight of the team work approach that likely got you the job, and may get you future jobs. Consider focusing on win-win rather than win-lose, or you may end up with lose-lose. You may want to exercise caution when saying or printing statements that may be awkward to explain later to management, clients or the arbitrator/judge/jury.
8. Attempt to Resolve Issues Early, but If Not, Reserve Your Rights. Consider working through issues early to mitigate future disputes. Many large projects engage Dispute Review Boards. Kicking every dispute to the end of the project may create an atmosphere of building the claim rather than the project. But, if reasonable efforts to resolve are unsuccessful, consider reserving your rights, clearly and expressly, and in writing. You may want to be cautious of statutory lien waiver forms such as: “this document becomes effective to release any mechanic’s lien, any state or federal statutory bond right, any private bond right, any claim for payment and any rights under any similar ordinance, rule or statute related to claim or payment rights.”
9. Evaluate Documents. If a claim arrives, consider evaluating the contract terms, notice requirements, change orders previously signed and pending, payment applications, lien waivers, and job cost reports.
10. Get Help. At the first sign of a dispute, consider utilizing project management resources, white papers, and tip sheets. See also Guidelines for a Successful Construction Project. Copyright © 2008, The Associated General Contractors of America / American Subcontractors Association, Inc. / Associated Specialty Contractors. And seek guidance from knowledgeable construction legal counsel, who can assist in contract drafting/revision/negotiations, early diagnosis and treatment of problem projects, engagement of effective consultants/experts, and resolution of disputes. Without good early help, the dispute may get much worse and take much longer to resolve.

Commercial Operation of Drones – What Construction Stakeholders Should Know

by Mark E. Konrad and James D. Carlson

The construction industry is one which routinely seeks to improve through the use of new technologies. One technology which has seen a steady increase in use by contractors, owners and others in the industry is the use of drones. Drones are now used for everything including real estate photography, evaluating and photographing problems, progress reports, roof inspections, and surveying undeveloped land. Increased use of drone technology comes with an increased need for understanding the pertinent regulations and laws surround drone use.

At the national level, regulation of commercial drone use is administered by the Federal Aviation Administration (FAA). The FAA’s final rule for small, unmanned aircraft went into effect on August 29, 2016. The FAA has provided a summary of the key operational limitations for drones or unmanned aircraft systems (UAS) which, among others, include the following:

• A drone is required to weigh less than 55 lbs.
• The drone must remain close enough to the remote pilot in command and the person manipulating the flight controls of the small UAS for those people to be capable of seeing the aircraft with vision unaided by any device other than corrective lenses.
• The drone may not operate over any persons not directly participating in the operation, not under a covered structure, and not inside a covered stationary vehicle.
• The drone should be operated during the day or civil twilight (30 minutes before official sunrise to 30 minutes after official sunset, local time) with appropriate anti-collision lighting.
• The maximum groundspeed for a UAS is 100 mph (87 knots).
• The maximum altitude for a UAS is 400 feet above ground level or, if higher than 400 feet, within 400 feet of a structure.
• The UAS can be operated when there is minimum weather visibility of three miles from the control station.
• A person may not operate a drone if he or she knows, or has reason to know, of any physical or mental condition that would interfere with the safe operation of a small UAS.

Many of the operational limitations identified above may be waivable if the operator can demonstrate to the FAA that his or her operation can safely be conducted under the terms of a certificate of waiver. The FAA also requires that a person who is operating a drone must “either hold a remote pilot airman certificate with a small UAS rating or be under the direct supervision of a person who does hold a remote pilot certificate (remote pilot in command).” In order to be eligible for a remote pilot certificate, a person must: (1) pass an initial aeronautical knowledge test at an FAA-approved knowledge testing center; or (2) hold a part 61 pilot certificate other than student pilot, complete a flight review within the previous 24 months, and complete a small UAS online training course provided by the FAA. Operators also must be at least 16 years old and are required to be vetted by the Transportation Security Administration.^[1]

You should also consider what state laws or regulations also apply to your drone use. According to the National Conference of State Legislatures, as of February 1, 2018, at least 41 states have enacted laws addressing the operation or use of UAS covering such areas as what qualifies as a drone or UAS, privacy protections, whether local regulation of drones is preempted by state law, and operational limitations.^[2]

In sum, the operation of drones for commercial purposes is now routinely subject to various levels of federal, state, and potentially local regulation. Care should be taken to assure that commercial use of drones for construction projects complies with all applicable laws and regulations.

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Notes:

^[1]See Summary of proposed regulation by the Federal Aviation Administration; Registration and Marking Requirements for Small Unmanned Aircraft, (cross referencing 14 CFR 1, 45, 45, 48, 91 and 375) available here.

^[2] Current Unmanned Aircraft State Law Landscape available here.

Early Mediation: Resolving Disputes Quickly and More Economically

by Stewart O. Peay

In the world of construction, time is money. This is true even when the owner and the contractor are engaged in a dispute. Unfortunately, dispute resolution and litigation–whether in state or federal court, arbitration or any other private resolution system–still move at the pace established when the Federal Rules of Civil Procedure were created generations ago. The only questions that clients ask more than “Do we have a good case?” is “How long will it take to resolve it?” and “How much will it cost?” With many owners and contractors dependent upon credit facilities or bonding, the issue is not only that a dispute needs to be resolved, but it is imperative to resolve it quickly and efficiently.

Here’s the good news: there is a pathway that may provide the possibility of a resolution in an accelerated manner that allows the parties to control the outcome of the litigation. It also may allow them to avoid spending bundles of money on attorneys and experts and to return to focusing on their core business. This path is early mediation. With almost every dispute resulting in settlement, the question that has to be asked is “Why wait?” Even if the mediation fails to resolve the case, the foundation for the settlement is often laid during the mediation session and, at worst, the issues that are really in dispute are identified and potentially refined.

There are three phases in a case where early mediation may be most effective: 1) before the parties go to court or retain an arbitrator; 2) right after the parties have entered litigation but before any substantive discovery has been done; and 3) after documents and electronically stored information have been exchanged by the parties but before the costly and time consuming deposition process has begun.

In my experience, option three is normally most preferable. First of all, by conducting at least preliminary discovery—such as reviewing key documents and interviewing key people—each party has vetted their own case. (They know their warts.) Second, it allows both sides to see the other side’s documents and analyze much of what the other side has recorded, to its benefit or detriment. (They know the other side’s warts, too.) Finally, through the mediation brief, both parties are forced to acknowledge those warts by “putting their cards on the table.” With this information, skilled and experienced counsel should be able to prepare their clients for a fruitful mediation.

Selection of a skilled mediator may be key. (I do not act as a mediator and write this from the perspective only of an advocate.) The mediator should consider being willing to not just “look for the number that will settle this matter” but rather to analyze the parties’ claims and identify the true issues in dispute. He or she should explain to the parties not only the benefits and risks of early resolution at the mediation but the risks and benefits of continued litigation. Some of the best mediators I’ve seen have had the courage to tell me, that I need to “make the other side bleed” before I can resolve the case or that my client’s options are to settle now or get pummeled before the judge in an upcoming hearing. In other words, the mediator should not only give a number but a reason for settling or continuing.

A skilled mediator will present options to each side and, along with counsel, help the parties identify the value of those options and decide whether there is a way to make a settlement work. Or, if the gap between the sides is too wide, the mediator will advise whether they need to invest further resources on depositions and experts to refine the case.

Analytics and experience will often allow the parties to bridge the gap. The analytical tools that owners and contractors have today can allow them to determine the value of the case. Experienced legal counsel may help refine that analysis in light of the governing law and litigation risks.

Even if early mediation does not result in an immediate resolution, it may be time well spent because the parties will have refined the issues in dispute, which in turn may be likely to lessen fact discovery and the need for or the amount of experts. More importantly, the parties have seriously opened the channels of communication that often lead to resolution at a later date. Although a final resolution may not come until after depositions of lay witnesses are complete or even after dispositive motions have been heard or even on the eve of trial, the foundation of that resolution may have been laid during early mediation.

While early mediation may not provide the courtroom drama of “A Few Good Men,” it may allow litigants to return to their core business and focus on their bottom line.

Important California Contracts Reminder – You Must Update and Review Your Private Works California Construction Contracts for 2018

by Michael J. Baker

As we move into the second quarter of 2018, we would like to impress upon the reader that it may be important to review your California private construction contracts now for 2018, if you have not already done so. California passed a new law which took effect January 1, 2018 for private works construction contracts executed after the first of the year which makes a private works Direct Contractor (Civil Code § 8018) liable for subcontractors’ failure to pay wages (any and all tiers). Effective now, a Direct Contractor is responsible to pay its subcontractor’s wages and benefits if that subcontractor fails to pay such wages and benefits. The new law is California Labor Code 218.7 or commonly known as AB 1701. The necessity to review your 2018 contracts may be important for any and all private work contractors who may be considered a Direct Contractor in California and this includes any person or entity that contracts directly with the owner. If a special purpose entity is used as a “builder” with a direct contract with the owner, the special purpose is now liable for these wages and fringe benefits just like a Direct Contractor.

Not only should Direct Contractors consider reviewing their contracts, subcontractors should too. If a subcontractor regularly signs standard form subcontracts that are issued by contractors they do business with, particularly Direct Contractors, subcontractiors may want to consider reviewing the agreement with an eye towards the new law because it may impact financial risk. Subcontractors may want to consider being on the lookout for new requirements to supply contract labor estimates for the overall job, payroll information, expanded recordkeeping requirements, expanded project paperwork and releases, and expanded liability by way of indemnity and potential guarantees, including personal guarantees and potential payment bond requirements when none were required before.

Here's a brief summary of the new law. The law applies to all Direct Contractors who make or take a contract in California for the “erection, construction, alteration, repair of a building, structure” who must assume and be liable for debts owed to a wage claimant, or a third-party acting on behalf of the wage claimant, by the contractor's subcontractor. This applies to wages incurred by the subcontractor for the wage claimant's performance of labor included in the subject of the original contract between the contractor and the owner. It applies only to unpaid wages, fringe benefits or other benefits of payment or contribution, including interest. It does not apply to penalties or liquidated damages.

Who can bring a lawsuit to enforce the law? The Labor Commissioner may bring a civil action or inaction under Labor Code section 98 or 1197.1 to enforce a contractor’s liability under Labor Code 218.7. The limit of a contractor’s liability is for unpaid wages, including interest owed. A third party who is owed fringe or other benefits and a joint labor–management cooperation committee (e.g., union or union trust) has the ability to bring a civil action to enforce a contractor’s liability under the law. If the action is brought by a joint labor–management cooperation committee, the prevailing plaintiff is entitled to its reasonable attorney’s fees and costs, including expert witness fees. Prior to bringing the suit, the committee must provide thirty (30) days’ notice to the contractor.

Contractors are now authorized to request that its subcontractors provide payroll records with sufficient information to ensure that the subcontractor is current on its payments for wage, fringe and other benefits. The contractor may also request that the subcontractor provide an estimate of journeyman and apprenticeship hours for that particular project, among other things. If the subcontractor does not provide the requested information, the contractor is able to withhold as “disputed” amounts all sums owed to the subcontractor. Labor Code section 218.7 does not limit a contractor's ability to enforce any lawful remedies it may have against the subcontractor it hires or liability it incurs in the subcontractor’s nonpayment of wages and benefits. The law specifically requires the subcontractor to provide payroll records to the contractor to assure compliance. An action must be filed within one year of the earliest of the following: (i) recordation of notice of completion (Civil Code 8182); (ii) recordation of notice of cessation of work (Civil Code 8188); and, (iii) actual completion of the work covered by the Direct Contractor.

There may be particular risk involved here with the new law because construction contracts are generally integrated into an amalgamation of documents that often include contract agreements, project construction specifications, special specifications and general conditions. These are generally referred to as “Contract Documents.” Most general construction contracts with owners require the general contractor to incorporate the terms therein, including all documents identified into and binding upon a subcontractor through “flowdown” clauses in the Direct Contractor’s agreements. These clauses typically require the subcontractor to be bound to the owner to the same extent as the Direct Contractor is bound to the owner. Therefore, a subcontractor may be bound to new requirements such as expanded indemnity obligations, a guaranty for payment of wages and benefits of their own and lower tier subcontractors and additional compliance “paperwork” requirements without even knowing it if they did not check and thoroughly review the subcontract agreements including the documents incorporated therein. Imagine the surprise of the subcontractor when they unexpectedly learn the new 2018 subcontracts agreements now requires them to produce payroll records and project job labor estimate before they receive any payment.

Those who have direct contracts with owners now have expanded liability which may be shifted and mitigated through contract risk shifting mechanisms in subcontracts. Private works owners, general contractors and subcontractors, of any tier, may want to consider this new law for every new contract they signed. There really is no excuse for not reviewing and tuning up California private works construction contracts this year, before learning an expensive lesson.

Nevada Supreme Court Issues New Ruling Impacting an HOA’s Ability to Bring Claims on Behalf of its Members

by Aleem A. Dhalla and Justin L. Carley

The Nevada Supreme Court recently addressed two narrow questions regarding a homeowners association’s (“HOA”) ability to bring claims on behalf of its members. In High Noon at Arlington Ranch Homeowners Ass’n v. Eighth Judicial Dist. Court, 402 P.3d 639 (Nev. 2017), both issues centered around what happens when the ownership of some units within an HOA changes after a lawsuit begins. Specifically, the Court addressed whether an HOA has standing to represent: 1) owners who have sold their units during litigation; and 2) owners who have purchased their units after litigation has started. The Court ultimately found that an HOA does not have standing to represent unit owners who sell their units during litigation, but may represent unit owners who purchase their units after litigation has already begun.

NRS Chapter 40 governs residential construction defect claims in Nevada. In High Noon, the HOA brought claims under NRS Chapter 40 in its own name on behalf of unit owners against the home builder, alleging breach of implied warranties of workmanlike quality and habitability, breach of contract, breach of express warranties, and breach of fiduciary duty. Because the ownership of several units had changed during litigation, the Court had to decide whether the HOA still had standing to bring its claims.

In reaching its decision, the Court examined the 2007 version of NRS Chapter 116, titled the “Uniform Common-Interest Ownership Act.” NRS Chapter 116 governs all common-interest communities and outlines their abilities, including creation, management, collection of fees, ability to lien properties, and representing members in legal proceedings. In High Noon, the Court specifically examined the 2007 version of NRS 116.3102(1)(d), which allowed HOAs to “[i]nstitute, defend or intervene in litigation or administrative proceedings in its own name on behalf of itself or two or more units’ owners on matters affecting the common-interest community.” While the Court had ruled several times before that an HOA has representational standing on behalf of its members generally under the statute, it was unclear how a change in membership during litigation would impact this standing. In a matter of first impression, the Court found that an HOA has representational standing to bring claims on behalf of owners who purchased their units after litigation commenced, as these subsequent purchasers become the real party in interest. However, because former unit owners are no longer part of the membership, an HOA does not have standing under the statute to represent former unit owners who sold their units during litigation.

The Nevada legislature amended NRS 116.3102(1)(d) with A.B. 125 in 2015 to specifically prohibit HOAs from representing unit owners in construction defect actions under NRS Chapter 40. A.B. 125 did much more than amend NRS 116.3102(1)(d), but overhauled several aspects of construction defect claims under Chapter 40. Thus, the Court’s ruling in High Noon does not impact an HOA’s ability to bring construction defect claims, as this was already prohibited by the current version of NRS 116.3102(1)(d). However, the Court’s ruling in High Noon is nevertheless important to HOAs, and the construction industry generally, as the ruling impacts an HOA’s standing to bring claims on behalf of its member outside of NRS Chapter 40.