Drafting Construction Contracts

By Kenneth W. Lee, Esq.

In drafting construction contracts, or any contract for that matter, one should always remember some very worldly advice - life is more imaginative and creative than what we can be individually.  Simply put, no client, lawyer or design professional can possibly contemplate all the situations, circumstances or conditions that can potentially arise during a construction project. 

This is particularly true when you realize that construction design, processes and methods have become not only quite complex, but also quite expensive.  The average medium home price in this country is almost $200,000. Any construction project -residential, commercial, industrial or highway/bridge - involves considerable cost to the owner and expense to the contractor and subcontractors. 

The issues which arise on a construction project run the gamut from timely payments, to labor disputes, to constructability and design, and sometimes, unfortunately and tragically, death or personal injury.  The relationships on a construction project are not limited to that of the owner and the contractor but often involve the owner/contractor relationships, the contractor/subcontractors relationships, the owner/design professional relationships, the contractor/design professional relationships, the owner/surety relationships, the contractor/surety relationships and a myriad of relationships between other entities such as the insurance companies of the owner, the design professional, the contractor and the subcontractor.  Throw into this mix the owner’s financial institution and the vast alphabet soup of governmental agencies, and the need for appropriate construction contract documents becomes evident.

An added complication is the perception of the parties as to their interpretations, goals and expectations of the construction project.  As would be expected, each party to the construction contract has its self interests in mind.   However, these self interests need to be recognized up front. Rarely, if ever, are intentions of a negative nature.  They are simply the by-product of human needs, desires and personalities. 

Contract law is one of the few areas which has not been overly impacted by acts of legislatures, and still remains a body of law based upon human experiences.  For example, where an ambiguity has developed, the ambiguity will be construed against the drafter of the contract and in favor of the other party.  This rule of law is based upon human experience that the party drafting the contract was in the best position to provide language which was much more succinct or clear. 

Another instance is where a preprinted contract was used, into which one or both parties to the agreement have inserted handwritten, typed or other alterations.  Those handwritten or typed alterations will govern any other provision of the printed form document as to the subject matter addressed.  The rule is that the hand written or typed alterations to the preprinted contract demonstrate an intent of the parties to change the preprinted form.

Considering the magnitude of potential issues as well as the numerous relationships on any construction project, it is impossible to draft construction contracts that will identify and cover each and every potential issue.  Bearing these matters in mind, there are essentially three key areas involved in the drafting of each and every contract for construction. They are allocation of risk, past experience and consistency.

ALLOCATION OF RISK

Risk is essentially the concept of which party will incur the costs in the event problems arise during the course of the project, be it in the design phase or the construction phase.  Risk is often the subject of vast negotiations in contracts and must be allocated to the parties so as not to break or potentially break the owner’s budget or to potentially eliminate qualified and reputable designers or contractors (including subcontractors) from wanting to perform the project. 

If the construction contract imposes the entire risk on one party or the other, the owner might not have the funds available to compensate in full the design professional or the contractor, or the price for which the design professional or contractor might be willing to perform the work may well be considerably higher than anticipated.  Quite often, the entire allocation of risk is placed upon a contractor where the owner has an extremely tight budget or where the owner has completed the design and has given no thought to the conditions that will constitute the owner’s agreement with the contractor.  Many of these situations arise because the owner begins a project with the sole goal of its final completion, commences the budget and design phases without much thought to future construction costs, and upon completing the design phase attempts to obtain a price which is within the owner’s remaining budget or loan balance. 

By drafting all contract documents pertaining to the parties’ relationships prior to either commencing design or obtaining financing, the owner can potentially anticipate future risk during construction and properly budget for unanticipated issues, or increased costs arising during the period between commencement of the design and construction.  Further, a continuing review of risk allocation permits the owner to determine (a) whether competitive bidding or a negotiated price is appropriate, (b) the manner of compensation to be paid (i.e., lump sum, unit pricing, or “cost plus”), (c) the types of insurance needed, (d) the type of design professionals required, (e) bonding, and (f) if it is desirable to engage a particular contractor or a construction manager.

PAST EXPERIENCE

Past experience does not include solely the owner’s past experience or that of the owner’s design professional, financial institution, legal counsel or other consultants.  It also includes the use of construction contracts which have been previously prepared by professional associations, the owner, or the lawyers.  To begin drafting construction contracts from “scratch” is a waste of time and money.  More importantly, many issues will be missed.  The use of published or previously drafted contracts are practical references as to the issues to be addressed and suggested language.

In determining the rights, obligations and duties of the parties on a construction contract, the parties must read the contract, read the contract, read the contract.  However, doing so often creates confusion.  The confusion is often caused by a lack of consistency both in what is represented in the contracts, what the contractual language expresses, and the differing perceptions of the parties.  As to the former, we often see the design professional given authority in the owner/contractor agreement which is not provided in the owner/design professional agreement.  As to the latter, we often see documents entitled one way while the other documents describe a document which has a completely different title.  For example does the term “Contract Conditions” refer to the General Conditions, the Supplemental Conditions or the characteristics of the project site?

CONSISTENCY

To provide consistency, the contract documents must be drafted at the earliest possible stage, be modified throughout the design and budgetary phases, and must all be prepared in conjunction with each other before any contract (be it for design or construction) is entered into.   

The construction contracts must at a minimum (a) delineate the duties of each party with each party’s duties consistently identified in each contract (i.e., the design professional’s duties are the same in the owner/contractor agreement as in the owner/design professional agreement); (b) contain a set of definitions for the terms to be used with those terms used throughout the contracts in the appropriate manner and the proper places; (c) provide for an appropriate allocation of risk; (d) identify all documents which are to be a part of the contract with specificity (for example “Drawings dated 01/01/05 by ABC Engineers” is not enough); (e) define the payment terms, including the manner of processing and the date payments are to be made; (f) identify the individuals who have authority to act on behalf of each party; (g) set forth a dispute resolution procedure which permits the parties to continue the work while a dispute is resolved; (h) be PROOFREAD; and (i) be adhered to by the parties as written, because a written contract is worthless if the parties change its terms by their subsequent conduct.

Kenneth W. Lee, a shareholder in the  firm’s Harrisburg office, is Co-Chair of the RECON Practice Group. For more information on this topic, please contact Ken at 717.234.4121 or via e-mail at klee@tuckerlaw.com.

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Phase I Environmental Site Assessment

By Bradley S. Tupi, Esq.

This article addresses the requirements and components of a Phase I Environmental Site Assessment.  The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes strict liability on certain parties for any contamination that may exist on a property.  Such a party, called a “potentially responsible party” (PRP) may be held liable to clean up contamination caused by the release of hazardous substances.  PRPs include property owners, so innocent purchasers sometimes find themselves facing expensive cleanup liability resulting from pre-existing contamination.

Lenders, developers, and other real estate professionals have developed due diligence methods to identify pre-existing contamination before purchase of a property.  Determining the existence of hazardous substances allows a buyer to walk away from a property before it is too late, or to negotiate cleanup liability with the seller.  The Phase I Environmental Site Assessment (ESA) is one of the methods that have evolved over the last 20 years.

A Phase I assessment typically consists of the following elements:

• Historical review of use and improvements made to property.

• Review of records of building, zoning, planning, sewer, water, environmental, and other government offices concerning property and adjacent parcels.

• Review of all state or federal environmental agency records and files affecting property or adjacent parcels.

• Review of all reports filed under CERCLA and other statutes concerning environmental conditions and events, such as releases or threatened releases of hazardous substances, on property and adjacent parcels.

• Inspection of property and all improvements.

• Verification of whether present or past owners or tenants stored, created, or discharged hazardous materials or wastes.

• Review of whether appropriate procedures, safeguards, permits, and notices with respect to hazardous substances are on the property.

• Analysis of old aerial photographs to determine construction or destruction of buildings and existence of ponds and disposal areas on property over time.

• Interviews with neighbors to determine prior uses of property.

• Review of building records and visual inspection of buildings to determine whether asbestos-containing materials are present.

• Review of scientific literature to determine potential existence of wetlands or radon.

The purpose of the Phase I ESA is to determine whether there are reasons to suspect contamination, in which case the more costly and invasive Phase II methods are necessary.  Absent the discovery or suspicion of any hazardous substances, a “clean” Phase I constitutes “all appropriate inquiry” (AAI), and environmental due diligence is complete.  A Phase I does not include soil sampling, groundwater analysis, or other subsurface testing characteristic of a Phase II ESA.

The roots of the Phase I ESA may be traced to the innocent purchaser defense in CERCLA.  However, CERCLA does not provide specific guidelines for conducting appropriate inquiry into a property’s environmental history.  In the absence of such guidance, industry groups, through the American Society of Testing and Material (ASTM), developed standards for conducting a Phase I ESA.  These standards may be found in ASTM “Standard E1527-97” and “Standard Practice for Environmental Site Assessment: Phase 1 Environmental Site Assessment Process.”

CERCLA was amended in January 2002 by the Federal Small Business Liability Relief and Brownfields Revitalization Act. Under this so-called Brownfields Law, the Environmental Protection Agency (EPA) was required to establish standards for AAI, and has proposed the “Standards and Practices for All Appropriate Inquiries Rule.”  Until the EPA promulgates regulations defining the standards for conducting a Phase I ESA, inspection of all property purchased on or after May 31, 1997 will continue to be subject to ASTM standards.

To avoid liability for contamination by a previous landowner, the PRP must conduct all appropriate inquiry. Conducting such inquiry allows a purchaser to rely on the innocent landowner defense in the event a hazardous substance is found on the property.  This defense requires the PRP to demonstrate that he neither knew, nor had any reason to know, that the property was contaminated at the time of acquisition. The determination of what constitutes an “appropriate inquiry” is made on a case-by-case basis.  In making this determination with respect to property purchased before May 31, 1997, several factors are taken into consideration:

1. Any specialized knowledge or experience that the party may have.

2. The relationship of the purchase price to the value of the property if uncontaminated.

3. Commonly known or reasonably ascertained information about the property.

4. The obviousness of contamination at the property.

5. The ability to detect such contamination by appropriate inspection.

Many urban areas are suspected of contamination by virtue of their industrial history.  Over the last 15 years, such sites have come to be called “Brownfields.”  A Brownfield site is defined as “real property, the expansion, redevelopment or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant or contaminant.” Contamination hinders redevelopment of Brownfields because the buyer fears liability for pre-existing contamination.  It would be less risky to develop a  “Greenfield” site than to buy a Brownfield property, so many Brownfields lay idle.  In an effort to prompt the cleanup and redevelopment of Brownfields, federal and state lawmakers and environmental authorities have developed programs to relax cleanup requirements and provide funding assistance.  For example, the Brownfield Action Team (BAT) program was established under Pennsylvania’s Growing Greener II program, and serves as a point of contact for priority projects located on distressed property.

The Growing Greener program was initiated in 1999 under Governor Ridge and was reauthorized in 2002 by Governor Schweiker.  On May 17, 2005, Governor Rendell’s Growing Greener II program was approved by Pennsylvania voters.  As the Commonwealth’s new environmental and quality of life initiative, the program will provide up to $625 million for the maintenance and protection of the environment, open space and farmland preservation, watershed protection, abandoned mine reclamation, acid mine drainage remediation and other environmental initiatives. 

The Growing Greener II program will be funded in part by the continuation and increase of waste disposal fees paid to dump trash in Pennsylvania.  These fees were slated to expire, but will now continue, and actually increase, to help pay for environmental initiatives.  According to estimates, approximately half of the fee increase collected would be paid by states that export waste to Pennsylvania landfills.

Eligible applicants for grants under the Growing Greener II program include municipalities, any city, borough, town or township of the Commonwealth.  To be eligible, a project must:

• Exhibit evidence of local support;

•  Be consistent with local zoning and planning; and

•  Be located within the corporate boundaries of a city, borough, or within other municipal districts designated for revitalization. 

• The project site must be located on a:

  • Brownfield;

  • Enterprise Zone;

  • Keystone Opportunity (Expansion) Zone; or

  • Keystone Innovation Zone.

OR

• Be located on a Grayfield/Abandoned Mine Land; and

• Include a project plan that includes:

  • Concept Plan for Reuse;

  • Identified Project Principals;

  • Time Schedule for Redevelopment;

  • Description of Community Benefits; and

  • Level of Committed Private Investment.

The Phase I ESA is the first step in determining the existence, or potential existence, of hazardous substances on a property.  Properly conducted, it satisfies the requirement for All Appropriate Inquiry and allows a Potentially Responsible Party to assert the Innocent Purchaser defense against the potential liability associated with the purchase of contaminated property.  It may also identify a Brownfield that may be eligible for Growing Greener grant monies. 

Bradley S. Tupi, shareholder, is in charge of the firm’s Environmental Practice and a member of the RECON Practice Group. For more information on this article, please contact Brad at 412.594.5545 or via e-mail at btupi@tuckerlaw.com.

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Substantially Prevailing Party:

The Mystery Continues

The Contractor and Subcontractor Payment Act (“the Act’) provides a powerful tool to compel payment of delinquent amounts.  For those projects where a mechanics’ lien waiver was demanded by the owner and/or where no payment bond has been posted, the Act can be the last best option for contractors and subcontractors for payment.

Failure to comply penalty

If arbitration or litigation is commenced to recover payment due under the Act and it is determined that an owner, contractor or subcontractor has failed to comply with the payment terms of this Act, the arbitrator or court shall award, in addition to all other damages due, a penalty equal to one percent per month of the amount that was wrongfully withheld.  An amount shall not be deemed to have been wrongfully withheld to the extent it bears a reasonable relation to the value of any claim held in good faith by the owner, contractor or subcontractor against whom the contractor or subcontractor is seeking to recover payment.

Award of attorney fee and expenses 

Notwithstanding any agreement to the contrary, the substantially prevailing party in any proceeding to recover any payment under this Act shall be awarded a reasonable attorney fee in an amount to be determined by the court, or arbitrator, together with expenses.

It is the possibility of the award of attorneys’ fees that will often prompt contractors and subcontractors to pursue litigation or arbitration when they might otherwise choose different tactics to get paid.  However, it must be noted that the award of attorneys’ fees is not automatic.  Attorneys fees are only to be paid to the “substantially prevailing party”.   Of  course, this means the defendant in an action would be entitled to an award of attorneys fees, should he “substantially prevail” in an action brought under the Act.  It is important to examine this aspect of the attorneys fees provision of the Act when deciding whether to include a claim under the Act in a breach of construction contract action. 

The first case to address “substantially prevailing party” was Bridges PBT v. Chatta.  In the Bridges matter, the contractor sought $75,329, plus interest, penalties and attorneys fees.  Following an arbitration, the Plaintiff was awarded $35,117 which was then reduced to $25,117.  The arbitrator also directed the respective parties to bear their own costs and attorneys’ fees.   The Plaintiff appealed the arbitrator’s decision, claiming attorneys’ fees should have been awarded pursuant to the Act. 

In affirming the decision of the arbitrator, the Superior Court reemphasized the court’s great reluctance to disturb arbitration awards.  The Superior Court also stated the award of attorneys’ fees under the Act is not mandatory.  The Superior Court assumed that the arbitrator’s reason for not awarding attorneys’ fees was an award of only 40 percent of the Plaintiff’s claim, which, the Court concluded was entirely reasonable.

After Bridges, one might be tempted to assume the term “substantially prevailing” means a recovery of, at least, 51 percent or greater of a claimant’s demand.  However, the Superior Court in F.J. Busse Company, Inc. v. Sheila Zipporah, L.P., cast some doubt on that proposition.  In Busse, Plaintiff was awarded $75,000 of its $83,000 claim in private arbitration.  However, the Plaintiff was not awarded attorneys’ fees.  Instead, the arbitrators found the Defendant’s action did not rise to the level that would warrant the imposition of counsel fees and expenses.  The Plaintiff petitioned the Allegheny County Court of Common Pleas, demanding an award of counsel fees pursuant to the Act.  The Court of Common Pleas granted the Plaintiff’s petition, holding that, “as a matter of law, a party which has been awarded 90 percent of its demand cannot be anything other than a substantially prevailing party.   Furthermore, the language [of the Act] is mandatory: a substantially prevailing party shall be awarded a reasonable attorney fee.” 

Without commenting on the propriety of the lower court’s determination that a 90 percent recovery is “substantially prevailing” as a matter of law, the Superior Court reversed.  The Superior Court ruled that the petition to the Court of Common Pleas claiming attorneys’ fees under the Act amounted to challenging the decision of an arbitrator based on an error of law.  The Superior Court reasserted the long standing proposition that an award pursuant to common law arbitration may not be overturned based on an error of law. 

Where does this leave claimants under the Act?  It should be noted that the aforementioned cases, Bridges and Busse, were both decided as reviews of arbitration awards.  Because of the strong judicial policy favoring private resolutions of matter, arbitration awards are not lightly disturbed.  As such, claimants must realize that they are bound by the decision of the arbitrators, and, if their contract requires arbitration, claimants need to be made aware that a “substantial” victory does not automatically translate into an award of attorneys’ fees.  

The situation is slightly better for those bringing actions before the courts.  Unlike arbitration awards, judicial decisions may be reviewed for errors of law.  As such, the situation in Busse might have been decided differently if the decision reviewed was from the court rather than an arbitrator.  However, there still exists little guidance as to the proper definition of “substantially prevailing”, and litigants will run the risk of additional uncertainty in their court actions.

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In each issue, we introduce a member of the RECON Industry Group. In this issue, we spotlight...

BRADLEY S. TUPI

Bradley S. Tupi, a 1975 graduate of Columbia College and a 1978 graduate of Columbia Law School, joined Tucker Arensberg as a shareholder in 1990.

Brad’s practice centers on litigation and environmental law.  He offers environmental law advice to buyers and sellers of real estate, construction firms, industrial companies, and lenders.  His litigation experience includes jury trials, non-jury trials, arbitrations, and appeals in a wide variety of disciplines.

In construction cases, Brad has represented owners, general contractors, and engineers.  He has handled claims for late payment, nonpayment, delay damages, and errors and omissions on behalf of plaintiffs and defendants.  He has also handled claims involving insurance coverage and surety bonds. 

Brad has worked on construction cases from Pennsylvania to Oregon to Australia.  The cases have involved all manner of construction: schools, warehouses, hotels, shopping centers, coal processing plants and steel mills. 

Mr. Tupi is licensed to practice in federal and state courts in Pennsylvania and New York.  He was named a Pennsylvania Super Lawyer® for 2004. He has an AV rating in the Martindale-Hubbell Law Directory, which is the highest rating for legal ability and ethical standards awarded by this national directory of lawyers.

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