Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

There are new developments in the saga of Krahl Construction.  Recently, one of the owners Krahl provided work to sued what is now Krahl's estate under the company's assignment for the benefit of creditors.  The owner's complaint (PDF) alleges that:

   1. Krahl over-billed the owner by more than $3M to build a data center on the west side of Chicago

   2. Krahl used white out to alter subcontractors' invoices before submitting them to the owner for payment under an AIA A111+ A201 cost-plus with guaranteed maximum price contract

But the most eye-catching allegation: this owner, suspecting that Krahl over-billed them, tipped off law enforcement.  Perhaps that set things in motion for the dramatic search of Krahl's offices, seizure of the company's records, and closure a few days later back in January 2010?

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In Building Overrun Cases on the Rise, journalist Ed Hammond at the Financial Times reports that late completion disputes are already rising this year in the UK.  He also mentions:

• With projects started in better times now yielding lower occupancy and returns, owners are more inclined to pursue claims against their contractors
   
• Liquidated damages claims for late completion are rising in frequency and amount
   
• Austere times and pressure on margins are compelling owners and contractors to become more contentious and adversarial
   
• The Construction Products Association predicts a 3% decrease in spending for 2010

Will these tends continue in the in the UK?  Will they cross the Atlantic to North America too?

As construction disputes intensify and relationships become more strained, your contracts will come under more scrutiny.  Are you and your contracts fortified for that?

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There's been a lot of recent decisions by judges applying the Illinois Home Repair and Remodeling Act (the "Act"). The Act is that statute requiring contractors working on people's homes to: (a) have a written contract, (b) include certain terms in the contract (e.g. price, insurance, dispute resolution), (c) give the homeowners a special brochure, and (d) get a receipt for giving the brochure. The judges in one case, Smith v. Bogard, held that homeowners needn't pay a contractor who fails to comply with the Act.

Well, Ashley Brandt over at the Illinois Construction Law Blog has done a great job analyzing two more recent decisions that go the other way:

• Artisan Design Build, Inc. v. Bilstrom from the Illinois 2nd District Appellate Court hearing an appeal from DuPage County
• K. Miller Construction Company, Inc. v. McGinnis from the Illinois 1st District Appellate Court hearing an appeal from Cook County

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In the last post on bank insolvency we talked about how the Federal Deposit Insurance Corporation (the "FDIC") sets the priorities for paying out claims against failed banks how the bank's creditors can set their allowed claims off against the FDIC's pursuit of loan repayment. 

Today we're going to take a break from how the FDIC repudiates contracts and claims for repudiation damages.  We're going to focus on another one of the FDIC's extraordinary powers - imposing a stay on proceedings (i.e., court cases) the failed bank is involved in.  The FDIC gets this power under Section 11(d)(12) of the Federal Deposit Insurance Act.

Mandatory Stay of Proceedings

After the FDIC is appointed as receiver or conservator of a failed bank, they may request a stay in any judicial action, or proceeding, that the bank is a party to, or becomes a party to.  The stay may last 90 days if the FDIC is appointed as receiver, and 45 days if they're appointed as conservator.

According to at least one judicial decision, Praxis Properties, Inc. v. Colonial Savings Bank S.L.A, the judge hearing the case must grant the stay.  It's mandatory.  They don't have any basis or discretion to deny the stay, regardless of how compelling the reasons for making an exception.  And the stay applies to all parties in the proceeding, not just the bank and the parties adverse to the bank.

Duration of the Stay

But according to the Praxis case, the stay doesn't last for that long.  The 90 (or 45) days begins on the day the FDIC gets appointed as receiver (or conservator) for the failed bank, not when the FDIC asks the judge to stay the case or when the judge grants that request.  So if the FDIC waits until the Appointment Date plus 80 days to ask for a stay, the stay only lasts for ten more days.

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After years of working on architects agreements, I've noticed that it seems like more often then not the architect starts work on a design before they and the owner get around to actually signing an architects agreement.  The same goes for contractors and construction contracts. 

This brings up a problem that actually has a couple of solutions.  One is to have a preliminary contract - perhaps for a limited scope of work and a limited amount of time that will then be superseded by a comprehensive architects agreement or construction contract.  Many call these early start agreements.  

But sometimes its too late for an early start agreement or those involved in the project don't want to spend the time and the money to negotiate and prepare one.  So the alternate is to include a prior work clause in the architects agreement or construction contract. 

Prior Work Clauses In Architects Agreements

The prior work clause applies the agreement  retroactively to cover architectural services or construction work provided before the owner and architect enter into the architects agreement. Or before the owner and contractor enter into the construction contract.  Parties can also use a prior work clause to serve a kind of audit function helping ensure that there are no pre-contract fees, reimbursable costs, costs of the work, or claims that will crop up later.

Here is my short list of things a prior work clause for an architects agreement should have:

• Retroactive application.  The agreement applies to all pre-agreement effective date services provided by, or on behalf of, the architect.  Whatever standards the agreement imposes on the scope and quality of the architects services will apply to services provided before the owner and architect entered into the agreement.

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Why Define Claims?

Designers, contractors, owner, lenders, and the like often get into disputes involving the design or building of a construction project. When this happens, we usually say "they're making a claim" or something like that.  Other times, we say "they're waiving their claims."  But what do we really mean when we refer to claims.  Especially when we refer to claims in the abstract - when we're referring to claims generally at large, not a specific set of identified claims?    

When referring to claims, it's usually a good idea to ensure that everyone involved and affected agrees on what qualifies as a "claim".  Especially when someone is waiving claims, as they often do in a Change Order, a settlement agreement, or a prior work clause.  Few things in business are as annoying as years of depositions, document review, motions, and counter-motions, all over whether "it was the intent of the parties" to waive this or that claim.  Of course defining what qualifies as a claim won't guarantee you'll avoid this; but your odds will be better.

So when I write a contract I usually define the term "claim".  There's several options for doing this.

• Use the definition in Section 15.1.1 of the American Institute of Architects' A201 General Conditions of the Contract For Construction (2007 edition).  This is the definition I see most often.  But I usually find it's not broad enough and leaves things out that should be in the definition of claim.
• Write your own custom definition.  Like all custom work, this takes a lot of thought, time, and care.  Plus there's a good chance of overlooking something.
• Use the definition in Section 101(5) of the United States Bankruptcy Code . This is the definition I usually use.  Why??

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