Category: Articles and Publications

1
The Tenth Circuit’s Prediction: New York State Likely to Follow Trend Recognizing Damages Caused by Subcontractor’s Faulty Work is a Covered “Occurrence”
2
A New (Sort of) Class Action in Protection of European Consumers
3
Preparing for the Changes in the New AIA 2017 Forms
4
Third party funding of arbitration in Hong Kong is given the green light
5
Return of arbitration to road construction disputes in Poland
6
What is the thinking behind zero subsidy bids in the first auction for offshore wind farms in Germany?
7
Techniques to Maximize SDI Coverage and Streamline the Claim Process
8
Pennsylvania’s New “State Construction Notices Directory” and the Implementation of Significant Changes to Pennsylvania’s Mechanics’ Lien Law
9
Dispelling the Myths of Lean Construction and IPD
10
Third Party Funding for Arbitration in Hong Kong

The Tenth Circuit’s Prediction: New York State Likely to Follow Trend Recognizing Damages Caused by Subcontractor’s Faulty Work is a Covered “Occurrence”

By Frederic J. Giordano, Stephanie S. Gomez                     

The United States Court of Appeals, Tenth Circuit recently issued a favorable decision for policyholders finding property damage arising from a subcontractor’s faulty work arose from an accidental “occurrence” under New York law.  In Black & Veatch Corp. v. Aspen Ins. (UK) Ltd,[1] a 2–1 Tenth Circuit panel agreed with Black & Veatch Corp. (“B&V”) that its excess policy — which contained a New York choice-of-law provision — covered claims for property damage to a third party caused by its subcontractor’s faulty work.[2]  The Tenth Circuit reversed the district court’s ruling that B&V’s subcontractor’s faulty work caused damage to only B&V’s own work and, therefore, was not a covered “occurrence.”[3]  The Tenth Circuit concluded the New York Court of Appeals would likely find the subcontractor’s faulty work was an accidental “occurrence,” following the growing trend of other state high courts that have addressed this coverage issue under commercial general liability (“CGL”) polices.[4]  Policyholders — whose policies are governed by New York law — should take notice and consider the implications of this decision on whether New York will soon join the majority view that faulty workmanship by a subcontractor can be an occurrence under CGL policies.

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A New (Sort of) Class Action in Protection of European Consumers

By Ignasi Guardans

Background
The European Commission (“Commission”) presented this initiative in the context of a proposed revision of the EU framework on consumer protection. The “Package” (as the name goes when several independent legal texts are intended to be negotiated together)  called “New Deal for Consumers,” builds on the Commission review of consumer law rules that was conducted as part of the so called Regulatory Fitness and Performance Program (REFIT). This is a policy program intended to keep EU law simple, removing unnecessary burdens and adapting existing legislation without compromising on policy objectives.

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Preparing for the Changes in the New AIA 2017 Forms

By: Justin L. Weisberg

After a decade, the AIA  released new design and construction contract forms in April 2017.  Some of the more notable changes to the AIA construction contract documents are summarized below.

Probably as a reflection of advancements in the use of technology in the design and construction industry, the construction forms now default to the E203-2013 Document titled Building Information Modeling and Digital Data Exhibit. The E203-2013, which is identified in the AIA construction agreement forms as a Contract Document, requires the parties to create a digital data protocol and, if building information modeling (“BIM”) is to be used, to create a BIM modeling protocol.  The A-201 requires the parties to agree on the Protocols set forth in the E203-2013 for the use, transmission and exchange of digital data.  The E203-2013 references two protocol forms, the G-201-2013 Project Digital Data Protocol Form and the G-202-2013 Project Building Information Modeling Protocol Form.  Any reliance by the Owner  or Contractor  upon digital data or a building information model without the completion and incorporation of the E203-2013 is at the relying party’s sole risk.

Another new Exhibit, which may be referenced in the construction contract, is the E204 -2017, the Sustainable Projects Exhibit. This E-204 – 2017 sets forth the obligations and terms between the Owner, Architect, and Contractor  for a project that seeks a sustainable objective or third-party certification of a sustainable objective or energy or environmental performance such as LEED®.

The A-201 now provides for direct communications between the Owner and the Contractor. While with the past forms all communications with the Contractor were supposed to go through the Architect, under the A201-2017, the Owner and Contractor can communicate directly, although the Architect is to be included in all communications that relate to or affect the Architect’s services or responsibilities.

The method of calculation for progress payments has been revised. For example, the calculation of progress payments on the AIA A-102 Cost Plus with a GMP  contract now incorporates the allocation of contingencies under the GMP requiring any contingency for costs to be allocated in the schedule of values.  The progress payment calculation under the AIA A-102 is as follows: the Contractor first provides evidence that the costs it has incurred exceed the progress payments previously received plus the current payroll minus the Contractor’s fee.  Assuming the costs plus Contractor’s Fee exceed the progress payments and payroll, the actual amount approved is calculated as: a) the percentage of work completed under the GMP; b) with the addition of amounts from any equipment delivered and suitably stored at the site; plus c) the portion of Construction Change Directives that the Architect believes to be reasonably justified; and  d) the Contractor’s Fee.  The amount calculated is then reduced by: a) the previously paid amounts; b) any amounts for uncorrected defective work; c) any amounts that a Contractor does not intend to pay a subcontractor or supplier; and d) any amounts that the Architect is authorized to refuse to certify under the General Conditions.

The list of amounts that the Architect is authorized to refuse to certify under the General Conditions remains unchanged and includes: 1) defective work; 2) third-party claims; 3) failure to pay subcontractors or suppliers; 4) reasonable evidence that the contract cannot be completed for the unpaid contract balance; 5) damage to the Owner; 6) reasonable evidence that the Contractor will not finish on time and that the remaining unpaid balance is not sufficient to pay the actual and liquidated damages; and 7) evidence of repeated failure to carry out the Work in accordance with the Contract documents. Of course, the final listed item of reduction for progress payments in the A-102 is retainage.

A major change to the construction forms includes removal of a number of insurance provisions in the A-201 and the placement of most of the insurance requirements into a new A101 – 2017 Exhibit A Insurance and Bonds form. Exhibit A is incorporated into the A101-2017, A102-2017, and A103-2017 construction contract forms.  The new insurance exhibit incorporates many of the insurance provisions previously included in the A201-2007, although the A101-2017 Exhibit A also has new insurance requirements including specifically identified additional ISO insurance forms.

The Insurance Exhibit A now specifically requires additional insurance endorsement ISO forms CG 20 10 07 04, CG 20 37 07 04, and with respect to the Architect CG 20 32 07 04. It should be noted, that unlike the previous CG 20 10 11 85 endorsement, which covered ongoing and completed operations in a single form “for liability arising out of ʻyour work’ for that insured by or for you,” the CG 20 10 07 04 form only covers liability “caused in whole or part by: 1. Your acts or omissions; or 2. The acts or omissions of those acting on your behalf in the performance of your ongoing operations for the additional insured(s). . ..”  The CG 20 37 07 04 form only covers liability “caused in whole or part by “your work” . . . “performed for that additional insured and included in the products completed operations hazard.”  Given the limitations stated in the specified forms as compared to forms such as the CG 20 10 11 85 form, or the more recent CG 20 10 10 01 and CG 20 37 10 01 forms, parties that are beginning to use the newly required forms for the first time should consult with their attorneys and brokers to determine whether they are in compliance with these new insurance requirements.  The parties should also consult with their attorneys to determine whether under the laws applicable to the project, the required forms have minimized exposure to any potential uncovered indemnity claims and are not precluded by any statutory restrictions.

The Insurance Exhibit A requires the Owner to obtain the Builders Risk Insurance but allows the obligation to be shifted to the Contractor. The Insurance Exhibit A also provides for the parties to elect from a menu of coverages including, for example, pollution coverage, professional liability coverage, manned and unmanned aircraft coverage, and cyber security insurance.

The right to request financial information during the project has been supplemented to allow the Contractor to request financial information if the Owner fails to make payments, or if the Contractor identifies a reasonable concern regarding the Owners ability to make payment. The Owner can now also identify any such information provided as confidential and require the Contractor to maintain the confidentiality of the designated information.

Under the cost plus forms, the method in which subcontractors are selected has been changed. Rather than the Owner with the advice of the Contractor and Architect determining which subcontractors are selected after submitting bids, the Contractor now selects the subcontractors subject to the Owner’s right to object.

An additional obligation now placed upon the Contractor under the A-201 requires the Contractor to defend and indemnify the Owner from subcontractor and supplier lien claims as long as the Owner has fulfilled its payment obligations to the Contractor.

If the Contractor terminates the Contract for cause it is now entitled to reasonable overhead and profit on Work not executed. If the Owner terminates the Contract for convenience, the Contractor is now entitled to a termination fee to be set forth in the Agreement, rather than reasonable overhead and profit on Work not executed.

In conclusion, given the amount of time that has passed since 2007 when the former AIA construction forms were updated, the extent of revisions in 2017 cannot be described as sweeping changes from the prior versions. However, as noted in the summary above, there have been some significant modifications in the new forms that contractors and owners need to consider when negotiating projects in the future with the new 2017 AIA construction forms.

 

Third party funding of arbitration in Hong Kong is given the green light

By Christopher Tung, Sacha Cheong and Dominic Lau, K&L Gates, Hong Kong

On 14 June 2017, the Legislative Council of Hong Kong passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016.

The Bill comes on the heels of the consultation paper issued in October 2015 by the Law Reform Commission’s Third Party Funding for Arbitration Sub-committee and closely follows the recommendations made by the Law Reform Commission in its Report dated 12 October 2016 to clarify the law concerning third party funding of arbitration and associated proceedings under the Arbitration Ordinance. (For more information about the report and the LRC’s recommendations, see our article in the May 2017 issue of Arbitration World.

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Return of arbitration to road construction disputes in Poland

By Łukasz Gembiś, K&L Gates, Warsaw

In February 2017, the Ministry of Infrastructure and Construction announced the introduction of the “New standards in road construction” aimed primarily at regulating the balanced division of risks in roads construction contracts. Among many changes that have been made to the new model of public procurement contracts in road construction, special attention should be paid to returning – after many years of absence – arbitration as the preferred method of settling disputes between public investors and general contractors in Poland.

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What is the thinking behind zero subsidy bids in the first auction for offshore wind farms in Germany?

By Christoph Mank, K&L Gates, Berlin

As announced last year in our blog post of 6 June 2016, Germany passed an amendment to the German Renewable Energy Act (Erneuerbare-Energien-Gesetz) to implement bidding processes for determining the amount of funding for the generation of electricity from renewable energies.

As mentioned in our earlier post, the German government saw the transition to bidding processes as being a central instrument for attaining two goals: (a) on the one hand, to develop a certain share of renewable energies in the production of electricity as laid down in policy guidelines; and (b) on the other hand, to limit the funding to a level that is economically essential.

The new law came into effect the beginning of 2017, and the new era started with an auction of 1.55 GW. Only very advanced projects that have already been granted approval or received planning permission, and whose commissioning is planned for the period from 2021 to 2024, were qualified to participate in that auction.

The result of the auction was surprising for many market observers: Four bids were able to be accepted, totalling 1,490 megawatts. All successful projects are located in the North Sea. Three of the four successful bids were awarded for zero subsidies, and the highest accepted subsidy by the regulatory authority was 6 ct/kWh, which is 50% below the highest possible maximum subsidy. There were only two large energy companies that were successful in the auction: a German utility with one project and a Danish energy group with three projects.

The thinking behind subsidy-free bids is mainly economy of scale and further development of the technology-in-use on the one hand and expectation of higher market prices for electricity on the other hand.

According to the regulatory authority, the result of the first auction has proven that the decision for a system change was the right one. Furthermore, it has also proven the competitiveness of offshore wind energy, which now claims to raise the regulated capacity for the development of offshore wind farms.

The German Federal Association for Wind Energy (Bundesverband WindEnergie – BWE), an interest group of the entire wind industry, which also includes the organized interests of the onshore wind industry, is more reluctant. According to their statement, it is not clear if state subsidies are just exchanged with group internal subsidies of offshore projects, a strategy which more medium-sized corporations with no public stakeholders may not be able to follow.s the objective of cost efficiency; however, it still remains to be seen whether the system will actually guarantee a further continuous development of wind energy — both offshore and onshore.

Techniques to Maximize SDI Coverage and Streamline the Claim Process

Newark partner Christopher Barbarisi was published by Construction Executive magazine on the topic of “Techniques to Maximize SDI Coverage and Streamline the Claim Process.”

Design-builders, general contractors and “at risk” construction managers are all vulnerable to the risk of a subcontractor default. Aside from contract-related safeguards, such as increased retention, joint checks and letters of credit, subcontractor surety bonds have been the traditional mechanism for third-party risk transfer.

First introduced in the mid-1990s, subcontractor default insurance (SDI) provides a viable “first-party” insurance alternative to traditional surety bonds. To compete with surety bonds, SDI policies are heavily marketed as having a more efficient claim processes. In practice, the SDI claim process is not without its challenges. Effective techniques can be employed to streamline the process and keep the project funded and on track.

To read the full article on Construction Executive, click here.

Pennsylvania’s New “State Construction Notices Directory” and the Implementation of Significant Changes to Pennsylvania’s Mechanics’ Lien Law

By William D. Wickard, Erin D. Fleury

Important changes to Pennsylvania’s Mechanics’ Lien Law recently took effect on December 31, 2016, with the launch of an online State Construction Notices Directory. These amendments to the Mechanics’ Lien Law (which were passed by the Pennsylvania legislature in 2014) modify the process and deadlines applicable to subcontractors, contractors and owners with respect to mechanics’ liens on projects costing over $1.5 million.  In short, these amendments require subcontractors to comply with an earlier lien notice requirement by providing a “Notice of Furnishing” within 45 days of beginning work or providing materials if the owner has filed a “Notice of Commencement” to the online directory with respect to a “searchable project” prior to commencement of work on the project.
To read the full alert on K&L Gates HUB, click here.

Dispelling the Myths of Lean Construction and IPD

By Justin L. Weisberg, K&L Gates, Chicago

The text of this article first appeared in the December 2016 issue of SubStance, a publication by the Illinois Mechanical & Specialty Contractors Association.

Over the last year we have witnessed a successful Congress in Chicago by the Lean Construction Institute, a growing number of projects adopting Lean Construction Processes (“LCP”), in Illinois, and the recognition of the completion of at least one significant project in Illinois, which utilized Integrated Project Delivery (“IPD”). Nevertheless, I have perceived that there is confusion in the industry relative to LCP and IPD based upon comments made at presentations given by practitioners in the construction industry, who have not been involved with, or studied Lean Construction. The following article provides a brief overview and a comparison of LCP and IPD to address the myths created by some of these comments.

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Third Party Funding for Arbitration in Hong Kong

By Sacha Cheong and Dominic Lau, K&L Gates, Hong Kong

Given the highly technical and complex nature of the activities in the construction industry, to provide familiarity and certainty, and to save time and (legal and administrative) costs, standard form contracts are widely in use. Arbitration agreements are contained in most standard form contracts for similar reasons.

Traditionally, parties to construction disputes rely on their own financial resources to pay for legal representation in arbitration. This may soon undergo substantial changes as third party funders become much more active in this area.

Many jurisdictions such as the United Kingdom, and more recently Singapore, already permit third party funding for arbitration.

The Hong Kong Government is in the process of introducing similar legislation in Hong Kong, along with various safeguards to ensure ethical standards are maintained and to prevent abuse. The law relating to maintenance and champerty, which is still punishable as a criminal offence, will no longer be applicable to Hong Kong arbitration.

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