Tag: construction contracts

1
Third-Party Funding of Construction Disputes: An Overview of Litigation and Arbitration Finance
2
Independent evidentiary proceeding—A legal tool in Germany to avoid construction court proceedings
3
“Badges” of Fraud Allow a Construction Contractor to Pierce the Corporate Veil of an Insolvent Developer and Hold the Principals Personally Liable
4
How’s the Weather? Construction Contracts Should Be Prepared for Any Answer.
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The Perennial Question of Concurrent Delay – The English Viewpoint

Third-Party Funding of Construction Disputes: An Overview of Litigation and Arbitration Finance

By Ian Meredith, Benjamin T. Mackinnon, K&L Gates, London

Introduction

Over the last decade, financing for commercial and investor-state arbitration / litigation claims has grown into a significant industry in certain jurisdictions with hundreds of cases now being funded by specialist investment funds (known as ‘third-party funders’). The benefits of third-party funding go well beyond solely the provision of funds to claimants who may otherwise be unable to bring worthy claims, and many commercial parties now use third-party funding as a means of managing risk. The increased availability of third-party funding and the potential to negotiate tailored solutions means that it is now becoming a routine issue for consideration at the outset of disputes and often before they even exist.

Over the course of several articles, we will examine some of the specific issues relevant to determining whether third-party funding is appropriate for your dispute, how best to approach third-party funders, and some of the issues that can arise during the course of a claim being supported by a third-party funder.

This article will provide an overview of third-party funding and highlight why it is becoming increasingly relevant for in-house lawyers dealing with construction disputes. The next articles in the series will examine some of the specific issues that can arise in respect of third-party funding and how best to approach funders.

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Independent evidentiary proceeding—A legal tool in Germany to avoid construction court proceedings

By Christoph Mank and Eva Hugo, K&L Gates, Berlin

The dilemma

A construction principal faces a lot of questions if material defects occur while a building is still under construction: he can decide to continue with construction in order to prevent a delay in completion, but faces the risk that it might be difficult, or rather, impossible, to outline and, in particular, to later prove the background and causes of defects. Furthermore, warranty claims against contractors or architects can become time-barred if the works continue for years without clarification of the defect. On the other hand, if construction stops until a court proceeding takes place, the project might be delayed due to the excessive duration of German construction court proceedings, possibly causing enormous financial losses. Besides the principal, contractors and architects also have an interest in the causes and responsibility for an occurring, material construction defect being promptly clarified and assessed.

Aims of independent evidentiary proceedings

Independent evidentiary proceedings, as provided in the German Code of Civil Procedure, can help those principals, contractors and architects involved in construction project to step out of the above scenarios.

Independent evidentiary proceedings are initiated by the application of one party. It is not required that a court proceeding be pending. Independent evidentiary proceedings aim to secure the state of construction and to clarify the causes of, and responsibilities for, a defect through an expert’s participation. This enables construction parties, for example, the principal and a contractor, to come to an agreement and to avoid a subsequent court proceeding. The defect can be remedied and the project continued to completion. Even if an agreement cannot be reached and a court proceeding follows, an independent evidentiary proceeding will help accelerate the construction court proceeding, because the independent evidentiary proceeding’s results will be considered as evidence in the court proceeding.

Legal requirements

Independent evidentiary proceedings have to be applied for at the court that would also settle the legal matter. Furthermore, the applicant party has to provide a legitimate interest to establish the state or value of an object, the cause of property damage or a material defect or the effort required to remedy the property damage or material defect by a written expert opinion. Such a legitimate interest is statutorily presumed if the establishment serves to avoid a court proceeding.

Evidence can be taken by way of written expert opinion. In its application, the applicant has to precisely designate the opponent, as well as the facts and circumstances on which evidence should be taken; it is not allowable to describe vague, unsubstantiated facts only for the purpose of obtaining information to concretize an argument of fact. However, it is permitted to describe the facts as they appear to the applicant as a lay person in construction matters. The court then decides whether to take evidence on the application, and chooses an expert to be instructed. The expert´s opinion only assesses the case on a factual basis; legal questions and interpretations are excluded.

Independent evidentiary proceedings end with the delivery of the expert´s opinion and, possibly, with an agreement between the parties, which then will be recorded by the court, but not by a contentious decision of the court. The court may set a time period within which the parties can raise objections to the expert´s opinion and may apply for appointments to orally discuss the opinion with the expert.  If, however, the case is later brought before court by one of the parties as the result of the independent evidentiary proceedings, the expert´s opinion will be treated as if it was obtained during the court proceeding.

The opening of an independent evidentiary proceeding also affects the underlying claims. The limitation of those claims, especially warranty claims, will be suspended from the beginning of the independent evidentiary proceeding until six months after its end, a further advantage of this special type of proceeding.

 

“Badges” of Fraud Allow a Construction Contractor to Pierce the Corporate Veil of an Insolvent Developer and Hold the Principals Personally Liable

By Jesse G. Shallcross, K&L Gates, Chicago

In a recent decision from the 1st District Appellate Court of Illinois, A.G. Cullen Constr., Inc. v. Burnham Partners, LLC, defendants husband and wife were held personally liable for roughly $450,000 due to unpaid construction work performed under contract with the limited liability company controlled by the couple.

Robert Halpin owned defendant Burnham Partners, LLC (“Burnham”), a real estate development company with a 90 percent stake in defendant Westgate Ventures, LLC (“Westgate”), and Halpin’s wife, Lori, ran the bookkeeping for both companies.  Westgate engaged plaintiff A.G. Cullen Construction, Inc. (“Cullen”) to build a warehouse and distribution facility in Big Beaver, Pennsylvania.

During the course of construction, Westgate refused to approve one of Cullen’s payment requests for work performed, and Cullen took the dispute to arbitration.  The arbitrator awarded Cullen $448,406.87 for the unpaid work and associated expenses and penalties, and the award was reduced to a judgment in Allegheny County, Pennsylvania.

Shortly before the arbitration hearing, Westgate sold the project and Halpin began winding up Westgate’s affairs and liquidating its assets, using the proceeds of the sale to pay other creditors.  He also paid a $400,000 developer’s fee to Burnham and transferred roughly $97,500 to himself and his wife, leaving a zero balance in the operating account of Westgate and no means with which to pay the Pennsylvania judgment.

Cullen filed suit in Cook County, Illinois against Westgate, Burnham and the Halpins to recover the amount owed by Westgate on the Pennsylvania judgment.  In attempting to hold Burnham and the Halpins liable for Westgate’s debts, Cullen argued that Burnham, through Halpin, perpetrated a fraud by transferring all of Westgate’s assets to themselves and other creditors.  The trial court ruled in favor of the defendants, however, finding that Cullen failed to present “undisputed evidence” of fraud.

The appellate court reversed the trial court’s decision and ruled in favor of Cullen, finding that the activity of the defendants presented nine of the 11 factors or “badges of fraud” set forth in the Illinois Uniform Fraudulent Transfer Act (UFTA) (740 ILCS 160/5) which give rise to an inference or presumption of fraud:

  1. There was a transfer of funds to a company “insider”, which term includes individuals who control the company and the relatives of such individuals, such as Robert and Lori Halpin.
  2. The action of transferring assets out of Westgate was concealed from Cullen.
  3. The transfer of Westgate’s assets to Burnham served to remove or conceal the assets themselves from Cullen.
  4. Before any of the transfers occurred, Cullen’s demand for arbitration had put the defendants on notice of a threatened lawsuit.
  5. Substantially all of Westgate’s assets were transferred.
  6. Westgate did not receive “reasonably equivalent value” in exchange for (a) its payment of a $400,000 development fee to Burnham or (b) its repayment of a $120,000 “loan” from the Halpins, the original payment of which, the court found, should have been a capital contribution from Burnham to Westgate under the terms of the company operating agreement.
  7. Westgate became insolvent after the transfers.
  8. The transfers occurred just 10 months after Cullen’s demand for arbitration and two months before the arbitration award was entered.
  9. Westgate had transferred assets to Burnham, a lienor, and Burnham then transferred those assets to the Halpins, who were insiders.

The court found that the defendants’ transfers of Westgate’s assets to themselves and other unsecured creditors when they knew about Westgate’s potential liability to Cullen amounted to fraud in violation of the UFTA.

While this finding of fraudulent activity of the defendants was a victory for Cullen, it did not necessarily follow that each of the defendants would be held personally liable for the obligations of Westgate to pay Cullen.  This is because a company is ordinarily treated as a separate legal entity, the debts and liabilities of which its shareholders or principals are not responsible for.

However, the common law system has developed a legal doctrine by which the principal of a company may be held liable for the debts and obligations of the company.  Where the principal has, for example, treated the company as a mere “alter ego”, failed to obey corporate formalities, or engaged in fraudulent activity, courts may “pierce” or “lift” the corporate veil to hold the principals liable for the actions of the company.

Under Illinois law, efforts to pierce the corporate veil of a company are governed by the law of its state of incorporation.  As Westgate was a Delaware limited liability company, the court applied Delaware law, which states that the corporate veil may be pierced where there is fraud.  The presence of nine of the 11 “badges of fraud” was enough to convince the court that the defendants had engaged in fraud.  As a result, the court ruled that Cullen may pursue each of Burnham and the Halpins for the $457,416.37 Pennsylvania judgment against Westgate.

How’s the Weather? Construction Contracts Should Be Prepared for Any Answer.

By Ryan D. DeMotte, K&L Gates, Pittsburgh

Mother Nature can often be an unwelcome intruder on a construction project. Heavy rains, snow, ice, wind, extreme cold, extreme heat; there are any number of weather events that can delay a project. While parties to a construction contract cannot control the weather, they can and should anticipate the possibility of adverse weather and address it in their contracts. Prudent contract provisions addressing bad weather events can help owners and contractors minimize the disputes that can develop when rain, snow, ice, and other weather events delay the project.

A common approach is to give contractors additional time but not costs for weather delays. Many commonly-used contract forms provide for weather-based time extensions if the weather event was “abnormal, “unforeseeable,” or “not reasonably anticipated.” Thus, in order to evaluate a request for a time extension based on adverse weather, the parties must first establish the appropriate weather baseline against which to measure the weather event at issue. Was the rainfall unusually heavy during a particular month? Was the temperature colder than previous years? If the contract itself does not define the baseline weather measurement, this can often be a point of dispute between parties. Some parties may try to minimize these disputes by providing detailed provisions for baseline weather measurements in the contract in the form of 10-year averages or other objective measures. Whether or not these types of provisions are useful depends on the project and its sensitivity to weather variations.

The parties must also determine how the weather caused the delay. Did cold temperatures delay paving work? Did heavy winds or sandstorms prevent the delivery and installation of sensitive equipment? In trying to answer these types of questions, the parties may dispute whether the delays were the result of the abnormal weather or the result of other causes.

Finally, owners and contractors need to consider why certain work was being performed during the adverse weather. For example, if, through a contractor’s own early delays it is still working outdoors at a time when it initially planned to be completing the interior of a building, an owner may be able to argue that the contractor is not entitled to an extension for any weather-related delays to its outdoor work. Conversely, if a contractor’s work is delayed by the owner’s delays, it may have a strong argument for any delays it incurs as it tries to complete the work in less-than-optimal weather conditions. A contractor may also be able to claim costs if it is pushed by owner delays into bad weather.

Given the inherent uncertainty of the weather, some parties decide to build into the contract and project schedule a certain number of extra days to absorb any weather delays.

As the above issues demonstrate, owners and contractors should give careful thought to the various types of weather risks their project may face when negotiating a construction contract and creating the project schedule.

The Perennial Question of Concurrent Delay – The English Viewpoint

By Mike R. Stewart and Mary E. Lindsay, K&L Gates, London

Concurrent delay remains a perennial issue in construction contracts and the disputes arising out of those contracts.  The classic situation of “concurrent delay” occurs when both a contractor and the employer allege that the other is causing delay, where the delay caused by each impacts the project at the same time.The key authorities on the topic remain the same, in our view (all emphasis added).

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