Contractual Risk Allocation Provisions Presented by: Rolly Chambers & Gene Rash Smith, Currie & Hancock, LLP

1. Contractual Risk Allocation Provisions Presented by: Rolly Chambers & Gene Rash Smith, Currie & Hancock, LLP March 5, 2013

2. Presenter Biographies Gene Rash and Rolly Chambers Partners in Charlotte, NC office of Smith Currie & Hancock, LLP Smith Currie & Hancock, LLP (http://www.smithcurrie.com) 60 attorneys devoted exclusively to construction and government contracts Focus on construction business legal matters Offices in Atlanta, Charlotte, Ft. Lauderdale, San Francisco & Washington, D.C. 2

3. Risk-Shifting Provisions • What will we cover? • Differing Site Conditions & Site Inspection Provisions • Delays and No-Damage-For-Delay Clauses • Indemnity Provisions • Disclaimers of Implied Warranty of Plans & Specs • Green Warranties 3

4. Risk-Shifting Provisions • Why be concerned? • Clients might not account for them because they may: • Overlook them in the rush of bidding • Misunderstand or misinterpret them • Believe them to be unenforceable • Not willing to risk losing the contract • You can help with knowledge and expectations 4

5. Differing Site Conditions • What is a differing site condition? • A physical condition • Encountered during the work • Not known when contract was formed • Materially different from the condition believed to exist when bid was prepared 5

6. Differing Site Conditions • What is a differing site condition? • Not readily apparent, hidden from view • Examples: • Poor soils • Concealed Rock • Unknown subsurface piping • Unanticipated groundwater 6

7. Differing Site Conditions • Who bears the risk? • The General Common Law Rule: contractor bears risks associated with his performance • The general rule creates problems: • If GC bears all risk, GC must account for an unknown • Owner may overpay if GC includes a large contingency • If contingency was too small, GC incurs a loss 7

8. Differing Site Conditions • The Solution – changed conditions clause • Shifts at least some risk to owner for changed (differing) site conditions • The shifted risks depend on the clause itself • May limit the types of conditions covered • May limit categories of costs recoverable 8

9. Differing Site Conditions • Changed Conditions Clauses: • Type I changed condition is a condition materially different from those indicated in the contract documents (FAR 52.236.2; p. 257 of CSCL) • Need to have some representation indicated in the contract documents regarding the condition at issue 9

10. Differing Site Conditions • Type II changed condition is: • an unknown physical condition at the site, • of an unusual nature, • which differs materially from those ordinarily encountered and recognized as inherent in work of the character provided for in the contract 10

11. Differing Site Conditions • Type 1 Changed Condition Recovery: • Certain conditions indicated by contract docs • Contractor relied on those physical conditions • Nature of conditions encountered was materially different from what was indicated • Proper notice given • Additional costs or time incurred 11

12. Differing Site Conditions • Type II Changed Condition Recovery • Conditions encountered were: • Unusual & Materially different from those anticipated given • The locale • The nature of the work • Notice + Damages • Totality of the circumstances analysis 12

13. Differing Site Conditions • Obstacles to Recovery • Site investigation provisions • Exculpatory Clauses • Disclaiming liability for accuracy of contract docs • Notice requirements • No Changed Conditions Clause 13

14. Differing Site Conditions • In the absence of a Changed Conditions clause: • Misrepresentation? • Mutual mistake? • Does Spearin doctrine apply? 14

15. Spearin Doctrine • What is it? • Party furnishing design impliedly warrants its adequacy and sufficiency • Shield/Sword • Defensive use – if Contractor complies with design • Offensive use – for additional costs/time 15

16. Spearin Doctrine • Chipping away at Spearin • Site inspection provisions • Require Contractor review/verification of plans/specs • Express disclaimers • Design/Build • Performance specifications 16

17. Delay Issues • Delays are a major source of disputes • Understanding delay analysis: • Excusable delays • Nonexcusable delays • Excusable – depends on contract terms • Fault of owner or its agent • Not contractor's (or its subcontractors’) fault and recognized by contract terms as excusable 17

18. Delay Issues • Excusable delay examples: • Design errors • Owner’s failure to provide site access • Owner’s interference • Unusual Weather? • Nonexcusable means no right to additional time or money 18

19. Delay Issues • Excusable delays may be: • Compensable or Non-compensable • Compensable: • Delay is fault of owner or its agent • Contractor entitled to time and money so long as contract provisions do not shift risk to Contractor 19

20. Delay Issues • Non-compensable but excusable • Usually not owner’s fault (unless risk shifting clause renders an owner caused delay non-compensable) • Not contractor’s fault • Contractor entitled to an extension of time, but no additional monetary compensation 20

21. Delay Issues • Multiple, overlapping delays? • Considered “concurrent delays” if excusable and non-excusable delays occur in the same timeframe • Traditional rule is neither party bears responsibility • Modern trend is to attempt to apportion responsibility if possible 21

22. Delay Issues • Delay Risk Shifting • The No-Damage-For-Delay provision • Common in prime and sub contracts • Generally enforceable • Exceptions to enforceability vary by jurisdiction 22

23. Delay Issues • Exceptions to enforceability of NDFD clause • Varies by jurisdiction • Fraud or misrepresentation • Active interference • So unreasonably long as to justify abandonment • Gross negligence • Not contemplated by the parties • Might be drafted in violation of anti pay-if-paid statutes 23

24. Indemnification Issues • Contractual Indemnity Agreements • Promise by indemnitor to hold harmless another for certain future losses, liabilities or damages. • Indemnitor does not have to be at fault • Heavily favors party with greater bargaining power • Potential for substantial liability 24

25. Indemnification Issues • Contractual Indemnity Agreements • Strictly construed by most courts • Some states have statutory limitations such as: • Sole negligence of indemnitee • Partial negligence of indemnitee (less common) • Prefer provisions with comparative negligence 25

26. Warranty Issues • Surety’s potential warranty liability • Performance issue, or • Material defect warranty (sealants, roofing….) • Green issues: • 3rd party certification (USGBC/GBCI re: LEED) • Performance requirements mandating specific energy reductions 26

27. Warranty Issues • Design/Build or performance based solicitation with extended energy reduction warranty obligation • Ripe for claims • Is the risk too high? 27

28. Contractual Risk Allocation Provisions QUESTIONS? If you do not have the opportunity to have your question addressed during the session, you may contact the presenters directly: Gene Rash & Rolly Chambers Company: Smith, Currie & Hancock, LLP Phone: 704-334-3459 Email: gfrash@smithcurrie.com Email: rlchambers@smithcurrie.com Address: 1023 W. Morehead St., Suite 301 Charlotte, NC 28208 28