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I have practiced law for 40 years with the vast majority as a “construction” lawyer. I have seen great… and bad… construction lawyering, both when representing a party and when serving over 300 times as a mediator or arbitrator in construction disputes. To be clear, I have made my share of mistakes. I learned from my mistakes and was lucky enough to have great construction lawyer mentors to lean on and learn from, so I try to be a good mentor to young construction lawyers. Becoming a great construction lawyer is challenging, but the rewards are many. The following is No. 5 of the top 10 mistakes I have seen lawyers make in construction disputes, and yes, I have been guilty of making this same mistake.

No. 5: Being a Jerk to Opposing Counsel 

One great part of being a construction lawyer is that most construction lawyers are reasonable, professional and make working with them easy. To be clear, such behavior is not inconsistent with always zealously representing your client. In most instances, I tell construction clients I prefer a good, experienced, and reasonable construction lawyer on the other side of a dispute. Having someone who knows what he or she is doing will many times save a client legal fees and enhance the chances of a reasonable settlement. The mistake (and it can occur with both young and old construction lawyers) is, simply put, being a jerk. Bad behavior can occur any number of ways, such as getting way too personal (“what kind of lawyer are you?”); inserting your ego into the matter (“never in my XX years have I seen such a **! argument); or simply refusing to cooperate when a reasonable request is made to extend a deadline (“why should I do that since you and your client are **?). 

 The old adage “what comes around goes around” is applicable. If you are uncooperative or refuse to be reasonable and let your ego get in the way, you will get it right back, and it may not benefit your client. To be clear, we have all had difficult clients who want “scorched earth” tactics and zero cooperation. You should explain to the client why it is in her best interest to be cooperative and why you are not being nasty to your adversary. As a member of the bar, you also have professional and ethical obligations, as well as a reputation to protect (both you and your law firm). You can also, without waiving any privilege or compromising your client’s case, let your adversary know that it’s not personal. Most good construction lawyers know – or can figure out – when there are difficult clients on both sides.  

For the “young” construction lawyers out there, be aware of other frequently overlooked consequences of being considered a jerk. First, especially in your geographical practice area, word gets around quickly. That could potentially affect how other lawyers deal with you and that may impact your representation of other clients. All experienced construction lawyers reading this know exactly what lawyers in their areas are…jerks.

Second, bad behavior can impact your personal and professional goals — and your pocketbook. Do you want to move up the ladder in participation on local, state, or national construction bar organizations? Doing so requires recommendations from your peers, and no one likes a jerk or wants to work with a known jerk. Also, in the construction legal world, multiple parties can be involved in a single dispute (e.g., owner/architect/lender/primecontractor/subcontractor/supplier/manufacturer). Legal, ethical, and sometimes business conflicts occur all the time, especially with larger law firms. When you have to tell a client that, unfortunately, you have a conflict that cannot be waived, that client will want a referral. You will want to make a referral to a colleague who you respect, who you know will not steal the client away for the next dispute, and who may have recently referred a client to you because of a conflict. Simply put, jerks do NOT get referrals. 

Finally, and this has happened to me many times: The other parties you do not represent in a matter will note your professional behavior. Just this year I was called out of the blue by the president of a large construction company looking to change counsel for all its construction legal needs. His company was adverse a few years ago to my client in very contentious construction contract negotiation, some of which were face-to-face with his counsel and him. He told me he remembered that while I was very tough and represented my client very well, I was good to work with, reasonable, and (while not using the word)… not a jerk. That company is now a good client of my firm. Having a former adversary hire you is one of the best compliments a construction lawyer can get. 

The moral to this article is simple: Don’t be the kind of construction lawyer who is considered to be a jerk. Don’t let your ego get in the way. Be aware of the consequences of unprofessional behavior. It will negatively impact your client’s case, and it can hurt your reputation, your professional development, and in many instances, your personal pocketbook. Be a bulldog for your clients. Be tough. Earn the other side’s respect… but, don’t be a…**!!!@@ [aka jerk]. 

Lawyer’s Advocacy in Arbitrations: No. 5 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers MakeDavid K. Taylor, Bradley Arant Boult Cummings, Nashville, TN
dtaylor@bradley.com
615-252-2396

This post is a continuation of the Top 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during, and after arbitrations in which I served as the arbitrator. As stated in the previous posts, there are pros and cons to binding arbitration versus trial in a court that go beyond a series of blog posts. In many instances, representing a party in an arbitration requires more due diligence and work than a trial. Great “arbitration” lawyering is essential, but many times does not happen.

No. 5: Know When to Fold ‘Em (Bad Claims/Defenses)

As the late Kenny Rogers sang, when playing poker, “you’ve got to know when to hold ‘em, know when to fold ‘em.”  The same analysis equally applies to preparing for an arbitration hearing and determining what claims/defenses will actually be presented at the hearing. Without repeating the title of these series of blogs, one serious mistake I see, while both acting as an arbitrator or counsel, is lawyers (and clients) who feel that they not only need to present every single possible claim/defense to the arbitrator, but refuse to concede positions in the middle of a hearing when it’s clear the facts are not going their way. An arbitration is not a hearing before a jury or a judge who may not know anything about the subject matter of the dispute. Your arbitrator is an industry expert, most of the time an experienced lawyer in the field at issue. She knows what good and bad positions are and when one side is trying to pull the wool over her eyes. Especially in arbitrations where there are multiple claims (such as a construction dispute), a party’s credibility on ALL positions is vital. Presenting four great claims/defenses but also one to two highly questionable ones, or stubbornly sticking to positions that look like losers, is a serious mistake. Your adversary will use anything they can to oppose the four great claims/defenses and use the questionable claims/defenses to cast doubt on the valid claims/defenses. More importantly, the arbitrator will look askance (he may not say so) at those bad claims/defenses and wonder why you are still presenting a position that appears to be a sure loser. Conceding certain claims/defenses during a hearing, no matter how hard fought, can increase your credibility to the arbitrator. Such a narrowing down on positions and in-hearing concessions can also help reduce exposure, especially if there’s a prevailing party attorneys’ fees clause. This may take some persuasion for a client who may be worried about making ANY concessions, especially in a hard fought, emotional arbitration. But part of your job as a counselor is to give the best advice possible and lay out the pros and cons, and the client can then decide if he wants to go “all in” on all stated positions.

Finally, the other great line from this song is “you never count your money when you’re sittin’ at the table.” Knowing what claims and defenses to “hold” and present, and which ones to dump and fold, will give you and your client the best chance of walking away from the arbitration table with money in your client’s pocket (after legal fees are paid, of course…).

Read numbers 1, 2, 3, and 4 on the list.

Number 5: Not Letting the Client and Mediator TalkThis post is a continuation of the 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make before, during and after mediations in which I was the mediator. As stated in previous posts, it takes more than throwing together a mediation statement at the last second and showing up at the mediation. Doing it right requires the same kind of due diligence and work that goes into preparing for a key deposition or even trial. Great “mediation” lawyering is essential and is the best way to get to an acceptable deal.

Number 5: Not Letting the Client and Mediator Talk

Most mediators want to hear and talk directly with the client – not the attorney – since she is ultimately going to make the decision at the end of day. Counsel, you have to jettison your ego. Do not try to cut off this vital communication. Your client may need to get something off his chest, and he finally has someone other than his lawyer at whom to vent. Mediators are paid to take it, and these direct conversations with the client are is immensely helpful for the mediator to determine the key factors to getting to a deal. Remember these are settlement discussions, and “what happens in mediation…stays in mediation.” The mediator needs to know the temperatures in all caucus rooms and many times “non-legal” factors that are not available in court determine if a deal can be done.

Many years ago, I resolved an age discrimination claim by talking directly to the client. She just wanted to move to another city to be near her grandchildren but had no money to do so.  The final deal included a year’s prepaid rent and a used car. The lawyers were not happy, but they are not a mediator’s client: the client is the Deal.

A mediator must establish a position of trust and confidence (and frankly likability) with the key client decision makers so that, when it is time to “fish or cut bait,” the clients will listen to what the Mediator has to say. That cannot happen when the lawyer does all of the talking, and the client just sits there mute like a house plant. Good mediators will not let that happen, even if that means hauling the lawyer out of the caucus room and having a stern discussion.

Read numbers 6, 7, 8, 9, and 10 on the list.

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I have practiced law for 40 years with the vast majority as a “construction” lawyer. I have seen great… and bad… construction lawyering, both when representing a party and when serving over 300 times as a mediator or arbitrator in construction disputes. To be clear, I have made my share of mistakes. I learned from my mistakes and was lucky enough to have great construction lawyer mentors to lean on and learn from, so I try to be a good mentor to young construction lawyers. Becoming a great and successful construction lawyer is challenging, but the rewards are many. The following is No. 6 of the top 10 mistakes I have seen construction lawyers make, and yes, I have been guilty of making this same mistake.

No. 6: Not Marketing Your Skills: Internally and Externally 

You are a proud construction lawyer.  Like Liam Nelson in many of his movies, you have a “special skill” set. You are both a transactional lawyer when negotiating construction contracts and a “dispute resolution” specialist when called upon. Unlike most “litigators,” who normally get involved after a dispute occurs, you are brought into a matter by a client early on in a project to provide legal and practical advice so that a full-blown dispute never happens – or if it does, the client will be in a better position to achieve a good result. You are an aggressive fact finder  and zealous advocate. You know more about the way a construction project is financed, negotiated, documented and built than some of your clients. You can provide a more accurate analysis of probable outcomes of disputes, especially in arbitrations. 

Then what’s the MISTAKE? The assumption in this post is that you want to be a successful, well respected, and – yes – profitable construction lawyer. If the answer is no, you are not reading this post. The mistake I often see, especially with young construction lawyers, is that they do not properly market themselves with these “special skill sets” both internally within the law firm and externally to fellow lawyers and the construction industry. This includes failing to make cross marketing a priority.

Marketing Internally

Of course, marketing yourself internally depends on your experience, the size of your law firm and your construction group. But you can’t sit back in your office and expect work to come to you or be fed work by a partner. Referrals can come from within a firm, whether from transactional lawyers or litigators. Establish yourself as one of the “go to” lawyers for reviewing and negotiating construction contracts, reviewing arbitration clauses in non-construction contracts, and for all things related to arbitration. Offer to put on seminars about your practice or attend monthly practice group meetings for other groups. Send relevant construction law updates to your partners who are assisting potential construction clients in other practice areas. Pay attention to trends in the industry and deals being worked on internally, especially with clients for whom you have done work. Make yourself available (and do great work) if asked to help a client by a non-construction attorney at your firm. Seek out and create relationships with the most successful lawyers in your firm or group and ask how they achieved their success. The benefits of a personal “in person” relationship, not just via zoom or email, are substantial.

Marketing Externally via the Bar 

Because of the very nature of construction, and the number of parties involved in a construction project (lender/developer/owner/designer/prime contractor/subcontractor), referrals by other lawyers due to conflicts regularly happen. If the construction bar in your area doesn’t know you, other lawyers will not refer work to you, and that has to change. Consider doing the following to help build you brand within the local/state construction bar:

  • Join and actively participate in your local or state bar construction committee, and that can include committees focusing on ADR. If there is not one, create one through your bar or via a separate organization. Contact the folks in charge of CLE for your local and state bar associations and offer to put on a construction (or even arbitration) related CLE program, which may be only an hour. In Tennessee, we created the “Tennessee Association of Construction Lawyers”, and it has been highly successful.
  • Try to write articles to be published in local or state bar magazines. The ABA Construction Forum is a great national construction lawyer organization, but it takes a willingness (as well as your firm’s support) to regularly attend meetings, actively participate, and work your way up to leadership positions.
  • Consider writing a series of blog posts, which can be picked up by national media groups. These efforts may also be taken into consideration when the various groups select “rising stars” and “best of” in different legal fields.             

Marketing Externally to the Construction Industry

Many successful construction lawyers focus their marketing efforts not on other lawyers but on construction industry groups. There are national construction organizations (such as ABC, AGC, ASA) that have local and state group meetings. Although frequently overlooked, there are also specialty construction groups, whether roofing, masonry, road building, specifications, or architects. Each group meets monthly and has state and national conferences… for which they need speakers. Research and consider joining these groups, go to the monthly lunches, and actively participate. Offer to put on continuing education at no charge. In addition, research which specialty groups publish magazines. Any time you visit a client see what publications are out front in the waiting area. What organizations are they a member of? Offer to co-speak on a topic at an upcoming meeting. Submit an article of interest geared towards that group. Many times this results in invitations to speak at national meetings. All of these efforts (as well as keeping your firm bio updated) can raise your profile within your law firm and group.           

Marketing and Cross-Marketing to Existing Clients

Be proactive in knowing your client’s business. Keep up with their projects and any awards. Many companies want to promote from within and educate their employees. You can offer to put on presentations at their office, which also solidifies you as their “go to lawyer.”  Finally, never overlook the fact that construction clients, like any other business, have many legal needs. If you work for a full-service firm, make the client aware that your firm can provide labor, banking, real estate, and transactional expertise. Getting that work into your firm not only helps you succeed but also makes for very happy, impressed and appreciative non-construction lawyers.        The bottom line is this: Don’t be “that” construction lawyer. Be proactive in determining how your  special skills can translate into becoming an even more successful lawyer. Make and stick to a written plan with both short- and long-term goals. Seek advice from your mentors. This may not immediately result in recognition and new clients, but business development is a process, and you have to stick with it in order for any plan to be successful.

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I have practiced law for 40 years with the vast majority as a “construction” lawyer. I have seen great… and bad… construction lawyering, both when representing a party and when serving over 300 times as a mediator or arbitrator in construction disputes. To be clear, I have made my share of mistakes. I learned from my mistakes and was lucky enough to have great construction lawyer mentors to lean on and learn from, so I try to be a good mentor to young construction lawyers. Becoming a great construction lawyer is challenging, but the rewards are many. The following is mistake No. 4 of the top 10 mistakes I have seen lawyers make in construction disputes, and yes, I have been guilty of making this same mistake.

No. 4: Not Folding Bad Claims/Defenses

We are taught in law school and as young lawyers to assert every claim and defense, especially at the beginning of a lawsuit or, in the case of most construction disputes, in arbitration. This is not a mistake. It is necessary because typically at that early stage of the dispute the facts are unclear. Your client also may be focused on going after the other side and want you to make every possible claim or defense. The mistake is to continue stubbornly on this path through to the arbitration hearing or trial in a courtroom. This kind of mistake was carved into stone by the late, great singer-philosopher Kenny Rogers, who crooned, “You’ve got to know when to hold ‘em, know when to fold ‘em.” This simple but catchy phrase is applicable to all trial lawyers, especially to construction lawyers. 

In the typical commercial construction dispute, there are scores of claims and an equal number of defenses. The best examples are defective work and change order claims. On a recent arbitration panel of which I was the chair, there were 38 claimed change orders – some seeking only money; some requesting time; and some seeking both money and time. But each change order had its own factual story, many times quite complicated. This is one of the reasons why construction disputes are so expensive as far as legal fees (and client time). As discussed in mistake No. 1 in this “mistake” series, the most important four issues in any construction dispute are the facts, the facts, the facts… and the facts. In turn, the defenses to such multiple claims can be equally factually complex. Many times, there are alternative theories: There was no timely claim notice; there was no defective work; even if there was notice and defective work, the client did not cause it; and even if the client caused it, the costs sought are both unnecessary or unreasonable or both. 

Credibility before an arbitrator or judge (and the jury), both for you as a lawyer and your client, is absolutely critical. If you have 15 claims and determine prior to the hearing that eight are extraordinarily strong, four are “iffy,” and three are extremely poor, the mistake is not “folding” the poor claims. The same goes for defenses. I cannot tell the young construction lawyers out there how many times, as an arbitrator, when bad claims/defenses are presented (through the same set of witnesses used for the strong claims/defenses), I have then questioned the credibility and viability of both the “iffy” and strong claims. This consequence applies equally to a party who stubbornly refuses to concede unopposed facts or portions of claims. Any attempt to practice scorched earth “litigation” tactics simply does not go over well in front of an arbitrator or judge. The best example in a construction context is when one side’s claims are less than the amount stipulated to be owed to the other side, but that side has refused to pay the undisputed amounts. 

Remember, while a judge or jury may not know anything about construction, a construction arbitrator does. The arbitrator is a construction industry expert, normally a very experienced construction lawyer, who has been through scores of arbitrations, both as counsel and as an arbitrator. Stubbornly sticking to losing positions, especially in arbitrations, is a grave error that will hurt your client’s chances of a successful arbitration outcome.  

Also, consider if raising a claim or defense is worth the time and effort. How much time do you have to put toward your case? I have had parties in a multi-day arbitration where the total claims exceeded $1 million spend three hours on a $1,000 claim when the total legal (and arbitrator) fees for these three hours may exceed $5,000. I have had a client go against my strict instructions to agree that a picture showed exactly what the other side was contending on a ridiculously small claim. Instead, he refused to do so. The other lawyer pounced on the opportunity. The arbitrator rolled his eyes, and it destroyed the client’s credibility and adversely affected the final result. His explanation to me afterwards was: “Oh, sorry, I just wanted to try to confuse that jerk of a lawyer.”   

To be clear, to fold a bad claim or defense you must fully educate and involve your client, and that can sometimes be difficult. The client is in charge and calls the shots. But there can be gobs of credibility gained with the arbitrator by strategically, timely, and tactically making concessions prior to and especially during a hearing. As Kenny wisely sang: “You’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.”       

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I have practiced law for 40 years, with the vast majority spent as a “construction lawyer.” I have seen great… and bad… construction lawyering, both when on the other side of a dispute, as well as when serving well over 300 times as a mediator or arbitrator in construction disputes. To be clear, I have made my share of mistakes. I learned from my mistakes and was lucky enough to have great construction lawyer mentors to lean on and learn from, and I have tried to be a good mentor to young construction lawyers. Becoming a great construction lawyer is challenging, but the rewards are many. The following are the Top 10 mistakes I have seen lawyers make in construction disputes, and yes, I have been guilty of making all of them.

No. 1: It’s About the Facts…and the Facts…and the Facts

One of the best construction lawyers around, when asked to provide advice to young construction lawyers, said it best when asked about the four most important things to know about the successful practice of construction law. They are in this order:

  1. The Facts
  2. The Facts
  3. The Facts
  4. The Facts

This is not a typo. There is no other area of law, including commercial litigation, where there can be scores of factual issues (bids, change orders, delays, supplementation, liens, defects, default, pass-through claims, termination, etc.), each of which has its own subset of hundreds of additional “facts.” In most commercial litigation disputes, the dispute has already occurred. In construction law, many times we are asked to provide advice prior to an issue ripening into a full-blown legal dispute. Is there an ongoing issue on a project that merits a default and/or termination? What are the “tool-box” options available to a party to invoke? Gathering all of these facts, especially from an e-discovery standpoint, can be time consuming (and expensive), but is absolutely critical not only to representing and providing advice to a construction client, but also to trying to achieve a preferred result. That advice may prevent a later full-blown legal dispute or put the client in a better position to obtain a preferred result.

Many construction clients are not sophisticated in the organization and retention of project records. Employees come and go. Part of a construction lawyer’s job is to ask… and ask… and ask… and, yes, bug the client to make sure that all documents are not only preserved, but provided, reviewed, and analyzed. One of my own notable examples was a dispute in which I represented a contractor. Right before the start of a week-long arbitration, I was preparing the site superintendent to testify. And, yes, I had hounded the client to produce all project documents. While doing a mock cross-examination, he smiled at a question and said, “Well, I have that fact documented in my personal, daily project journal I keep on every project.”  My response was “WHAT the (expletive deleted)!” That journal had not been provided to me, much less to the other side, and certainly was not a hearing exhibit. I disclosed the journal, produced it immediately, and was able to use it (over objection, but that is one of the advantages of arbitration). It did not play a huge role in the final result (which was a win for my client), but I learned a valuable lesson from this “mistake” and never made it again. Remember, when on the warpath, search for ALL client project documents.

To be clear, the “law” is always a vital part of any construction dispute, both statutory and basic case law. Any good construction lawyer has to know the law and how best to present that law in conjunction with the facts to the decision maker. The oft-heard criticism of arbitration is that arbitrators do not care about the “law” as much as trial court judges. I disagree, but since most construction arbitrators are normally great, experienced construction lawyers, I have found that their adherence to the “facts” is manifest. Ignore facts that hurt your side or be surprised by “facts” that show up in document production at your and your client’s peril.

 Finally, at any hearing, the construction lawyer that has done his or her homework and knows the facts in and out is normally the most successful and persuasive. In a recent arbitration, one older lawyer was searching unfruitfully for an exhibit, when a young (well-trained) lawyer on the other side helpfully piped up saying, “Look at Volume 3, Exhibit 75.” That young lawyer knew the other side’s exhibits as well as his own. It was impressive. Was that enough to sway my final award? Of course not, but it did show me which side was more prepared and persuasive.

So, the moral of this mistake is to always, always remember: It’s. All. About. The. Facts.

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A Texas court has rejected a pipeline contractor’s $25 million claim for additional costs based on broad release language include in an executed change order (see Wood Group, USA v. Targa NGL Pipeline Company, LLC, No. 01-21-00542, 2023 WL 5280249 (Tex. Ct. App. Aug. 17, 2023)). The change order at issue increased the contract price by $1.3 million to cover additional costs resulting from a specific change to the contractor’s scope of work (i.e., an increase in the number of horizontal directional drilled bores). Included in the change order was broad release language whereby the contractor waived and released any claim based upon information the contractor knew or should have known prior to the date of the change order. The contractor argued that the release should only apply to claims related to the specific change addressed by the change order. The trial court disagreed and applied the release as written to bar over $25 million in claims that it held were known or should have been known as of the date of the change order. 

In affirming the trial court’s, the Texas Court of Appeals provided this helpful overview of how releases are interpreted and enforced under Texas law:

A release is a written agreement that discharges a duty or obligation owed to one party to the release and operates to extinguish the claim and is an absolute bar to any right of action on the released matter. A release is a contract subject to the rules of contract construction. Thus, we read the contract as a whole and must examine the entire contract to harmonize and give effect to all its provisions. We give the release’s language its plain grammatical meaning unless doing so would defeat the intent of the parties. To effectively release a claim, the releasing instrument must mention the claim to be released and claims that are not clearly within the subject matter of the release are not discharged, even if they exist when the release is executed. Although releases generally contemplate claims existing at the time of execution, a valid release may also encompass unknown claims and future damages.

Wood Group is a good reminder to pay close attention to the fine print before signing any legal document like a change order. The contractor may have thought it was only giving up claims related to the particular change at hand, but the wording of the release went much broader than that. By signing the $1.3 million change order, the contractor agreed to the broad release and gave up over $25 million in claims.

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Here’s the Scenario: Try explaining the concept of “retainage” to a businessperson unfamiliar with the construction industry at your next holiday party. Here’s the typical response as she spits out her eggnog: “Wait a minute: are you telling me that when work and materials timely supplied on a private commercial project are approved, the contractor and subcontractors have (depending on the state) 5%-10% withheld every month until the very end of a long project? That’s just nuts!” You respond: “Crazy, but this is standard in the industry, even when profit margins are getting smaller and smaller.” And the businessperson then says: “Where is this ‘retainage’ during this time, in a safe in the Grinch’s cave? Your response: “Well, while its mostly the subcontractors’ retainage, since most prime contractors don’t self-perform, maybe the retainage is with the owner or even the lender and it may not be actually set aside.” The businessperson does her best Santa “Ho, Ho, Ho,” shakes her head, heads back to the bar for more eggnog, and strongly suggests you should get yours spiked.

A Warning

If you do historical research to find out where the heck the concept of retainage came from, you have to go back in England in the 1840s during a boom in railway construction called “railway mania.” With not enough competent contractors, and then a crash in the market, the railway companies began to withhold up to 20% to make sure that the work was properly and timely done. This concept somehow filtered over to the United States during the industrial revolution and has been in use ever since.  The idea of “protecting” retainage reached a legislative peak after the series of failed projects and bankruptcies that followed the 2008-2010 financial meltdown. Lenders foreclosed, wiped out any lien rights and then sold the projects without having to pay a dollar to the construction companies that built the half-completed projects. And where was the subcontractor retainage for approved work on these failed projects?  Most of the time, it did not exist and had not been funded to the owner by the lender as set forth in a loan agreement. Poof, an invisible lump of coal shoved down your financial throat. Recall from the previous post, the “owner” on any prime contract is typically a “limited liability” company whose only asset is the heavily mortgaged land. Who may be holding the empty retainage bag when all the subcontractors all gather around the Prime office trailer tree with their hands out? Yep, prime contractors.    

So, what can a prime contractor do?

  • Know the Retainage and Prompt Pay Laws in the Project’s state: Some states (like Tennessee) have mandatory requirements and severe civil penalties if retainage on a commercial is not paid into an interest-bearing escrow account during the project. These laws can also limit the % of retainage which can be withheld and even when and how retainage is released. Most of these laws also cannot be “waived” by contract. To be clear, there can be consequences not just for the owner for not following the retainage laws, but also to the prime contractors which have in turn withheld retainage from their subcontractors. In Tennessee, due to a very active subcontractor’s lobbying efforts, as an example, the failure to establish a retainage account after written notice can even be a criminal violation. Don’t get bad news after the fact from your Chief Legal elf. 
  • Can you get the owner to not withhold retainage?  Because of the perceived unfairness of retainage and the possibility of retainage abuse, there is a trend for owners (mostly state and federal agencies) not to withhold retainage. Why should retainage be withheld if there is a payment and performance bond required of the prime contractor? The primary problem is still on commercial, financed projects where the status quo is for lenders to demand that retainage be withheld and even make retainage, even if escrowed, part of the security for the loan (think the Grinch in his cave hiding the Whoville toys) in the event of an owner default (which may be a violation of a retainage laws).  The argument is that the owner can properly manage a project through the ability to withhold payments from monthly pay applications if there’s an issue with the work. When quality and loyal subcontractors are sometimes hard to find, what better way to ensure loyalty than to tell a subcontractor, like an ecstatic toddler Christmas morning, that for approved work, it will get paid 100% of a pay request?
  • Can there be creative ways to benefit all sides and not hold retainage? Put on your Santa thinking hat. Can the owner be protected, and the prime contractor and subcontractors benefitted, by not withholding “retainage” but placing some monetary value on some aspect of the work or requirements for final payment such as project close out?  But be careful if the goals are to avoid retainage laws.  Again, many of these laws cannot be waived by contract, and if some withholding of monies looks and sounds like retainage (looks and quacks like a duck), it may be deemed by a judge or (in many cases) an arbitrator as retainage.
  • Be smart about retainage provisions in contracts.  Be like Cindy Loo Who ferreting out her toys and the Grinch.  Don’t sign a prime contract that calls for retainage until you have some reliable information about how “your” retainage is located/held. More importantly, look carefully at the retainage provisions. Going back to the lender issues, many loan agreements provide that if there is an owner loan default, over which a contractor has zero control, retainage will not be released but used to cure any owner default.  Scrutinize the contract provision for “final” payment, which normally includes retainage. Are there unacceptable conditions, such as lender approval? You don’t want to be left with an empty bag like Santa at 11:59 pm on December 25th. 
  • Check your own “form” Subcontracts.  While most prime contracts are heavily negotiated, many prime contractors have their own “form” subcontracts.  Again, every state’s lien, retainage and prompt payment laws are different. An effort needs to be made to modify that form, just like Santa continues to update his naughty and nice list. 

The Bottom Line

What’s your profit margin?  Think through how retainage impacts your bottom line during your projects. Even Santa has to feed and water his reindeer before, during and after Christmas. In 98% of your projects, the retainage will flow down to you and in turn you are handing out retainage checks like candy canes at a holiday parade but be prepared if you see a big fat retainage lump of coal coming to the stocking on your mantle.

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Here’s the Scenario: After months of working with a new national developer (and providing hours of unreimbursed value engineering), you get the draft prime contract and see that the named “owner” will not be the hugely successful developer, but a specially created “limited liability company” that’s sole “asset” is the land upon which the project will be built. The developer has also shopped around to obtain investors for this project, and the LLC is made up of a series of limited liability companies, limited partnerships, etc. The project is also being financed, so that the sole owner “asset” is subject to a deed of trust/mortgage by the lender that will take precedence over any contractor lien claim. While there’s been zero discussion or mention of this “owner,” the pressure is on. What options do you have?   

A Warning

Those old timers who have been around recall the series of failed projects and bankruptcies that followed the 2008-2010 financial meltdown. This put many construction companies out of business while the lenders foreclosed, wiped out any liens, and then sold the projects without having to pay a dollar to the construction companies that built the half-completed projects. Any non-escrowed withheld retainage is gone. Always, always, know that there is a reason a “LLC” is called a “limited liability” company.

So, what can a prime contractor do?

  • Demand and ask for evidence of financing whether or not the owner is or is not financing the project. Some owners do not need financing. If using an AIA form prime contract, remember that the standard A201 General Conditions (Article 2.2) states that upon a written request, the owner is required to provide “reasonable evidence” that the owner has made “financial arrangements” to fulfill the owner’s obligations. And the contractor also has no obligation to “commence the work” until such information is provided. If the AIA form is not used, include something similar in your prime contract.
  • Don’t sign the contract until you have some reliable information about financing. For financed projects, you have some leverage. Typically, the owner/developer is ready to finalize the plans, get the prime contract signed, close the loan, and break ground. And to close the loan, it needs an executed prime contract. At this late date, it’s really hard for an owner to then find another contractor. Use that leverage if necessary. 
  • Protect withheld retainage: Many states (like Tennessee) have mandatory limitations on the amount of retainage that can be withheld (ranging from 5% to 10%), and for a long project, that’s a lot of delayed profit. Know the retainage laws (and penalties) if the retainage is not escrowed throughout the project, which is mandatory in some states (like Tennessee). Try to have the owner even agree NOT to withhold retainage, which would allow a contractor to in turn have very, very happy subcontractors. 
  • During the course of the project, track payments and don’t accept promises of payment. No matter the explanations, strictly adhere to the payment terms and conditions, especially for deadlines for notices for claims. Know deadlines for lien notices. It’s also vital to carefully examine those typically required partial lien releases that are required to be provided with pay applications: Make sure that any and all claims or proposed change orders are carved out and preserved. You better believe that after a dispute or termination, without making these efforts, these lien waivers will be thrown back in the contractor’s face by the owner or the lender.      
  • Before you exercise any default, threats to stop work, or initiate ADR proceedings, make sure that there not any other executed documents that may have been required by any lender. My previous post discussed the issues with the demand that the contractor execute the typically required “Consent and Assignment Agreement” in favor of the lender.

The Bottom Line

In 98% of your projects, contractors will get paid, which will in turn allow subcontractors to get paid, and the work will be done properly and on time. Any issues are worked through in good faith. The “we are all a team” attitude should prevail throughout a successful project, and everyone should pledge to work together again. But remember “who” you are contracting with, and it’s not the great developer. If there are issues and the developer decides to tank the project, or has issues with the lender, you could be holding the bag and face potential liability from subcontractors. “Know thy owner” is a mantra that should be a part of every internal discussion before embarking on a new project.

Lawyer’s Advocacy in Arbitrations: No. 10 of the Top 10 Horrible, Terrible, No Good Mistakes Lawyers Make: Not Looking for Ways to Make Your Arbitrator Happy at the End of a HearingDavid K. Taylor, Bradley Arant Boult Cummings, Nashville, TN
dtaylor@bradley.com
615-252-2396

There’s a great argument that lawyer advocacy in an arbitration is more essential than at a trial in court. This is the last post of the 10 most horrible, terrible, no good, “bang your head against the door” mistakes that I have seen lawyers make in arbitrations, both when I served as counsel and as an arbitrator. Agreeing to arbitrate a dispute, whether in a contract or by agreement, is a serious decision for any business. There are pros and cons to binding arbitration versus trial in a court that go beyond a series of blog posts, but the fact is that when a dispute is arbitrated, finality is the rule. It is very difficult to appeal an arbitration award. In many instances, representing a party in an arbitration requires more due diligence and work than a trial. Great “arbitration” lawyering is therefore essential but… sometimes does not happen.

No. 10: Not Looking for Ways to Make Your Arbitrator Happy at the End of a Hearing

Prior to the time that the proof in an arbitration is formally “closed” and you pack up your bankers boxes and thank the arbitrator (and are gracious to your adversary), think through how you can help the arbitrator make a well-informed award. Especially with an arbitration where there are scores of claims (such as change orders, each of which may be factually complicated) and defenses, remember that while you may have lived with the dispute for years, the arbitrator only has her notes and the (many times) voluminous exhibit books. Depending on your working relationship with opposing counsel, they have the same general goal when the hearing ends: Make sure the arbitrator understands each sides’ claims and defenses.

Therefore, be creative. Would post-hearing “summaries” that link up specific issues or claims to witnesses and exhibits be helpful, even if you work with opposing counsel to do so?  If there are claims for the recovery of legal fees (such as who is the “prevailing party”) and allocation of arbitration costs (which can be significant and include the arbitrator’s compensation), while you should have determined prior to the hearing how the arbitrator wants to handle such claims, ask for direction. Are your damages clear and unambiguous and have they remained unchanged from when the hearing began? Many times, during the hearing, claims and defenses are modified/revised/withdrawn. What about proposing the submittal of a Word document or Excel spreadsheet that lists the claims and amounts sought with a blank space for what will be awarded on that claim? Most arbitrators want to and will address every “claim” in the written award and want to be 100% clear on the relief sought.

While most arbitrators do not want formal post-hearing briefs that address every single issue, it may help to offer to submit a short and to-the-point summary of your damages. Sometimes there are pure legal (such as contract clause interpretation) issues that were raised for the first time in the hearing. If you are unclear or unsure that the arbitrator understands your position on such issues, offer to submit a short memorandum or even an email.  Do remember that whatever is submitted (under most arbitration rules) the time frame for the issuance of an award (typically 30 days from the close of the hearing) does not formally begin until all “post-hearing” filings have been submitted.

The bottom line is this: If you were the arbitrator, what would you want from counsel to make your final decisions and the award easier to write? Especially in a dispute where there may be scores of issues and claims, any post-hearing efforts or offers to the arbitrator to make her job easier will win you brownie points; hopefully increase your and your client’s credibility; and will pay off in the final result.

Finally, since this is the last of the top 10 posts, thank you for all of the great feedback I have received from readers all over the country, including a number of suggestions and recommendations from full-time arbitrators. One suggestion I recently implemented in an arbitration where I served as counsel was well received by the arbitration panel. For the 10 jointly created exhibit books, instead of putting them all in typical black binders, we used different color binders for each book. It saved time for all involved by being able to ask a witness or the panel arbitrator to turn to the “green” binder.

Read numbers 1, 2, 3, 4, 5, 6, 7, 8, and 9 on the list.