Contractor Liability: How to Stay Out of Court

1. Contractor Liability: How to Stay Out of Court March 15, 2007 Thomas C. Bell William A. Bianco Andrea Wang Jonathon D. Bergman

2. Indemnity Clauses Thomas C. Bell (303) 892-7472 tom.bell@dgslaw.com

3. Shifting the Risk of Loss

4. Basic Clause • Indemnity: Subcontractor agrees to indemnify and hold harmless Contractor, Owner and Architect from and against any claim, loss or threatened claim or loss by reason of the liability or potential liability of Contractor, Owner and/or Architect for or arising out of any claims for damages.

5. SubcontractPro-Subcontractor Clause • Indemnity:Subcontractor agrees to indemnify and hold harmless, Contractor, Owner and Architect, from and against any claim, loss or threatened claim or loss arising out of or related to Subcontractor’s Work and caused by Subcontractor, Subcontractors employees, agents, or others for whom Subcontractor is responsible. To the extent any claim, loss or threatened claim is caused in part by Contractor, Owner, Architect or others, and in part by Subcontractor, liability therefore shall rest solely on the party causing the same in proportion to its degree of fault or negligence.

6. Owner/Contractor Contract (Residential Construction) • Indemnity: During construction, Contractor shall indemnify and hold harmless the Owners from any loss, liability, damage, claim, or obligation for damage to person or property caused by the negligence or willful misconduct of the Contractor or the subcontractors or suppliers of the Contractor; provided that this indemnity shall not be applicable to the finished Residence. Such obligation of indemnity shall not include (i) injury to persons or property relating to the entry of the Owners on the Property during construction or (ii) acts or omissions of or conduct by the Owners or the contractors, subcontractors, agents, guests, family members or invitees of the Owners. The Owners shall indemnify and hold harmless the Contractor from any loss, liability, damage, claim, loss or obligation for damage to person or property caused by the negligence or willful misconduct of the Owners or the contractors, subcontractors, agents, guests, family members or invitees of the Owners.

7. Owner/Contractor Contract Pro-Owner Clause Indemnity. To the fullest extent permitted by law, Contractor shall indemnify and hold harmless Owner, Architect, Architect’s consultants, and agents and employees of any or all of them (the “Contractor’s Indemnitees”) from and against any and all claims, damages, losses and expenses, including reasonable attorneys’ fees, arising out of or resulting from performance of the Project or Contractor’s activities (or those of any Contractor-Related Person(s)) on or about the Site, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than demolition and alterations required pursuant to the Project itself) including loss of use resulting therefrom, but only to the extent caused in whole or in part by negligent acts or omissions of any Contractor-Related Person(s) or anyone for whose acts they may be liable, whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder (“Contractor’s Indemnity”). Contractor’s Indemnity shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity to which Contractor’s Indemnitees might otherwise be entitled.

8. Owner/Contractor Contract Pro-Owner Clause (cont.) No Damages Limitation. In claims against any Contractor’s Indemnitee made by any Contractor-Related Person(s), Contractor’s Indemnity shall not be limited by any limitation on amount or type of damages, compensation, or benefits payable by or for Contractor or any Contractor-Related Person(s) under any worker’s compensation, disability benefit, or other employee benefit act. Architect’s Liability. Contractor’s Indemnity shall not extend to the liability of Architect, Architect’s consultants, or agents and employees of any of them arising out of (1) the preparation or approval of maps, drawings, opinions, reports, surveys, Change Orders, designs or specifications, or (2) the giving of or the failure to give directions or instructions by Architect, Architect’s consultants, and agents and employees of any of them provided such giving or failure to give is the primary cause of the injury or damage.

9. Owner/Contractor Contract • Contractor Indemnity. To the fullest extent permitted by law, Contractor does and shall indemnify, defend and hold harmless, and hereby releases and discharges, Owner and its constituent managers and members or partners and their respective owners, employees, directors, officers, agents, affiliates, successors and assigns (collectively, the “Owner Related Persons”), except to the extent caused by the negligence or willful misconduct of any Owner-Related Persons, or from any breach or default hereunder by Owner, for, from and against all claims, demands, liabilities, losses, damages, costs and expenses, including but not limited to court costs and reasonable attorneys’ fees, arising out of, resulting from or in connection with:

10. Owner/Contractor Contract (cont.) • the performance of the Work or Contractor’s use or occupancy of the Lots, • any work, occurrence, conduct, act or omission maintained, performed, permitted or suffered by Contractor or any representative, subcontractor or supplier of Contractor, or any employee, agent, invitee or licensee of any of the foregoing, on or about or pertaining to the Lots, • any condition of or on the Lots or of or on any street, curb or sidewalk thereon or adjacent thereto or any improvement constructed or to be constructed thereon arising during the term of this Agreement, • Contractor’s failure to perform Contractor’s material obligations, or Contractor’s breach of Contractor’s material representations or warranties, under this Agreement, • any act or negligence of Contractor or its representatives, subcontractors, suppliers, employees, agents, invitees or licensees,

11. Owner/Contractor Contract (cont.) • any accident, injury or damage whatsoever caused to any person, firm or corporation in the Lots or any sidewalk, street or land adjacent thereto arising as a result of any act or omission of Contractor or its representatives, subcontractors, suppliers, employees, agents, invitees or licensees during the term of this Agreement, or • the physical condition of the Property or any portion thereof existing, created or arising prior to or during the term of this Agreement, and the impact of any federal, state or local law, common law, statute, ordinance, regulation, administrative rule, policy or order, now in effect or at anytime hereafter enacted which pertains or is applicable to or governs: hazardous materials or substances, or the use, permitting and/or environmental condition of the Property (including the subsurface thereto and any property adjacent thereto), or which pertains to health, industrial hygiene or the regulation or protection of the environment. The indemnification obligation under this paragraph shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or a Subcontractor under workers’ or workmen’s compensation acts, disability benefit acts or other employee benefit acts.

12. AIA-201 (1997) • INDEMNIFICATION: 3.18.1 To the fullest extent permitted by law and to the extent claims, damages, losses or expenses are not covered by Project Management Protective Liability insurance purchased by the Contractor in accordance with Paragraph 11.3, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect's consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity which would otherwise exist as to a party or person described in this Paragraph 3.18.

13. AIA-201 (1997) (cont.) • INDEMNIFICATION: 3.18.2 In claims against any person or entity indemnified under this Paragraph 3.18 by an employee of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under Subparagraph 3.18.1 shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or a Subcontractor under workers' compensation acts, disability benefit acts or other employee benefit acts.

14. Engineers Joint Contract Documents Committee C-701 6.20 Indemnification • To the fullest extent permitted by Laws and Regulations, Contractor shall indemnify and hold harmless Owner and Engineer, and the officers, directors, partners, employees, agents, consultants and subcontractors of each and any of them from and against all claims, costs, losses, and damages (including but not limited to all fees and charges of engineers, architects, attorneys, and other professionals and all court or arbitration or other dispute resolution costs) arising out of or relating to the performance of the Work, provided that any such claim, cost, loss, or damage is attributable to bodily injury, sickness, disease, or death, or to injury to or destruction of tangible property (other than the Work itself), including the loss of use resulting therefrom but only to the extent caused by any negligent act or omission of Contractor, any Subcontractor, any Supplier, or any individual or entity directly or indirectly employed by any of them to perform any of the Work or anyone for whose acts any of them may be liable.

15. Engineers Joint Contract Documents Committee C-701 (cont.) • In any and all claims against Owner or Engineer or any of their respective consultants, agents, officers, directors, partners, or employees by any employee (or the survivor or personal representative of such employee) of Contractor, any Subcontractor, any Supplier, or any individual or entity directly or indirectly employed by any of them to perform any of the Work, or anyone for whose acts any of them may be liable, the indemnification obligation under Paragraph 6.20.A shall not be limited in any way by any limitation on the amount or type of damages, compensation, or benefits payable by or for Contractor or any such Subcontractor, Supplier, or other individual or entity under workers’ compensation acts, disability benefit acts, or other employee benefit acts. • The indemnification obligations of Contractor under Paragraph 6.20.A shall not extend to the liability of Engineer and Engineer’s officers, directors, partners, employees, agents, consultants and subcontractors arising out of: • the preparation or approval of, or the failure to prepare or approve, maps, Drawings, opinions, reports, surveys, Change Orders, designs, or Specifications; or • giving directions or instructions, or failing to give them, if that is the primary cause of the injury or damage.

16. Warranty and Remedies Clauses William A. Bianco (303) 892-7396 bill.bianco@dgslaw.com Andrea Wang (303) 892-7423 andrea.wang@dgslaw.com

17. Warranty and Remedies Clauses Introduction

18. Clauses that limit the scope of liability • Limited Warranty Clauses • Through a limited warranty clause, the party promises to cover certain defects for a certain period of time to the exclusion of other remedies. It allows the party to limit the substantive and temporal scope of its liability. • BASIC EXAMPLE: Subcontractor warrants against defects in work performed by Subcontractor for a period of one year from the date of completion of Subcontractor’s work. This warranty is in lieu of all other claims, rights, and remedies, express or implied, provided by law.

19. Limited Warranty Clauses (cont.) • A warranty can be a single provision of a contract or a stand-alone agreement incorporated into the larger contract. More comprehensive warranty clauses or agreements can include: • notice and claim requirements • limitations on the types of damages available • arbitration clauses • definitions sections expressly defining what falls within the scope of the warranty • more extensive waivers (see exculpatory clause section below) • termination provisions • Enforceability: As long as the warranty does not fail of its essential purpose and, as long as the waivers included in the warranty are clear, limited warranty clauses are generally enforced in Colorado. If the warranty seeks to waive the warranty of merchantability or warranty of habitability it must expressly state this.

20. Exculpatory Clauses • An exculpatory clause limits liability under certain legal theories • BASIC EXAMPLE: The Parties agree that neither party shall be liable to the other for any tort claim (except for those arising from willful and wanton conduct), including, but not limited to, actions arising out of negligence and strict liability. • Enforceability: Although disfavored in Colorado, exculpatory clauses will be upheld as long as the contract was fairly entered into and the exculpatory clause is clear. Colorado courts will also void exculpatory clauses that appear in contracts for essential public services. Under no circumstances will a court enforce a clause that waives liability for willful and wanton conduct.

21. Example of Comprehensive Limited Warranty and Exculpatory Clause in Residential Home Building Context

22. Pending Legislation • The “Homeowner protection Act of 2007” as currently introduced would void waivers of remedies in contracts with Colorado residential property owners. This legislation would also nullify any attempts to shorten the period of time during which a residential property owner could bring a claim: • “In order to preserve Colorado Residential property owners’ legal rights and remedies, in any civil action or arbitration proceeding described in section 13-20-802.5(1), any express or implied waiver of, or limitation on, the legal rights, remedies, or damages provided by the “Construction Defect Action Reform Act”, this Part 8, or Provided by the “Colorado Consumer Protection Act”, Article 1 of Title 6, C.R.S., as described in this section, or on the ability to enforce such legal rights, remedies, or damages within the time provided by applicable statutes of limitation or repose, are void as against public policy”

23. Clauses that Limit the Scope of Damages • Limitations on Consequential Damages • Through a provision limiting liability for consequential damages, a party can limit its liability to damages that are directly caused by its breach. Consequential (or “incidental”) damages are secondary loses. For example, a plumber will be responsible for the cost of repairing the ceiling that was ruined when the negligently installed pipes leaked (direct damages), but not for the cost of moving the tenants from the building and the rent lost from those tenants (consequential damages). • EXAMPLE: The parties agree that neither party shall be liable to the other for any incidental or consequential damages of any nature, however caused. • Enforceability: limitation clauses on consequential damages are generally enforced in Colorado.

24. Limitations on Punitive Damages • Through a provision limiting liability for punitive damages, a party can limit its liability to actual damages. Punitive (or “exemplary”) damages are damages above and beyond actual damages that are awarded to make an example of especially egregious behavior and further punish the wrongdoer. Absent a limitation, these damages are available in Colorado only for fraud, malice and willful and wanton conduct. • EXAMPLE: The parties agree that neither party shall be liable to the other for any punitive or exemplary damages of any nature, regardless of the conduct of the parties. • Enforceability: Although one cannot limit liability for willful and wanton conduct, there is no indication that Colorado courts will not enforce a limitation on punitive damages.

25. Liquidated Damages • Parties can predetermine the exact extent of liability for a breach of contract through a liquidated damages clause. • EXAMPLE: The parties agree that should either party breach this contract, damages will be difficult to ascertain and, accordingly, hereby agree that, in the event of a breach, the breaching party shall be liable to the other party for the sum of $10,000.00. • Enforceability: Colorado courts will enforce these clauses when, at the time the parties entered into the contract, the anticipated damages from a breach were difficult to ascertain; the parties agreed to liquidate the damages in advance; and the amount of the liquidated damages was, at the time of contracting, a reasonable estimate of potential damages from a breach, not a penalty.

26. Damages Caps • Parties can limit their total exposure with the use of damages caps. The cap can be for a specific dollar amount, or linked to an external factor, such as coverage under an insurance policy. • EXAMPLE: Owner agrees that the total liability of Contractor for any and all claims arising out of or in connection with the subject matter of this contract shall be limited to $10,000. • Enforceability: As long as the limit is reasonable, and the parties have similar bargaining power, Colorado courts should enforce damages caps.

27. Attorneys’ Fees Provision • An attorneys’ fees provision will decrease the prevailing party’s cost of enforcing a contract. • EXAMPLE: In any litigation arising out of, or in any way connected to, the subject matter of this agreement, the prevailing party shall be entitled to recover it reasonable attorneys’ fees and expenses. • Enforceability: Attorneys’ fees provisions are enforced.

28. Arbitration Clauses Jonathon Bergman (303) 892-7421 jon.bergman@dgslaw.com

29. Arbitration Defined • Arbitration is a process for parties to submit their disputes to a private, neutral third party or panel, who renders a final decision • conducted and adjudicated by private entities and arbitrators, not the courts, judges or juries • examples of administering agencies include the American Arbitration Association, JAG, JAMS, etc.

30. Perceived Benefits of Arbitration • Confidential and private • awards are not publicly filed (but not necessarily confidential) • Limited pre-arbitration discovery (document requests, depositions, etc.) • generally true • discovery takes place in arbitration -- scope determined by arbitrators • Typically quicker and less expensive than litigation • generally true • arbitration can be costly • Decision is binding • grounds for appeal are limited

31. Arbitration Clause Examples (cont.) • AIA Document A401, Standard Form of Agreement Between Contractor and Subcontractor: Article 6.1 Any controversy or claim between the Contractor and the Subcontractor arising out of or related to this Subcontract, or the breach thereof, shall be settled by arbitration, which shall be conducted in the same manner and under the same procedure as provided in the Prime Contract with respect to claims between the Owner and the Contractor . . . . If the Prime Contract does not provide for arbitration or fails to specify the manner and procedure for arbitration, it shall be conducted in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect unless the parties mutually agree otherwise. K. P. Meiring Cons. v. Northbay, 761 So.2d 1221 (Fla.App. 2 Dist. 2000)

32. Arbitration Clause Examples • Standard arbitration clauses suggested by AAA: Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

33. Arbitration Clause “Up-grades” • Mediation before arbitration • meeting between executives • dispute resolution board • useful if participation is meaningful • used as a discovery tool? • How arbitrators are selected • selections by parties based on lists generated by the AAA • appointments • qualifications specified by parties (e.g., architect, engineer, etc.)

34. Arbitration Clause “Up-grades” (cont.) • How many arbitrators will be used • Fast Track Procedures • unless otherwise specified, the AAA applies this procedure to disputes <$75,000 • 1 arbitrator (unless the parties specify 3) • 60-day “time standard” for case completion • Regular Track • unless otherwise specified, the AAA applies this procedure to disputes between $75,000-$500,000 • 1 or 3 arbitrators; the AAA resolves any disputes on this issue • Large Complex Cases . $1M – 3 arbitrators • unless otherwise specified, the AAA applies this procedure to disputes >$500,000

35. Arbitration Clause “Up-grades” (cont.) • Hearing Locale • selected locale may imply choice of procedural law • convenience • available pool of qualified arbitrators • Governing law • specify familiar jurisdiction • Scope of discovery (if any) • discovery is expensive • preparing a case for hearing without information is expensive • AAA Construction Regular Track Rule 22 allows the arbitrators to direct the exchange of witness lists and documents • no other discovery allowed unless ordered by the arbitrator in extraordinary cases • arbitrators try to limit discovery

36. Arbitration Clause “Up-grades” (cont.) • Award of attorneys’ fees • general rule: each party pays their own fees and costs and splits the administrative fees • AAA rules allow the arbitrator to reassess the allocation of administration fees • contract can provide for an award of attorneys’ fees -- prevailing party? • Form of award • AAA R-43 provides for a concise written breakdown of the amount awarded • reasoned opinions are another option • expensive

37. Arbitration Clause “Up-grades” (cont.) • Consolidation or Joinder of Disputes • multiple parties to same transactions • arbitration based on voluntary or contractual consent • efficiencies associated with one arbitration? • avoid duplicative evidence • considerations for subcontractors -- along for the ride?