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Extended Duration Warranties, Performance Warranties , and Liquidated Damages in Construction Contracts – What are the Risks ? P resented by: Gene Rash & Rolly Chambers Smith, Currie & Hancock, LLP. May 7, 2013. Presenter Biographies Gene Rash and Rolly Chambers

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Extended Duration Warranties, Performance Warranties, and Liquidated Damages in Construction Contracts – What are the Risks?

Presented by:

Gene Rash & Rolly Chambers

Smith, Currie & Hancock, LLP

May 7, 2013

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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.

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extended duration and performance construction warranties
Extended Duration and Performance Construction Warranties
  • What will we cover?
    • General legal principles for construction warranties
    • Extended duration construction warranties
    • Construction performance warranties
    • Performance liquidated damages and construction warranties

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extended duration and performance construction warranties1
Extended Duration and Performance Construction Warranties
  • Why be concerned about construction warranties?
    • Construction warranties shift significant risks to clients
    • Financial risk of repairing nonconforming items
    • Clients may misunderstand the risks involved
    • You can help by recognizing construction warranty risks and exploring risk mitigation strategies

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general principles for construction warranties
General Principles for Construction Warranties
  • What is a warranty?
    • Promise that particular statement of fact is true and may be relied upon by other contracting party
  • “Standard” construction warranty
    • Materials and equipment new and of good quality
    • Work free from defects in workmanship
    • Work conforms to requirements of contract
    • No express time limit

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general principles for construction warranties1
General Principles for Construction Warranties
  • Contractor will repair defects for 1 year after substantial completion
    • AIA, ConsensusDocs, EJCDC
  • Supplementary conditions may have additional warranty language
    • Contractor warrants Work “will be free from defects in materials and workmanship for a period of one year from substantial completion”

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general principles for construction warranties2
General Principles for Construction Warranties
  • Performance bonds and warranties
    • Incorporate principal’s construction contract, including warranty obligations
    • Surety’s warranty obligations derive from principal’s warranty obligations
    • Warranty obligations extend beyond completion
    • Warranty obligations extend beyond final payment

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extended duration construction warranties
Extended Duration Construction Warranties
  • Construction warranties > 1 year
  • Owner shifts repair risk to contractor for longer term period
    • Public owners increasingly looking for extended duration warranties
    • Extended duration warranties stretch owner’s construction dollars

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extended duration construction warranties1
Extended Duration Construction Warranties
  • Highway construction contracts
    • State DOT’s face reduced funding
    • Reduced funding impacts DOT q.c. testing and inspections
    • DOT’s require longer duration warranties to cover risk of correcting quality problems
    • Pavement warranties can be 3, 5, 7 years

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extended duration construction warranties2
Extended Duration Construction Warranties
  • Building construction contracts
  • Extended warranties for building components (e.g. roofs, HVAC equipment, etc.)
  • Warranty durations may be 5,10, 20 years
  • If contractor goes out of business during extended warranty period, then performance bond surety will be liable

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extended duration construction warranties3
Extended Duration Construction Warranties
  • Extended duration warranties impact contractor bonding
  • Difficult to estimate future financial obligations to cover extended warranty repair work
  • Long term warranty obligations extend long after contract funds are paid – surety concern
  • Sureties raise underwriting standards for longer term coverage

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extended duration construction warranties4
Extended Duration Construction Warranties
  • Are there ways to mitigate risks of extended duration warranties?
  • Assign manufacturer’s long term warranty to owner
  • Obtain warranty bond separate from performance bond to cover extended warranty obligations
  • Limitations through terms of performance bond
    • Limit duration of performance bond
    • Exclude long term warranty language

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construction performance warranties
Construction Performance Warranties
  • Contract warranties that concern performance of completed project
  • Sustainable (“green”) building
    • Project will perform at certain level of energy consumption
  • Clean energy projects (solar, wind turbine)
    • Project will perform at certain level of output

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construction performance warranties green building
Construction Performance Warranties“Green” Building
  • Sustainable buildings are certified to meet standards for energy and environmental performance
    • LEED, Energy Star, green building codes
  • Federal, state, and local governments
    • Increasingly incorporate sustainable building standards in construction contracts
    • Want construction warranties that completed project will perform to “green” building standards

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construction performance warranties green building1
Construction Performance Warranties“Green” Building
  • AIA Guide for Sustainable Projects (2011)
    • Disclaims warranty that project design and construction will perform to “green” building standards
    • Owner maintenance and operations after completion affect project’s performance
  • But …
    • >20% of U.S. cities over 50,000 in population had green building programs in 2009

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construction performance warranties green building2
Construction Performance Warranties“Green” Building
  • Federal design-build project - warehouse
    • Required design to achieve energy consumption at least 40% below a given baseline (performance)
    • Required warranty of project design “through the statute of limitations and statute of repose” (extended duration)
    • Required design-builder to furnish performance bond

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construction performance warranties green building3
Construction Performance Warranties“Green” Building
  • Federal design-build project - warehouse
    • Government’s remedies for breach
      • Equitable adjustment (deductive change)
      • Contractor repair or replacement of defective item at contractor expense (re-design)
  • Risk mitigation techniques
    • Performance bond covering construction work but excluding design
    • Design-build performance bond limiting liability for design (e.g. ConsensusDocs 470 (rev. 2011)

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construction performance warranties clean energy projects
Construction Performance WarrantiesClean Energy Projects
  • Solar cell and wind turbine power projects
  • Developer financing depends on selling a given level of output
    • Investors and lenders want assurance from developer
    • Developer shifts performance risk to project designer and contractor with performance warranties

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construction performance warranties epc projects
Construction Performance WarrantiesEPC Projects
  • EPC Contracts
    • Engineering, Procurement, and Construction
    • Type of design-build contract
    • Commonly used for constructing clean energy or industrial projects
  • EPC Contracts include performance warranties and construction warranties
    • If project fails to perform to warranted level, then EPC contractor is obligated to bring performance to the warranted level

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construction performance warranties epc projects1
Construction Performance WarrantiesEPC Projects
  • Are there ways to mitigate risks of performance warranties in EPC contracts?
  • Errors and omissions insurance from designer for design defects
  • Performance warranty insurance from manufacturer of project components (solar cells, turbines, etc.)
  • Manufacturers warrant output performance of solar cells or turbines for long term – 12, 15, 25 years
  • Manufacturer partners with insurance company
  • Developer can obtain coverage directly

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construction performance warranties performance liquidated damages
Construction Performance WarrantiesPerformance Liquidated Damages
  • EPC contracts may provide for both construction delay and performance liquidated damages
  • Performance LD’s do not involve delays in construction
  • Performance LD’s involve delays in achieving a warranted level of output
  • Developer assesses performance LD’s while output is below warranted level

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construction performance warranties performance liquidated damages1
Construction Performance WarrantiesPerformance Liquidated Damages
  • Are there ways to mitigate risk of performance LD’s?
  • Limitation of damages clause can cap an EPC contractor’s or performance bond surety’s liability for performance LD’s

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extended duration and performance construction warranties2
Extended Duration and Performance Construction Warranties
  • Extended duration and performance construction warranties shift significant risks to contractors and their sureties
  • Trend to include such warranties is likely to increase
  • Recognizing financial and legal risks and attempting to mitigation them is crucial

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contractual risk allocation provisions
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

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