Monday, March 31, 2008

The Legal Ins and Outs of Construction: An Interview with Royce (Rob) Remington, Partner, Hahn, Loeser & Parks LLP, Attorneys at Law

About Rob Remington:
As head of the Construction Group at Hahn Loeser & Parks LLP, a full-service law firm in Cleveland, Ohio, Rob Remington represents owners, general contractors, subcontractors, material suppliers, design professionals and sureties in a wide variety of construction-related matters. He has experience in commercial litigation in various state and federal courts and regulatory agencies. Rob is listed in "The Best Lawyers in America," 2008 edition for Construction Law.
Contact Rob at rrremington@hahnlaw.com.


FRED: Can you tell me a little bit about your background? I see that you earned a technical undergrad degree from Rochester Institute of Technology before going on to law school. So how did you end up as head of Hahn Loeser & Park's Construction Group?

ROB:
After graduating from Cleveland Marshall Law School in 1988, I got a job at Hahn Loeser... and I've been there ever since. Some of the very first things I got involved with, because of my background, were construction-related cases. And that was really where I got my start.

FRED: How interesting; it's sort of like what I've gone through. I just kind of fell into this industry. You know that's the most common way people end up doing what they do.

ROB:
It's true. And I'm glad I ended up in construction. It's been something that I really have enjoyed doing. I don't think people realize how specialized it is though. Everything you do as a lawyer is unique. You know, you think you can apply certain principles to common fact patterns, but in reality, there are no common fact patterns. In construction, everyone's business is different, and everyone operates differently.

FRED: Would you say that is why contractors need to hire an experienced attorney? Because it is such a specialized industry?

ROB:
Absolutely. Within this industry in particular, you really have to employ an attorney. I mean, in your situation Fred, you might have us look at your contract once every three years, like when an issue comes up and you make a tweak and you keep right on using it. Construction is different because everything is unique. You might be able to have master terms and conditions with some people on some projects, but by and large, you’re getting different contracts from all the people you’re contracting with upstream.

FRED: That's interesting. It's like every job is a new business. You could build a CVS Pharmacy here and a CVS over there and even though it's the same design, you might have different environmental issues, different zoning laws, employ union or non-union employees, and so on.

ROB:
And all these contracts are unique because there are a lot of unique areas in the law. Every day we run into so many things that I think even a good lawyer who doesn’t practice in the area wouldn't know.

FRED: Can you give me an example?

ROB:
I got a call from a mechanical contractor who happened to mention to me that he was out $60,000 on this job because the mechanical went into bankruptcy. He said he had written it off, but they called him to do training, and he wanted to know if he had to do that. And I asked if the project had been given final completion. He said no, it was a year-old project, and it hadn't been completed. I told him, "Well, we can make a claim against the general contractor's bond". We did, and the general contractor ultimately had to pay twice. He paid the contractor that went into bankruptcy and a year later this guy recovered $60,000 that he had written off and walked away from. Had he not mentioned it to me, he would be out this money. This kind of makes my point to contractors: you want to have a lawyer and you want to have professionals that know the business.


FRED: Let's focus on the middle market contractor, which we'll define as companies with $3 or 4 million in revenues up to $50 million. What do you think the most common legal problems or issues are for these types of companies?

ROB:
A big thing right now in the industry is limitation liability. Everybody's looking to limit their liability to appropriate levels given the type and size of the contract.

FRED: So in other words, preventative actions are very important. Do you see a real need for that among the construction market?

ROB:
Definitely. Liability risks are extremely high in this industry. I would say most contractors are just one bad project from being put out of business.

FRED: So how do they prevent that?

ROB:
It starts with limiting their exposure and liability and being very aware of their exposure and liability on every project. For example, you enter into a contract with a manufacturer to do a reasonably small project in one of their plants. Let's say your margin on that project is ten thousand dollars. They ship a million dollars worth of widgets a month, something happens, and you shut down their plant for a month. Now you've got a situation where you could have substantial liability for a ten thousand dollar margin. How do you protect against that? You start by insisting that the owner waive any right to consequential damages arising out of or relating to your work

FRED: And that's part of the contract.

ROB
: Correct. So you waive that they don't have the right to come after you for their lost revenue. Do they have the right to come after you for direct damages? Absolutely. If you didn't get the job done, your going to have liability for their cost to complete the project. You can quantify that damage as a contractor and take on that risk. The problem with agreeing to a contract where there are consequential damages is you can’t quantify that risk.

FRED: You would say then, to summarize, the number one legal problem associated with your middle market contractors is the need for good contracts.

ROB:
They need good contracts. More specifically, they need to take on exposure and liability that is commensurate or consistent with the project and their margin. And they need to understand the risk they are taking on. There's a big difference between knowingly taking the risk on and then safeguarding against it during the course of the project verses not knowing you’re taking it on - not having a clue.

FRED: So obviously having solid contracts to help limit liability is a must. What are some other things that contractors must do to ensure their continued existence?

ROB:
It begins, in my view, and ends, first and foremost, with how you estimate, or take off a project. Another key component before you ever get to the legal issues is accurately defining the scope of your work on a project and incorporating all the exclusions that are important.


FRED: But a lot of times contractors are bidding on a job and they don't have much control over the terms.

ROB:
Right, but here's what's in your control. I get this a lot, where clients say "They're dictating the terms and conditions for me, they're telling me what I can and can’t do, and there is very little leeway." And my reaction is, let's put that aside to start. What you absolutely can control right out of the gate is your estimate. You can make sure you’re dead accurate in terms of estimating that work. What you absolutely can control is the scope of your work. If there are things that need to be included in there, or excluded, you need to be very specific.

FRED: I see what you are saying. So how do they go about it?

ROB:
If you're agreeing to supply, for example, certain electrical services, but there are things that you don't believe would be included, you need to list out what those exclusions are so later on, when somebody comes back with "Hey wait a minute, we thought we were going to get this and this," there is no question. We see that all the time. If we question what's included in the scope of work, the most common response we get from our clients is "well, that's pretty accepted in the industry." Well, if it’s not put on paper, there always can be a dispute about what's accepted and what is not.

FRED: And you see the companies that are successful are really good at doing that?

ROB:
Absolutely. They have a niche, they know their business, they stay within that, and they stay out of trouble that way. And that’s my point. I can write the best contract in the world and I can put in every waiver of liability and limitation of liability, but that is not worth the paper it's written on if you don’t get the scope right and you don't get the price right. You're going to be in trouble and then there’s nothing that my terms and conditions are going to do for you. So it begins and ends with you getting the price right, you getting the business terms right, you getting the scope right, and you excluding what shouldn't be in there and spending the time and the resources internally to get those things right.

FRED: So bottom line: contractors need to be involved, request changes if things don’t sound right, and negotiate their contracts.

ROB:
First of all, you should always ask because you never know. We're getting into a market where the available contractors and laborers are getting harder and harder to lock in. There are a lot of projects, and a lot of people have pretty decent back-logs and you have some ability to negotiate. You don't know until you've asked. And frankly, if you negotiate and they say no, you still need, as a good business person, to make a conscientious decision whether or not you're going to take that risk.

FRED: Doing all this won't guarantee that a contractor will never have liabilities, but at least it won’t be catastrophic?

ROB:
Right. If you've done your homework on the estimating and you've done your homework on the scope, you've already set yourself up to be in a good position. Make sure consequential damages are waived; try to get a limitation of liability provision, so that no matter what your liability is going to be limited to a certain dollar amount. Try to make sure your indemnity provision is fair, and that other exculpatory clauses are kept to a minimum.

FRED: Once a job is in production, how do contractors protect themselves? One of our software clients said they recently won a huge lawsuit thanks in part to their detailed documentation.

ROB:
That's a really good point. I would say you start with the preventative stuff, but then there's the day-to-day, both construction documentation and your own business documentation. Many contractors don't want to do it, and when I suggest that they need to improve their documentation, they roll their eyes. But the fact of the matter is, again, if you document and somebody tells you this is what they want you to do, and you put it in writing, it's very hard for them later on to deny that.

FRED: Why do contractor's roll their eyes at that suggestion?

ROB:
Because it is so difficult to do. Any contractor reading this will say, "Yeah, but you have to be on the jobsite. It’s impossible, there are a million things happening." And it's very true. And part of the process there I think is to know when you absolutely have to do it.

FRED: So what are the absolute minimums when it comes to documentation?

ROB:
At a minimum it’s reviewing project meeting minutes and responding to them when they're erroneous. If somebody gives you an instruction that you think is important and you have issues with it, document it to them factually, and confirm what they're asking you to do. Follow the contract documents: that's the other part. Once you’ve negotiated the contract – good, bad or indifferent - there are procedures in there that everyone has to follow. If the owner doesn't follow them, they're in breach of that contract. But if you let them not follow them, and then there's an issue, that can create a problem.

FRED: Why would a contractor be in trouble if the owner doesn't follow the contract?

ROB:
If there's a change in condition, an unforeseen condition or if there's extra work, and their contract requires you to follow certain procedures, you need to very carefully follow the terms of that contract. In Ohio, for example, there's a lot of cases where the courts have basically taken a zero tolerance position on that issue. If you don't do it, you’ve lost. So, the bottom line is, contractors really need to understand their contract and follow it to the letter.

FRED: Wow, there really is a lot to consider when it comes to construction law. But I think many contractors hesitate to hire a good attorney, to be honest, because it's expensive. What would you say to them?

ROB:
I think it all comes down to managing your business. You know, an excellent electrical contractor told me years ago about how he had the opportunity to buy his employer's business. He said: "The first thing I did was I hired the best lawyer I could find and the best accountant that I could find. I surrounded myself with the best professionals I could surround myself with, because I knew that they would protect me." I think that you do have to be conscience of your expenses. But I think a good lawyer that you trust will give you practical advice and will work within the confines of your business. And frankly, Fred, they will help you avoid catastrophes, and save you money in the long run. But they've got to be people that you trust and who you have relationships with, and it's got to be the whole package I think.

FRED: I couldn't agree more.


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