Construction Law Blog
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Litigating and arbitrating construction cases is extremely expensive. By the time the procedural rules are complied with and the discovery process is done, even the smallest of construction cases with the most cost-conscious legal counsel will run $300,000. Larger construction cases are vastly more costly. For example, the 2012 King County Bright Water Tunneling dispute (VPFK v. King County) cost taxpayers over $10 million in attorneys’ fees alone. For more information, read our blog article, King County Scores a $155.8 Million Victory Against Contractor on Brightwater Tunneling Project.
A recent Southern District of New York ruling addressed the issue of public access to arbitration awards. The case involved a motion to confirm an arbitration award and a joint request from the parties to “seal” various documents relating to the arbitration. Sealing of court records prevents public access and ensures the proceedings remain confidential.
One of the primary benefits of conducting business through a corporation or limited liability company is the limitation of personal liability. Shareholders or members are not generally liable for the debts of the entities that they own. The corporate structure, however, can be abused by shareholders in order to defraud creditors from recovering on debts owed by the corporation. As you will read below, shareholders may transfer a corporation's assets into the hands of another of the shareholder's business entities to shield those assets from creditors.
Contractors across the nation are increasingly using Building Information Modeling (BIM) technology to test design details through virtual, three-dimensional models. Although it is difficult to define, BIM essentially builds a complex system of databases, which integrates the work of all project team members into a centralized storage vehicle. The project is modeled in the computer and conflicts among mechanical, electrical, plumbing, and structural features are resolved "on paper rather than in the field." The BIM model is "intelligent" in the sense that the objects in the model contain their own physical characteristics, as well as their relationship to other objects.
The benefits of using BIM are numerous. Contractors employ BIM models primarily for clash detection purposes, but also to ensure code compliance, proper sequencing, adequate supply lead time, energy efficiency, and effective cost control measures. BIM is capable of providing more detailed designs and reducing costly mistakes in the field. By allowing the team members to visualize every detail, contractors can discover problems much earlier in the process, decreasing the overall degree of risk that something might go wrong during construction.
More than a mere technology, BIM is a methodology. A basic premise of BIM is collaboration and the successful implementation of BIM necessarily depends upon the cooperation of the project participants. BIM projects allow the parties to collect data, share ideas, and communicate more effectively. If used in this way, BIM has the potential to redefine the relationships between the parties.
In contrast with the collective nature of BIM projects, the American legal system focuses on individual rights and responsibilities. As the construction industry moves forward with more collaborative relationships, legal rights and liabilities will need to be clearly allocated among the parties. Some of the most important legal issues are:
- Data Loss, Corruption, or Manipulation: Computers are inherently susceptible to data loss, corruption, and manipulation. The risks involved are significant because even a small data loss or minor mistakes can result in significant design errors. Thus, appropriate data protection and backup strategies are essential. The parties in a BIM project should specify who is responsible for the integrity of the data, how the changes in the data will be tracked, and what additional steps will be taken to ensure accuracy in the data.
- Design Defects: Due to the high degree of collaboration, one of the greatest risks for contractors in BIM projects is the unintended assumption of responsibility for design defects. Under the Spearin Doctrine, owners warrant the adequacy of plans and specifications that they require contractors to follow, and thus a contractor will not be liable for damages resulting from a defect in those designs. In a BIM project, the owner is not necessarily in charge of the creation and modification of the data that forms the BIM model. Therefore, contractors should be cautious that the collaborative process during the design phase does not deprive them of implied warranty protection if the designs contain errors.
- Intellectual Property: Designers, in particular, have long been concerned with the improper use of their concepts and ideas. Copyright law alleviates some of these concerns by protecting the design professional's expression of ideas, but a complete BIM model is the result of a collaborative effort. No single party can claim "originality" for the end product. Therefore, early in the contracting process, the parties should reach an understanding of who will own the BIM model, and whether anyone is entitled to licensing and access rights.
Today, two-dimensional drawings continue to serve as the contract documents. The construction industry really has not changed how risks get allocated in BIM projects. But as technology continues to advance, it is likely that BIM models will become far more important during the contracting process. Several industry groups have already developed contract documents that specifically address the concerns raised by BIM technology:
- Associated General Contractors: providing a detailed examination of specific aspects of a BIM project, focusing on how the data is exchanged and used. It allows parties flexibility by requiring fill-in-the-blank responses to a variety of hardware, software, and application issues. It expressly reserves access rights for certain parties to ensure that copyright-protected information can be safely shared.
- American Institute of Architects: The AIA's Digital Data Protocol Exhibit focus on the functional aspects of communication, utilizing an open-ended matrix that defines how information will be exchanged, what formats are to be used, and the permitted uses of the information. The Digital Data Licensing Agreement expressly addresses the use of protected intellectual property through licensing provisions. Together, these documents were designed to be comprehensive and usable BIM forms.
- Current Engineers Joint Contract Documents Committee: Section 3.06 of EJCDC Document 700 takes the most conservative approach. Reflecting an underlying concern with the inherent reliability of electronic data, it states that the contractor may only rely on printed copies of the electronic files and requires the party receiving any electronic information to test the data to detect errors. The form does not provide any specific protection of the electronically stored intellectual property.
- Lee Fehrenbacher, BIM's big question: Who's legally liable?, Daily Journal of Commerce - Oregon, December 14, 2012.
- Harvey M. Bernstein & Stephen A. Jones, New Research Shows Contractors Are Big BIM Users, Engineering News-Record, November, 28, 2012.
- Dmitri Alferieff, Blazing the BIM Trail, Constructor Magazine, January/February 2013.
- Lonny Simonian, Legal Considerations Associated with Building Information Modeling, http://www.caed.calpoly.edu/pdci/research-projects/simonian-10.html (last visited Feb. 25, 2013).
A recent article addressing International Arbitration contains some helpful practice pointers as to producing and storing Electronically Stored Information ("ESI"). It is imperative to manage the risks associated with ESI in arbitration. Key construction documents are no longer found only in filing cabinets. Instead, project records may be among thousands of electronic documents housed on hard drives, remotely located servers, back–up tapes and the like. If a dispute arises on a construction project, producing and exchanging of ESI can run into the tens of thousands of dollars. ESI issues therefore should be considered when drafting construction contracts or at least as soon as a dispute arises on a construction project.
Negotiation of an arbitration clause in a commercial contract is often routine and a last-minute affair. The authors recommend by including these seven parameters in the arbitration provision, later disputes regarding preservation and production of ESI can be greatly reduced:
1. Confining disclosure requirements to a specified number of custodians (perhaps with leave to request disclosure of additional custodians from the arbitrator upon showing of good cause);
2. Limiting or prohibiting disclosure from third parties (including affiliates, wholly-owned subsidiaries, etc.);
3. Narrowing the relevant time period;
4. Disclosing from specified accessible active data sources only;
5. Limiting the form of production to native format;
6. Specifying whether it is necessary to produce privilege and confidentiality logs; and
7. Limiting the pool of eligible arbitrators to those who are knowledgeable about disclosure of ESI.
Including these seven parameters in an arbitration clause, particularly on large projects, is recommended to avoid costly disputes involving ESI downstream if a dispute develops.
Gilbert & Diana, The Seven Point System: Managing The Risks And Costs Of Preserving And Producing Electronically Stored Information In International Arbitration, International Arbitration Perspectives (Winter 2011).