THE LATEST INDUSTRY INSIGHTS FROM OUR CONSTRUCTION ATTORNEYS MARCH 2009

Keeping Your Green Project Out of the Red By: David W. Zimmerman Salt Lake City Office With the buzz of “going green” as the latest trend, public and private owners alike are seeking environment- ally friendly construction projects. The trend comes with an increased risk of liability for designers and contractors on green projects. The leading edge of insurance claims against designers, contractors, and now lawsuits arising from unachieved green building results, are starting to create waves in the industry. The rise of claims is a warning that designers and contractors need to adjust their practices to keep their green projects from dragging their bottom line into the red. Best practices include: 1) Adjust expectations by engaging in clear project-

level communication; 2) Understand the green products to be used on the

project; and 3) Avoid conduct that warrants or guarantees a final

result.

Adjusting Expectations Clear communication and clear contract language can ensure that all parties understand the risks of a green project and which party bears the risks. The following are actual claims that demonstrate problems which arose from maladjusted expectations: • An owner of a facility to be used for sensitive

government contract work sued the designer because extensive daylight systems created security risks.

• An owner repeatedly altered its sustainability objectives on a project and then disputed the designer’s significantly increased BIM costs as arising from the designer’s inexperience with sustainable building.

• When owner-requested aesthetic changes during construction reduced the project’s LEED rating, the owner claimed that the architect should have allowed for adjustments when calculating target LEED points.

It is important for an owner to understand that LEED certification is determined by a third-party organization (the USGBC). Therefore, LEED certification targets on projects need to be treated as target goals, not performance specifications or performance guarantees. Each party should request clear contract language to limit its responsibility to its own respective LEED credits.

Understanding Green Systems and Materials Eco-friendly materials that have leaked, molded, or simply not performed adequately create risk on green projects. Further, some green techniques have not been tested for unexpected consequences. For example, a university sued the designer of a fresh air system in a library after pigeons used the solar shading as shelter and introduced diseases into the air. LEED-friendly materials may be in short supply and not readily available for all construction projects. Reported claims have centered around the unavailability of specified green materials that caused project delays. When sufficient time is not available to research an innovative material or system design, the contractor and designer should be cognizant of the resulting risks. Where possible, the contracts should be modified to account for such risks. Avoid Guarantees or Warranties Designers and contractors can unwittingly expose themselves to claims by guaranteeing the project would achieve a certain level of certification, efficiency, or tax credits. Aggressive marketing materials or representations about a party’s experience with the LEED certification process or on LEED projects can give the owner basis to assert a claim for breach of guarantee, misrepresentation, fraud, or violation of consumer protection laws if the desired result is not achieved. For example, an owner recently sued a contractor for in excess of $600,000 in lost tax credits after a project failed to achieve its LEED goal. An owner could make a strong argument that lost tax credits are direct damages arising from an alleged breach by a contractor.

Parties should avoid language in contracts, proposals, and marketing materials that guarantees performance. Examples include statements that indicate the completed structure will be “30-percent more energy efficient than similar structures” or “increase employee productivity by 15 percent.” Contract documents should not incorporate proposals that represent that a certain certification or efficiency level will be achieved.

Waivers or caps on potential damages become important because an owner can seek to recover costs such as lost energy efficiency, diminution in rental value, or lost tax credits if the project fails to achieve a target goal.

Parties need to carefully craft contract language to mitigate risks. Standard form contracts simply do not address risks unique to LEED, sustainable, and performance-based contracts.

555 17th Street, Suite 3200 Denver, CO 80202

Keeping Your Green Project Out of the Red ........................1

LEED 2009 Takes Effect in March 2009.......................2

Mandatory Ethics Reporting Rule for Government Contractors ...............................2

Pay-if-Paid Clauses: Still Alive in Nevada ...............................3

E-VERIFY: Federal Rule Suspended until at least May 21, 2009 ........3

Construction Case Alerts.....................4

IN THIS ISSUE Utah: Termination Clause in Prime Contract Does Not Limit Subcontractor’s Damages The Utah Supreme Court required a general contractor to pay a subcontractor in excess of $1 million in termination for convenience damages under the terms of the subcontract. Even though the subcontract incorporated the terms of the prime contract, which had priority in the event of a conflict, the court determined that the prime contract only applied to a termination of the contractor by the UDOT. The case serves as a warning to contractors that broad incorporation by reference provisions with order of precedence clauses do not avoid the need for thoughtful subcontract drafting.

Encon Utah, LLC v. Fluor Ames Kraemer, LLC (Utah Jan. 27, 2009).

Arizona: Supreme Court Upholds Limitation of Liability Clause The Arizona Supreme Court upheld a limitation of liability clause in a design contract because it found that the clause had been bargained for and did not violate the anti-indemnity statute. The Arizona court expressly declined to follow the reasoning of other state courts which have invalidated limitation of liability clauses on the grounds that they violate the state’s anti-indemnity clause. The decision indicates that limitation of liability clauses are likely to survive judicial scrutiny in many jurisdictions and any analysis is likely to involve the terms of the anti-indemnity statute.

1800 Ocotillo, LLC v. WLB Group, Inc. (Ariz. Oct. 2008).

Utah: ADR Provision not a Condition Precedent to Right to Litigate The Court determined that a mandatory mediation provision was merely a promissory provision and not a condition precedent to a party’s ability to litigate a dispute. The decision indicates that a party to a contract with a mediation provision can likely proceed directly to litigation without waiving its rights.

Miller Family Real Estate, LLC v. Hajzaden (Utah App. Dec. 26, 2008).

CONSTRUCTION CASE ALERTS

Holland & Hart LLP Attorneys at Law www.hollandhart.com Aspen Billings Boise Boulder Carson City Cheyenne Colorado Springs Denver Denver Tech Center Jackson Hole Las Vegas Reno Salt Lake City Santa Fe Washington, D.C.

SPEAKING ENGAGEMENTS

March 10, 2009: Green Building: The Basics and the Risks presented by Greg Gilbert and Melissa Orien at ABC of Las Vegas

March 19, 2009: Utah Legislative Digest presented by David Zimmerman at the ABC of Utah Annual Convention

RECOGNITION

Buck Beltzer was appointed to the Steering Committee of Division 3, Design, of the ABA Forum on the Construction Industry.

Melissa Orien is now recognized by the Green Building Certification Institute as a LEED Accredited Professional.

NEWS & EVENTS

David Zimmerman has more than 20 years of experience in the area of construction law, and focuses on representing general contractors in delay, disruption, and impacts claims. Contact David at (801) 799-5848 or dzimmerman@hollandhart.com.

THE LATEST INDUSTRY INSIGHTS FROM OUR CONSTRUCTION ATTORNEYS MARCH 2009

Printed on New Leaf Reincarnation Matte 100% Recycled Content 50% Post-Consumer Waste

CONTRACT DRAFTING TIP

Greg Gilbert represents owners, contractors, and design professionals on construction-related transactional and litigation matters around the country, including renewable projects and energy savings performance contracts. Contact Greg at (702) 669-4620 or gsgilbert@hollandhart.com.

Mandatory Ethics Reporting Rule Released“LEED 2009” Takes Effect in March By: Melissa A. Orien Salt Lake City and Las Vegas Offices The next evolution of the LEED rating system passed member ballot by the United States Green Building Counsel (“USGBC”) and will take effect in March 2009. Termed, LEED Version 3, it involves the following: 1) changes to the LEED rating

systems; 2) changes to the professional

accreditation requiremements; and 3) efforts to standardize the different

LEED rating systems. One component of LEED Version 3 is LEED 2009. LEED 2009 is the new term for the updated rating systems for commercial buildings and will supersede the current LEED NC 2.2 system. Changes introduced to the LEED rating system with the rollout of LEED 2009 will include the following: addition of regional credits; extra points within a project’s

environmental zone; re-weighting of credits; incorporation of market and user

feedback from Credit Interpretation Rulings on previous projects, and

a “pilot process” to allow technical developments to be flexibly trialed and incorporated into LEED.

LEED 2009 increases available points for certain credits including: development density (from 1 to 5

points); alternative transportation (from 1 to

6 points); fuel-efficient vehicles (from 1 to 3

points); water efficient landscaping (from 1

to 2 points); and enhanced commissioning (from 1 to

2 points). Projects started before LEED 2009 takes effect can elect to proceed under the previous version of the rating system.

LEED 2009 will include a new prerequisite requiring that projects achieve water efficiency of at least 20% below a baseline. The timeline for the rollout of LEED Version 3 is as follows: March 2009: Release of New

Reference Guides and Workshops March 2009: LEED 2009 effective Fall 2009: Changes to professional

accreditation system.

Ms. Orien is a LEED accredited profes- sional who frequently counsels clients on green and perfor-mance-related projects. She may

be reached at 801-799-5863 or morien@hollandhart.com.

Pay-if-Paid Clauses: Still Alive in Nevada

E-VERIFY: Federal Rule Suspended until at least May 21, 2009 By: John Scorsine Colorado Springs Office The U.S. Department of Justice (DOJ) has agreed to suspend the effective date of a new rule that would mandate federal contractors to use the Employment Eligibility Verification (E-Verify) system to verify the immigration status of all new and existing employees. The suspension of the rule arises from a legal challenge brought by industry groups and several employer associations. The rule had been scheduled to go into effect January 15, 2009. The effective date was first bumped to February 29, 2009, and was recently extended again to May 21, 2009. As a result of the DOJ’s agreement, federal contracts awarded prior to May 21, 2009, will not require contractors to include the E-Verify clause. It is also possible that the May 21 date may be extended. What is E-VERIFY? E-Verify is an electronic system that employers can use to verify employment eligibility of potential workers. The E-Verify system was created by a partnership between the Department of Homeland Security (DHS) and the Social Security Administration (SSA). U.S. Citizenship and Immigration Services (USCIS) oversee the program. E-Verify functions by allowing participating employers to electronically compare employee information taken from the Form I-9 (the paper-based employee eligibility verification form used for all new hires) against records in SSA and DHS immigration databases. For an analysis of the E-Verify requirements and how it may affect the construction industry, visit “Who Is That Worker, Government Contractors and Forthcoming E-Verify Requirements,” available at www.coloradoconstructionlaw.com.

Mr. Scorsine focuses his practice in the area of government contracting. He may be reached at 719-475-6496 or jmscorsine@ hollandhart.com.

By: Charlie Lucy Colorado Springs Office On November 12, 2008, the FAR Council issued its long-awaited Final Rule aimed at curtailing con- tractor misconduct in the federal procurement sector. The Final Rule became effective on December 12, 2008. It implements “The Close the Contractor Fraud Loophole Act” (Pub. L. 110—252, Title VI, Chapter 1) and adds multiple, significant agency requirements. The Rule includes detailed regulations intended to provide more ethics guidance to contractors doing business with the Government and greater accountability in the federal procurement process. Among other things, the Final Rule provides a new ground for contractor debarment or suspension and also creates an affirmative duty for many contractors to disclose certain types of conduct to the Government. Minimum business conduct requirements that many Contractors will have to maintain in order to do business with the Federal Government are also provided. The Final Rule sets out standards that are applicable primarily to contracts expected to exceed $5 million and take longer than 120 days to perform. However, it is crucial to recognize that it also creates a new ground for suspension or debarment of any contractor, regardless of: the expected cost or duration of the contract; whether the contractor is big or small; whether the contract is for commercial items; or whether the contract is to be performed

overseas. Any contractor may be suspended or debarred if that contractor’s principal, as broadly defined by the Rule, knowingly fails to timely disclose credible evidence of significant overpayments on the contract or a violation of either: 1) Federal criminal law involving fraud, conflict of

interest, bribery, or gratuity violations found in Title 18 of the United States Code; or

2) the Civil False Claims Act (31 U.S.C. §§ 3729—3733). FAR §§ 9.406-2 and 9.407-2 (as amended by Final Rule).

The Rule also sets out a number of requirements contained in a heavily revised version of FAR § 52.203.-13. It applies only to contracts and subcontracts expected to exceed $5 million and take longer than 120 days to perform. Under Section 52.203-13(b)(1), all covered contractors must have a written code of business ethics and conduct and make a copy of the code available to each employee who is performing the contract. Section 52.203-13(b)(2) provides that contractors must “exercise due diligence to prevent and detect criminal conduct and otherwise promote an organizational culture that encourages ethical

By: Greg S. Gilbert Las Vegas Office In a time of economic turmoil, the issue of which party bears the risk of owner insolvency or non- payment is a hot issue. In Nevada, contractors can still pass this risk downstream. With an initial decision in June and a revised opinion in October, the Nevada Supreme Court indicated that pay-if-paid clauses are valid in Nevada in the Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc. case. The case arose from a subcontractor’s claim for payment on the Venetian project in Las Vegas. A subcontractor filed a lien claim and then sued to recover amounts owed. The owner and general contractor asserted that a prospective lien waiver and a pay-if-paid provision in the subcontract agreement barred the subcontractor’s claim. The subcontract agreement incorporated a provision from the prime contract through which the subcontractor effectively contracted “‘not [to] suffer or permit any lien or other encumbrance to be filed' against the project.” The subcontract agreement also contained a pay-if-paid clause where the subcontractor agreed that it had no right to payment against the general contractor unless the owner paid the general contractor for work performed by the subcontractor. The court refused to enforce the prospective lien waiver and noted that, as drafted, the “lien waiver provision applies regardless of whether [subcontractor] received any payment,” and therefore concluded that “such provision violates public policy, as it fails to secure payment for [subcontractor].” In the initial opinion, the court held that the pay-if-paid provision in the subcontract agreement was unenforceable because “a pay-if-paid provision limits a subcontractor’s ability to be paid for work already performed,” and therefore “such a provision impairs the subcontractor’s statutory right to place a mechanic's lien on the construction project.” This language caused many to opine that pay-if-paid clauses were effectively unenforceable in Nevada. In the revised opinion, the court clarified, “Pay-if-

GOVERNMENT CONTRACTS UPDATE

Charlie Lucy has 30 years of experience in government contracting, state and federal procurement matters, and bid protests, in addition to construction and design representation. Contact Charlie at (719) 475-6447 or clucy@hollandhart.com.

conduct and a commitment to compliance with the law.” Section 52.203-13(b)(3) creates an affirmative duty to disclose certain conduct to the agency Office of the Inspector General (“OIG”). The contractor must timely disclose conduct occurring in connection with the performance of the contract, or a subcontract thereunder, that the contractor has credible evidence to believe it constitutes a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code, as well as violations of the False Claims Act. With the exception of small businesses or contracts for commercial items only, Section 52.203-13(c) states that all covered contractors must create and implement a Business Ethics Awareness and Compliance Program and Internal Control System. The purpose of the Internal Control System is to establish standards and procedures to facilitate timely discovery of improper conduct and ensure corrective measures are promptly carried out. FAR § 52.203-13(c)(2)(i) (as amended by Final Rule). The Final Rule specifies a number of minimum standards that the Internal Control System must comply, including the provision of an anonymous or confidential internal reporting mechanism, full cooperation with any Government investigations, audits, or corrective actions, as well as a reiteration of the duty to disclose as discussed above. FAR § 52.23-13(c)(ii). Although many of the Final Rule requirements appear to be clear cut, several questions regarding the application of a few provisions of the Rule remain unsettled. For example, some ambiguity exists regarding how the Final Rule interacts with the requirement to disclose misconduct that occurred prior to the effective date of the Final Rule. In the Supplementary Information to the Final Rule, the FAR Council draws a distinction between the disclosure requirement as set out in Sections 52.203-13(b)(3), 52.203-13(c)(2)(ii)(F), 9.406-2, and 9.407-2. On the one hand, the Council provides that “the contract clause direct requirement for contractor disclosure” (assumedly Section 52.213-13(b)) applies only to contracts containing the clause, which implies a prospective application. On the other hand, the Council asserts that “disclosure under the internal control system or as a potential cause for suspension/debarment” relates back to misconduct that occurred prior to the effective date of the Final Rule, although not as far back as 20 years, which implies a retroactive application. The Final Rule, as adopted, says that the mandatory disclosure obligation with respect to reportable misconduct in connection with the award, performance, or closeout of a government contract continues until three years after final payment on that contract. In essence, the FAR Council crafted a rule that is both prospective and retroactive, encompassing all reportable conduct for existing contracts and extending the reporting obligation for three years after the contract ends.

paid provisions entered into subsequent to the Legislature’s amendments [of NRS 624] are enforceable only in limited circumstances and are subject to the restrictions laid out” in NRS Chapter 624. This was a significant restatement of the court’s first opinion which noted that “the prompt payment provisions [of NRS 624]… make pay-if-paid provisions unenforceable.” Although the court’s interpretation of NRS Chapter 624 was dicta and not the issue before the court, the restated decision clarifies that contractors can use pay-if-paid provisions in their contracts.

The practical effect of the decision does not alter existing Nevada law. As a result of the restated decision, contractors are left with the same rights that they had before the decision: pay-if-paid clauses in construction contracts are enforceable.

The question remaining for contractors is: what are the apparently “limited circumstances” in which the court deems pay-if-paid provisions to be enforceable? The language of the opinion offered no guidance as to why the court read NRS 624 to limit pay-if-paid clauses. NRS 624 itself does not contain any such limiting language. While the risk of a pay-if-paid clause actually violating NRS 624 appears small, the greater issue is that the decision’s limiting language may confuse district courts about the enforceability of pay-if-paid provisions. This risk challenges contractors to carefully draft their pay-if-paid clauses to avoid a challenge or determination that the clause violates the provisions of NRS 624.

In addition to the pay-if-paid discussion, the court further determined that the enforceability of a lien waiver clause is a case-by-case determination. The court did not offer guidance as to what types of lien waiver provisions would be enforceable without full payment. The articulated public policy against prospective lien waivers, coupled with NRS 108.2453(1), suggests that without payment in full, mechanic’s lien rights cannot be waived. Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 197 P.3d 1032 (Nev. October 2008), withdrawing, 185 P.3d 1055 (June 12, 2008).

GREEN PIECE

CONTRACT DRAFTING TIP

Greg Gilbert represents owners, contractors, and design professionals on construction-related transactional and litigation matters around the country, including renewable projects and energy savings performance contracts. Contact Greg at (702) 669-4620 or gsgilbert@hollandhart.com.

Mandatory Ethics Reporting Rule Released“LEED 2009” Takes Effect in March By: Melissa A. Orien Salt Lake City and Las Vegas Offices The next evolution of the LEED rating system passed member ballot by the United States Green Building Counsel (“USGBC”) and will take effect in March 2009. Termed, LEED Version 3, it involves the following: 1) changes to the LEED rating

systems; 2) changes to the professional

accreditation requiremements; and 3) efforts to standardize the different

LEED rating systems. One component of LEED Version 3 is LEED 2009. LEED 2009 is the new term for the updated rating systems for commercial buildings and will supersede the current LEED NC 2.2 system. Changes introduced to the LEED rating system with the rollout of LEED 2009 will include the following: addition of regional credits; extra points within a project’s

environmental zone; re-weighting of credits; incorporation of market and user

feedback from Credit Interpretation Rulings on previous projects, and

a “pilot process” to allow technical developments to be flexibly trialed and incorporated into LEED.

LEED 2009 increases available points for certain credits including: development density (from 1 to 5

points); alternative transportation (from 1 to

6 points); fuel-efficient vehicles (from 1 to 3

points); water efficient landscaping (from 1

to 2 points); and enhanced commissioning (from 1 to

2 points). Projects started before LEED 2009 takes effect can elect to proceed under the previous version of the rating system.

LEED 2009 will include a new prerequisite requiring that projects achieve water efficiency of at least 20% below a baseline. The timeline for the rollout of LEED Version 3 is as follows: March 2009: Release of New

Reference Guides and Workshops March 2009: LEED 2009 effective Fall 2009: Changes to professional

accreditation system.

Ms. Orien is a LEED accredited profes- sional who frequently counsels clients on green and perfor-mance-related projects. She may

be reached at 801-799-5863 or morien@hollandhart.com.

Pay-if-Paid Clauses: Still Alive in Nevada

E-VERIFY: Federal Rule Suspended until at least May 21, 2009 By: John Scorsine Colorado Springs Office The U.S. Department of Justice (DOJ) has agreed to suspend the effective date of a new rule that would mandate federal contractors to use the Employment Eligibility Verification (E-Verify) system to verify the immigration status of all new and existing employees. The suspension of the rule arises from a legal challenge brought by industry groups and several employer associations. The rule had been scheduled to go into effect January 15, 2009. The effective date was first bumped to February 29, 2009, and was recently extended again to May 21, 2009. As a result of the DOJ’s agreement, federal contracts awarded prior to May 21, 2009, will not require contractors to include the E-Verify clause. It is also possible that the May 21 date may be extended. What is E-VERIFY? E-Verify is an electronic system that employers can use to verify employment eligibility of potential workers. The E-Verify system was created by a partnership between the Department of Homeland Security (DHS) and the Social Security Administration (SSA). U.S. Citizenship and Immigration Services (USCIS) oversee the program. E-Verify functions by allowing participating employers to electronically compare employee information taken from the Form I-9 (the paper-based employee eligibility verification form used for all new hires) against records in SSA and DHS immigration databases. For an analysis of the E-Verify requirements and how it may affect the construction industry, visit “Who Is That Worker, Government Contractors and Forthcoming E-Verify Requirements,” available at www.coloradoconstructionlaw.com.

Mr. Scorsine focuses his practice in the area of government contracting. He may be reached at 719-475-6496 or jmscorsine@ hollandhart.com.

By: Charlie Lucy Colorado Springs Office On November 12, 2008, the FAR Council issued its long-awaited Final Rule aimed at curtailing con- tractor misconduct in the federal procurement sector. The Final Rule became effective on December 12, 2008. It implements “The Close the Contractor Fraud Loophole Act” (Pub. L. 110—252, Title VI, Chapter 1) and adds multiple, significant agency requirements. The Rule includes detailed regulations intended to provide more ethics guidance to contractors doing business with the Government and greater accountability in the federal procurement process. Among other things, the Final Rule provides a new ground for contractor debarment or suspension and also creates an affirmative duty for many contractors to disclose certain types of conduct to the Government. Minimum business conduct requirements that many Contractors will have to maintain in order to do business with the Federal Government are also provided. The Final Rule sets out standards that are applicable primarily to contracts expected to exceed $5 million and take longer than 120 days to perform. However, it is crucial to recognize that it also creates a new ground for suspension or debarment of any contractor, regardless of: the expected cost or duration of the contract; whether the contractor is big or small; whether the contract is for commercial items; or whether the contract is to be performed

overseas. Any contractor may be suspended or debarred if that contractor’s principal, as broadly defined by the Rule, knowingly fails to timely disclose credible evidence of significant overpayments on the contract or a violation of either: 1) Federal criminal law involving fraud, conflict of

interest, bribery, or gratuity violations found in Title 18 of the United States Code; or

2) the Civil False Claims Act (31 U.S.C. §§ 3729—3733). FAR §§ 9.406-2 and 9.407-2 (as amended by Final Rule).

The Rule also sets out a number of requirements contained in a heavily revised version of FAR § 52.203.-13. It applies only to contracts and subcontracts expected to exceed $5 million and take longer than 120 days to perform. Under Section 52.203-13(b)(1), all covered contractors must have a written code of business ethics and conduct and make a copy of the code available to each employee who is performing the contract. Section 52.203-13(b)(2) provides that contractors must “exercise due diligence to prevent and detect criminal conduct and otherwise promote an organizational culture that encourages ethical

By: Greg S. Gilbert Las Vegas Office In a time of economic turmoil, the issue of which party bears the risk of owner insolvency or non- payment is a hot issue. In Nevada, contractors can still pass this risk downstream. With an initial decision in June and a revised opinion in October, the Nevada Supreme Court indicated that pay-if-paid clauses are valid in Nevada in the Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc. case. The case arose from a subcontractor’s claim for payment on the Venetian project in Las Vegas. A subcontractor filed a lien claim and then sued to recover amounts owed. The owner and general contractor asserted that a prospective lien waiver and a pay-if-paid provision in the subcontract agreement barred the subcontractor’s claim. The subcontract agreement incorporated a provision from the prime contract through which the subcontractor effectively contracted “‘not [to] suffer or permit any lien or other encumbrance to be filed' against the project.” The subcontract agreement also contained a pay-if-paid clause where the subcontractor agreed that it had no right to payment against the general contractor unless the owner paid the general contractor for work performed by the subcontractor. The court refused to enforce the prospective lien waiver and noted that, as drafted, the “lien waiver provision applies regardless of whether [subcontractor] received any payment,” and therefore concluded that “such provision violates public policy, as it fails to secure payment for [subcontractor].” In the initial opinion, the court held that the pay-if-paid provision in the subcontract agreement was unenforceable because “a pay-if-paid provision limits a subcontractor’s ability to be paid for work already performed,” and therefore “such a provision impairs the subcontractor’s statutory right to place a mechanic's lien on the construction project.” This language caused many to opine that pay-if-paid clauses were effectively unenforceable in Nevada. In the revised opinion, the court clarified, “Pay-if-

GOVERNMENT CONTRACTS UPDATE

Charlie Lucy has 30 years of experience in government contracting, state and federal procurement matters, and bid protests, in addition to construction and design representation. Contact Charlie at (719) 475-6447 or clucy@hollandhart.com.

conduct and a commitment to compliance with the law.” Section 52.203-13(b)(3) creates an affirmative duty to disclose certain conduct to the agency Office of the Inspector General (“OIG”). The contractor must timely disclose conduct occurring in connection with the performance of the contract, or a subcontract thereunder, that the contractor has credible evidence to believe it constitutes a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code, as well as violations of the False Claims Act. With the exception of small businesses or contracts for commercial items only, Section 52.203-13(c) states that all covered contractors must create and implement a Business Ethics Awareness and Compliance Program and Internal Control System. The purpose of the Internal Control System is to establish standards and procedures to facilitate timely discovery of improper conduct and ensure corrective measures are promptly carried out. FAR § 52.203-13(c)(2)(i) (as amended by Final Rule). The Final Rule specifies a number of minimum standards that the Internal Control System must comply, including the provision of an anonymous or confidential internal reporting mechanism, full cooperation with any Government investigations, audits, or corrective actions, as well as a reiteration of the duty to disclose as discussed above. FAR § 52.23-13(c)(ii). Although many of the Final Rule requirements appear to be clear cut, several questions regarding the application of a few provisions of the Rule remain unsettled. For example, some ambiguity exists regarding how the Final Rule interacts with the requirement to disclose misconduct that occurred prior to the effective date of the Final Rule. In the Supplementary Information to the Final Rule, the FAR Council draws a distinction between the disclosure requirement as set out in Sections 52.203-13(b)(3), 52.203-13(c)(2)(ii)(F), 9.406-2, and 9.407-2. On the one hand, the Council provides that “the contract clause direct requirement for contractor disclosure” (assumedly Section 52.213-13(b)) applies only to contracts containing the clause, which implies a prospective application. On the other hand, the Council asserts that “disclosure under the internal control system or as a potential cause for suspension/debarment” relates back to misconduct that occurred prior to the effective date of the Final Rule, although not as far back as 20 years, which implies a retroactive application. The Final Rule, as adopted, says that the mandatory disclosure obligation with respect to reportable misconduct in connection with the award, performance, or closeout of a government contract continues until three years after final payment on that contract. In essence, the FAR Council crafted a rule that is both prospective and retroactive, encompassing all reportable conduct for existing contracts and extending the reporting obligation for three years after the contract ends.

paid provisions entered into subsequent to the Legislature’s amendments [of NRS 624] are enforceable only in limited circumstances and are subject to the restrictions laid out” in NRS Chapter 624. This was a significant restatement of the court’s first opinion which noted that “the prompt payment provisions [of NRS 624]… make pay-if-paid provisions unenforceable.” Although the court’s interpretation of NRS Chapter 624 was dicta and not the issue before the court, the restated decision clarifies that contractors can use pay-if-paid provisions in their contracts.

The practical effect of the decision does not alter existing Nevada law. As a result of the restated decision, contractors are left with the same rights that they had before the decision: pay-if-paid clauses in construction contracts are enforceable.

The question remaining for contractors is: what are the apparently “limited circumstances” in which the court deems pay-if-paid provisions to be enforceable? The language of the opinion offered no guidance as to why the court read NRS 624 to limit pay-if-paid clauses. NRS 624 itself does not contain any such limiting language. While the risk of a pay-if-paid clause actually violating NRS 624 appears small, the greater issue is that the decision’s limiting language may confuse district courts about the enforceability of pay-if-paid provisions. This risk challenges contractors to carefully draft their pay-if-paid clauses to avoid a challenge or determination that the clause violates the provisions of NRS 624.

In addition to the pay-if-paid discussion, the court further determined that the enforceability of a lien waiver clause is a case-by-case determination. The court did not offer guidance as to what types of lien waiver provisions would be enforceable without full payment. The articulated public policy against prospective lien waivers, coupled with NRS 108.2453(1), suggests that without payment in full, mechanic’s lien rights cannot be waived. Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 197 P.3d 1032 (Nev. October 2008), withdrawing, 185 P.3d 1055 (June 12, 2008).

GREEN PIECE

THE LATEST INDUSTRY INSIGHTS FROM OUR CONSTRUCTION ATTORNEYS MARCH 2009

Keeping Your Green Project Out of the Red By: David W. Zimmerman Salt Lake City Office With the buzz of “going green” as the latest trend, public and private owners alike are seeking environment- ally friendly construction projects. The trend comes with an increased risk of liability for designers and contractors on green projects. The leading edge of insurance claims against designers, contractors, and now lawsuits arising from unachieved green building results, are starting to create waves in the industry. The rise of claims is a warning that designers and contractors need to adjust their practices to keep their green projects from dragging their bottom line into the red. Best practices include: 1) Adjust expectations by engaging in clear project-

level communication; 2) Understand the green products to be used on the

project; and 3) Avoid conduct that warrants or guarantees a final

result.

Adjusting Expectations Clear communication and clear contract language can ensure that all parties understand the risks of a green project and which party bears the risks. The following are actual claims that demonstrate problems which arose from maladjusted expectations: • An owner of a facility to be used for sensitive

government contract work sued the designer because extensive daylight systems created security risks.

• An owner repeatedly altered its sustainability objectives on a project and then disputed the designer’s significantly increased BIM costs as arising from the designer’s inexperience with sustainable building.

• When owner-requested aesthetic changes during construction reduced the project’s LEED rating, the owner claimed that the architect should have allowed for adjustments when calculating target LEED points.

It is important for an owner to understand that LEED certification is determined by a third-party organization (the USGBC). Therefore, LEED certification targets on projects need to be treated as target goals, not performance specifications or performance guarantees. Each party should request clear contract language to limit its responsibility to its own respective LEED credits.

Understanding Green Systems and Materials Eco-friendly materials that have leaked, molded, or simply not performed adequately create risk on green projects. Further, some green techniques have not been tested for unexpected consequences. For example, a university sued the designer of a fresh air system in a library after pigeons used the solar shading as shelter and introduced diseases into the air. LEED-friendly materials may be in short supply and not readily available for all construction projects. Reported claims have centered around the unavailability of specified green materials that caused project delays. When sufficient time is not available to research an innovative material or system design, the contractor and designer should be cognizant of the resulting risks. Where possible, the contracts should be modified to account for such risks. Avoid Guarantees or Warranties Designers and contractors can unwittingly expose themselves to claims by guaranteeing the project would achieve a certain level of certification, efficiency, or tax credits. Aggressive marketing materials or representations about a party’s experience with the LEED certification process or on LEED projects can give the owner basis to assert a claim for breach of guarantee, misrepresentation, fraud, or violation of consumer protection laws if the desired result is not achieved. For example, an owner recently sued a contractor for in excess of $600,000 in lost tax credits after a project failed to achieve its LEED goal. An owner could make a strong argument that lost tax credits are direct damages arising from an alleged breach by a contractor.

Parties should avoid language in contracts, proposals, and marketing materials that guarantees performance. Examples include statements that indicate the completed structure will be “30-percent more energy efficient than similar structures” or “increase employee productivity by 15 percent.” Contract documents should not incorporate proposals that represent that a certain certification or efficiency level will be achieved.

Waivers or caps on potential damages become important because an owner can seek to recover costs such as lost energy efficiency, diminution in rental value, or lost tax credits if the project fails to achieve a target goal.

Parties need to carefully craft contract language to mitigate risks. Standard form contracts simply do not address risks unique to LEED, sustainable, and performance-based contracts.

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Keeping Your Green Project Out of the Red ........................1

LEED 2009 Takes Effect in March 2009.......................2

Mandatory Ethics Reporting Rule for Government Contractors ...............................2

Pay-if-Paid Clauses: Still Alive in Nevada ...............................3

E-VERIFY: Federal Rule Suspended until at least May 21, 2009 ........3

Construction Case Alerts.....................4

IN THIS ISSUE Utah: Termination Clause in Prime Contract Does Not Limit Subcontractor’s Damages The Utah Supreme Court required a general contractor to pay a subcontractor in excess of $1 million in termination for convenience damages under the terms of the subcontract. Even though the subcontract incorporated the terms of the prime contract, which had priority in the event of a conflict, the court determined that the prime contract only applied to a termination of the contractor by the UDOT. The case serves as a warning to contractors that broad incorporation by reference provisions with order of precedence clauses do not avoid the need for thoughtful subcontract drafting.

Encon Utah, LLC v. Fluor Ames Kraemer, LLC (Utah Jan. 27, 2009).

Arizona: Supreme Court Upholds Limitation of Liability Clause The Arizona Supreme Court upheld a limitation of liability clause in a design contract because it found that the clause had been bargained for and did not violate the anti-indemnity statute. The Arizona court expressly declined to follow the reasoning of other state courts which have invalidated limitation of liability clauses on the grounds that they violate the state’s anti-indemnity clause. The decision indicates that limitation of liability clauses are likely to survive judicial scrutiny in many jurisdictions and any analysis is likely to involve the terms of the anti-indemnity statute.

1800 Ocotillo, LLC v. WLB Group, Inc. (Ariz. Oct. 2008).

Utah: ADR Provision not a Condition Precedent to Right to Litigate The Court determined that a mandatory mediation provision was merely a promissory provision and not a condition precedent to a party’s ability to litigate a dispute. The decision indicates that a party to a contract with a mediation provision can likely proceed directly to litigation without waiving its rights.

Miller Family Real Estate, LLC v. Hajzaden (Utah App. Dec. 26, 2008).

CONSTRUCTION CASE ALERTS

Holland & Hart LLP Attorneys at Law www.hollandhart.com Aspen Billings Boise Boulder Carson City Cheyenne Colorado Springs Denver Denver Tech Center Jackson Hole Las Vegas Reno Salt Lake City Santa Fe Washington, D.C.

SPEAKING ENGAGEMENTS

March 10, 2009: Green Building: The Basics and the Risks presented by Greg Gilbert and Melissa Orien at ABC of Las Vegas

March 19, 2009: Utah Legislative Digest presented by David Zimmerman at the ABC of Utah Annual Convention

RECOGNITION

Buck Beltzer was appointed to the Steering Committee of Division 3, Design, of the ABA Forum on the Construction Industry.

Melissa Orien is now recognized by the Green Building Certification Institute as a LEED Accredited Professional.

NEWS & EVENTS

David Zimmerman has more than 20 years of experience in the area of construction law, and focuses on representing general contractors in delay, disruption, and impacts claims. Contact David at (801) 799-5848 or dzimmerman@hollandhart.com.

THE LATEST INDUSTRY INSIGHTS FROM OUR CONSTRUCTION ATTORNEYS MARCH 2009

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