Law

Avoiding War: Three Underutilized Dispute Resolution Methods

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By QUINN MURPHY

Alternative dispute resolution has become a popular way to resolve legal disputes without the time and cost of protracted civil litigation.  Among the various dispute resolution methods, mediation and arbitration are by far the most often utilized, gaining traction throughout the construction industry and in many commonly utilized contract forms like AIA. While the two forms of dispute resolution are generally understood and effective, three less utilized variations of these methods can help resolve particularly difficult disputes when normal arbitration and mediation are unsuccessful.  

  1. A Mediator’s Proposal

In typical mediation, the parties voluntarily agree to mediate their dispute with an agreed upon private mediator, who attempts to negotiate settlement through private caucuses with the parties and their counsel. If the mediator is able to reach mutually agreeable settlement terms, the dispute settles. If not, the mediation ends and the parties return to arbitration or litigation where additional legal costs will be incurred.

But what happens when the mediator confidentially knows the parties are very close to settlement but have exhausted their authority to negotiate further? Both sides believe one last effort at resolution could be productive but both have exhausted their “final number,” so to speak? In these instances, a “mediator’s proposal” could be utilized to bridge the gap toward settlement.

For example, if one party is demanding $1 million in exchange for a release of all claims and the most the defendant is willing to pay is $700,000, the mediator could suggest making a “mediator’s proposal” where the mediator suggests a number between the two settlement amounts that he or she believes will resolve the case. Mediators with significant jury trial experience may also inform the parties that he or she believes the mediator’s number reflects the likely jury award at trial. Procedurally the mediator meets separately with the parties to disclose and explain the mediator’s number, then merely asks the parties to respond “yes” or “no.”  If both parties answer “yes,” the matter is settled but if either party responds “no,” the parties are told that the matter did not settle and the mediation is concluded without disclosing either of the party’s respective positions.

A mediator’s proposal can be a remarkably effective way to bridge the gap between parties’ strikingly close settlement numbers. The method also allows strong-willed clients to avoid feeling they “gave in” to the other side in that it is the mediator’s proposal (not the opposition’s offer) that is ultimately being accepted. 

  • Baseball Arbitration

Standard arbitration is a private proceeding where the parties effectively “litigate” their case before a private arbitrator who decides the case and issues an award to the winning party.  Arbitration of construction disputes originally rose to prominence as a result of the delay and inefficiency of the court system and the need for prompt resolution of disputes. The parties to an arbitration typically pay half of the arbitrator’s fee, which leads to concern that commercial arbitrators may lean towards “splitting the difference” in an effort to secure future arbitration work from the parties or their counsel.

To mitigate this risk, many contractors have started submitting their arbitration disputes to a process called “baseball arbitration” as opposed to a more standard arbitration procedure. In baseball arbitration, after the parties have presented their evidence to the arbitrator via witness testimony or legal briefs, each party submits a proposed award to the arbitration for evaluation. After evaluating the proposals, the arbitrator must choose one of the awards or the other. The arbitrator cannot compromise or alter the proposals in any way; one must be chosen.

This unconventional methodology is intended to encourage the parties to submit reasonable offers, thereby making their proposals more appealing to the arbitrator, who must choose one over the other. A party submitted an overly aggressive offer risks the arbitrator choosing the opponent’s more reasonable offer. When baseball arbitration works, the arbitrator often has to choose between two surprisingly reasonable settlement offers, thereby resulting in an end result both parties can live with.

  • Conciliation

Conciliation is like mediation, but with a twist. In standard mediation procedure, the mediator attempts to negotiate an agreed-upon settlement without making a decision of his or her own. The conciliation process is similar to mediation with the exception that at some point in the negotiation process, the conciliator provides the parties with a non-binding settlement proposal that the mediator believes accurately represents a likely outcome at trial and attempts to account for the parties’ related individual interests. The parties are then free to work from the conciliator’s proposal by accepting it, revising it or working from it toward a point of compromise. Conciliation can be a remarkably effective dispute resolution procedure, particularly in cases where the parties are entrenched in their positions and may need a third party’s “opinion” to move off their respective numbers and toward settlement.  

A mediator’s proposal, baseball arbitration and conciliation are still relatively uncommon procedures in today’s construction dispute environment. But by thinking outside the box and utilizing these variations to standard mediation or arbitration, contractors can often resolve disputes and avoid the cost of time-intensive and costly litigation.   

Quinn Murphy heads both the construction and receivable recovery industry teams at Sandberg Phoenix & von Gontard P.C. He represents contractors in non-payment claims in all 50 states and in helping contractors create internal collections policies that maximize net recovery. Murphy can be reached at qmurphy@sandbergphoenix.com.

Surviving the Perfect Storm: Five Ways to Handle Contractual Disagreements over Instructions to Proceed

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By QUINN MURPHY

Quinn Murphy

Few events strike fear into captains and sailors like a perfect storm.  In sailing parlance, the perfect storm happens on rare occasions when warm air approaches from one direction, cool dry air approaches from another and both combine with an existing tropical hurricane. While typical hurricane winds can average 50+ mph, the combination of these three elements can result in winds exceeding 150+ mph. A captain attempting to navigate a perfect storm has few options. Death and destruction are virtual certainties.

One such event took place in 1991 off the cost of Massachusetts that was detailed in Sebastian Junger’s hit novel The Perfect Storm. For several weeks, storm trackers and hurricane enthusiasts had been tracking an approaching hurricane, but they did not anticipate the simultaneous combination of conditions that resulted in a catastrophic hurricane for the record books. Once combined, this super-hurricane yielded winds over 75 mph and 100-foot waves, destroying ships and everything else in its path. The event eventually gave birth to what is now called the perfect storm.

Construction projects are rife with their own storms. Experienced contractors know that the ability to adjust to changing project conditions separates average contractors from those that can consistently deliver for owners. Competing objectives and project conditions often change in real time with little warning. Navigating weather storms is no task for the faint of heart. Neither is project management. And yet, some of the most common storms that contractors encounter have their genesis in very common contract provisions agreed to long before ground is ever broken. Proficiently navigating project conditions that trigger these two contractual provisions can ultimately determine both project and business viability. 

The Contract Provisions

Most construction contracts contain provisions that require contractors to expeditiously prosecute changes in the work as instructed by the upstream contractor. These same contracts also contain provisions requiring changes in the work to be memorialized by change order and, where there is disagreement about price or deadline extension, through a dispute resolution process. 

The Perfect Storm

When a change in the work is instructed, the contractor has no choice but to proceed expeditiously as it has contractually agreed to do. But often the upstream contractor does not agree on price or extension, and there simply is no time to resolve their disagreement and keep the project on track. This problem is only exacerbated if payments are already late and contractors find themselves in the crosshairs of an instruction to proceed notwithstanding no written agreement as to the resulting time and cost. In these instances, the contractor faces a catch 22 in which it must decide whether to prosecute the work and risk non-payment or refuse to prosecute the work and risk a claim for delay. For the unfortunate contractor, this is the perfect storm.

Navigating the Perfect Storm

If there were a simple answer to the perfect project storm, it wouldn’t be perfect. But a contractor seeking to minimize its risk and preserve its legal entitlement to full payment should employ the following five strategies:

Preemptively revise the contract. Require expedited approvals for changes taking place after mobilization and require such approvals to “not be unreasonably withheld” to secure legal footing to claim an increase in the contract sum or extension of the completion deadline.

Communicate early and often. Request an immediate meeting with your upstream contractor and ask for all decision makers to be present for efficiency. Document your meeting requests, and draft meeting notes and circulate to all persons in attendance. If an agreement is not reached, the documentation you created will support your good faith and strengthen your claim in litigation.

Document your non-delay. Through email, letter, project notes or otherwise, create documentation of your non-delay. Consistently confirm readiness to proceed with work and your commitment to timely project completion. Understand that documentation created at the time of a disagreement is often valued more by juries than testimony at trial.

Maintain your mechanics lien rights. No matter what, maintain your lien rights. If you have to file your lien before the project (or your work) is complete, do it. Your lien rights are your most powerful form of security for payment. Do not allow your lien rights to expire based on “promises to pay” that may not come to fruition. You can always negotiate a lien release as part of an acceptable payment resolution.

Document Prior Breach. If you are going to refuse to proceed with the instruction without an agreement, simultaneously document prior breaches by the upstream contractor as well. In most states, a previously breaching party is prohibited from strictly enforcing the provisions of a contract it has already breached, so a properly documented prior breach (untimely payment for example) can potentially justify your refusal to proceed.

There are no simple solutions to addressing the contractual risk associated with instructions to proceed without full agreement. But by utilizing these five strategic methodologies, experienced contractors may safely navigate deep waters and survive the perfect storm.

Quinn Murphy heads both the construction and receivable recovery industry teams at Sandberg Phoenix & von Gontard P.C. He represents contractors in non-payment claims in all 50 states and in helping contractors create internal collections policies that maximize net recovery. Murphy can be reached at qmurphy@sandbergphoenix.com.

Litigation Poker: Five Contract Provisions That Tilt Litigation Odds in Your Favor

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By QUINN MURPHY

Quinn Murphy

For years the debate has raged: Is poker a game of chance or a game of skill? In most countries poker is still legally regarded as a game of chance over the vehement objection of professionals, who argue it is a game of skill and should be respected as such. The professionals most prevalent “skill argument” is that it is a game of skill because the poker player’s opponents are the fellow players, not the house. Because human nature is understandable, predictable, and can be strategically manipulated, poker professionals believe that skill (not luck) determines outcomes. In the movie Rounders, Matt Damon’s character is quoted as saying that in poker, “If you can’t spot the sucker in your first half-hour at the table, then you are the sucker.” The implication is that players who don’t understand the controllable variables of the game should never sit down at a poker table.  

Successful construction litigation strategy is just as nuanced as poker. In certain instances, being the litigation aggressor appears to pay dividends while in other instances, it only increases costs. But the truth is, succeeding in construction litigation is about knowing your opponent better than he knows you. It is about understanding your opponent’s tendencies, predicting his or her reaction to certain actions and inactions and strategically manipulating those tendencies with factors you control before you ever see the inside of a courtroom. And few tendencies are more predictable than your litigation opponent’s desire to minimize risk/cost and maximize reward. And hedging against these tendencies can, and should, take place at the time of contracting by strategic inclusion of the following five provisions:

  1. Mediation Provision

Mandatory mediation provisions require the parties to participate in mediation before initiating arbitration or litigation. Mediation allows the parties to hear each other’s legal and factual position before incurring further costs and permits a mediator to attempt to negotiate an early voluntary resolution. Mandating contractual mediation adds an additional step that slows the timing of payment, and costs both parties’ attorneys’ fees and (normally) half the fees of a qualified mediator.

Advantage: Mediation favors parties holding funds as delay can exacerbate cash flow concerns among those demanding payment. Mediation will also benefit financially strong parties in that it allows an early evaluation of an opponent’s liquidity and financial desperation.  Information presented at mediation (e.g., payment plan duration, demands for large down payment) are “tells” that can allow more financially stable parties to secure more favorable settlement terms. Most mediators require an advance deposit, so the initial cash outlay can incentivize the claimant to compromise more heavily to avoid the initial out of pocket expense.

  • Arbitration Provision

Like mediation, requiring the parties to arbitrate can be time consuming and costly. While commonly considered to be less expensive than litigation, the process is rarely less time consuming and often equally burdensome. Filing fees for the American Arbitration Association can range from $2,000 to more than $10,000 depending on the amount of the claim, which can be a significant obstacle to pursuing dispute resolution through the AAA if required by contract. Importantly, any arbitrator’s award must be registered in Court for collection through initiation of a typically expedited form of litigation, which only adds to the overall cost of arbitration. 

Advantage: As with mediation, the timing and often significant up-front cost of initiating arbitration typically favor parties withholding funds creating negotiating leverage against claimants seeking payment. Specifying the location of arbitration in a party’s “home forum” can create inconvenience and further negotiating leverage.   

  • Forum Selection Clause.

Forum selection clauses require all litigation between the contracting parties to be brought in a particular state forum and court.

Advantage: For projects that require work across state lines, requiring an opponent to litigate outside its home state can create significant strategic advantage to the home state litigant. Out-of-state contractors will need to retain a local attorney, witnesses will need to travel for depositions and trial, the out-of-state contractor may be general unfamiliarity with local litigation and trial practice, and the time and administrative inconvenience can create negotiating leverage that significantly favors the local litigant.    

  • Prevailing Party Provision.

Prevailing party provisions require the losing party of a lawsuit or arbitration to pay the legal expenses of the prevailing party, including attorney’s fees.

Advantage: The risk of having to pay damages and your opponent’s attorney’s fees greatly increases both parties’ risk exposure. This increased risk creates a disincentive for pursuing smaller disputes and incentives both parties to compromise in negotiation.

  • Indemnity and Hold Harmless Provision.

Indemnity provisions require one contractor to reimburse another contractor for losses covered by the provision. Hold harmless provisions require that contractor to pay the attorney’s fees and costs of the contractor having to defend and seek indemnification.

Advantage: Requiring an indemnify and hold harmless provision creates significant risk exposure for contractors which, in turn, can discourage small claims and encourage compromise in lieu of litigation. While the impact of this provision is equal, financially stable litigants may be more able to risk paying its opponents damages/fees/costs than smaller, less stable contractors. This contractually increased risk exposure can be exploited to create leverage and drive settlement.     

As with poker, successful litigation strategy is as much about creating favorable odds as it is any particular strategic decision. Many of these odds are created at the time of contracting, long before any actual dispute arises. Strategically including these five provisions in your construction contracts will give you a meaningful litigation advantage that helps put your litigation adversaries on tilt.

Quinn Murphy heads both the construction and receivable recovery industry teams at Sandberg Phoenix & von Gontard P.C. He represents contractors in non-payment claims in all 50 states and in helping contractors create internal collections policies that maximize net recovery. Murphy can be reached at qmurphy@sandbergphoenix.com.

Construction Collections 101: Five Ways to More Effectively Pursue Collections

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By QUINN MURPHY

Quinn Murphy

There are few commonalities in construction. The phrase “no two projects are exactly alike” permeates the industry and is on the tip of every bidding contractor’s tongue. The truth is, every project is just as unique as the conditions that surround it, and because those conditions are rarely identical, similarity is rare.

But if there is one commonality in the construction industry, it is contractors’ need to efficiently collect payment for work performed or labor/materials provided. Payment delays pervade the construction industry and have only gotten worse during the pandemic and globalization of construction supply chains. Creating a system to efficiently pursue payment is critical to long-term success in the industry. Collections can make or break a project and ultimately make or break a contractor. But many contractors don’t know where to begin with construction collections. The process is stressful, expensive and all too often unproductive, creating a very real sense that deciding when and how to pursue collections should be based on a “gut feeling,” reading the proverbial tea leaves or a random flip of a coin.

But the truth is, effective collections require planning, intentionality, discipline and partnering with collections professionals who are committed to these principles for the contractor’s sole economic benefit. While there is no “one size fits all” corporate collections policy that can be implemented across contractors, trades and industry professionals, there are common methods and tools that help contractors recoup payment and maximize net recovery. Here are five of these methods:

  1. Effective collections requires a plan, so have one.

Start to think of collections as an investment, for which a healthy return is both anticipated and expected. You wouldn’t invest in the stock market without a well-defined and thought-out plan, so don’t invest in collections without one either. Many contractors “trust their gut” about which payments to chase and which to let go. Resist this urge. You earn your money through experience and expertise; collections professionals do the same, so utilize that expertise to create a plan that you and your accounting folks can reasonably believe will recoup the money that rightfully belongs to you.

  • Set AR parameters for collections, then revisit them every six months.

Set well-defined parameters for which amounts you will pursue and which you will let go. Set these parameters before the frustration with non-payment sets in on any particular project. Perhaps a contractor may decide to pursue any receivable over $10,000 that is more than 30 to 45 days overdue. The particular parameters aren’t as important as the discipline of holding yourself to the policy without exception. Then revisit the policy every six months and adjust those parameters to maximize your net recovery.

  • Request payment bonds at project onset and send notices of intent.

For bonded projects, always request a copy of the payment bond at the onset to avoid delay if you need it later on. For non-bonded projects, state mechanics’ lien statutes can be confusing, often inconsistent and complex. There is no realistic way for a contractor to learn or adequately digest the legal nuance of precisely what is required under each state law where projects are located. Some states require notice of intent to lien, and some don’t. If you are a contractor operating in multiple states, make it a policy to calendar and serve a notice of intent to lien at the very onset of all projects. This will assure your compliance in states that require it and will have no negative impact in states that don’t.

  • Analyze collectability pre-suit.

Many a contractor has won at trial only to be told that the defendant has no assets and is effectively judgment-proof. We recommend you flip this analysis on its head and run asset searches through counsel on debtors before referring the matter to an attorney or collections professional. A dollar saved is no less valuable than a dollar recovered, so ask for pre-suit asset searches and collectability analysis to avoid throwing good money after bad. Focus on debtors that have robust bank accounts, largely unencumbered real property or expensive equipment that you can lien and sell to maximize recovery.

  • Should I use a collections agency or attorney? Both.

One common dilemma for contractors is determining when to send receivables to an attorney versus collections agency. As a general rule, collections agencies (operating on contingency fees) are better suited for smaller receivables and attorneys for larger ones. The reason is purely economic. If a contractor assigns a $10,000 receivable to a collections agency who writes a half-hour demand letter and collects, the contractor pays that collections professional $4,000 (40 percent) for writing the letter rather than $100 to $200 (one half-hour of time) for an attorney to do the same thing. On the other hand, a collections agency can chase smaller receivables longer without incurring any additional cost unless they recover. In the end, both are important partners in a contractor’s collections toolbox that should be utilized where they are most efficient and effective. As a general rule, most contractors refer receivables under $10,000 to collections agencies and over $10,000 to attorneys, but this should be tracked and revisited periodically to adjust allocation to the most productive debt collector.

No collections system is perfect. All are a work in progress. But by utilizing these five ways to more effectively pursue collections, contractors can recoup payments and maximize net recovery for years to come.

Quinn Murphy, heads both the construction and receivable recovery industry teams at Sandberg Phoenix & von Gontard P.C. He represents contractors in non-payment claims in all 50 states and in helping contractors create internal collections policies that maximize net recovery. Murphy can be reached at qmurphy@sandbergphoenix.com.

To Litigate or Arbitrate, that is the Question: When in Doubt, Mediate

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By RICHARD STOCKENBERG

The decision whether to litigate or arbitrate a construction contract dispute is a judgment call. It all depends, but what is clear is that mediation offers a viable alternative to reach peaceful resolution without the need to resort to either.

What are the Differences?

Litigationis a public court proceeding utilizing and enforcing rules of evidence and procedure with attorneys representing the litigants. The decision maker is either a jury or a judge. The decision is binding and enforceable and is subject to review by a higher court.

Arbitration is a private proceeding that is voluntary, officiated by a single arbitrator or, in some cases, by a panel of three arbitrators. While there are rules governing procedures, arbitration does not follow the strict rules of evidence. The decision is binding with only limited rights of appeal. Attorneys are not required but are generally used.

Mediationis a non-binding settlement process facilitated by a neutral mediator, usually an attorney experienced in construction law. While mediation is generally voluntary, some courts will require litigants to engage in the process, though neither side is required to settle – just to make a good faith effort. Selection of the mediator is by agreement of the parties.

Contract Provisions

While parties cannot be required to surrender their rights to litigate, when a party signs a contract agreeing to arbitration, courts will typically enforce the clause.

In prior iterations, the American Institute of Architects family of documents required disputes to be resolved by arbitration using the services of the American Arbitration Association. However, to afford the parties options, the forms were modified to require the parties to check the box selecting either arbitration or litigation. Unless the arbitration box was selected, litigation became the default procedure.

Contractual Protection: Sharing the Risk of Escalating Prices for Material

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By RICHARD A. STOCKENBERG

Dick Stockenberg

Lump sum construction contracts are designed to provide for the comfort of certainty, or at least relative predictability. But in times of uncertain and volatile economic conditions when prices for materials are neither certain nor predictable, an enhanced level of risk is introduced into the equation, resulting in a need to head to shore to seek the comfort of a safe harbor.

During periods of escalating prices, not even an owner with an ironclad lump sum contract can be assured it has the best deal it can get. For example, when contractors are unsure that they can procure materials for the duration of the project at the same price as contained in their bids, it will not come as a surprise that savvy contractors have built into their bids a “material escalation factor” that is perhaps more than is needed. In that case, the owners may be paying more than necessary.

To avoid such a dilemma, an option that may work for some owners, but not others, is to pre-purchase materials, especially if there is storage space available and insurance coverage.

Another source of possible relief is to provide for a line-item contractual contingency fund to be drawn upon when material prices exceed a defined level.

Contractors and subcontractors sometimes qualify their bids to allow for adjustments when there are unusual price increases in materials, equipment and energy. In such case the bidder, in order to receive an adjustment, will have to reveal how it priced these commodities, and most importantly it needs to assure that the price escalation qualification language found in the bid finds its way into the contract. This is particularly important for subcontractors who often have subcontract language saying that their bid does not become a binding contract document.

However, in reality there is no perfect solution that will eliminate all risk for all parties. As a matter of principle, risk should be borne by the party who can best control the risk. But when it comes to price escalation for materials, it can be generally said that parties who sign construction contracts have little, if any, control over such escalation. Fortunately, stakeholders in the construction industry are not totally averse to risk; if they were, they would find employment elsewhere.

ConsensusDocs’ Response

ConsensusDOCS is a consortium of 40-plus trade associations formed for the purpose of agreeing on fair and equitable – but not perfect – contract terms, especially as those terms deal with how risks are shared, not shifted. These documents do not contain one-sided clauses designed to purposefully shift risks downstream. Instead, they are drafted to find a balance that is equitably apportioned.

ConsensusDOCS is believed to be the first, if not only, publisher of a standard material price escalation clause (ConsensusDocs 200.1). This material escalation clause allows users to list specific materials affected for their project, and it may adjust the contract price by referencing an agreed-upon objective market index. In fact, only commodities specifically identified can potentially be adjusted up or down, and the parties may limit the extent of the adjustment.

The new language is intended to be completed and executed contemporaneously with the construction contract. Because it is intended to be flexible and to cover many different kinds of materials, calculation methods are suggested, e.g., established market or catalog prices; actual material costs; material cost indices. 

The document can also be incorporated into subcontract agreements and others, such as design/build and construction management at risk.

Safeguards are built into the language. For example, documentation for adjustments is required. The number of increases/decreases can be limited; however, the Associated General Contractors has noted that using a cap eliminates some of the benefit of a contractor eliminating contingency in submitted bid amounts.

The new form also addresses time extensions in the event of project delay caused by scarcity or delivery delay. Adjustments to time and money are not allowed for impacts caused by the contractor or its subcontractors or suppliers.

Also, the clause can function as a de-escalation clause when prices go down, thus allowing for mutuality to the owner’s financial benefit.

In addition to the duty of both the contractor and the owner to mitigate damages due to price escalation, the contractor is not allowed to include overhead and profit in any price adjustment.

Like the entire family of contract documents published by ConsensusDOCS, the new price escalation clause represents a consensus of a broad spectrum of construction industry stakeholders. Whether the ConsensusDOCS form is used, parties at all levels should consider some form of contractual protection extending the entire length of the contractual food chain, starting with the owner and extending down to the lower tier subcontractors and suppliers.

Richard A. Stockenberg, founder of The Stockenberg Law Firm LLC, limits his law practice to construction law. He can be reached at richard@stockenberglawfirm.com.

COVID-19 Causes Breaches to Construction Contracts: Which Party Bears the Risk?

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By TYLER SCHAEFFER

Tyler Schaeffer

The COVID-19 pandemic has been extremely unpredictable in its effects on businesses. On March 16, 2020, at the very beginning of the pandemic, the Dow Jones Industrial Average plunged 2,997 points – the largest single-day point drop in history. By the end of 2021, however, the stock market had fully recovered and reached new record highs. At the beginning of the pandemic, the concern focused heavily on rampant unemployment and need for increased government benefits. More recently, the job market has been measured by the number of available jobs that remain unfilled. 

One of the most noteworthy – and perhaps not immediately predictable – consequences of the COVID-19 pandemic was its exposure of the fragility of our global supply chains; many businesses and industries experienced unprecedented delays in obtaining needed products and supplies. The breakdown in the supply chain coupled with drastic changes in consumer demand caused wild inflationary swings in the pricing of certain products and commodities. These swings in the availability and affordability of certain goods and services caused many businesses finding themselves unable to fulfill contractual obligations made before the beginning of COVID-19. 

 Which party bears the risk of pandemic-caused inability to fulfill the terms of a contract? Parties may allocate the risk of unforeseen circumstances in what is known as a “force majeure,” or escape clause, in the contract. “Force majeure” is a French term that means “greater force.” A force majeure clause allocates the risk if performance becomes impossible or impracticable especially because of an event or effect the parties could not have anticipated or controlled at the time of contracting. 

If the contract does not allocate risk through a force majeure clause, the common law provides several related defenses that may excuse performance due to unexpected causes: impossibility, commercial impracticality and commercial frustration.

  • Impossibility is the most stringent standard and excuses a party’s performance only when its performance is rendered impossible by an act of God, the law or the other party. Unforeseen difficulties, however great, will not excuse performance.
  • Commercial impracticality will excuse a party when an occurrence of a superseding, unforeseen event prevents performance, not within the reasonable contemplation of the parties at the time the contract was made and that goes to the heart of the contract.
  • Lastly, commercial frustration may excuse performance when the contract’s principal purpose is frustrated without fault by the happening of some event, the nonoccurrence of which was a basic assumption on which the contract was made.

Should a company find itself unable to fulfill its obligations under a contract due to COVID-19, looking to a force majeure clause as well as the defenses listed above provide potential avenues to escape liability for the COVID-caused breach of contract. Although COVID-19 has been with us for two years, the caselaw providing guidance on the applicability on typical force majeure clauses and these defenses is not fully developed and often has limited applicability to the specific facts in such cases. As such, none of the options above provide a sure-fire solution to an otherwise innocent party unable to meet its contractual obligations due to COVID-19.

The complications caused by COVID-19 have also inspired many companies to revisit and rethink the negotiation of their contracts to include greater protections for the risks of pandemics and their collateral consequences. Concepts such as pandemics and government shutdowns will surely be expressly appearing in future contract escape clauses. Additional rights for cancellation and for delay based on such events will also be appearing in such contracts. On the other hand, parties to contracts concerned about the other side’s potential delay or inability to perform due to unknown consequences of a pandemic will also wish to obtain protections in their contracts. There are many new and creative contract options for both sides to consider in a post-COVID-19 world.

Hopefully COVID-19’s effects on businesses will soon be a thing of the past. But, before memories of this time fade, businesses would be wise to ensure they protect themselves contractually from the risks of a severely disruptive pandemic or similar event in the future. Any contracting parties unable to fulfill their contractual responsibilities due to COVID-19 or wishing to negotiate a new contract with an escape for unforeseen circumstances caused by the pandemic should contact their attorney to explore available options.

Tyler C. Schaeffer is an attorney with Carmody MacDonald and concentrates his practice in business litigation. He works closely with businesses including construction companies in disputes, including contracts, business tort, financial restructuring and bankruptcy, and consumer protection. Contact Tyler at tcs@carmodymacdonald.com or (314) 854-8645.

This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.  

What’s Your Marketing Budget for 2022 and How Do You Measure ROI?

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By STEPHANIE WOODCOCK

Stephanie Woodcock

The average B2B company spends between 6 percent to 7 percent of its overall revenue on marketing costs. According to a study conducted by Deloitte and Duke University’s Fuqua School of Business, each industry varies based on different growth strategies. The energy industry, for instance, spends 3 percent of its total revenue on marketing and the construction industry spends 2 percent.

Based on these numbers, a small construction company with an annual revenue of 3 million dollars should be spending $60,000 on marketing.

To determine our own 2022 marketing budget, we need to know our growth objectives. Let’s start with what we have in common:

We all want qualified leads, repeat clients, better cross selling, greater market share, market recognition and brand loyalty. 

For those of us who want to grow in 2022, a quick overview of our numbers helps. What is our annual recurring revenue? And by what amount do we want to increase that revenue? The difference is the growth delta.

Typically, a company will spend 40 percent of that growth delta in effective marketing to achieve certain goals. Isn’t that fascinating? Many of the companies I see who want to grow miss the big picture. They buy more equipment, onboard an expensive CRM program, get better computers but neglect to realize their website has a slow load speed, is not optimized for mobile, is not SEO friendly and has no value proposition to set them apart from their competition.

Companies typically spend money on items that count the money rather than make the money because it’s easier to measure than make. 

I was recently asked in a new client meeting, “How do you measure ROI (return on investment)?” Great question. 

ROI is based on whether you meet your key performance indicators (KPIs) with your marketing strategy and implementation.

You can’t determine your KPIs until you know your marketing objectives.  A KPI of 4 new clients a month may be good for one company but not good for a firm that wants to increase market share with 10 product lines.

What is your KPI? How do you want marketing to move the needle for your business?

Here’s where so many company owners differ, stating:

I want to grow my company XX amount. 

I want to increase my brand presence and enhance my company image.

I want to grow the company through more product lines or services.

I want to increase customer loyalty.

I want to impress existing customers with technology enhancements.

Your marketing budget should be based on determining your objectives and putting real numbers to those objectives. Finding the right strategy and a good workable budget depends on which of these objective(s) you want to meet.

Now the good part. How do we get in front of those new clients? What’s our strategy?

We find the events where they are. We use the marketing channels they pay attention to. We get in front of them with inbound and outbound marketing. 

Measuring the ROI is no easy task because our key performance indicators are so dependent on the quality and accuracy of our strategy. 

I once had a client who spent the bulk of his budget being a platinum sponsor in a customer-rich association. He attended every meeting, spent beyond his annual platinum sponsorship and knew the value of each customer attained through that association. Event marketing was his main strategy to reach his KPIs. 

I had another client who needed website leads nationwide. He had a new product on the cusp of an emerging market but needed brand recognition. His marketing budget was devoted to revamping his website, optimizing it for higher Google rankings and investing in paid search.

I have another client who writes articles and sends them out in press releases, magazines and online newsletters. She creates her own tribe of followers through thought leadership articles and can charge top dollar for her services because she has personally helped construct its value.

We can be successful with a variety of strategies. The key is to BE where the customers are or where they are going to be. 

Your marketing team’s focus should not be on improving the measurables to prove their own success and better measure ROI. Rather, they should be focusing on tactics that will make an impact.

We can become so consumed with trying to measure the data and determine ROI that we forget to use common sense and our instincts. Marketing in this industry takes instinct. Our buyers take a long time to become customers.

It’s easier for me to measure the ROI of an email marketing campaign than it is to measure the value of an event sponsorship or a print ad. The three work together, so which strategy gets the marketing credit?

Together we learn how to carefully curate the best value for our customers with the right marketing channels. 

My favorite strategies for the construction industry are content, email and event marketing. Content marketing delivers 3 times the leads versus tradition advertising. It also has a longer sales cycle because you’re often developing brand awareness with customers before they are “now” buyers. Traditional advertising works as well strategically in the right environment. 

The research backs me up. In a 2019 survey of 1,000 senior-level B2B marketers, the most effective B2B marketing channels were reported as:

1.) In Person Events (41 percent)

2.) Content Marketing (27 percent)

3.) Email Marketing (14 percent)

4.) Paid Social and Search (6 percent)

5.) Organic Social and Search (3 percent)

But I’m getting ahead of myself. Once you answer some of the questions above and find a budget line for marketing, contact me to discuss strategy and ROI.

Stephanie Woodcock is president of Too Creative, a St. Louis-based design and marketing agency. She can be reached at stephanie@toocreativestl.com.

Is Your Insurance Company Refusing to Pay Out a Claim?

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How the Law’s “Good Faith” Measure is On Your Side

By MEGHAN M. LAMPING

Responsible business owners and companies understand they face risks every day. To manage – and potentially mitigate – those risks, companies purchase insurance. In exchange for sometimes hefty premium payments, companies expect their assets to be protected in the event of a claim for damages or a lawsuit. 

In fact, companies turn to their insurance carriers for help in many situations. Companies may look to their insurance carrier if they experience property damage or are dragged into a lawsuit alleging claims of negligence or unworkmanlike performance. In these types of situations, companies expect their insurer to step in and either pay out a claim for damages or settle a lawsuit. When an insurance company balks at paying out a claim or settling a lawsuit on the company’s behalf, that company is, understandably, frustrated. 

But there are some mechanisms built in the law to encourage insurance companies to treat their insureds fairly, act promptly and in accordance with the policies of insurance they issue.  Insurance companies owe their insureds certain duties and obligations under the law and the policies of insurance issued. When insurance companies do not act properly, they can then find themselves facing additional liabilities. 

For instance, in Missouri, an insurance company can be liable for causing damages to its own insured if it “vexatiously” refuses to pay claims covered by its policy. Damages, including attorneys’ fees and monetary penalties, can be awarded when an insurer’s refusal to pay a claim is determined to be “vexatious and without reasonable cause.” The statutory protections exist, in part, to incentivize insurance companies to pay legitimate claims without litigation. 

Additionally, an insurance company can face tort liability, including punitive damages, if it unreasonably refuses to settle a claim or lawsuit against its insured. In Missouri, an insurer runs the risk of a legal liability where, in bad faith, it assumes control over a legal proceeding against its insured and refuses to settle a claim within insurance policy limits after the insured has demanded that the claim be settled. Missouri courts describe “bad faith” as “the intentional disregard of the financial interest of the insured in a hope of escaping responsibility imposed upon the [insurer] by its policy.” Again, the purpose of these laws is to encourage insurance companies to settle cases or claims covered by the policies. 

To be sure, the penalties and awards of damages ordered against insurance companies, where liability is found, are not insignificant. Litigation against an insurance company is expensive and courts often recognize this burden when they award litigants tens or hundreds of thousands of dollars in attorneys’ fees. Damages awarded to an insured – apart from attorneys’ fees – can similarly be significant. In 2013, a Missouri court of appeals affirmed a jury’s verdict of more than $6 million in favor of an insured over its insurer where the jury “apparently believed the refusal to pay the claims or make a determination of coverage was unreasonable.” In another Missouri case, an insurer was ordered to pay its insured more than $900,000, including punitive damages, for denying a claim and defaming the insured by claiming – incorrectly – that the insured had burned down his own house.   

It’s obviously important to mitigate risks in business by having the proper insurance coverage. It’s also important to remember insureds have legal protection when working with insurance companies not acting in good faith. Specifically, the existing applicable laws and stiff penalties associated with running afoul of the purchased protections. 

Meghan M. Lamping is an attorney at Carmody MacDonald and focuses her practice in the areas of general civil litigation. Contact Meghan at mml@carmodymacdonald.com or (314) 854-8676.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

New Bankruptcy Law Provides Welcome Changes for Small Contractors

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Chapter 11’s New Subchapter V Helps Achieve Successful Restructuring

By ROBERT E. EGGMANN and THOMAS H. RISKE

Thomas Riske
Robert Eggmann

Shortages of materials and skilled labor continue to put increased pressure on some small construction contractors and subcontractors to consider bankruptcy reorganization. Unfortunately for them, the hope of re-emerging in Chapter 11 is often unsuccessful because the rules are complicated, challenging and not traditionally well-designed for their needs.

Last year, the federal Small Business Reorganization Act (“SBRA”) became law, added a new “Subchapter V” to Chapter 11 that streamlines bankruptcy procedures for small contractors and provides new tools designed to achieve more successful restructuring.  Subchapter V should be welcome news for many small contractors facing financial difficulties, although individual circumstances will dictate whether this is the right course of action.

Eligibility

A person or entity must be engaged in commercial or business activity with an aggregate liability below $2,725,625. At least half of the debt must have arisen from the business. The CARES Act provides for a temporary increase of this threshold to $7.5 million that is scheduled to roll off in 2021.

Creditors’ Committee

In Subchapter V, no creditors’ committee is appointed unless a court orders otherwise, making it the exception and not the rule and saving the small business money.

Appointment of Trustees

The SBRA created a new type of trustee, a Subchapter V trustee, to be appointed in every case. The trustee’s duties include appearing at the first status conference and hearings that concern major case milestones, facilitating the development of a consensual reorganization plan, and making payments to creditors under the plan. 

Disclosure Statement

No disclosure statement is required unless a court orders otherwise, which removes a common source of protracted battles among the parties involved.

Reorganization Plan

Only the small business debtor may file a plan of reorganization under Subchapter V and must do so within a shortened 90-day timeframe from the order for relief. The rules for the contents of a Subchapter V plan of reorganization are more debtor-friendly. Notably, a loan secured by a principal residence can now be modified if the proceeds of the loan were used for the business.

Plan Confirmation

There are two ways to have a plan confirmed:

  1. Consensual. Subchapter V strives to help the debtor and creditors reach a consensual plan. Confirmation of a consensual plan terminates the trustee and the debtor receives a discharge upon confirmation, two important incentives for debtors.
  2. Cramdown. A plan can still be confirmed if some or even all classes of creditors don’t accept it, so long as the plan doesn’t discriminate unfairly, and is “fair and equitable” to impaired unsecured creditors.  A “reasonable likelihood” of repayment must be demonstrated, and the plan must provide remedies to protect creditors if payments are not made.

Voting

Voting rules change significantly under Subchapter V. As mentioned above, a debtor can now confirm a plan with no votes from creditors.

Absolute Priority Rule

In Subchapter V there is no absolute priority rule, allowing debtors to retain ownership without adding new value – provided the reorganization plan does not discriminate unfairly and funds the repayment of creditors in three to five years by committing all projected disposable income.

Robert Eggmann and Tom Riske both serve as Chapter 11 Subchapter V trustees in the Central and Southern Districts of Illinois, respectively.They practice in the financial restructuring and bankruptcy department at Carmody MacDonald P.C. in St. Louis. Contact any of Carmody MacDonald’s attorneys at 314.854.8600.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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