A Penalty and a Damage Clause in the Contractor Agreement

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A Penalty and a Damage Clause in the Contractor Agreement Powered By Docstoc
					            Contractor Liability:
          How to Stay Out of Court
                            March 15, 2007
                                 Thomas C. Bell
                                William A. Bianco
                                  Andrea Wang
                              Jonathon D. Bergman


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                Indemnity Clauses
   Thomas C. Bell
     (303) 892-7472
     tom.bell@dgslaw.com




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            Shifting the Risk of Loss
                                                            subcontractor gross
                             contractor negligence              negligence
                                                                                subcontractor
                                                                                 negligence


                contractor gross
                  negligence




               1) Degree of Fault:
                -Negligence
                -Gross Negligence
                -Willful
               2) Whose Conduct:
                -Indemnitor's (Subcontractor)
                -Indemnitee's (Contractor)
                                                          third parties (e.g.
                -Third Parties'
                                                         trespasser, visitor)
               3) Insurance




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                          Basic Clause
   • Indemnity: Subcontractor agrees to indemnify and hold
     harmless Contractor, Owner and Architect from and
     against any claim, loss or threatened claim or loss by
     reason of the liability or potential liability of Contractor,
     Owner and/or Architect for or arising out of any claims for
     damages.




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                  Subcontract
            Pro-Subcontractor Clause
   • Indemnity: Subcontractor agrees to indemnify and hold
     harmless, Contractor, Owner and Architect, from and
     against any claim, loss or threatened claim or loss arising
     out of or related to Subcontractor’s Work and caused by
     Subcontractor, Subcontractors employees, agents, or
     others for whom Subcontractor is responsible. To the
     extent any claim, loss or threatened claim is caused in part
     by Contractor, Owner, Architect or others, and in part by
     Subcontractor, liability therefore shall rest solely on the
     party causing the same in proportion to its degree of fault
     or negligence.


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             Owner/Contractor Contract
             (Residential Construction)
   • Indemnity: During construction, Contractor shall indemnify and hold
     harmless the Owners from any loss, liability, damage, claim, or
     obligation for damage to person or property caused by the negligence
     or willful misconduct of the Contractor or the subcontractors or
     suppliers of the Contractor; provided that this indemnity shall not be
     applicable to the finished Residence. Such obligation of indemnity
     shall not include (i) injury to persons or property relating to the entry of
     the Owners on the Property during construction or (ii) acts or omissions
     of or conduct by the Owners or the contractors, subcontractors, agents,
     guests, family members or invitees of the Owners. The Owners shall
     indemnify and hold harmless the Contractor from any loss, liability,
     damage, claim, loss or obligation for damage to person or property
     caused by the negligence or willful misconduct of the Owners or the
     contractors, subcontractors, agents, guests, family members or invitees
     of the Owners.
Davis Graham & Stubbs             LLP       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                         attorneys at law
                    Owner/Contractor Contract
                       Pro-Owner Clause
      Indemnity. To the fullest extent permitted by law, Contractor shall
      indemnify and hold harmless Owner, Architect, Architect’s consultants,
      and agents and employees of any or all of them (the “Contractor’s
      Indemnitees”) from and against any and all claims, damages, losses
      and expenses, including reasonable attorneys’ fees, arising out of or
      resulting from performance of the Project or Contractor’s activities (or
      those of any Contractor-Related Person(s)) on or about the Site,
      provided that such claim, damage, loss or expense is attributable to
      bodily injury, sickness, disease or death, or to injury to or destruction of
      tangible property (other than demolition and alterations required
      pursuant to the Project itself) including loss of use resulting therefrom,
      but only to the extent caused in whole or in part by negligent acts or
      omissions of any Contractor-Related Person(s) or anyone for whose
      acts they may be liable, whether or not such claim, damage, loss, or
      expense is caused in part by a party indemnified hereunder
      (“Contractor’s Indemnity”).       Contractor’s Indemnity shall not be
      construed to negate, abridge, or reduce other rights or obligations of
      indemnity to which Contractor’s Indemnitees might otherwise be
      entitled.
Davis Graham & Stubbs LLP                   1550 Seventeenth Street, Suite 500, Denver, CO 80202 Tel: 303.892.9400
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                    Owner/Contractor Contract
                     Pro-Owner Clause (cont.)
          No Damages Limitation. In claims against any Contractor’s
          Indemnitee made by any Contractor-Related Person(s),
          Contractor’s Indemnity shall not be limited by any limitation on
          amount or type of damages, compensation, or benefits payable
          by or for Contractor or any Contractor-Related Person(s) under
          any worker’s compensation, disability benefit, or other employee
          benefit act.

      Architect’s Liability. Contractor’s Indemnity shall not extend to
      the liability of Architect, Architect’s consultants, or agents and
      employees of any of them arising out of (1) the preparation or
      approval of maps, drawings, opinions, reports, surveys, Change
      Orders, designs or specifications, or (2) the giving of or the
      failure to give directions or instructions by Architect, Architect’s
      consultants, and agents and employees of any of them provided
      such giving or failure to give is the primary cause of the injury or
      damage.
Davis Graham & Stubbs LLP                1550 Seventeenth Street, Suite 500, Denver, CO 80202 Tel: 303.892.9400
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            Owner/Contractor Contract
   • Contractor Indemnity. To the fullest extent permitted by law,
     Contractor does and shall indemnify, defend and hold harmless,
     and hereby releases and discharges, Owner and its constituent
     managers and members or partners and their respective
     owners, employees, directors, officers, agents, affiliates,
     successors and assigns (collectively, the “Owner Related
     Persons”), except to the extent caused by the negligence or
     willful misconduct of any Owner-Related Persons, or from any
     breach or default hereunder by Owner, for, from and against all
     claims, demands, liabilities, losses, damages, costs and
     expenses, including but not limited to court costs and
     reasonable attorneys’ fees, arising out of, resulting from or in
     connection with:

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       Owner/Contractor Contract (cont.)
      a)   the performance of the Work or Contractor’s use or occupancy of
           the Lots,
      b)   any work, occurrence, conduct, act or omission maintained,
           performed, permitted or suffered by Contractor or any
           representative, subcontractor or supplier of Contractor, or any
           employee, agent, invitee or licensee of any of the foregoing, on or
           about or pertaining to the Lots,
      c)   any condition of or on the Lots or of or on any street, curb or sidewalk
           thereon or adjacent thereto or any improvement constructed or to be
           constructed thereon arising during the term of this Agreement,
      d)   Contractor’s failure to perform Contractor’s material obligations, or
           Contractor’s breach of Contractor’s material representations or
           warranties, under this Agreement,
      e)   any act or negligence of Contractor or its representatives,
           subcontractors, suppliers, employees, agents, invitees or licensees,


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           Owner/Contractor Contract (cont.)
      f)    any accident, injury or damage whatsoever caused to any person, firm or
            corporation in the Lots or any sidewalk, street or land adjacent thereto
            arising as a result of any act or omission of Contractor or its representatives,
            subcontractors, suppliers, employees, agents, invitees or licensees during
            the term of this Agreement, or
      g)    the physical condition of the Property or any portion thereof existing, created
            or arising prior to or during the term of this Agreement, and the impact of any
            federal, state or local law, common law, statute, ordinance, regulation,
            administrative rule, policy or order, now in effect or at anytime hereafter
            enacted which pertains or is applicable to or governs: hazardous materials or
            substances, or the use, permitting and/or environmental condition of the
            Property (including the subsurface thereto and any property adjacent
            thereto), or which pertains to health, industrial hygiene or the regulation or
            protection of the environment. The indemnification obligation under this
            paragraph shall not be limited by a limitation on amount or type of damages,
            compensation or benefits payable by or for the Contractor or a Subcontractor
            under workers’ or workmen’s compensation acts, disability benefit acts or
            other employee benefit acts.
Davis Graham & Stubbs             LLP         1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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                          AIA-201 (1997)
   •   INDEMNIFICATION: 3.18.1 To the fullest extent permitted by law and to the
       extent claims, damages, losses or expenses are not covered by Project
       Management Protective Liability insurance purchased by the Contractor in
       accordance with Paragraph 11.3, the Contractor shall indemnify and hold
       harmless the Owner, Architect, Architect's consultants, and agents and
       employees of any of them from and against claims, damages, losses and
       expenses, including but not limited to attorney's fees, arising out of or resulting
       from performance of the Work, provided that such claim, damage, loss or
       expense is attributable to bodily injury, sickness, disease or death, or to injury
       to or destruction of tangible property (other than the Work itself), but only to the
       extent caused by the negligent acts or omissions of the Contractor, a
       Subcontractor, anyone directly or indirectly employed by them or anyone for
       whose acts they may be liable, regardless of whether or not such claim,
       damage, loss or expense is caused in part by a party indemnified hereunder.
       Such obligation shall not be construed to negate, abridge, or reduce other
       rights or obligations of indemnity which would otherwise exist as to a party or
       person described in this Paragraph 3.18.

Davis Graham & Stubbs                LLP         1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                                         www.dgslaw.com
                            attorneys at law
                    AIA-201 (1997) (cont.)
   •   INDEMNIFICATION: 3.18.2 In claims against any person or entity indemnified
       under this Paragraph 3.18 by an employee of the Contractor, a Subcontractor,
       anyone directly or indirectly employed by them or anyone for whose acts they
       may be liable, the indemnification obligation under Subparagraph 3.18.1 shall
       not be limited by a limitation on amount or type of damages, compensation or
       benefits payable by or for the Contractor or a Subcontractor under workers'
       compensation acts, disability benefit acts or other employee benefit acts.




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            Engineers Joint Contract
          Documents Committee C-701
  6.20 Indemnification
  A. To the fullest extent permitted by Laws and Regulations, Contractor shall
        indemnify and hold harmless Owner and Engineer, and the officers,
        directors, partners, employees, agents, consultants and subcontractors of
        each and any of them from and against all claims, costs, losses, and
        damages (including but not limited to all fees and charges of engineers,
        architects, attorneys, and other professionals and all court or arbitration or
        other dispute resolution costs) arising out of or relating to the performance
        of the Work, provided that any such claim, cost, loss, or damage is
        attributable to bodily injury, sickness, disease, or death, or to injury to or
        destruction of tangible property (other than the Work itself), including the
        loss of use resulting therefrom but only to the extent caused by any
        negligent act or omission of Contractor, any Subcontractor, any Supplier,
        or any individual or entity directly or indirectly employed by any of them to
        perform any of the Work or anyone for whose acts any of them may be
        liable.


Davis Graham & Stubbs             LLP       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
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           Engineers Joint Contract
       Documents Committee C-701 (cont.)
  B.   In any and all claims against Owner or Engineer or any of their respective
       consultants, agents, officers, directors, partners, or employees by any employee (or
       the survivor or personal representative of such employee) of Contractor, any
       Subcontractor, any Supplier, or any individual or entity directly or indirectly
       employed by any of them to perform any of the Work, or anyone for whose acts any
       of them may be liable, the indemnification obligation under Paragraph 6.20.A shall
       not be limited in any way by any limitation on the amount or type of damages,
       compensation, or benefits payable by or for Contractor or any such Subcontractor,
       Supplier, or other individual or entity under workers’ compensation acts, disability
       benefit acts, or other employee benefit acts.

  C.   The indemnification obligations of Contractor under Paragraph 6.20.A shall not
       extend to the liability of Engineer and Engineer’s officers, directors, partners,
       employees, agents, consultants and subcontractors arising out of:
        1.   the preparation or approval of, or the failure to prepare or approve, maps,
             Drawings, opinions, reports, surveys, Change Orders, designs, or
             Specifications; or
        2.   giving directions or instructions, or failing to give them, if that is the primary
             cause of the injury or damage.
Davis Graham & Stubbs               LLP          1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                                         www.dgslaw.com
                           attorneys at law
      Warranty and Remedies Clauses
   William A. Bianco
     (303) 892-7396
     bill.bianco@dgslaw.com

   Andrea Wang
     (303) 892-7423
     andrea.wang@dgslaw.com




Davis Graham & Stubbs      LLP       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                             www.dgslaw.com
                  attorneys at law
      Warranty and Remedies Clauses

                          Introduction




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          Clauses that limit the scope of
                     liability
   A. Limited Warranty Clauses
   • Through a limited warranty clause, the party promises to
      cover certain defects for a certain period of time to the
      exclusion of other remedies. It allows the party to limit the
      substantive and temporal scope of its liability.

      –   BASIC EXAMPLE: Subcontractor warrants against defects in work
          performed by Subcontractor for a period of one year from the date of
          completion of Subcontractor’s work. This warranty is in lieu of all other
          claims, rights, and remedies, express or implied, provided by law.




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     Limited Warranty Clauses (cont.)

     • A warranty can be a single provision of a contract or a stand-
       alone agreement incorporated into the larger contract. More
       comprehensive warranty clauses or agreements can include:
          – notice and claim requirements
          – limitations on the types of damages available
          – arbitration clauses
          – definitions sections expressly defining what falls within the scope of the
            warranty
          – more extensive waivers (see exculpatory clause section below)
          – termination provisions
   • Enforceability: As long as the warranty does not fail of its
      essential purpose and, as long as the waivers included in the
      warranty are clear, limited warranty clauses are generally
      enforced in Colorado. If the warranty seeks to waive the
      warranty of merchantability or warranty of habitability it must
      expressly state this.
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   B. Exculpatory Clauses
   • An exculpatory clause limits liability under certain legal
      theories
       –   BASIC EXAMPLE: The Parties agree that neither party shall be liable to
           the other for any tort claim (except for those arising from willful and
           wanton conduct), including, but not limited to, actions arising out of
           negligence and strict liability.
   •   Enforceability: Although disfavored in Colorado,
       exculpatory clauses will be upheld as long as the contract
       was fairly entered into and the exculpatory clause is clear.
       Colorado courts will also void exculpatory clauses that
       appear in contracts for essential public services. Under
       no circumstances will a court enforce a clause that waives
       liability for willful and wanton conduct.

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   C. Example of Comprehensive Limited Warranty and
      Exculpatory Clause in Residential Home Building
      Context




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      D. Pending Legislation
      •  The “Homeowner protection Act of 2007” as currently
         introduced would void waivers of remedies in contracts
         with Colorado residential property owners. This legislation
         would also nullify any attempts to shorten the period of
         time during which a residential property owner could bring
         a claim:
          “In order to preserve Colorado Residential property owners’ legal
           –
          rights and remedies, in any civil action or arbitration proceeding
          described in section 13-20-802.5(1), any express or implied waiver
          of, or limitation on, the legal rights, remedies, or damages provided
          by the “Construction Defect Action Reform Act”, this Part 8, or
          Provided by the “Colorado Consumer Protection Act”, Article 1 of
          Title 6, C.R.S., as described in this section, or on the ability to
          enforce such legal rights, remedies, or damages within the time
          provided by applicable statutes of limitation or repose, are void as
          against public policy”
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                 Clauses that Limit the Scope of
                           Damages
   1.       Limitations on Consequential Damages
        •     Through a provision limiting liability for consequential damages, a
              party can limit its liability to damages that are directly caused by its
              breach. Consequential (or “incidental”) damages are secondary
              loses. For example, a plumber will be responsible for the cost of
              repairing the ceiling that was ruined when the negligently installed
              pipes leaked (direct damages), but not for the cost of moving the
              tenants from the building and the rent lost from those tenants
              (consequential damages).
             •    EXAMPLE: The parties agree that neither party shall be liable to the
                  other for any incidental or consequential damages of any nature,
                  however caused.
        •     Enforceability: limitation clauses on consequential damages are
              generally enforced in Colorado.


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   2.       Limitations on Punitive Damages
        •     Through a provision limiting liability for punitive damages, a party
              can limit its liability to actual damages. Punitive (or “exemplary”)
              damages are damages above and beyond actual damages that
              are awarded to make an example of especially egregious behavior
              and further punish the wrongdoer. Absent a limitation, these
              damages are available in Colorado only for fraud, malice and willful
              and wanton conduct.
             •   EXAMPLE: The parties agree that neither party shall be liable to the
                 other for any punitive or exemplary damages of any nature, regardless
                 of the conduct of the parties.
        •     Enforceability: Although one cannot limit liability for willful and
              wanton conduct, there is no indication that Colorado courts will not
              enforce a limitation on punitive damages.


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     3.    Liquidated Damages
          • Parties can predetermine the exact extent of liability for
              a breach of contract through a liquidated damages
              clause.
               •    EXAMPLE: The parties agree that should either party breach
                    this contract, damages will be difficult to ascertain and,
                    accordingly, hereby agree that, in the event of a breach, the
                    breaching party shall be liable to the other party for the sum of
                    $10,000.00.
          •
          Enforceability: Colorado courts will enforce these
          clauses when, at the time the parties entered into the
          contract, the anticipated damages from a breach were
          difficult to ascertain; the parties agreed to liquidate the
          damages in advance; and the amount of the liquidated
          damages was, at the time of contracting, a reasonable
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          estimate of potential damages from a breach, 80202 aTel: 303.892.9400
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          penalty. attorneys at law
   4.    Damages Caps
        • Parties can limit their total exposure with the use of
           damages caps. The cap can be for a specific dollar
           amount, or linked to an external factor, such as
           coverage under an insurance policy.
            •   EXAMPLE: Owner agrees that the total liability of Contractor for
                any and all claims arising out of or in connection with the
                subject matter of this contract shall be limited to $10,000.
        •   Enforceability: As long as the limit is reasonable, and
            the parties have similar bargaining power, Colorado
            courts should enforce damages caps.


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   5.    Attorneys’ Fees Provision
        • An attorneys’ fees provision will decrease the prevailing
            party’s cost of enforcing a contract.
            •   EXAMPLE: In any litigation arising out of, or in any way
                connected to, the subject matter of this agreement, the
                prevailing party shall be entitled to recover it reasonable
                attorneys’ fees and expenses.
        •   Enforceability: Attorneys’ fees provisions are enforced.




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                Arbitration Clauses
   Jonathon Bergman
     (303) 892-7421
     jon.bergman@dgslaw.com




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                  Arbitration Defined
      • Arbitration is a process for parties to submit their
        disputes to a private, neutral third party or panel, who
        renders a final decision
         – conducted and adjudicated by private entities and
           arbitrators, not the courts, judges or juries
             • examples of administering agencies include the
               American Arbitration Association, JAG, JAMS,
               etc.




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      Perceived Benefits of Arbitration
        – Confidential and private
           • awards are not publicly filed (but not necessarily confidential)
        – Limited pre-arbitration discovery (document requests,
          depositions, etc.)
           • generally true
           • discovery takes place in arbitration -- scope determined by
             arbitrators
        – Typically quicker and less expensive than litigation
           • generally true
           • arbitration can be costly
        – Decision is binding
           • grounds for appeal are limited

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       Arbitration Clause Examples                                                    (cont.)

   • AIA Document A401, Standard Form of Agreement Between
     Contractor and Subcontractor:
           Article 6.1 Any controversy or claim between the Contractor and
          the Subcontractor arising out of or related to this Subcontract, or
          the breach thereof, shall be settled by arbitration, which shall be
          conducted in the same manner and under the same procedure as
          provided in the Prime Contract with respect to claims between the
          Owner and the Contractor . . . . If the Prime Contract does not
          provide for arbitration or fails to specify the manner and procedure
          for arbitration, it shall be conducted in accordance with the
          Construction Industry Arbitration Rules of the American Arbitration
          Association currently in effect unless the parties mutually agree
          otherwise.
            K. P. Meiring Cons. v. Northbay, 761 So.2d 1221 (Fla.App. 2 Dist.
                                                                            2000)

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         Arbitration Clause Examples
   • Standard arbitration clauses suggested by AAA:
            Any controversy or claim arising out of or relating to this contract,
           or the breach thereof, shall be settled by arbitration administered by
           the American Arbitration Association under its Construction
           Industry Arbitration Rules, and judgment on the award rendered by
           the arbitrator(s) may be entered in any court having jurisdiction
           thereof.




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        Arbitration Clause “Up-grades”
      – Mediation before arbitration
         •   meeting between executives
         •   dispute resolution board
         •   useful if participation is meaningful
         •   used as a discovery tool?
      – How arbitrators are selected
         • selections by parties based on lists generated by the AAA
         • appointments
         • qualifications specified by parties (e.g., architect, engineer, etc.)




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    Arbitration Clause “Up-grades” (cont.)
      – How many arbitrators will be used
         • Fast Track Procedures
             – unless otherwise specified, the AAA applies this procedure
               to disputes <$75,000
             – 1 arbitrator (unless the parties specify 3)
             – 60-day “time standard” for case completion
         • Regular Track
             – unless otherwise specified, the AAA applies this procedure
               to disputes between $75,000-$500,000
             – 1 or 3 arbitrators; the AAA resolves any disputes on this
               issue
         • Large Complex Cases . $1M – 3 arbitrators
             – unless otherwise specified, the AAA applies this procedure
               to disputes >$500,000
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    Arbitration Clause “Up-grades” (cont.)
      – Hearing Locale
          • selected locale may imply choice of procedural law
          • convenience
          • available pool of qualified arbitrators
      – Governing law
          • specify familiar jurisdiction
      – Scope of discovery (if any)
          • discovery is expensive
          • preparing a case for hearing without information is expensive
          • AAA Construction Regular Track Rule 22 allows the arbitrators to direct
            the exchange of witness lists and documents
              – no other discovery allowed unless ordered by the arbitrator in
                 extraordinary cases
              – arbitrators try to limit discovery

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    Arbitration Clause “Up-grades” (cont.)
      – Award of attorneys’ fees
         • general rule: each party pays their own fees and costs and splits
           the administrative fees
         • AAA rules allow the arbitrator to reassess the allocation of
           administration fees
         • contract can provide for an award of attorneys’ fees -- prevailing
           party?
      – Form of award
         • AAA R-43 provides for a concise written breakdown of the
           amount awarded
         • reasoned opinions are another option
             – expensive



Davis Graham & Stubbs           LLP       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                                  www.dgslaw.com
                       attorneys at law
    Arbitration Clause “Up-grades” (cont.)
      – Consolidation or Joinder of Disputes
         • multiple parties to same transactions
         • arbitration based on voluntary or contractual consent
         • efficiencies associated with one arbitration?
         • avoid duplicative evidence
         • considerations for subcontractors -- along for the ride?




Davis Graham & Stubbs           LLP       1550 Seventeenth Street, Suite 500, Denver, CO 80202   Tel: 303.892.9400
                                                                                                  www.dgslaw.com
                       attorneys at law

				
DOCUMENT INFO
Description: A Penalty and a Damage Clause in the Contractor Agreement document sample