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By
William DeVan
Thelen Reid Brown Raysman & Steiner LLP
The
attacks of September 11, 2001, have had a profound impact
on all aspects of American life, resulting in a broad-based
legislative response, including the Homeland Security Act,
the Terrorism Risk Insurance Act and the Maritime Transportation
Security Act. P.L. 107-296, P.L. 107-297, 46 USC §70101,
et. seq.
Besides
this legislation, the Bush Administration is, in the words
of Deputy Homeland Security Sec. Gordon England, attempting
to provide "embedded economic incentives" to encourage
the private sector to adequately secure the nation's critical
infrastructure.
While
none of the legislative enactments or "embedded economic
incentives" are targeted directly at the construction
industry, the homeland security environment increases potential
liability for injuries sustained in terrorist attacks, regulatory
burdens on owners of critical infrastructure components
and the need to revise form contracts to allocate risks
arising from homeland security issues. Increased homeland
security awareness also will create business opportunities
for contractors and designers. This article will survey
the impact these developments may have on the construction
industry.
Changing Standards of Care in Design and Construction
Most
fundamentally, owners, designers and contractors now will
be held to a higher standard of care in performing their
work. Negligence is the failure to use such care as a reasonably
prudent and careful person would use under similar circumstances
to prevent harm to others. As a general rule, reasonableness
is determined by foreseeability -- i.e., what a reasonably
prudent person could be expected to foresee as a possible
consequence of his or her acts or omissions. Until September
11, 2001, no reasonable person could have foreseen an event
involving the co-ordinated highjackings of four airliners
for the sole purpose of flying them into landmark buildings
such as the World Trade Center and the Pentagon. After September
11, experience requires us to contemplate just such an attack.
Fast
on the heels of September 11, an as-yet-unidentified person
or group mailed a series of letters containing weaponized
anthrax to members of Congress. These letters contaminated
congressional offices, the postal facility where the letters
were sorted and cross-contaminated other mail processed
through the postal facility. This bioterrorist attack killed
several postal workers, and the cross-contaminated mail
randomly infected scores of other mail recipients. Yet,
again, what was once unforeseeable, has become foreseeable.
Because
such acts now are foreseeable, developers, designers and
contractors arguably have a duty to take the possibility
of terrorist attacks into consideration when designing new
projects. Similarly, owners of existing facilities may have
a duty to evaluate the terrorist threat to their facilities
and take appropriate measures to counter those threats.
While many such measures do not involve construction activities
(such as employee and visitor screening), others (such as
installation of additional escape routes and protection
of HVAC systems) will impact facility design and construction.
Thus,
part of the review process for each new project of any significance
should include some evaluation of the potential terrorist
threats to that project. Considerations that should be taken
into account include:
- Whether
the project has any landmark significance, i.e., does
the project have sufficient symbolic significance to merit
terrorist attention?
- Will
the project have a government tenant?
- Will
an attack on the project have a significant ripple effect
on the economy or a region? For example, a pipeline could
pose a more attractive target than a warehouse because
an attack on a pipeline could affect millions of people
and the entire economy while an attack on a warehouse
might affect only a few people.
- Would
an attack on the facility have a secondary physical impact?
For example, an attack on chemical plant could release
a toxic plume killing or injuring thousands of people.
- Is
the project near an attractive terrorist target? Recall
that many neighboring buildings were damaged in the World
Trade Center attack.
Once
the potential threats have been identified, designers should
take into consideration features necessary to eliminate
or mitigate the loss from an attack. While it may not be
possible to design a building to withstand the impact of
a Boeing 767 loaded with jet fuel, it may be possible to
mitigate the impact by adding more stairwells than required
by code or bridging twin towers (as in the Petronas Towers)
so that tenants can move to another structure if their escape
route is cut off. Similarly, if the project is near a chemical
plant, prudence may require that the ventilation systems
be designed to allow for the filtering of toxic chemicals
released in an attack.
Architects
and engineers have developed blast-resistant glass for windows,
placed decontamination showers outside hospitals and designed
landscaping to absorb the force from a blast. These innovations
can be quite expensive. For example, column-wrapping that
allows damaged columns to maintain their shape and load-bearing
capacity even when damaged can cost $4,000 a column.
Any
determination of what a reasonably prudent person should
do to guard against a terrorist attack must be made on a
case-by-case basis, factoring in the use of the facility,
the surrounding circumstances, regulations particularly
applicable to the project and, of course, costs.
Business Regulation and Opportunities Arising From Homeland
Security
Besides
new projects, a number of legislative mandates now require
security reviews and upgrades for existing facilities. The
mandates provide significant opportunities for contractors
and design professionals.
Utilities: Water, Power and Pipelines
Congress
has required every community water system serving more than
3,300 persons to conduct an assessment of its vulnerability
to a terrorist attack. For large systems (those involving
populations of 100,000 or more), such assessments were required
to have been completed by March 31, 2003. Medium-sized systems
(serving populations of 50,000 to 100,000) are required
to complete their assessments by December 31, 2003. All
others covered by the law must complete their assessments
by June 30, 2004.
Congress
also has appropriated funds to upgrade community water systems
to make them less vulnerable to attack. For the 2002 fiscal
year, such grants are limited to $5 million and may be used
for a variety of purposes, including purchasing security
systems (such as fencing) and making certain system components
tamper-proof.
The
electric power industry also has initiated programs to increase
security. The Nuclear Regulatory Agency is assessing reactor
vulnerabilities. The North American Electric Reliability
Council recently hosted a conference to explore conventional
power plant vulnerabilities. The Federal Energy Regulatory
Commission has proposed regulations relating to cyber-security
for the electrical grid. As these programs progress, new
standards will evolve, and numerous plants will need to
be upgraded.
In
2002, Congress also enacted the Pipeline Safety Improvement
Act (P.L. 107-355), which requires the Departments of Transportation
and Energy, together with other agencies, to use their expertise
in consultation with industry representatives to carry out
a program of research, development and standardization regarding
pipeline safety. One aspect of the research is finding ways
to improve and standardize security against terrorist threats.
The initiative seems certain to lead to increased capital
spending by pipeline owners.
Transportation
While
airport security has gotten the most public attention, the
construction industry likely will be more affected by provisions
of the Maritime Transportation Security Act of 2002 (MTSA).
As with water systems, MTSA requires a vulnerability assessment
for each port. This assessment, however, is to be conducted
by the Coast Guard. Once the assessment is completed, the
Department of Transportation can grant up to 75 percent
of the cost of making improvements to ports to secure them
from terrorist attack. Unfortunately, Congress has yet to
fully fund this program, but the current cost estimate for
completing the assessments and upgrades is $7.9 billion
over the next 10 years.
Science and Industry: Biohazards and Chemical Hazards
President
Bush signed the Bioterroism Preparedness Act (P.L. 107-188)
into law on June 12, 2002. The act authorized grants to
assist states and their political subdivisions in preparing
for a bioterrorist attack. The act requires states to develop
preparedness plans and appropriated $520 million to enhance
preparedness of hospitals and other clinics for a bioterrorist
attack. 42 USC §247d-3a. The act also provides
for revitalization of the Centers for Disease Control and
authorized it to let multi-year contracts for upgrading
its facilities and for developing an early warning and surveillance
network.
The
bioterrorism act places enormous responsibilities on persons
who possess biological agents and toxins that are determined
to be of potential interest to terrorists. They must establish
internal controls to prevent access to the materials. The
act also requires the Food and Drug Administration to expand
its port-of-entry inspection of certain items. Both implementation
of internal controls over biological agents and toxins and
port-of-entry screening will require facility upgrades.
Contract Revisions
The
lessons of September 11 and legislative responses to those
attacks require that construction contracts be reviewed
for compliance with the new laws and regulations. Following
are some contract clauses that should be reviewed in light
of these new circumstances.
Force Majeure Clauses
Construction
contracts often include force majeure clauses, which excuse
the parties from contract obligations if certain events
outside their control occur. "Acts of war" typically
are events of force majeure. Terrorism has been held to
not constitute an "act of war" under an insurance
policy exclusion. Pan American World Airways, Inc. v.
Aetna Casualty & Surety Co., 505 F.2d 989 (2d Cir.
1974). Although Pan American did not involve a force
majeure clause, the court's holding would appear to undercut
arguments that the term "act of war" in a force
majeure clause includes acts of terrorism.
Accordingly,
construction contracts should be revised to specifically
allocate the risks of terrorism. The risks include not only
the direct impact from a terrorist attack but also impacts
caused by responses to such attacks. For example, projects
located in Manhattan were impacted not only by the loss
of work time attributable to the attacks themselves but
also by resulting government restrictions preventing trucks
from freely crossing onto the island after the attack.
Indemnity
Nearly
every construction contract contains indemnity provisions
under which contractors and subcontractors agree to indemnify
the other contracting party against losses from personal
injury or property damage. In the event of a terrorist attack,
these indemnity clauses may be triggered, and contractors
could find themselves acting as insurers for project owners.
Insurance
Most
construction contracts require contractors to maintain general
liability insurance on an all-risks basis and to obtain
builder's risk policies covering the project during construction
and testing. Many insurance policies now exclude coverage
for terrorism-related events, and the parties must make
sure contractual insurance requirements and insurance policies
procured in response to those provisions are consistent.
Because terrorism-related insurance is difficult and costly
to obtain, one should not lightly promise to procure such
coverage. (For more information on insurance issues, see
"The New
Federal Insurance Program for Terrorist Acts: How It Works
and the Open Issues")
Project Funding
Insurance
restrictions also may affect project funding. For example,
a lender required the project owner to obtain terrorism
insurance even though the cost exceeded the debt service.
Four Times Square v. Cigna Investments, Inc., 227
NYLJ 121 (2002). The court held that the loan documents
allowed the lender to require the owner to procure such
insurance if it was generally available at commercially
reasonable premiums. If loan documents give lenders similar
power, lenders may be able to stop funding midway through
projects unless owners can procure terrorism or other insurance
demanded. Accordingly, contractors may want to obtain contract
provisions requiring owners to disclose the existence of
such requirements and to give notice of any resulting threats
to continued project funding. Such provisions should be
more explicit than the provisions in Article 2.2.1 of AIA
Document A201, allowing contractors to require owners to
provide reasonable evidence of funding upon the contractor's
request.
Environmental Liabilities
Contractors
also may be held liable as Potentially Responsible Parties
whenever they disturb hazardous substances or exercise control
over those substances. If a terrorist attack causes the
release of hazardous substances on a project, the contractor
may acquire environmental liabilities. Accordingly, contracts
should be structured to place such responsibility on the
owner when existing facilities containing toxic substances
are being renovated. While such provisions will not free
contractors of regulatory liability, they may allow contractors
to at least pass that liability through to owners or their
insurer.
Compliance
Construction
contracts typically require contractors to conform to all
building codes, laws and regulations. Often, project specifications
require compliance with particular industry standards. In
a stable environment, such compliance becomes a routine
part of the work. The homeland security environment, however,
is anything but stable. Vast forces in both government and
industry are at work trying to identify threats and the
best way to address those threats.
Thus,
the scope of work on a project may become subject to new
homeland security regulations and industry standards as
construction progresses. Accordingly, contracts should allocate
the risk that newly promulgated homeland security regulations/industry
standards may require changes to design documents and that
differences may exist between newly promulgated regulations/industry
standards and existing building codes.
Homeland
security directives also may require contractors to take
steps to secure critical infrastructure information to which
they become privy in performing their work. This can involve
additional hiring screening, with attendant labor and employment
issues. It also may require additional home office and computer
security systems.
Summary
Homeland
security will affect the construction industry in multiple
ways. Industry participants need to recognize both the increased
risks posed to their interests by a terrorist attack and
the opportunities presented by the national effort to bolster
homeland security. As a beginning step, all industry participants
should review existing form contracts to ensure that they
clearly allocate the risks associated with both terrorism
and the current efforts to combat it.
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For more information about the issues covered in this report, please contact William DeVan in our Washington, D.C. office at 202-508-4054 or at wdevan@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction & Government Contracts Department, click here.
©2003 Thelen Reid Brown Raysman & Steiner LLP
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