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(This article first appeared in The International
Construction Law Review, [1998] 15 ICLR 447.)
By Jesse B. Grove, III
Introduction
By
adopting the motto "Friend of the Project," the
American College of Construction Lawyers intuitively recognized
that what is good for the project is good for the project
participants. That is, successful projects tend to make
money for all concerned while troubled projects can cause
losses all around. The College is suggesting by its motto
that construction lawyers ought to have a role in making
projects successful that is different from their traditional,
client-focused roles of negotiating advantageous contracts
and shifting losses through claims and litigation. This
sort of thinking has led to the "Project Counsel"
concept 1/ described in this journal by Christopher
L. Noble. 2/
In
part, the Project Counsel concept is a reaction to the construction
industry's very vocal aversion to lawyers and their traditional
services. In the United States, the industry has long embraced
ADR as a means of getting the lawyers out of the dispute
resolution process or at least limiting lawyer enrichment.
The instant popularity of "partnering" showed
that the industry is willing to go even farther by marginalizing
the relevance of contracts and focusing on dispute prevention
almost to the exclusion of dispute resolution. The industry
is striving to be lawyer-free, but the lawyers do not intend
to be left behind even if it means changing stripes.
To
this end, 17 seasoned construction lawyers from 16 U.S.
law firms that specialize in construction law (including
Mr. Noble and the author) devised a new legal services program
for the construction industry known as "Fixed Fee Dispute
Avoidance." To oversimplify, these lawyers will warrant
that construction projects having the advantage of this
program will not be plagued by litigation or arbitration,
failing which the lawyers will refund their fees.
Fixed Fee Dispute Avoidance Defined
The
stated mission for the program is:
If
dispute resolution by traditional adversarial means (litigation,
arbitration, mini-trial) is regarded as unacceptable,
and by other means (mediation, dispute review board, project
neutral evaluation) as expensive and problematic, there
should be made available to the industry a dispute avoidance
service unencumbered by procedural codes that is inexpensive,
efficient and highly likely to produce results that are
acceptable to the project participants even if the project
is troubled.
The
concept, put succinctly, is:
The
decades of litigiousness in our industry produced some
highly experienced construction law experts who can (1)
guide project participants away from disputes, (2) efficiently
evaluate adversarial positions, and (3) bring any unavoidable
dispute to a just, negotiated conclusion without engaging
in dispute resolution procedures. If the project participants
will each engage such an expert in advance and on the
terms stated herein, entanglement in dispute resolution
procedures will likely be avoided in almost all instances.
And
the required terms of reference are:
1.
This service is available to leading industry participants
for projects valued over $50 million in construction cost.
Engagements will be accepted on either a selected project
or an ongoing basis.
2.
The service is conditional upon each of the main project
participants engaging counsel on the terms stated herein.
3.
Counsel's brief will be as stated in the concept above.
4.
Counsel will fulfill their charge by providing, at a minimum,
the following services:
(a) Pre-contract structuring advice, risk review
and sanity checks;
(b) Review of management reports as submitted;
(c) Monthly site or home office visits;
(d) Full telephone access;
(e) Change order/backcharge advice and articulation
of positions as appropriate;
(f) Position evaluation, negotiation and mediation,
and
(g) Resolution documentation.
5.
Counsel shall attend all partnering sessions, if any.
6.
Counsel shall have access to senior management upon request.
7.
Each counsel's fee shall be a fixed lump sum payable in
advance and returnable in full if, despite counsel's service,
a contract dispute should, at either client's discretion,
proceed to arbitration or litigation. Out-of-pocket disbursements
shall be reimbursed at actual cost.
From
this it can be seen that the participating counsel are willing
to risk their fees on the proposition that their expertise
applied early and continuously will free the industry not
from lawyers but from what lawyers traditionally do.
It
will have been noted that the amount of the fixed fee is
not specified. That is deliberate. It is left for negotiation
between the lawyer and his individual client. It is not
a matter that other participating counsel should be concerned
with so long as the fee is both fixed and refundable. The
required aspects of the fee arrangement are to ensure that
all participating counsel are equally incentivized. This,
plus the mutual respect that the 17 named participants hold
for one another, makes it tolerable for counsel to put their
fees at risk. If a lawyer other than the 17 is to be a participant,
the same degree of respect would be required. That is left
to individual, ad hoc determination.
Bringing the Program to Market
Having
devised the program, the lawyers did not immediately make
it available because of U.S. antitrust concerns arising
from the fact that the program anticipates, but does not
require, that industry consumers will choose counsel from
among the 17 lawyers sponsoring the program and because
the program mandates that each counsel be engaged for a
fixed, returnable fee. To alleviate the concern, a request
to the Justice Department for a "statement of present
enforcement intentions" was made on June 10, 1996.
In response, the department stated on January 17, 1997 that
"the proposed agreement amongst seventeen attorneys
to offer services in an interdependent legal fee arrangement
on a non-exclusive basis would not appear to raise prices,
reduce output or diversity, erect barriers to entry or in
any other way restrain competition." In fact, the department
said "the proposed conduct could have a procompetitive
effect. To the extent that utilization of a returnable flat
fee structure reduces legal costs, either directly or by
reducing uncertainty relating to such potential costs, construction
industry participants will secure benefits without having
to sacrifice any competitive options." With this concern
abated, the program was offered for subscription in March
1997.
Perceived Program Benefits
The
potential benefits of this program are many. Foremost is
the potential for avoidance of litigation. If the industry
hates litigation (and arbitration) as much as it proclaims,
then this can be thought of as a sort of litigation prophylactic
or litigation insurance with a return of premium feature.
Against this, it could be argued that counsel will compromise
(even "sell out") client rights in order to protect
their fees. A similar argument is now leveled against litigation
counsel who are accused of creating and protracting disputes
in pursuit of billable hours. One answer is that if counsel
are thought to have so little integrity, then which way
would the industry prefer that they be incentivized? 3/
The better answer is that the clients have absolute control
over proposed compromises. The right to forfeit counsels'
fees by proceeding to arbitration or litigation lies within
the clients' absolute discretion. (Consequently counsel
will probably choose their clients with care.) The real
incentive in the program is to find the "right"
answer, that is, the answer that should be acceptable not
only to both counsel but also to both clients. That has
to be better than an externally imposed answer gained at
enormous transactional cost.
It
is not only the ability to find the right answer that lies
at the heart of this program. It is the enhanced likelihood
that both parties will accept the right answer. From experience,
the participating counsel have concluded that (1) there
will be a right answer, (2) each of them is capable of finding
it or at least recognizing it when it is presented by counterpart
counsel, and (3) once found both clients can be persuaded
to accept it. Most litigation is engendered by bad advice
(or unwise animosity, about which more later). One party
or both has unrealistic expectations. It is rare, especially
in the construction industry, for issues of constitutional
dimension to arise. Mostly the issues are causation and
quantification. There is no reason to refer that sort of
thing to the courts unless someone is overreaching. If overreaching
is eliminated through sound legal advice on both sides,
litigation is unnecessary.
Assuming
the risk of a "sellout" is nil, there is no other
risk or downside to the clients. If the program fails to
achieve its intended results, only the lawyers' fisc will
suffer. The clients will have received all of the above
services and advice absolutely free of charge. The only
possible objection from a client's perspective is that sometimes
fixed fees will have been paid to lawyers to participate
in projects that would have been successful anyway. That
is true, and it serves to balance the potential free service
benefit. However, clients can exercise control here as well.
If a project is thought not at risk, the program need not
be engaged. Moreover, the cost of unnecessary engagements
will be but a fraction of the cost of avoidable litigation.
Sophisticated clients should be able to weigh up the balance.
Another
attractive aspect of the program is that it provides pre-contract
evidence of the bona fides of the program participants.
Each of contractor and employer will know in advance that
the party it is about join in a construction endeavor shares
a strong pre-commitment to obtain and act upon first-class
advice regarding consensual resolution of disputes and a
strong aversion to traditional dispute resolution procedures.
Both sides will have "put their money down" on
the proposition that right answers can be achieved. The
climate for success is thereby greatly enhanced.
Client
pre-commitment and expert implementation of it addresses
two significant project risks that cannot be eliminated
by even the best of contracts. For the contractor, the risk
is abusive contract administration by the employer. For
the employer, the risk is excessive "claimsmanship"
by the contractor. When these risks materialize, the project
is soon poisoned. Each side demonizes the other. Unwise
passions are aroused, and extreme positions are adopted.
Commercial reality fades, and the breeding ground for litigation
has been created. Since the whole idea of partnering is
to prevent this problem from occurring, one concludes that
the immediate industry embrace of the partnering concept
confirms that the problem is prevalent and vicious. Adoption
of the Fixed Fee Dispute Avoidance program should eliminate
these risks.
The
philosophy of the program is to recognize that disputes
will inevitably occur and to show determination not to let
disputes interfere with project success. That should mean
a great deal to a lender, especially in the project finance
context, because project-financed jobs will founder long
before a court or tribunal can determine who had the better
contractual position. Lenders simply cannot tolerate loggerhead
situations that threaten project completion. The revenue
stream must come on line on time. If it does not, no court
will ever be able to put Humpty Dumpty back together again.
All of a sudden the stakes become huge, and full-bore litigation
is inescapable. If this program ameliorates that risk, and
it should, it ought to be worth consideration in determining
financing costs.
Partnering Plus
The
program obviously borrows heavily from its sister concepts
of partnering, project counsel and mediation. By taking
the pre-commitment feature from the partnering concept,
and combining it with the enhanced application of expertise
feature from the project counsel concept and the common
sense feature from the mediation concept, it could be said
to be a form of "partnering plus." It also avoids
some of the perceived difficulties with these allied concepts
such as the ethical and loyalty concerns about using project
counsel and the worry that non-professionals will ignore
or unwittingly tinker with their contracts through partnering.
Some Introspection
Since
the author is a promoter of the program, it ought to be
admitted here that the foregoing is as yet entirely theoretical.
And it may remain so. No set of project participants has
taken up the program even though 17 lawyers have described
its availability to many of their clients during the last
12 months. Of course it is early days for a program of this
dimension, but it is worth considering whether there may
be some barriers to acceptance that were not anticipated
(i.e., in addition to the cost and "sell out"
issues mentioned above).
This
program may be seen by project participants as unduly intrusive.
The business development and contract negotiator types could
view contract formation as difficult enough already without
another set of lawyers getting mixed up in the process.
There could even be "turf protection" worries.
Project managers and employer representatives may see the
program as erosive of their roles and prerogatives or at
least their own importance to the effort of project implementation.
In-house counsel may argue that much of this is nothing
more than what they already are doing themselves. One hesitates
to argue back that the job can be done better than before,
but at bottom there is a bit of arrogance in what the 17
lawyers are asserting here, perhaps more than is tolerable.
The
program also could be seen as taking too much upside potential
out of the construction process. It clearly would have a
leveling effect. The potential for windfall results through
clever contracting or ruthless implementation is substantially
reduced, perhaps entirely eliminated. The industry still
may be more buccaneer than we think and, for that matter,
quite content with the risks as they are. After all, the
potential for reward has a strong relationship to risk.
("No pain, no gain".) Partnering and the like
may be for namby pambies and deserving of lip service only.
Conclusion
In
the coming year, the program will become more widely known
and debated. Lenders and financiers will be exposed to it
for the first time. It is possible that they may exert coercion
on the industry to move in this direction. It will be interesting,
even if academic, to see what comes of it all.
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ENDNOTES
1/
Many who believe that a Project Counsel truly would be a
friend of the project nonetheless stumble over the practicalities.
Who will pay the Project Counsel, and how can the answer
not affect his neutrality? What are the applicable rules
of ethics and are they consistent with codes that govern
lawyer-client relations?
2/
Volume 15, Para. I, page 78, January 1998.
3/
Another might be that the integrity of the 17 participating
counsel is verifiable and beyond reproach.
©2001 Howrey LLP
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