There are several emerging trends in 2023 concerning construction component manufacturers.
1. Tendering to and/or Adding Subs and Suppliers to Claims/Cases/Matters
The most notable trend specific to manufacturers is that their largest customers have now largely decided upon a defense strategy of tendering to and/or adding its subs and suppliers, including the manufacturers, to any and all claims/cases/matters.
For instance, some manufacturers never used to add and/or otherwise join its subs and suppliers to its claims/cases/matters. However, company strategies have changed over the years. They now tender and/or make demand upon manufacturers for almost any claim/case/matter they receive involving the manufacturer’s products.
2. Addendums Either Not Attached to General Contractor’s Documents or Not Executed by General Contractor
A second observation is that for the routine construction defect claims, we have discovered that oftentimes the addendum (which includes limitations on recovery, modifications to indemnity provisions, etc.) is either (1) not attached to the general contractor’s and/or distributor’s contract documents, or (2) if it is attached, it is not executed by the general contractor and/or distributor.
This has allowed contractors/distributors to rely on language in their contracts/agreements that is favorable to them and not to manufacturers. This has certainly put manufacturers in unfavorable positions (arguably owing defense, indemnity and/or additional insured status in many instances), and weakened defenses in some cases.
3. Increases in Delay Claims Continue Since COVID-19
Third, we have seen an uptick on delay claims since the COVID-19 pandemic began in 2020.
As for a general marketplace trend, we have seen both an uptick in delay claims (including liquidated damages claims) due to scarcity and/or sheer inability to supply product or meet prior agreed upon schedules, as well as defect claims related to material substitutions due to material unavailability.
Specific to manufacturers, while many of the delay claims received near the start of the pandemic were no doubt caused by the pandemic, we have actually seen some recent claims which do not appear caused by it, and actually caused by other emerging factors.
For instance, manufacturers may take on more orders than they can handle.
Secondly, scheduling departments are communicating changes in the schedule directly to the contractor/distributor. In these circumstances it appears the contractor/distributor is learning of the delay at the same time as manufacturer sales personnel assigned to the account. This, unfortunately, prevents the manufacturer sales personnel, who has the relationship with the customer, from preemptively reaching out to let them know there may be scheduling issues.
Managing customer expectations is obviously key to overall business success, but also key in defense strategies throughout the claim and litigation/arbitration phases.
4. Cyber Insurance Needed as Data Breaches, Online Payment Intercepts Plague Industry
Fourth, the likelihood of claims and disputes over cyber-attacks is becoming more common.
As a result, cyber insurance is now more common place, and certainly advisable as part of a company’s risk management arsenal.
But in addition to cyber-attacks causing supply chain issues that result in delay and other claims from customers, we are seeing increased disputes arise when payments are intercepted and otherwise go to bad actors on construction projects.
A recent example that one of our construction practice team members passed along was that a contractor was paying a subcontractor by wire transfer. The contractor had sent this subcontractor a couple hundred thousand dollars for a pay application that was due and as a result of a cyber-attack, the wire for the pay application went somewhere else. The general contractor ended up having to pay this subcontractor twice as a result.
The above example is a perfect one for a new disturbing trend and a crucial reason why cyber insurance is so important these days.
About David Toney: David Toney, resident in the Adams and Reese Houston office, is a member of the law firm’s Executive Committee and co-leader of the Construction Practice. He advises clients in the areas of construction disputes, commercial litigation, products liability and personal injury defense. His broad experience in business and commercial litigation, as well as construction and real estate litigation, includes complex, multi-party commercial and residential construction disputes concerning construction and design defects, product failure, warranty claims and allegations of fraud. He has served as national counsel and regional counsel for several manufacturers, managing lawyers and cases throughout the United States, and he has handled cases alleging damages in excess of $1 billion. Toney is the former President of the Houston Bar Association’s Construction Law Section. He is ranked by clients and peers among Texas Super Lawyers and Best Lawyers in Construction Law.