Social media – online ways to interact with others – is exploding. Facebook has more members than the United States has citizens. In fact, if Facebook were a country, it would be the third most populous country in the world (behind China and India). And Twitter’s growth is beyond exponential.

There are all kinds of social media sites, with some that are more specialized than others. There is LinkedIn, which is kind of a professional social networking site. There are Google Buzz, Myspace, Stumbleupon, YouTube, Digg, and Flickr – just to name a few.

There are pros and cons to each site, but the consensus is that (for right now, at least) your business should probably be aware of how to engage social media. More importantly, your business should be aware that 1) your employees are likely engaging in social media; and 2) your company could be held liable for the things your employees do and say, even after hours!

As with email, fax, or any other communication (both within and outside of the office environment), employees can create liability for your company if they post, forward, or otherwise pass on information containing libelous, defamatory, offensive, racist, or obscene remarks.

In a real world example, Jane is a secretary for Ted, a project manager. During Jane’s lunch break, she checks her Facebook account. She updates her status to: “My boss is so sexy. I wonder what he’d like like in a speedo?” Jane has several Facebook friends in the office, and they all make similar comments on her status, ratcheting up the rhetoric. One of the friends is a manager in a different department. Soon the inside joke is that Ted can really “fill a banana hammock.”

Six months later, Ted hears of these comments for the first time. He files suit against the company, alleging that it permitted a sexually charged atmosphere in the office, and other allegations sufficient for a sexual harassment claim.

Would the company in this example be liable? Maybe. It depends on who knew what, when they knew it, and what was done about it.

In another situation, what if one of the employees posts disparaging remarks about another employee. If the posts were egregious enough, would they rise to the level of intentional or negligent infliction of emotional distress? Could an employer be held liable, even if the employee make these remarks on his work computer on his own time? Maybe. I can certainly envision scenarios where it’s possible.

The bottom line is that employees’ comments about one another, or another entity, can potentially expose the company to liability.

And that doesn’t even begin to deal with the consequences relating to how employees can damage (or help) your company’s reputation.

Consider the situation in which an employee does something fairly innocent, like simply listing where they work on their Facebook info page. Later, they may update their status (or comment on others) something like “I hate working at this place. It’s full of idiots!” If any of that employee’s friends are customers, or potential customers, how has that affected your business’s reputation?

Or what if a site supervisor mentioned how “chincy” a particular owner was, or how much better the project would be if only the owner would pay for quality materials. Could those remarks affect your relationship with the project owner?

The reality is that social media is likely here to stay. We suggest that you put a social media policy (and email and fax policies) in place. Why? Because it can reduce your exposure to liability and because it can lessen potential damage to your reputation.

Now that is not to say that your social media policy should be “don’t do it.” Not at all. In fact, our advice is to do exactly the opposite of that. As an example of a policy we’d endorse, Zappos (an online retail company) encourages all employees to have a Twitter account. However, they train their employees on how to effectively use Twitter to make personal relationships with potential customers. For more information on Zappos’s engagement in social media, read here. I’d like to go into more detail about other policy ideas, but that is a post for another day.

The conclusion is simply this: decide how you want your company to approach social media, and train your employees accordingly.

ConstructLaw, L.L.C. provides company policies and other services for construction companies concerning social media, as well as other traditional legal concerns. If you have specific questions or needs, feel free to contact us at any of our myriad communication mediums (email: alan@myconstructlaw.com; phone: 318.841.1253; facebook:http://bit.ly/d0ef7o; twitter: http://www.twitter.com/myconstructlaw; or via our website: http://www.myconstructlaw.com).

[Ed.'s note: The following appeared at Legal Practice Pro (http://bit.ly/bvhHn3) today. We loved it so much that we reproduced it in it's entirety below. Our comments are below.]

By Jay Fleischman

We’ve been told for years to be remarkable. Seth Godin tells us to be remarkable (and he should know). He tells us to earn buzz by being so good, so wonderful, so over-the-top that people can’t help but to talk about us with such glowing praise that we shoot into the stratosphere.

Fabulous.

Look, we’re lawyers – not software developers or people who are looking to cure cancer or baldness or whatever. We are technicians, mechanics and fixers. The job of a lawyer is to take stuff that’s broken (contracts, marriages, laws, financial lives, etc.) and fix them. Simple as that.

Know what would be really remarkable? If every lawyer in American (and beyond!) woke up tomorrow and decided to do what we’ve been hired to do, and to do it in a human way. Talk to clients and tell them what’s going on. In plain English, not legalese.

Answer the damn phone when it rings. And if you’re not there, call back quickly. Update your voice mail to alert callers when you’re out of the office and unavailable.

Take a minute to find the ZIP+4 of the recipient’s address when you send something by snail mail. It gets there just a little faster.

Smile when your client comes to the office. Not a fake one, but a real, live smile that says, “I’m so happy you chose me to be your lawyer and paid me your hard-earned money, which allows my family to eat and have a decent life in a time when some really smart people are homeless.”

Call a client to say hello and to find out if things are going alright for them. Not as a way to drum up business, but just because you care.

Apologize when something goes wrong. Really, really apologize. Fall on your sword, and promise to never let it happen again. And mean it.

In our personal lives, none of that is so remarkable. It’s called “being a good person.” But once we put on our professional attire, that sensibility goes out the window for many of us. Heck, I forget sometimes. We all do.

Lawyers have gotten lulled into the belief that our results are what matter most. We think that a favorable result is remarkable, and that our legal acumen sets us apart from the competition. As for the rest of it? Good enough is good enough.

Consumers now have more choice than ever before, and more of a voice in making their displeasure known. They demand that their lawyer provide them with a remarkable experience. And they have every right to make such demands on us. Because as human beings, we deserve to be treated remarkably. And a favorable result is … well, not such a big deal.

Am I asking too much? Am I setting the bar too high?

I don’t think so.

You?

At ConstructLaw, we couldn’t agree more. That’s why we give our direct-line phone numbers and personal email addresses. When you call 318.841.1253, you reach me (Alan). I don’t have my secretary answer the phone. We put correspondence protocols in place to better serve our clients. You don’t leave a message and wait a week for me to call back. If I’m not available when you call, I get back to you when 30 minutes of being back in the office. I (almost always) respond to emails within 60 minutes during business hours. The bottom line is this: we’re here to help you. And we are acutely aware that you need access to us in order for that to happen. We know that you have options for legal services. When you choose us, we are grateful and seek to serve you to the best of our abilities. That’s not just a slogan, or a motto. It is simply the way we do business.

Friday’s post was about monitoring those customers who owe us money to limit our exposure if they file bankruptcy. Today’s post concerns what to do if a customer declares bankruptcy.

Initial Issues:

There are various types of bankruptcy. Your prospects for repayment vary with each type. Despite being a federal action, bankruptcies are still subject to (some) state law. However, all types of bankruptcy largely permit a debtor to repay much less than it owes – if anything at all. Further, bankruptcy affords debtors an “automatic stay,” which effectively suspends any creditor’s collection activities pending certain decisions by a bankruptcy court.

You first need to decide whether or not you will seek to pursue payment in bankruptcy court. In so doing, you should likely consider at least:

1. The type of bankruptcy
2. How much money you are owed;
3. How much time a claim may take;
4. If and how much it will cost to hire an attorney to pursue your claim.

Types of Bankruptcy:

• Chapter 7 – If the customer is a corporation or partnership, the entity will be dissolved. A trustee will sell any assets and distribute the proceeds to the creditors in a preferential manner – as described below.
• Chapter 11 – This is reorganization bankruptcy for businesses. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In this situation, the business still operates but certain debts are restructured, reduced, or forgiven. Other debts are repaid in the preferential manner described below.
• Chapter 13 – This a usually reserved for individuals who need bankruptcy reorganizations. Debts are not completely forgiven; instead payments are repaid in the preferential manner described below.
• Chapter 12 – This is the family farmer reorganization. This type of bankruptcy is rarely seen in construction law.

Claims Payment Strata:

1. Secured creditors. These are creditors who have legally tied their extended credit to a particular item or group of items. For example, lenders of mortgages have security in the real property. Automobile lenders have a priority claim in the vehicle. Secured creditors either get their collateral or the value of the collateral in cash. If the collateral is worth less than their claim, then the claim is bifurcated into a secured claim covered by the collateral and an unsecured claim for the remaining portion. The secured claim is paid in full while the unsecured claim receives a pro rata share of any payments to unsecured creditors.
2. Unsecured creditors. An unsecured creditor is any entity owed anything unsecured by a real or tangible item, such as real property. Section 726 of the Bankruptcy Code lists six classes of unsecured claims, and each class must be paid in full before the next lower class is paid anything. These classes are:

• FIRST: Claims in the priority as set forth in Section 507(a) of the Bankruptcy Code. They are:

(1) administrative expenses and any fees and charges assessed against the estate;

(2) unsecured claims in an involuntary case which arise in the ordinary course of the debtor’s business or financial affairs after the commencement of the case but before the appointment of a trustee and order for relief. These are sometimes referred to as involuntary “gap” claims.

(3) wages or commissions of employees of the debtor that are earned within 90 days before the date of a bankruptcy filing or the date of cessation of the debtor’s business, whichever occurs first, to the extent of $4,000 for each individual or corporation.

(4)certain contributions to an employee benefit plan which arise from services rendered within 180 days before the date of a bankruptcy filing or the date of cessation of the debtor’s business, whichever occurs first.

(5) unsecured claims of grain farmers and United States fisherman to the extent of $4,000 for each claimaint;

(6) unsecured consumer claims, to the extent of $1,800 for each individual,arising from the deposit, before the commencement of the bankruptcy case, of money in connection with the purchase, lease, or rental of property or services for personal, family or household property, that were not delivered.

(7) cetain spousal and child support;

(8) unsecured claims by governmental units such as income or gross receipts tax, property tax, trust fund tax, employment tax, excise tax, customs duties, and certain penalties relating to those taxes

(9) unsecured claims based on commitment made by a debtor to a Federal depository institutions regulatory agency to maintain the capital of an insured depository institution.

• SECOND: Other claims except for those claims that are filed late or tardy, claims, or fines, penalty or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the date of the bankruptcy filing or the appointment of a trustee, to the extent that they are not compensation for actual pecuniary loss suffered by claimant.
• THIRD: Allowed unsecured tardy or late claims.
• FOURTH: Allowed secured or unsecured claims for any fine, penalty, or forfeiture, or for multiple, exemplary, or punitive damages, arising before the earlier of the date of the bankruptcy filing or the appointment of a trustee, to the extent that such claims are not compensation for actual pecuniary loss suffered by the claimant.
• FIFTH: Interest at the legal rate from the date of the filing of the petition on any allowed claims paid.
• SIXTH: To the Debtor.

Note on Bankruptcy Claims Priority:

Usually, a seasoned businessperson can fairly easily see where his business falls. If your business is an general unsecured creditor (falling into the second TIER, after the 9 classes of the priority unsecured creditors are paid in full), you can likely guess about how much money you can expect to recieve. HINT: It ain’t much. A 10% return is not uncommon. And many unsecured creditors would gladly take 10%.

In other words, if you’re a general unsecured creditor, it may not be a wise use of time to go after this debtor, other than to simply file a claim with the bankruptcy court. But I recommend seeking qualified legal counsel just to be certain in your specific circumstances.

If you decide to go forward, do the following:

Do this RIGHT NOW:

1. Recall any goods in transit;
2. If you can, attempt to retrieve goods already at the customer’s location;
3. Gather all documents including contracts, bills, and especially unpaid invoices.
4. Review recent payments from the debtor, bills to the debtor, and any transaction that could be out of “the ordinary course of business.” In bankruptcy, payments without a certain amount of time of filing for bankruptcy may be classied as “preferential,” which means that the debtor preferred one creditor over the others. The remedy is rather harsh – the preferred creditor must cough up any monies received to be divided according to the claim priority. However, one of the defenses of potential preferential creditor status is when the transaction took place in the ordinary course of business.
5. Examine the documents. Are you able to collect from co-debtors, such as spouses or business partners, or anyone who might have guaranteed your account?
6. If necessary and prudent, get a lawyer.

Then:

1. File a proof of claim. This form is usually attached to a bankrupcty notice. If you need a replacement, most bankruptcy courts have the form on their website.
2. If the amount owed is large, attend a creditors’ meeting. Debtors are required to meet with their creditors in what is known as a 341 meeting, in which you can ask questions and identify courses of action. You aren’t required to attend, but doing so will give you a better understanding of your options.
3. Collect on credit insurance, if applicable.

Other potential actions that you (or your attorney) may take:

1. Petitioning the bankruptcy court for relief from the automatic stay. This may encourage the debtor to make arrangements for paying you in an amount at least equal to the value of your collateral.
2. Request permission from the bankruptcy court to continue with any lawsuit you’d already started at the time the bankruptcy was filed. A judgment creditor (someone who has a judgment against the debtor) may be repaid sooner than a general unsecured creditor.
3. Petition to have the bankruptcy dismissed, if the debtor isn’t complying with the bankruptcy rules or the orders of the bankruptcy court.
4. Petition the bankruptcy court to create or be a part of a creditors committee to oversee the operations of the bankruptcy debtor.
5. Petition to have a bankruptcy trustee appointed if the debtor filed a Chapter 11 proceeding that generally doesn’t require that a trustee be appointed.
6. Sue other creditors to try to force them to give money back to the bankruptcy proceeding if they were paid in “preference” to other creditors. As mentioned above, a “preference” is a preferential payment that a debtor makes on old debt within three months of filing bankruptcy (or within a year if the payment is made to a family member or some other insider who has a special relationship with the debtor).
7. Petition the bankruptcy court to deny a discharge of the debt in whole or in part, if you think the debtor has acted fraudulently.

Conclusion:

Do your best to anticipate customers likely to go bankrupt. If possible, get security agreements or personal guarantees long in advance of any bankruptcy filing. For other tips, see our post here.

When preparation fails, file a claim with the bankruptcy court. Evaluate any potential claim that you have. Avoid spending good money to go after bad. But if the situation is appropriate, use the tools available to see that you increase your payment chances.

This post is not legal advice and does not apply to any particular specific situation. If needed, contact a trusted legal professional, or call us. ConstructLaw, L.L.C. provides bankruptcy claim services and other risk-minimizing services. If you have specific questions or needs, feel free to contact us at any of our numerous communication mediums (email: alan@myconstructlaw.com; phone: 318.841.1253; facebook:http://bit.ly/d0ef7o; twitter: http://www.twitter.com/myconstructlaw; or via our website: http://www.myconstructlaw.com).

[Ed.'s note: The topic of today's post is default by a customer. In cases of subcontractors, this post is substantially altered by "pay when paid" or "pay if paid" clauses. In other situations, the contract can and will modify payment schedules as well. In other words, this post doesn't apply to everyone in every situation.]

In the construction business, products, materials, and services from subcontractors or vendors are often purchased on a Net 30 account (meaning that payment is due 30 days after the product is shipped). To send out materials or providing services prior to payment, of course, represents a risk by the subcontractor or vendor.

In today’s troubling economy, business insolvencies are becoming more and more common. It’s a scary thought that you can do everything right – pay your bills on time, do quality work, offer a good value – and still lose everything due to other people’s actions. But that is exactly what can happen.

I have seen it happen. One end-user fails to pay a large balance, and the resulting missed income ends up cascading into disaster.

The question is, what can you do to avoid it?

Answer: Prepare.

Pay attention to the warning signs, which are:

1) The customer paying late;

2) If it’s a large or public company, watch for a drop in stock prices or analyst downgrades;

3) The customer asking for an increase in credit when its business isn’t doing well; and

4) You hear whispers from your sales people or other industry colleagues.

The best preventative measures is this: PAY ATTENTION!!! If your receivables are troubling, contact the customer and find out what’s going on. This doesn’t have to be adversarial. Sometimes, the old adage applies – the squeaky wheel gets the grease. Be friendly and courteous – to a point. Trust your gut. And watch those receivables!

For those of you unaware, a potential “perfect” game was destroyed by a horrendous call. With two outs in the 9th inning, the umpire called the batter “safe” at first. The only problem was that the runner was clearly out. By a full step.

It should be noted that there were only 3 perfect games thrown in the decade from 2000-2009. So this is an incredibly rare occurrence. How did the pitcher, Armando Galarraga, react? By doing nothing. He didn’t yell or scream at the ump. He didn’t cry foul or throw a temper tantrum. He simply went back to work, and got the next man out. Essentially, he pitched a 28-out perfect game.

What did the umpire, Jim Joyce, do? He watched the tape and found out just how wrong that call was. He then took the rare (for umpires) step of telling the media that he blew the call. He even personally apologized to Galarraga. Galarraga reported that Joyce cried, and that Joyce felt worse than he did!

This is a wonderful tale of sportsmanship, and the power of saying “I’m sorry.” Many excellent articles have been written in response to the events of last night, such as those found here and here.

One of the articles linked to above is an excellent post about the healing potential of saying “I’m sorry.” It was in reference to legal marketing. I suspect that the gist of the article involved taking injustices inflicted upon us to social media. This article, written by Heather Morse-Milligan, invites us to handle these situations with more dignity. And when we angrily go on the offensive or otherwise act less than respectfully, we should apologize. I sincerely agree and endorse those suggestions in that context.

My thoughts center, however, upon apologies in the construction world. Is it advisable to apologize when wrong?

I very tentatively suggest that in limited circumstances that we should, in fact, apologize.*

*DO NOT, under any circumstances, take this suggestion in any criminal proceedings or interactions with any authorities. You will NOT talk yourself out of an arrest or charge. You can only hurt yourself by talking.

In an example of a breach of contract for a small amount (say, less than $5,000), and you were wrong, and are prepared to make it right, then there is no harm in apologizing. In fact, in most situations where you are prepared to correct the issue, there is no harm in apologizing. However, realize that by doing so you may very well be forfeiting any rights, defenses, or other advantages.

The most basic reason for an apology is this: to admit a wrong, and make it right. At ConstructLaw, we believe that 1) your reputation is your greatest asset; and 2) most conflicts can be dealt with in ways other than litigation.

In making an apology, you certainly do not want anything in writing that may undermine your position if the issue becomes contentious. But if you truly intend on making it right, own up to the mistake and make it right. Stand behind your products – and service. It may cost more in the near term but in the long run it is the only foundation for a sustainable, growing business.

Of course, this isn’t to say that an apology is the correct choice in all situations – or even the majority of them. When any of the parties aren’t the most level-headed, for example, an apology may not be a good idea. When an issue appears headed to litigation it’s probably not the best time to apologize, either. Finally, if you’re not absolutely certain that you messed up and/or if you don’t have the ability to fix it, it may not be a good idea.

What is the best legal advice I know?

Be nice.

Be nice, treat people with respect, and work toward solutions when issues arise. Anyone can ratchet up the rhetoric or inflame the situation. But remember that in business, relationships are they key to ongoing success. Remember the proverb: A gentle answer turns away wrath, but a harsh word stirs up anger.

To be gentle, or nice, is not the same thing as being weak or allowing people to take advantage of you. Instead, appeal to a person’s good nature they will (usually) respond accordingly. The best way to win a fight is to not get in one. If you do wrong, say so and work for a solution. People will respect you and know that you’ll do what it takes to get the job done. And that, friends, is good for business.

Again, this post is NOT legal advice. Be certain to confer with an attorney, if necessary, long before a decision is made on how to remedy a particular situation.

1. Hire only Louisiana State Licensed or Registered Contractors

• Commercial Projects over $50,000 require state license
• Residential New Construction of Single Family Homes require state license
• Home Improvement/Remodeling over $7,500 requires state registration
• Hazardous materials or mold remediation over $1.00 requires state license

2. Verify Contractor License or Registration number at 1-800-256-1392 or clicking here and search for contractor license/registration number

3. Get at least 3 local area references and review contractor experience

4. Get at least 3 bids on the work to be performed.

5. Get a written contract and don’t sign anything until you understand the terms of your contract clearly. Be sure to include a payment schedule in the contract.

6. Pay 10% down, or $1,000, whichever is less, depending on project size and reasonable starting cost requirements.

7. Don’t let payments get ahead of work completed. Keep a record of all payments.

8. Don’t make the final payment until you are satisfied with the job.

9. Never pay cash.

10. Keep a job file of all papers relating to your construction project.

OTHER ISSUES TO BE AWARE OF:

Door-to-Door Solicitations

A solicitor offers to do roofing, painting or paying work at a reduced price. Once payment is made, little or no work is done and the project is abandoned.

High Pressure Sales

An unscrupulous contractor pushes for an immediate decision about work, which makes it impossible for the homeowner to get competitive bids, check licenses/registrations and review references.

Scare Tactics

A deceitful contractor offers to perform a free inspection, then claims that faulty wiring, bad plumbing, or a leaky roof put the homeowner in danger. The alarmed homeowner agrees to unnecessary and over-priced work.

Demand for Cash

A contractor demands cash payments, sometimes going so far as to drive the victim to the bank to withdraw funds. With money in hand, the unscrupulous operator takes the money and runs.

Illegally Large Down Payments

A dishonest contractor takes more for a down payment than is reasonable, claiming to need instant cash for supplies and to pay workers. A down payment shouldn’t exceed 10% or $1,000, whichever is less, or reasonable to the size of the project after you have investigated the license/registration, and verified the references of the contractor.

Verbal Agreements

A contractor states that a written contract is unnecessary—promising to deliver on the verbal agreement. The shady contractor takes advantage of the situation to perform shoddy work or none at all.

[Ed.'s note: This information is provided via the State of Louisiana Licensing Board for Contractors, and may be found here.]

Every ten years or so the American Institute of Architects (“AIA”) issues a new set of contract documents for the construction industry. For many years these were the standard construction contracts. Today, these contract documents remain prominent, along with other industry leaders like the ConsensusDOCS.

In 2007, several AIA contract documents introduced a new term/actor: the Initial Decision Maker (“IDM”). This term is found in the A101-2007, the A102-2007, the A201-2007, and some lesser-used construction contracts. The IDM is similar to, but not the same as the project neutral in ConsensusDOCS. The IDM is the person who decides all disputes between the Owner and the General Contractor while work is ongoing. In previous iterations of these contract documents, the architect of record fulfilled these duties. Contractors were critical of that arrangement because they (rightfully) questioned the architect’s ability to impartially decide disputes given that the architect’s fees were being paid by the owner. Owners, on the other hand, often felt that architects should be favor the owner’s interests as a matter of fiduciary loyalty. In completion of the relationship triangle, architects often reported unease with having to make decisions that might go against the client/owner.

In response to those criticisms, the AIA created a new role – the IDM. This is not a mandatory position. In fact, if no IDM is appointed, the architect of record serves as the IDM.

The IDM can be anyone not a party to the construction document that the parties feel comfortable with. The person could be an architect, engineer, lawyer, diesel mechanic, an assistant manager at McDonald’s, etc.

After hearing a dispute, the IDM has 30 days to render a decision. If no decision is given within the 30 days or one party wishes to, the matter will be submitted for mediation. If mediation fails, binding arbitration often follows by default.

The intent of designating an IDM is quick, efficient, and cheap resolution of disputes. However, there are many issues with using an IDM also that should be addressed in the contract documents. These issues will be dealt with in later posts. But suffice it to say that the issues are significant enough for us to STRONGLY RECOMMEND that before you sign a contract designating an IDM, that you contact an attorney experienced in these matters.

ConstructLaw, L.L.C. provides contract reviews, and drafts construction contract supplements concerning IDMs and other issues. We also provide IDM services. If you have specific questions or needs, feel free to contact us at any of our myriad communication mediums (email: alan@myconstructlaw.com; phone: 318.841.1253; facebook: http://bit.ly/d0ef7o; twitter: http://www.twitter.com/myconstructlaw; or via our website: http://www.myconstructlaw.com).

[Ed.'s note: Many construction companies are some form of limited liability company, such as LLCs or LLPs. This post intends to briefly discuss how that liability shield can sometimes be removed. Please note that this is not Louisiana law-specific.]

By: Tyler Weaver

The corporate structure of your business will provide shelter for your personal assets. There are several events that will cause a judge to disregard the corporate entity or “pierce the corporate veil.” There are several reasons why the corporate veil may be pierced. There are also several easy steps you can do to avoid the corporate veil from being pierced.

The corporate veil can be pierced if a party is tricked or misled into dealing with the corporation rather than an individual. Whenever the corporation does correspondence with a third party, the officers and directors of that company need to make it clear that they are acting on behalf of the corporation and not themselves individually. All the documents need to clearly be entered into on behalf of the corporation otherwise there may be a conflict that could arise that would pierce the corporate veil.

If the corporation is set up to never make a profit or always be insolvent it is considered too “thinly” capitalized. This could be when the corporation is formed without sufficient capital to meet potential liabilities and debts. This often occurs when an individual or group of people uses a corporation as a form of shield from liabilities instead of a legitimate business.

When the corporation fails to follow corporate formalities where the corporation is located, it can be pierced. A few of the corporate formalities are meetings, minutes, stock ledger. If the corporate entity fails to do some of these duties the judge can rule that it is not a proper corporation.

The biggest mistake small corporations usually make is not keeping separate accounts for the corporation. If an individual moves funds from their bank account into the corporate bank account, and vise versa then the court will disregard the corporate entity.

If the corporation is engaged in illegal enterprise where it is ruled that the corporation was setup as a sole means for those involved to partake in an illegal activity, the corporate veil can be pierced. For instance, a corporation will not be tried for murder. The individuals responsible will be tried for it. The same thing can be applied for all kinds of cases such as drug trafficking, etc.

While it is possible for the corporate veil to be pierced, if you take the proper precautions when setting up your corporation you will help to protect your own personal assets. A few of the steps to protecting your personal assets are quite simple and some are even common sense. The important thing is that you take care when operating a business, and you get sound legal advice before doing anything questionable.

Author Bio
Tyler Weaver is a writer for Lawyer Locater and has written many articles on the subject of corporations.

[*Ed's note: We're referring to binding arbitration as simply "arbitration" for the purposes of this post.]

Quick and brief review of previous the problems inherent with traditional arbitration in construction contracts:

Arbitration has become “judicialized.” It is now more formal, costly, time-consuming, and subject to hardball advocacy than ever before. Though “court-like” arbitration has alienated many construction professionals, arbitration agreements have become typical, largely because of the AIA and ConsensusDocs contracts that dominate the construction industry. Finally, lawyers often strive to make arbitration even more like court trial through agreements for expanded judicial review of arbitration awards.

Note on all arbitration clauses:

When negotiating dispute resolution clauses, it is critical to bear in mind the potential need to enforce any decision in your company’s favor, so be certain that the clause is state and federal-law compliant. Most of the time so long as all parties agree in advance, the arbitration award will be upheld. But you just want to check to be sure.

General themes to consider:

1. Timing. When the dispute has arisen is already too late. Get consensus during the contractual phases/pre-construction meetings. Take the extra time then to figure this out – when everyone’s giddy about all the money they’ll make.

2. Specificity. One of the foremost advantages of arbitration is the flexibility it offers to participants. Take advantage of it! If you want court-like proceedings, our advice is to skip arbitration all together. If that is what you want, then this is not the post (or series of posts) for you.

In order to make the most of the promise of arbitration, contract drafters must move beyond a one-size-fits-all view of arbitration and make deliberate process choices based on client goals and priorities. Similarly, those who prepare tomorrow’s contracts must look “beyond the monolith” to understand that clauses that are essential in one dispute resolution setting may be detrimental in another.

3. Name names. Instead of simply designating which agency or arbitration provider shall arbitrate, write a name (or set of names) into the contract. We have found that parties can argue for months over simply deciding who the arbitrator should be. And for those disputes while the job is ongoing, the AAA process of choosing an arbitrator leaves much to be desired.

4. Fees. Set forth who pays the fees for the arbitrator. They could be equally shared, or (we suggest) the losing party pays the arbitrator’s fees.

5. Timing, Part Deux. Set a time frame for when disputes shall be arbitrated, and when an award will be given. For example, parties could set a time frame for a hearing to be within two (2) weeks of written request for arbitration. The parties would have one (1) week for the exchange of information, if any, and the arbitration would be held onsite. Discovery provisions could simply be that documents and people must be made available for copying or deposition if the opposing party requests it. If one side refuses a request, the arbitrator can take that into consideration when making the award. Finally, if more information is needed, the arbitrator can request it. On the date of the hearing, the parties can bring any witness, document, or produce any other evidence (that the arbitrator allows). The arbitrator must then make a written award within 7 days of the hearing. Viola! Within 21 days the issue is likely done. Now that’s faster, cheaper, and likely just as good as litigation!

Specific ideas to consider when drafting (consider some or all!):

1. Dollar threshold. Under a certain dollar threshold (we usually recommend about $100,000), streamline the process as suggested above. For disputes over that amount, perhaps give an extra week or two before the hearing, set forth more clearly discovery processes, and consider having a dispute review board (DRB), also called an arbitration panel. In this situation, put the names of three arbitrators into the contract for all the reasons mentioned above.

2. Define claim categories. Make clear delineation of claims subject to arbitration. The agreement should specifically state what types of claims will be arbitrated, and what types will not.

3. Discovery. In anticipation for discovery related issues that may (or will likely) arise, make sure that parties can gather sufficient information from the other side regarding their claims, just as they would be allowed to in a jury trial. [*This is a fine line here. Too much discovery will bog down the dispute resolution process. Too little may be inherently unfair. Tread lightly.]

4. Neutral arbitrators. Have a backup arbitrator in case of death, incapacity, unwillingness, or impropriety. Sometimes, an original choice for the arbitrator ends up representing one of the parties in an unrelated matter. This should immediately disqualify the arbitrator from hearing disputes on the project.

5. A provision requiring a written decision that contains sufficient detail to ensure meaningful judicial review.

Conclusion:

If you take one thing from this post, let it be this: if you want traditional litigation, don’t accept it’s kid brother. Be sure that you put in writing what you want, and how you want to get it. That’s the beauty of arbitration. It is whatever you make it (within reason).

ConstructLaw, L.L.C. is a law firm operating in Louisiana. Representation is not offered or legal advice given herein. For specific answers to your questions, contact us at: 318.615.9812 or alan@myconstructlaw.com

Ideal arbitration scenarios:

In many circumstances, arbitration is fantastic and does exactly what it purports to do – make better resolutions quicker and cheaper. For example, consider the following illustrations:

In a dispute between a seller and a buyer of widgets over the quality of widgets, the parties send for an expert in widget quality. The expert arrives a short period of time later and resoles the dispute. The expert is asked to decide because she is an expert in widget quality and is a part of the industry in which both buyer and seller are members. The parties may not be happy about the decision, but likely let it end the dispute.

Another setting for effective arbitration is an issue contained in a collective bargaining agreement. The union will present a grievance of a worker who may claim, for example, that she was wrongfully terminated. The grievance cannot be resolved by the union and employer, so they they call for the permanent arbitrator. The arbitrator is someone who has been previously designated as the decider of these disputes in the collective bargaining agreement. The arbitrator is likely someone who is respected in the industry and who is aware of the needs of the employer and understands the reasonable expectations of the workers. The arbitrator comes to the plan, hears each side’s witnesses, and makes a decision that day or within a few days. The arbitrator’s decision is followed by both parties.

In both examples, arbitration is terrific because it is quick and inexpensive – likely because the disputes are not exceedingly complex. The parties accept the decision even if they are not happy with it; no one goes to court. Unfortunately, construction disputes do not fall into similar patterns.

Arbitration in the context of construction disputes:

There are so many variables, industries, and issues in the construction industry that it is difficult to designate one expert for everything ahead of time. For example, disputes may involve simple technical matters, or some may require special testing. Other issues may deal with contractual matters. There may be quality control issues. And, of course, there are payment/reimbursement issues.

Some specific considerations:

1(a). If the job is now over, then questions arise dealing with transactions dating back several years. There could have been intervening conferences and/or settlements, and certainly the parties communicated with each other – perhaps modifying agreements. If it was a large project, there could be substantial amounts of documents to be researched and cataloged. And discovery (the production of documents and other evidence) has not traditionally been compelled, though that appears to be changing recently.

1 (b). If the project is current and ongoing, disputes need to be resolved quickly to keep things running. The correctness of the decision is less important to the project as a whole than simply getting a decision and moving on. Generally, that is why the American Institute of Architects (“AIA”) contract documents allow for the architect (or other) to be the Independent Decision Maker (“IDM”). The unhappy party (or parties) generally reserves its rights and seeks arbitration or litigation once the project is completed. [Ed.'s note: This approach is a band-aid. It's not bad, and it fills a need. But it postpones (and likely prolongs) the process. We have a better approach, which we will detail in Part 3 of this series.]

2. There are several separate entities involved in construction. Usually, one thinks of the traditional triangle of construction as owner-architect-contractor. However, there are usually many, many more involved, especially if it is a larger project. Subcontractors, materialmen, other suppliers, sureties, and multiple insurers are often involved.

3. Some construction projects may involve goods, services, or materials from multiple states, which may rise to interstate commerce. This is largely a significant legal designation because it indicates that such disputes may fall under either state or the federal arbitration statutes. What that means is that the award may be reviewable in either state or federal court, which may incentivise post-arbitration trips to the courthouse – which is what arbitration is designed to avoid in the first place!

4. The parties often choose an arbitrator or select from names provided by an outside organization such as the American Arbitration Association (“AAA”). In AAA proceedings, each party selects three names, the opposing party chooses three names, and the AAA eventually decides for each party who will be the arbitrator. In theory, arbitrators generally are chosen because they are fair-minded and have specific expertise in the subject of the dispute. The thinking is that these expert-arbitrators would need less education about the technical matters than would a judge or jury. Theory and practice, however, often are not the same. The arbitrators on the list provided may not really have technical knowledge of the specific subject. Further, as mentioned above, an expert in one field or area may not necessarily have the correct experience in all of the multiple areas in which construction disputes arise.

5. Finally, arbitration (and all ADR) works best when the parties have a continuing relationship and have reason to make arbitration work. If the parties are going to work together again, for example, each has incentive to be fair and reasonable. Construction companies do not usually have this incentive to make arbitration work.

Arbitration is becoming more like traditional litigation:

Unfortunately, arbitration (in general) is becoming more like traditional litigation and less like the transformative, faster-better-cheaper dispute resolution mechanism it is intended to be. There resolutions achieved may be fair but the possibility of saving the parties time and money are diminished. The main reason for this is because attorneys for both parties attempt to utilize some of the more time and cost-intensive techniques of litigation. For example, they will often introduce numerous exhibits, question witnesses over and over about the same subject, asking leading questions, and making “for-the-record” objections.

It is nearly impossible to compare the time and expense of arbitration with the duration and cost of litigation because the same dispute never goes through both processes. We can only guess what it might cost to either litigate or arbitration a particular construction dispute. It seems clear, however, that importing litigation techniques into arbitration is costly and takes time.

These changes require one to ask, “If the justification for incorporating an arbitration clause in a construction contract is to obtain a speedier resolution at less cost, why are so many lawyers trying to transform the arbitration process into litigation?”

The answer is a complex one. A number of commenters, most prominently Justin and Jonathan J. Sweet, feel that arbitration in construction contexts largely because of the arbitration clauses (which were mandatory until 2007) contained in AIA contracts.*

* Sweet, Justin and Sweet, Jonathan J., “Sweet on Construction Industry Contracts: Major AIA Documents.”Aspen Law & Business, New York, NY, 1999.

So should you insert an arbitration clause into your contracts?

Here is where we give the ubiquitous attorney answer: “It depends.”

It depends on the parties, the likely disputes, the size of the project, the arbitrator chosen, and on a number of other factors.

What we will say is this: if done properly, arbitration can be very successful and efficient as a way to deal with the disputes that inevitably come in the construction industry. But it is not the great panacea for all disputes that some make it out to be.

The truth is that, for a large number of disputes, standard arbitration clauses are not going to result in quicker or cheaper outcomes. We believe that the results will be fair due to the general good work that arbitrators perform. But companies and individuals who enter contracts with standard arbitration clauses shouldn’t think they are agreeing to a faster and cheaper dispute resolution system.

In our next post, we’ll detail specific ways to tweak arbitration clauses that will ensure quick and timely resolutions. We believe that arbitration, as an idea, remains viable. We just have to do a better job of articulating how it will be applied to the specific problems that arise.