The Seattle and Bellevue real estate markets have been a magnet for large condominium, apartment, and hotel towers over the past several years, and the continued number of building applications to both municipalities’ building departments indicate that the construction boom is not over yet.
As Washington developers work to finance, plan, and design their next developments, Canadian product manufacturers and suppliers are presented with a buffet of lucrative business opportunities for some of the largest and most innovative structures in North America.
Construction is a risky business. Because Washington-based developers and contractors are perhaps more litigious than their Canadian counterparts, it behooves Canadian-based product manufacturers and suppliers to consider a full spectrum of risk management and mitigation strategies before engaging in cross-border business activities.
This article provides a high-level checklist of tools to consider before embarking on your first project in Washington.
Business Entity Formation
Before beginning any business, individuals should consult with an attorney about the nature of their proposed business, where to incorporate, what type of entity to select, how many business entities are needed to support their business’s operations, and the tax implications of their business’ organizational structure.
Business entity formation is especially relevant for Canadian-based businesses that may want to form a Washington business entity for cross-border projects. The most popular entities for product manufacturers and suppliers are either a S- or C-corporation or a limited liability company, based on the business’ source of capital, size of operation, tax structure, and preference for limited liability.
Establish and Maintain Corporate Formalities
In the world of product manufacturers and suppliers, it is common for an individual or a parent entity to own several subsidiaries – each representing an essential part of the supply chain.
For example, a window company may form (i) a first entity to manufacture insulated glass units, (ii) a second entity that assembles the insulated glass units into window frames, and (iii) a third entity that purchases the final window products and sells them to third parties or contracts with a subcontractor for installation at a specific project.
To maintain the benefits of limited liability, corporate formalities must be followed, including but not limited to holding regular meetings and special meetings; the creation and maintenance of corporate records; adopting bylaws, articles of incorporation, or other governing documents; separation of personal and corporate bank accounts; and adequately funding and insuring each entity.
Moreover, to the extent an upstream entity actively engages with a downstream entity, it may be prudent to execute an arms-length agreement that defines the roles, responsibilities, liabilities, and transactions between the entities.
Product manufacturers and suppliers should confer with their insurance broker regarding the types, limits, and durations of coverage needed for each entity’s operations.
Likewise, they should also consult with their attorney regarding each entity’s exposure in the event of a claim. To the extent an entity holds significant assets or engages in a higher volume of projects, it may be prudent to purchase excess insurance policies to mitigate the risk of a claim that results in a settlement or judgment.
Product manufacture and supply entities should purchase commercial general liability coverage to cover claims related to personal injury and property damage arising out of products they manufactured or supplied.
Distributors should contractually require that they be listed as an additional insured on the upstream manufacturer’s insurance using a standard ISO Vendor’s endorsement. To the extent a company installs its own products, it may be eligible to enroll in a project’s owner-controlled insurance policy (“OCIP”) or contractor-controlled insurance policy (“CCIP”), which provides coverage similar to a commercial general liability policy for all parties who work on a project.
OCIP and CCIP policies usually do not cover parties for work off-site – including transportation, product manufacture, and supply companies and most general liability policies exclude coverage available to their insured for any liability arising out of a project anytime the insured is covered by an OCIP or CCIP.
Quality Assurance and Quality Control Procedures
Next, it is time to focus on the product. Hazards and risks can often be controlled or eliminated by proper quality assurance and quality control procedures. Companies should seek to ensure that their products comply with or exceed industry and government standards.
Once these standards are established, review and analysis of product performance and safety in light of these standards should happen early and often. Relatedly, manufacturers should establish quality control procedures and a corresponding document retention policy so they can prove their compliance with these standards and procedures in the event of a claim.
Review Your Supply Contracts
A product supplier should engage an attorney to review its supply agreement’s general terms and conditions to ensure that the contract complies with the laws of the jurisdiction where the project is located and contains supplier-friendly terms.
Key provisions to review include scope of work; payment; changes; insurance; indemnity; actual, liquidated, or consequential damages; dispute resolution; warranty and attorneys’ fees. Allocating risk to the party best-equipped to shoulder the risk is helpful in the event of a claim so the parties are in control and the decision is not left to a third-party decision maker.
Suppliers’ Lien Claims
In Washington, a construction lien is a useful tool for a supplier to secure payment for materials it furnishes to improve private real property. Chapter 60.04 of the Revised Code of Washington governs construction liens within this context.
Only first-tier suppliers may have lien rights; second-tier suppliers and manufacturers do not. Parties must comply with various time-sensitive notice, recordation, and service requirements to preserve their lien rights. If left unpaid, the lienor may proceed to foreclose its lien against the project and recover amounts owed based on the priority of its lien interest.
The uncertainty and risks associated with manufacturing and supplying products for major projects are significant because of the numerous opportunities for design, supply, transport, and installation error.
Fortunately, Canadian-based product manufacturers and suppliers can mitigate their potential losses by insulating themselves with the best corporate entities; establishing corporate formalities; purchasing the correct types, limits, and durations of insurance coverage; and ensuring compliance with quality assurance and quality control procedures.
This checklist forms an effective blueprint for mitigating future risks and liabilities so your company can continue to focus on producing a quality product for its customers.
Loni L. Hinton is an associate attorney in Stoel Rives’ Seattle office and practices with the firm’s Construction and Design group. Hinton assists clients with risk management, contract drafting and negotiation, course of construction disputes, and construction defect claims. Send Industry Voices comments or questions to email@example.com.