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Risk mitigation tools for Canadian firms raising Seattle’s skyline

Risk mitigation tools for Canadian firms raising Seattle’s skyline

Canadian developers continue to make headlines as their skyscrapers expand Seattle’s skyline. Multiple British Columbia companies broke ground on Seattle-metro tower projects in 2019. More high-rise projects are slated through 2020. Because Seattle is amid one of the longest economic booms on record, it is unsurprising that Canadian developers are capitalizing on the lucrative market. While remunerative development opportunities currently abound, cross-border development projects are not without risks. This article provides Canadian developers with an overview of important risk-mitigation tools to consider before engaging in cross-border developments.

Before beginning a cross-border business venture, developers should strategize about the nature of the proposed business, the type of entity to select, the number of business entities needed to support the business’s development strategy, where to incorporate, and the tax implications of the business’s organizational structure. An appropriate entity selection will consider the business’s source of capital, size of operation, tax structure, and preference for limited liability.

Insurance is one of the most powerful risk-mitigation tools available to developers. Developers should confer with their insurance broker regarding the types, limits, and durations of coverage needed for each of its business entities’ 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 larger number of projects, it may be prudent to purchase excess insurance policies to help mitigate the risk of a claim resulting in a settlement or judgment.

It is critical that foreign businesses review their coverages to ensure that their policies’ coverage territory applies to their development’s location. The standard ISO commercial general liability form provides three separate coverages: Coverage A for bodily injury and damage to property, Coverage B for personal and advertising injury liability, and Coverage C for medical payments. Each of these coverages refers to a particular coverage territory. It is not uncommon for a primary policy’s coverage territory to include the United States and Canada. However, some policies are silent as to where coverage applies. The absence of a defined coverage territory is common in some umbrella policies. Therefore, developers should never assume that their current insurance coverages apply to cross-border projects.

Cross-border developers must exercise caution when selecting a project-delivery method. This is particularly important when the developer lacks familiarity with the jurisdiction or the scope of the project. For example, a developer with less experience in a particular area may benefit from the collaborative design-build process more than a seasoned developer that has a clear vision for its project and merely needs to engage a contractor for the construction phase of the project.

In general, Washington state construction titans tend to favor the flexibility of the design-build delivery method. Design-bid-build and general contractor/construction manager methods are also widely utilized. Regardless of the project-delivery method selected, contracts should be drafted to incentivize collaboration. Requiring frequent discussions with the owner during the design and construction phase, a periodic schedule of submissions from the contractor, and unambiguous dispute resolution provisions will facilitate frequent communications and help preserve the parties’ relationship throughout the project.

A limited subset of risks is insurable. Fortunately, well-drafted construction contracts can allocate uninsurable risks to the party best suited to shoulder them. It is prudent to consider these risks early in the negotiation process, and before the parties begin designing or constructing the project. Often, developers will become wedded to their designers and contractors before their contracts are executed, thereby weakening their bargaining position as the project progresses. Key provisions include scope of work; payment; changes; insurance; indemnity; actual, liquidated, and consequential damages; dispute resolution; and warranty and attorneys’ fees. Reviewing these provisions at the project’s outset is advantageous to developers and helps ensure the final contract fairly distributes risks between the parties.

Washington’s lien statute exposes developers to potential liability for lien claims against their projects. Therefore, Canadian developers should familiarize themselves with Washington’s lien statute prior to beginning development. Revised Code of Washington 60.04.021 entitles providers of “labor, professional services, materials, or equipment for the improvement of real property” to payment for their services. Developers should consider contract clauses that can mitigate lien risk, such as monthly lien waivers and indemnity from the prime contractor against subcontractor and supplier liens.

Canadian developers looking for new opportunities should evaluate the risks associated with Washington projects early so they can reasonably mitigate future liabilities and capture cross-border development opportunities.

 

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.

Danika L. Duffy is a 2019 summer associate at Stoel Rives.

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