Contract Risk Management for Airport Agreements (2016)

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14 3 Specific strategies, legal and regulatory conditions, and the objectives, advantages, and disadvantages associ- ated with the use of private-sector companies for airport maintenance services are discussed in ACRP Report 36: Airport/Airline Agreements—Practices and Characteristics, TransporTaTion research Board (2010), http://onlinepubs. trb.org/onlinepubs/acrp/acrp_rpt_036.pdf. which they procure a subcontractor default policy to cover the defaults and deficiencies of the subcontrac- tors. This is a risk that a contractor carries, but the coverage does provide an ancillary benefit to the airport owner, as a carrier will step in to cover a sub- contractor default. As the airport owner is generally well protected by bonds and insurance coverage on the contractor, this additional level of coverage is not typi- cally something the airport should pay for or require. e. Bonds.—Most states require public construc- tion projects to be secured by payment and perfor- mance bonds. These bonds provide an additional layer of security that the construction contract will be faithfully performed and that all subcontractors and suppliers will be paid. The bonds are triggered when a contractor defaults. Even absent a state law requirement, it is strongly recommended that air- port owners bond all public improvement projects, as every construction project carries risk, and recovery from a contractor in default can prove to be difficult. If permitted by state law, the performance bond should have explicit language providing for recovery of not just actual damages, but any incidental and consequential damages, liquidated damages, and attorneys’ fees and costs, in the event of a default. The performance bond should also provide coverage for latent construction defects for a period that is commensurate with the exposure of the contractor for such deficiencies. Not all states automatically interpret performance bonds to cover latent defi- ciencies arising postcompletion. C. Repair/Maintenance Agreements Repair and maintenance agreements are essen- tial to ensure that the airport’s operational equip- ment and premises continue to function effectively, reliably, and safely.3 Equipment such as automated people movers, lift systems, and jetway bridges are integral to successful airport operations. When items like these are not repaired or maintained properly, other airport operations are stressed and overused, causing an unwanted and costly ripple effect on the rest of airport operations. As a consequence, the primary risk associated with repair and maintenance agreements is the impact to operations and damages associated with the subject equipment being out of operation for any length of time. Identification of Risk 1. Standard of Care/Faulty Work.—Quality and routine maintenance can prevent accidents and a shutdown of activity. When repair is needed, quality and prompt repair can similarly prevent future maintenance or repair issues or prolong the need for such maintenance or repair. All of these elements protect an airport from unnecessary liabilities and costs. It is therefore important for every repair and maintenance agreement to succinctly define the standard of care. Example/Sample Provision The following is an example of how the standard of care or faulty work may be addressed to mitigate risk in a repair and maintenance agreement: 4.2.1. Standard of Performance Contractor shall perform the Services with that degree of skill and care required to satisfactorily meet the require- ments as set forth in the Detailed Specifications and to the satisfaction of the CPO [Chief Procurement Officer]. The Contractor will, at all times, act in the best interest of the City [Owner]. 4.2.8. Work Performed on City Property Contractor’s personnel will exercise safe and sound busi- ness practices with the skill, care, and diligence normally shown by professional technicians employed in the type of Services required under this Contract. The Contractor will employ only competent and efficient employees, and when- ever, in the opinion of the Commissioner, any employee is careless, incompetent, obstructs the progress of the Ser- vices, acts contrary to instructions or conducts themselves improperly, the Contractor will, upon the request of the Commissioner, remove the employee from the premises and will not employ such employee again for the Services under this Contract, except with the written consent of the Com- missioner. While on City premises, the Contractor will not store any equipment, tools or materials without prior writ- ten authorization from the Commissioner. The City will not be responsible for or liable to pay the Contractor for any loss of equipment, tools or materials stored in unsecured areas without proper authorization. See Appendix C-1, Chicago O’Hare/Chicago Midway Airports. Appendix C-1 provides a survey of additional con- tractual provisions used by other airports to address standard of care or faulty work. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to standard of care or faulty work: • Claim presentation requirements. • Pre-suit mediation or tiered-negotiation. • Litigation or arbitration. • Consideration of Advanced ADR or Dispute Resolution Boards for larger, complex construction or infrastructure projects.

15 2. Liability and Damages.—Maintenance and repair agreements should explicitly provide for the recovery of all “consequential” damages, when pos- sible. Consequential damages that arise from an unnecessarily extended period of downtime for the equipment at issue will almost always be the largest damage that arises from repair or maintenance. This being said, some specialty or unique equipment can have such a monopoly on the market that there may be an attempt to negotiate limitations on conse- quential damages. These limitations should be avoided whenever possible. A compromise could involve capping liability for consequential damages to a heightened but specified amount, which could include the limits of insurance coverage. Although it is not recommended that any damages be waived or limited, in the event such compromise is necessary, the limitation or capping must be reasonably com- mensurate with the equipment’s nonmonetary value, and there must be a clear assessment of worst-case scenario events. Example/Sample Provision The following is an example of how the liability and damages may be addressed to mitigate risk in a repair and maintenance agreement: 4.1. The Contractor shall be responsible for the prompt pay- ment of any fines imposed on Authority or Contractor by the FAA [Federal Aviation Administration], Transportation Security Administration (TSA) or any other federal, state or local governmental agency as a result of Contractor’s, or its subcontractors (or the officers’, directors’, employees’ or agents’ of either), failure to comply with the requirements of any law or any governmental agency rule, regulation, order or permit. The liability of the Contractor under this Section 4 is in addition to and in no way a limitation upon any other liabilities and responsibilities which may be imposed by applicable law or by the indemnification provisions of Sec- tion 5 hereof, and such liability shall survive the expiration or earlier termination of this Contract. 4.2. The Contractor’s liability to Authority hereunder shall be limited to Ten Million Dollars ($10,000,000.00).* In addi- tion, neither party shall be liable for indirect or consequen- tial damages arising out of this Agreement. Such limitations and exclusions shall not apply (a) to claims for bodily injury or death (including obligations of indemnification from claims against the Authority for bodily injury or death) and (b) to claims arising under Section 5 hereof (Indemnifica- tion and Insurance) and related insurance obligations. 4.3. The Contractor shall not be responsible for any costs, damages or losses of any nature whatsoever, including but not limited to delays, penalties, outages or downtime, aris- ing from or caused by work being performed under Contract BPS-10Q, whether or not caused by the act or omission of a party to that Contract or a third party, except for Contrac- tor’s and its subcontractors’ percentage of fault, if any, for such costs, damages, losses, delays, penalties, outages and downtime. See Appendix C-2, Orlando International Airport. *Note that this damage limitation was a non-negotiable for the vendor and, due to the complexity of the service, was required. This provision exemplifies how to limit damage caps to insurance coverage. Appendix C-2 provides a survey of additional con- tractual provisions used by other airports to address liability and damages. Methods to Contractually Mitigate Risk The following is a key issue to consider when drafting or reviewing a contractual provision related to standard of care or faulty work: • Consider capping liability for consequential damages to a heightened, but specified, amount if unlimited consequential damages are not available. 3. Dispute Resolution.—Due to the highly techni- cal nature of most foreseeable disputes, mainte- nance and repair agreements should provide for pre-suit dispute resolution options, such as manda- tory pre-suit formal discussions and mediation or arbitration. Because highly technical matters might be better suited to arbitration with a panel of industry experts, mandatory arbitration should be carefully considered. In any event, the contract should pro- vide that, during the pendency of any dispute and at the owner’s option, the provider should continue to perform its obligations under the contract. This will help to prevent additional equipment from falling into disrepair and prevent consequential damages from accruing. Example/Sample Provision The following is an example of how mandatory mediation may be used to mitigate risk in a repair and maintenance agreement: 2.7 In the event of any dispute under or in connection with the Contract, authorized representatives of Contractor and Authority shall meet in person in Orlando, Florida, no later than fifteen (15) calendar days after delivery of either party’s request for a face-to-face good faith negotiation. If the parties meet and the dispute cannot be resolved within fifteen (15) days after commencing good faith negotiations, either party may declare an impasse and the parties shall proceed with the dispute resolution procedure set forth below. 2.7.1 If a dispute arises concerning this Contract which can- not be resolved by the procedure as set forth in Section 2.7 above, then each party shall submit a written statement of its contentions to a certified mediator designated by the Authority’s Executive Director, within fifteen (15) days after the end of the forty-five (45) days after either party’s request for a meeting under the provisions of Section 2.7. 2.7.7 Unless otherwise agreed in writing, the Contractor shall carry on the Work and maintain its progress during any court proceedings or arbitration, and the Authority shall continue to make undisputed payments to the Con- tractor in accordance with the Contract Documents. See Appendix C-3, Orlando International Airport.

16 Appendix C-3 provides a survey of additional con- tractual provisions used by other airports to address dispute resolution. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to dispute resolution: • Consider mandatory arbitration before an expert in highly technical services. • Require ongoing performance of obligations while dispute is pending. 4. Indemnity.—Airports are frequently sued by parties injured or damaged as a result of improperly maintained equipment. Personal injuries to mem- bers of the public or property damage to a tenant are common consequences. A broad indemnity provision is critical to limit risk and shift it to the appropriate parties, and if allowed by state law, also to require a duty to defend. Example/Sample Provision The following is an example of how indemnifica- tion may be addressed to mitigate risk in a repair and maintenance agreement: Contractor must defend, indemnify, keep and hold harmless the City [Owner], its officers, representatives, elected and appointed officials, agents and employees from and against any and all Losses (as defined below), including those related to: (i) injury, death or damage of or to any person or property; (ii) any infringement or violation of any property right (including any patent, trademark or copyright); (iii) Contractor’s failure to perform or cause to be performed Contractor’s covenants and obligations as and when required under this Agreement, including Consultant’s failure to perform its obligations to any Subcontractor; (iv) the City’s exercise of its rights and remedies under this Contract; and (v) injuries to or death of any employee of Contractor or any subcontractor under any workers com- pensation statute. “Losses” means, individually and collec- tively, liabilities of every kind, including monetary damages and reasonable costs, payments and expenses (such as, but not limited to, court costs and reasonable attorneys’ fees and disbursements), claims, demands, actions, suits, pro- ceedings, judgments or settlements, any or all of which in any way arise out of or relate to the negligent or otherwise wrongful errors, acts, or omissions of Contractor, its employ- ees, agents and subcontractors. At the City Corporation Counsel’s option, Contractor must defend all suits brought upon all such Losses and must pay all costs and expenses incidental to them. However, the City has the right, at its option, to participate, at its own cost, in the defense of any suit, without relieving Contractor of any of its obligations under this Contract. Any settlement may only be made with the prior written consent of the City Corporation Counsel, if the settlement requires any action or obligation on the part of the City. To the extent permis- sible by law, Contractor waives any limits to the amount of its obligations to indemnify, defend or contribute to any sums due to third parties arising out of any Losses, including but not limited to any limitations on Contractor’s liability with respect to a claim by any employee of Contrac- tor arising under the Workers Compensation Act, 820 ILCS 305/1 et seq. or any other related law or judicial decision (such as, Kotecki v. Cyclops Welding Corp., 146 III. 2d 155 (1991)). The City, however, does not waive any limitations it may have on its liability under the Illinois Workers Compensation Act, the Illinois Pension Code or any other statute. The indemnities in this section survive expiration or termina- tion of this Contract for matters occurring or arising during the term of this Contract or as the result of or during the Contractor’s performance of work or services beyond the term. Contractor acknowledges that the requirements set forth in this section to indemnify, keep and save harmless and defend the City are apart from and not limited by the Contractor’s duties under this Contract, including the insurance requirements set forth in the Contract. See Appendix C-4, Chicago O’Hare/Chicago Midway Airports. Appendix C-4 provides a survey of additional con- tractual provisions used by other airports to address indemnity. Methods to Contractually Mitigate Risk The following are key issues to consider when drafting or reviewing a contractual provision related to indemnity: • Use broadest language possible. • Require duty to defend where permitted. 5. Extension and Termination.—Because mainte- nance and repair agreements are, by their nature, continuing agreements, extension periods and ter- mination are important provisions that must be carefully written. The number of extensions should be explicit, provide the method for invoking an extension, and avoid automatic, indefinite exten- sions. A maintenance and repair agreement will ide- ally provide for immediate termination by the owner for cause or violation of the contract terms, which can include bankruptcy of the owner, a force majeure event not remedied within a certain amount of time, or a violation of the law by the provider that may have a material adverse effect on the maintenance or operation of the facilities. The agreement should also provide for termination by the owner for other reasons, with a notification period. These “other rea- sons” can include the provider exceeding the owner’s budget for reimbursable costs or simply that the owner does not wish to extend the agreement. These extension and termination provisions allow an air- port to control risk scenarios and manage mainte- nance costs without breaching the contract. Example/Sample Provision The following is an example of how termination may be addressed to mitigate risk in a repair and maintenance agreement: