Construction Contract Terms You Need to Know

Is a Verbal Agreement Valid?

A common but mistaken belief is that a verbal contract isn’t any good and can’t be enforced.  This is not true.  In Florida, and in many other states, a contract need not be in writing to be binding.  

Whether written or oral, any agreement just needs to have three elements to be a real contract.  You need an offer, acceptance of that offer, and consideration for the deal.  Here’s a simple illustration.  You offer to paint someone’s house for $5,000.  The customer agrees and you both shake on it.  The deal gets formalized once payment of the $5,000 is made from the customer to you.  

There are certain agreements which must be in writing.  In Florida these include contracts for the sale of real estate or contracts that will take longer than one year to complete.  

And while oral contracts can work in many instances, it is always best to formalize any agreement in writing and avoid the possibility of any future confusion in what was agreed to. 

Sound Contract Practices

You might be surprised to learn how many business people with a dispute don’t have any written agreement to back up their claim. Sound contract practices protect your company. It’s well worth sticking to these principles any time you agree to a job.

Write it down.

Any contract you have should be in writing. Thorough is better than brief, but something is far better than nothing. An agreement can be handwritten or electronic. It could be an email exchange that shows agreement to outlined terms and conditions. A recent legal ruling found a text message created a valid agreement between two parties. A contract doesn’t have to be notarized or be an original copy to be valid. The more complete the better, but just make sure you have your agreement in writing.

Don’t automatically sign another’s contract.

Someone else’s contract is likely designed to protect them, not you. It’s better to review and amend someone else’s contract rather than just signing off. Don’t be intimidated by formal language or assume it offers you protection.

Be cautious about “standard” contracts. If someone tells you, “This is what we use for all our jobs,” that doesn’t mean it’s fair. Do not sign without reviewing and amending if necessary. Some favor contracts produced by trade organizations such as the American Institute of Architects. Those are relatively fair to all the parties involved, but could still be made better. Don’t sign blindly.

Clearly define the scope of work.

Whether it’s materials, materials and labor, or just labor, be very clear in defining your work. When someone hires you, he wants a broad definition of the work that you are going to perform. He wants to have all the opportunities that may exist in the contract to say, “This is within the scope of your work,” even if it’s somewhat vague.  In contracts prepared by AIA or others, there may be a statement making you responsible for all work that is shown in the plans and specifications, as well as all work that is “reasonably inferable.” Under those terms, if a “reasonable person” believes that something should be part of your work, a judge could determine that to be the case. This can expand the scope of your work beyond what you intend.

When sophisticated owners define scope of work, sometimes they include all the pages of the entire plan and specifications – plumbing, architectural, structural, mechanical, etc. Be wary. If you are an electrician, you want just the plan’s electrical pages defining your scope. But they may want to hold you responsible for all electrical issues in the entire plan. If something is left off the electrical plan, but it is included in the mechanical plan as an electrical item, unless you have limited your scope you could likely be deemed responsible and have to include it for the same price.

List all exclusions.

There are things you don’t do in the scope of your work. Have a list of exclusions prepared and be able to itemize what is not included in your price or scope. Include that list of exclusions and limitations as an exhibit in your contract.

Understand the change order process.

Ideally, you’ll do extra work on a contract only after there’s an agreement on a change order – scope, price, and timeline changes fully defined – and the agreement is memorialized and signed. When you review a contract or generate one yourself, make sure you understand the change order process and, most importantly, follow it.

Most general contractors with their own contract specify that you can’t do any work without getting a signed and approved change order in advance. However, in such a contract it also likely states that if you are asked to do further work, you agree to keep separate, detailed records of that work and submit the bill. It will be determined later whether it was extra work and whether there was an impact on the schedule and cost, based on your records.

Therefore, if you don’t segregate your own records for the change order work and process, it will be difficult to submit pricing. The contract should state that if you are asked to make a change, the contractor or owner need to verify that change. Generate and submit a change order before you do the work. If it’s rejected, ask for a change directive from the contractor. Either way, you need a paper trail associated with the change.

Verify the schedule.

Closely review any schedule in the contract to make sure it’s achievable. Does the contract include a penalty for failing to perform the work in a timely manner? A provision for “liquidated damages” means a per-day penalty for not performing your scope of work on time. Consider adding some sort of buffer to your agreement, a 30-day window before those damages would kick in. If the contract doesn’t call for liquidated damages, you might still be liable for actual damages. That could mean any employees hired and kept on standby to cover your incomplete work, or profits that were lost because the project wasn’t completed on time.

Understand payment terms.

How will you be paid and when? You need to clarify these points in advance so you aren’t surprised later.  Are you to be paid within 30 days of your payment application; are you agreeing to a pay-when-paid or pay-if-paid clauses – they’re not the same and both are problematic.  Is there a retainage and when will that be released?

Refine the dispute resolution procedures.

Disputes can happen during a job, not just over its end result. Four steps should be included your contract. First, those associated with the dispute should have an in-person meeting to attempt to resolve it. If that initial meeting doesn’t work, the second step is mediation. Both parties would meet, splitting the cost of a neutral, mutually agreed-upon third party mediator who will try to mediate, or facilitate, an agreement.

The third and fourth possibilities are mutually exclusive. You can take a case to a judge or jury to be decided, which can take anywhere from eight to 24 months and be expensive, or you can choose arbitration. Arbitration means the disputing parties hire one to three arbitrators (perhaps a former judge, contractor, engineer, and/or lawyer) who get paid as professionals to decide the matter. Arbitration may be faster than a trial, but there are additional costs associated with this method of resolution, and an arbitration decision is not generally appealable.

Make sure the winner gets legal fees.

There are two ways in most states to recover legal fees. First, when someone is sued for violating a statute, typically the winner is awarded their legal fees. The lien and payment bond statutes are among those providing for this. Secondly, if you have a written contract, that contract can include the necessary language to ensure that the prevailing party is entitled to recover legal fees. Because litigation is so expensive, make certain your contract includes this provision, should you need to go down this road.

Contracts are no place to cut corners. It doesn’t have to be complicated, but your contract must be in writing, thoughtful and thorough to give your work and your company the proper protection.

Contract Signatures – how to do it right

After you finalize your estimate for remodeling work requested by the husband and wife homeowners, you make an appointment to present your proposal. When you arrive with your paperwork, only one spouse is available. He agrees with your numbers and signs your construction contract. Should you start work or insist that both he and his wife sign your agreement?

You would do well to insist. Not having both signatures on a home improvement contract could be a costly oversight. Here’s an illustration.

One residential contractor, who had only obtained the signature of one spouse, filed suit against both husband and wife when he wasn’t paid all that he believed was due. Both owned the house where he performed his work. But to his surprise, this contractor discovered he could only sue both spouses if he had a lien in place.  That is the law in many jurisdictions. If only one spouse enters into a contract for improvements to real property, the contractor’s options are to either sue that one spouse under the contract or hope the applicable lien law will allow the non-contracting spouse’s interest in that property to also be encumbered. This assumes the property is owned by at least one of them, the couple is not living apart, and the contractor has a valid lien in place.

Unfortunately, the contractor in our example did not timely file his lien. So all he could do was to pursue his contract rights. The signed agreement created personal liability for the husband but not the wife. Okay you might think, that’s not so bad. Well in this case the husband was actually unemployed and deep in debt. The only real asset was his ownership interest in the house and that would not be attachable without a valid lien. Ouch.

There are any number of stories retelling homeowners’ surprise when residential contractors wouldn’t even make an appointment for an estimate without a commitment that both spouses would be present.  This is clearly an extreme position, running the risk of actually offending the customer –the wife for one could easily perceive the contractor as being sexist. Better to request that both spouses be available at the time of contract signing by explaining that this is company policy so as to properly protect the contractor’s future lien rights, if ever needed.

And what about those signatures, do they have to be originals for you to be able to enforce your contract? Not these days when electronic signatures are recognized in most all jurisdictions as originals. The number of worldwide e-signature transactions jumped ten fold since 2012 to over 800 million. The benefits are obvious. You no longer have to wait on folks to sign off on your proposals and return an original for your files.

That said, obtaining electronic signatures is generally best accomplished through a third party service such as DocuSign or RightSignature. Such an approach minimizes the opportunity for fraud, can store completed documents in the cloud, and allow the quick and easy transmission of a signed contract to the intended recipient.

Pricing a job correctly is an important first step for any contractor. Finalizing the contract properly with the right number and type of signatures will seal the deal.

I don’t have an original signature on my contract, should I be worried?

The average person believes that if a signature or document isn’t in its original form then somehow, it is going to be challenged in court, or the signing party can argue that it is not authorized or it is a forgery. All of that is possible, but having litigated hundreds if not thousands of cases in our Miami construction law firm over the last twenty-five years, we can tell you that it is astonishingly rare we receive claims from a signing party that the document is not an original, or that the signature is not an original. Most times, all we present as evidence in court is a photocopy of the actual document, and it is very rarely challenged.

What can you do to protect yourself if you don’t have an original?

Try to obtain correspondence surrounding the transmission of the document to show that the person that provided it to you knew that it was coming from or going to their office. Let me give you a practical example of what I mean.

Some months ago, we had a case involving one of our clients, a subcontractor. The contractor claimed that the change orders that were part of our claim were not authorized, even though they were signed by the contractor’s project manager. Not only did we have the executed change order with a signature (we presented a copy because everything was electronic), but we also attached email correspondence surrounding the change orders that went to most of the contractor staff, including the contractor’s president. And in addition, of the same people including the president of the construction company were copied with the signed change order we received from the contractor. Importantly we were also able to show, no one argued or complained at the time about the document.  So, when we were able to present all of these pieces of evidence that the change was not only authorized, but that they knew about it, their arguments melted away.

So, the first thing to do to protect yourself is to make sure that you obtain correspondence to and from the people that authorized the transaction, whether it’s a change order, a release, a waiver, whatever document that it may be, showing that the people who need to receive the document are shown on the email chain, and they receive copies and related correspondence.

The second thing you can do to protect yourself is to see if your contract requires only certain people execute the particular document. For example, many construction contracts state that only the project executives have the authority to order new work or sign change orders. If you have a contract that says that you need to make sure you have those people execute the document. Know that if the authorized person doesn’t sign the document, you may run a risk later that the document will not be considered to be properly authorized.

Is the Signed Agreement Valid?

You think you have an understanding. So you prepare and sign an agreement with all the key points, and send it to the other side for signature. You even add a provision, asking that the document be signed and returned by a particular date. What if it isn’t; do you still have a deal? Someone, whose agreement contained the following provision, recently asked the court the same question:

The parties had proceeded as if a deal was in place even though no signed agreement was returned by the stated deadline. Two months later though, when a dispute arose, one of the parties asserted for the first time that there was no agreement. He argued that he hadn’t ever received back a signed copy by the July due date. He demanded the return of the deposit he had paid. When he didn’t get that back, he filed a lawsuit.

How many signatures do you need?

You might think this would be an open and shut case. The agreement wasn’t received back in time so what was there to argue about? However, the court determined that while the agreement may not have been delivered back timely, it had been accepted. Yes, it had been sent after the deadline, but no objection was raised either at the time of receipt or any time thereafter. The facts actually revealed that the parties had gone about incorporating changes to the agreement, even creating an addendum which was signed sometime later by each of them, all after the noted deadline.

Simply having a drop dead date in an agreement, even one stating there would be no deal if a signed copy is not received or signed by a particular date, isn’t going to be effective if the parties subsequently waive that requirement by their actions. In most instances, the law looks at what the parties have actually done not just what they wrote.

No Deal, Not Until Everyone Signs

Florida courts have consistently held that a settlement agreement resulting from a mediation will not be enforced without the signatures of both the attorney and the client. The fact that an attorney may have signed on behalf of his client or in the presence of his client is not sufficient to overcome the legal requirement that such an agreement also have the client’s signature.

A recent appellate decision upholding this long established position grew out of a case brought by a lawyer who sued for unpaid legal fees. The amount in dispute was some $25,000. While the parties (the former lawyer seeking his fees, the client who owed the fees, and the client’s new attorney) had attended a mediation, they couldn’t reach an agreement after three hours of settlement discussions.

Mediated Settlement Agreement: is it Valid?

They did, however, agree to continue seeking a resolution. Some time later, the former lawyer filed a Motion for Final Judgment, attaching what he referred to as a Mediated Settlement Agreement, calling for monthly payments over a period of time, with the usual provision that if the client didn’t make the promised payments, the lawyer could obtain a final judgment. Apparently, the client’s new attorney and the former lawyer had signed this agreement but the client had not. The representation to the court was that the client had orally agreed to the terms of the Mediated Settlement Agreement, and the court granted the Motion for Final Judgment.

The client subsequently denied that he had ever agreed to anything and he turned around and immediately appealed the court’s ratification and entry of this agreement. The client argued that the court incorrectly relied on a settlement agreement he hadn’t signed. Florida Rules of Civil Procedure along with a long line of cases supported the client. They state that any settlement agreement resulting from a successful mediation must be in writing and signed by both the parties and their counsel. Indeed, courts have even held that an attorney’s signature in the presence of a client is not enough to bind a client to the terms of a mediated settlement.

Unsigned proposal can be an enforceable contract

After you finalize your estimate for remodeling work requested by the husband and wife homeowners, you make an appointment to present your proposal. When you arrive with your paperwork, only one spouse is available. He agrees with your numbers and signs your construction contract. Should you start work or insist that both he and his wife sign your agreement?

You would do well to insist. Not having both signatures on a home improvement contract could be a costly oversight. Here’s an illustration.

One residential contractor, who had only obtained the signature of one spouse, filed suit against both husband and wife when he wasn’t paid all that he believed was due. Both owned the house where he performed his work. But to his surprise, this contractor discovered he could only sue both spouses if he had a lien in place.  That is the law in many jurisdictions. If only one spouse enters into a contract for improvements to real property, the contractor’s options are to either sue that one spouse under the contract or hope the applicable lien law will allow the non-contracting spouse’s interest in that property to also be encumbered. This assumes the property is owned by at least one of them, the couple is not living apart, and the contractor has a valid lien in place.

Unfortunately, the contractor in our example did not timely file his lien. So all he could do was to pursue his contract rights. The signed agreement created personal liability for the husband but not the wife. Okay you might think, that’s not so bad. Well in this case the husband was actually unemployed and deep in debt. The only real asset was his ownership interest in the house and that would not be attachable without a valid lien. Ouch.

There are any number of stories retelling homeowners’ surprise when residential contractors wouldn’t even make an appointment for an estimate without a commitment that both spouses would be present.  This is clearly an extreme position, running the risk of actually offending the customer –the wife for one could easily perceive the contractor as being sexist. Better to request that both spouses be available at the time of contract signing by explaining that this is company policy so as to properly protect the contractor’s future lien rights, if ever needed.

And what about those signatures, do they have to be originals for you to be able to enforce your contract? Not these days when electronic signatures are recognized in most all jurisdictions as originals. The number of worldwide e-signature transactions jumped ten fold since 2012 to over 800 million. The benefits are obvious. You no longer have to wait on folks to sign off on your proposals and return an original for your files.

That said, obtaining electronic signatures is generally best accomplished through a third party service such as DocuSign or RightSignature. Such an approach minimizes the opportunity for fraud, can store completed documents in the cloud, and allow the quick and easy transmission of a signed contract to the intended recipient.

Pricing a job correctly is an important first step for any contractor. Finalizing the contract properly with the right number and type of signatures will seal the deal.

Going beyond the written terms of an agreement

A recent case should give pause to those who believe that legal disputes between parties will always be decided by the written terms of their agreement. A hospital learned the hard way that what you say to induce a party to enter into a contract can sometimes be as or more important that the words contained in the document itself.

A local contractor had a long standing relationship with the hospital, having been awarded every bid submitted to the facility over a 16 year period. Apparently, this relationship existed in large part due to a close relationship between the contractor’s representatives and the chief executive officer of the hospital.

In 1999, the parties entered into an agreement to construct a parking garage and medical offices. The contract had a “work-plus” provision meaning that the contractor would be paid the actual cost of the job plus certain fees. However, in 2002, the project fell behind schedule. By this time, the hospital’s CEO had resigned and was no longer part of the organization. The new management at the hospital prevailed upon the contractor to sign a modified contract which switched the payment plan from a “work-plus” to a guaranteed maximum price. In effect, project costs above the stated maximum limit would not be paid back to the contractor.

Be Prepared to Defend Yourself

The contractor later claimed that the hospital used its leverage to force him into the modified contract – an agreement with considerably less favorable terms than the original contract. Representations were allegedly made that absent this modification to the contract, the hospital would forever remove the contractor from its preferred list of bidders for future work.

The amended contract went into effect in March, 2002. However, despite the contractor’s agreement to the modifications insisted upon by the hospital, he was removed from the preferred list of bidders. The contractor was never again invited to bid on any of the hospital’s projects. In July, 2003, the contractor closed operations and went out of business.

Not taking his losses lightly, the contractor sued the hospital for fraudulent misrepresentation. After an eight day jury trial, the contractor was awarded 3.4 million dollars. Only $696,630 of the verdict was awarded to compensate the contractor for its losses, the remaining $2.65 million was awarded as punitive damages. The hospital has filed an appeal, but the damage has been done.

For those who have been strong-armed into changing the terms of a contract to their eventual disadvantage, this case may provide food for thought and, if upheld on appeal, support for possible legal action to recoup one’s losses.

Time is of the essence

Timing can be everything, especially if there is a “time is of the essence” provision in your construction contract.

Most people enter into such a contract with the understanding that performance will occur within a specific time frame.  When that doesn’t happen, people tend to look to the terms of the contract for recourse. And if they find specific language, making it clear that time does matter – that “time is of the essence” – then they’ll have found a contract provision which could make all the difference. Where “time is of the essence” is included in a contract, delayed performance of the particular or general contract terms will likely result in a material breach of the contract.  This essentially allows the non-breaching party to terminate the contract.  In a subcontract, the general contractor will specify a completion date and often include the “time is of the essence” provision.  If the subcontractor does not complete its work on or before that date, the general contractor may choose to terminate the subcontract, hire another subcontractor to complete the job, and sue the original subcontractor for breach of contract.

Interestingly, if a contract does not include such a “time is of the essence” provision, a delay will not be considered a material breach so long as performance is effectuated within a reasonable time. For example, a “time is of the essence” provision can be waived if the parties continue their dealings regardless of late performance.  In that case, courts will tend to not enforce termination of a contract.  But be aware that simply granting extensions to perform will not necessarily constitute a waiver.  To preserve your “time is of the essence” provision, it is advisable that you grant extensions in writing expressly noting that the defaulting party is still in breach of the contract.  In that way, when you’ve had enough of the delays, you can still choose to terminate the contract.

Be mindful of “time is of the essence” provisions – they’re not just generic contract provisions but useful tools to enforce performance dates.

4 Required Construction Contract Disclosures

1. Lien Law Disclosure

The first is the Lien Law Disclosure. If your contract is in excess of $2,500 and is for the construction or repair of a residential dwelling up to four units, then your contract is required to include a certain disclosure. This disclosure needs to be at least twelve point-font, bold and all caps and needs to be either on the front page of you contract or needs to be on a separate page signed by the Owner. In essence, this disclosure informs the Owner that if they don’t pay you, you have the right to lien their property and possibly sell it in a foreclosure proceeding. This disclosure is only required by those that have a direct contract with the Owner. If your contract is as a Subcontractor or Supplier, this disclosure is not required by you. Additionally, if the Owner hasn’t suffered any prejudice because you did not include the disclosure, a court will likely not impose sanctions upon you. If the Owner happens to be a licensed General Contractor, the law says they didn’t need the disclosure in the first place.

2. Construction Defect Disclosure

Next is the Construction Defect Disclosure requirement. If you have a contract with an Owner, you’re obligated to include a certain disclosure that informs the Owner that to the extent there is a construction defect, Chapter 558 of Florida Statutes will control. Chapter 558 in short is a procedure that exists prior to a lawsuit to give the Owner and the contract an opportunity to hopefully resolve claims regarding construction defects.

3. Recovery Fund Disclosure

Next is the Recovery Fund Disclosure. This disclosure is required for any contract between a contractor and residential owner in excess of $2,500. The disclosure informs the owner that to the extent the contractor violates one of the provisions of Chapter 489, which includes financial mismanagement or any type of fraud committed by the contractor. The homeowner may be able to recover his or her loses from the recovery fund – a fund maintained by the state solely for the purpose of compensating owners because of the violations of contractors.

4. Municipal Disclosures

Finally, are certain Municipal Disclosures. Certain counties and even certain cities require that you include certain provisions in your residential construction contracts. As an example, Miami-Dade County in Chapter 10-33 of their municipal codes requires that a contractor signing a contract with a residential owner needs to include approximately one entire page of disclosures. These disclosures are in addition to, not in lieu of all of the other disclosures we talked about.

If you do the type of construction work that requires these disclosures, it’s imperative that you take the time to amend your contracts so that your contracts comply with the law.

What Should be in Every Construction Agreement

Who doesn’t want to have a detailed and coherent construction agreement in place on every job? It minimizes confusion, makes clear everyone’s respective responsibilities, and should reduce disputes. You can do so by simply making sure you address the following 6 topics.

Define the scope

You need to define what the scope of work is that you will be providing. Will it be only materials; will it be materials and labor; or will it be just labor? You need to be very clear and very specific in how you spell out the scope of your work.  Many contracts state that you are responsible for all work that’s shown on the plans and specifications, as well as that which is reasonably inferable. Pretty subjective – even if not actually on the plans or specifications, someone may believe that something should be part of your work. This could expand what you have to do beyond what you understood or priced out.

List all the exclusions

Do the parties each have the same understanding as to what is covered in the contract? How often are you faced with the exclamation from your customer – Gee, I thought this was included as part of your work? You may have believed that task, or that material, or that specially fabricated item was excluded. But was it? Did you articulate what was and was not in your scope and your price? Specifically listing what is excluded can obviate this problem. Articulate what is not in your price and not in your scope and reduce the chance of one party believing that something is to be done when it isn’t.

Explain the change order process

When you have to perform extra work under a contract, obtain a written agreement on every change order. Make sure it’s fully memorialized – signed with change in scope, change in price and change in time, and approved before you do the work.  Often you are just given a revised page in the plans. Before you do the work, generate the change order, submit it, and have it accepted. Alternatively, you can request a change directive, directing you to do this change work. You will then have the necessary paper trail.

Verify the schedule

As important as the price in your contract is the schedule – how quickly is the work to be done? Importantly, check to see whether or not the agreement has any penalty associated with the failure to timely perform. Review the schedule and make sure that it is doable. Are there any liquidated damage provisions that exist in the contract and if so, are they reasonable? Do you agree with them? Know that not having a liquidated damage provision doesn’t mean there are no damages for delay. You may be liable for actual delay damages. As an example, let’s assume you are a drywall subcontractor on a hotel and the hotel’s completion is delayed, and it’s late in part because of your failure to timely perform certain aspects of your work. If that’s the case and there are no liquidated damages in the contract, the owner may still be able to assess damages. The hotel’s actual damages could involve having to hire employees and keep them on standby. It could mean rooms weren’t rented. All of these actual damages may become your responsibility even without those scary liquidated damage provisions. So review that schedule to be sure it is achievable.

Refine the dispute resolution procedure

Require that the executives of each party have a meeting within a week or two of any disagreement to try to resolve any dispute. If that doesn’t work, then the parties should go to mediation. Mediation is a process in which both parties meet and split the cost of a neutral mediator who tries to facilitate a resolution between the parties. The mediator may be able to bring the parties together and have them settle their dispute. If an impasse is reached at mediation, then the parties can proceed to either arbitration or litigation, but only after they mediate. Fifty percent or more of disputes actually settle at mediation.

Make sure the winner gets legal fees

A lot of contractors incorrectly believe that winning their case automatically means they will also recover their legal fees and costs. That’s incorrect. In most states there are only two ways to recover the legal costs you incur in any dispute – by statute or by contract. Not all construction laws automatically call for an award of legal fees to the winner, and these days determining the winner on the substantial issues in any given legal case has become a bit complicated. The better approach is to always have a clear contractual provision which allows you to recover your reasonably incurred fees if you win, and which goes one step further by defining what makes one the prevailing party in any dispute. Dealing with legal issues can be very expensive, so make sure that if you have to litigate, you will be able to recover your fees if you prevail.

Remember, a short document is better than no document, and a more thorough document is better than one that is too general. Sometimes people wonder whether a handwritten (versus a typed) agreement is valid. Yes it is. And what about something electronic, will that work? Sure – an email authorizing the terms and conditions of your agreement will be accepted as a contract. What if you don’t have an original? No problem; you don’t have to have the original for there to be a valid contract.  A recent case even determined that an exchange via text message was enough to create a valid contract between two parties.

So keep your hard earned income on those challenging projects by making sure you have addressed these six provisions. Verbal acknowledgements won’t work here. You need to get them all in writing. 

And while you’re at it, take a few minutes and download our latest eBook, the Construction Subcontract: 23 Provisions That Matter. You’ll learn how to level the playing field by including, excluding, and modifying contract terms. The right contract with the right provisions can be your best resource.

Critical Subcontract Terms

Many contracts seem impenetrable, with pages upon pages of fine print and complicated language. What is a subcontractor to do? At the very least, smaller construction firms should focus on the areas where a mistake could be costly and exposure is likely. Three categories could make the difference between profit or loss, and liability or success.

Scope of Work

You clearly need to define the scope of the work that you intend on performing. Specifically, what will you do, what services and materials will you provide. As importantly as what you do provide, you need to clearly delineate what you will not provide. Most disputes that we get involved with a disagreement between the parties. Some misunderstanding where one party believed something was included and the other party did not. To the extent that you know that there are certain things that your price does not include, make sure to include an exclusions provision. That is, what is not included in your scope of work. By just doing that one thing you will save yourself a tremendous amount of headache.

A subcontractor can gain a tactical advantage and protect itself in advance of an issue through the delineation of the exact scope of work. While a primary contractor may try to have the description of the work be as broad as possible (for example, stating “subcontractor is responsible for all work, labor, materials and services on the project”), the subcontractor should try to narrow the subcontract to cover only that for which it is responsible.

The subcontract should list not only the specific work the subcontractor will actually perform, but also that for which it will not be responsible. Such specifics should allow a subcontractor to prevent disputes on whether an item should have been included in the subcontract.

Price

Next is price. Obviously it goes hand in hand with the scope of your work. Whether you are singing a cost plus contract or a stipulated sum contract, the price is critical that it mirror the scope that you intend on providing.

Time

Most subcontractors don’t think twice about entering into subcontracts that state “time is of the essence.” When time is determined to be of the essence, it means a breach of the time provision will be a material breach of the subcontract. Because delays are common on construction projects and may be outside of the subcontractor’s control, a subcontractor should exclude this provision from any subcontract.

If eliminating this provision proves difficult, the subcontractor should at least broaden the time requirements. For example, many contractors refer to a critical path schedule or require periodic updates from the subcontractor. Limit or exclude these schedules and requirements while adding more time to complete assigned tasks.

Start Date

The start date – when will you commence your work? Is that a specific date in the contract? Is it some triggering event such as the issuance of a permit? Whatever it is, it’s important that it be defined clearly in your contract.

Completion Date

Fifth and finally is the completion date. When are you expected to finish the work associated with your contract. Is it a specific date? Is it a certain number of days from the day you started work? Again, that’s up to you to decide, the important thing is that the contract that you sign include when the completion of the work is supposed to occur. This becomes critically important to the extent there are damages that extend from you being late on the job, such as liquidated damages.

You need to address these five issues in every contract and that will be a great start to the way you negotiate contracts going forward.

Payment Terms

Most contracts say that you will be paid within a certain amount of time of rendering your invoice or payment application. However, most contracts also include a pay-when-paid provision. This means that if the Owner doesn’t pay the contractor, the contractor may not pay you. If so, you need to know that that provision exists in your contract and be prepared to deal with it in your negotiations.

Most importantly, a subcontractor must look carefully for popular “pay-when-paid” provisions, which effectively state the contractor will not be required to pay the subcontractor until it receives payment from the owner. These provisions generally mean exactly what they say and can result in payment being delayed or withheld without any fault of the subcontractor.

If eliminating these provisions is not possible, then the subcontractor should look to ensure any pay-when-paid or pay-if-paid provision creates a reasonable time for payment to be made versus an absolute condition precedent to payment. Subcontractors also should not reduce or diminish their lien rights or abilities to lodge a claim against any existing bond-something primary contractors often attempt to do.

It can be easy to get lost in the minutiae of a subcontract agreement. But it really comes down to three things: You contract to perform certain work; you need an amount of time to complete the work; and you want to be paid for the work performed. Tweaking a subcontract in these three areas will significantly enhance a smaller company’s chances of getting through a job successfully.

4 Contract Provisions that can make a difference

There are four very specific contract provisions which can make a big difference in your construction contracts – a merger clause, limitation of liability, governing law and venue, and attorney’s fees and costs.

1. Merger Clause

A merger clause says that to the extent you and I discuss, either verbally or in writing, any contract provision, but that provision doesn’t exist in the contract we’re signing today, then it doesn’t exist. Let me give you an example – let’s say you and I are negotiating this contract and I exchange emails with you and it says that you’re going to pay me every 15 days. The contract says that you’re going to pay me only every 30 days. If the contract contains a merger clause, than the courts will find that the fact you were negotiating payment terms at 15 days is of no moment. What the court is going to look at are the actual terms in the contract that you signed. So what do you need to remember? If you have negotiations and discussions about provisions in your contract, and they are not written into the contract you are signing, then they don’t exist as far as the court is concerned if the contract contains a merger clause.

2. Limitation of Liability and Waiver of Consequential Damages

Construction is a very risky business and there are lots of things that could go wrong. And if they do go wrong, they could be very, very expensive. Consequential damages, while they flow from the contract, extend beyond the scope of the direct contract. Let me give you an example – a classic owner claim of consequential damages would be if the job were delivered late, then the owner may have lost rent or have additional costs associated with a construction loan that wasn’t converted to a permanent loan. It would be nice if your contract included some sort of limitation of liability such as a Waiver of Consequential Damages. Such a provision is relatively standard; it’s even included as a standard provision in the AIA contract.

3. Governing Law and Venue

Next is governing law and venue. Most written agreements include such a provision. It will dictate where and how a dispute will be resolved. If you’re doing business in Florida, you’ve been exposed to Florida law – it would be nice to have Florida law govern your contract. However parties are free to agree to use other laws from other jurisdictions. One example we recently encountered was a case in which a client based in Alabama, performed a project in the Bahamas, but the parties agreed to use New York law to govern their transaction. All of which was perfectly legal. When you review your contract, make sure that it includes a provision dictating what law will govern and where the dispute will be addressed. If you have any ability to negotiate those terms, it’s important that you try to have the law of the state that you’re in, as well as the venue where the project is located govern.

4. Attorney’s Fees

Finally, let’s talk about the attorney’s fees provision in your contract. In the construction setting there are two specific statues that are used most often. If you file a lien or assert a bond claim, both of those statues typically include the right to recover your attorney’s fees. The other way to recover your attorney’s fees in the state of Florida is if you sign a written agreement and have that written agreement provide for the recovery of attorney’s fees. Sometimes attorney’s fees dictate the outcome of a case, and the ability to recover those fees is crucial.

So when you’re reviewing your contract make sure that it includes a provision so that the prevailing party, hopefully you, will be able to recover your increased attorney’s fees.Having these four provisions in your contract will give you a leg up.

Do You Have These 2 Provisions in Your Contracts?

Every company seems to have its own form of contract these days. Whether it’s the general contractor, the plumber, or the tile distributor, everyone wants you to sign “their” contract, so that they’re protected on the job—or so they hope. In the rush to get a job and get it started, many contractors find they can’t get their terms and conditions into a contract so they overlook important details in the contracts they do sign. This could be a mistake, a big mistake, especially if the following provisions are not addressed!

Legal Fees

If you have to pay an attorney to prosecute or defend a claim, whether it goes to trial or not, the ability to recover those fees from the other side can dictate how hard you fight or how quickly you settle. So when reviewing a contract, make sure it includes a provision that allows the prevailing party, hopefully, you, to recover incurred attorney’s fees and costs.

If your agreement is not in writing (a problem) or if it is not signed (another problem), then the ability to recover legal fees becomes much harder, if not impossible. This can happen with construction clients who have “terms and conditions” on their delivery tickets or invoices but who never get those documents signed. In those cases, the unsigned terms and conditions are useless.

Dispute Resolution

When a business relationship sours, it can often lead to disputes. When this occurs, it is helpful to have a pre-agreed procedure in place to resolve disputes. Often times this is just left to a simple statement that disputes shall be arbitrated or litigated. We would suggest something more.

Ideally, the parties should agree to have a principal to principal initial meeting within 30-60 days of a problem arising. If that meeting doesn’t resolve the problem, then the parties should agree to mediate their dispute before a jointly selected and certified mediator.  Mediation should always be a prerequisite to the initiation of litigation or arbitration. Each party should absorb their own legal fees during this process and before litigation. The mediator’s fees, on the other hand, should be split evenly between the parties.

Construction is a very risky business. Lots of things can go wrong, and when they do, it can be very expensive to fix them. Having these two provisions in your agreements will surely help.

What Clauses Could Put You in Jeopardy?

Contractors should know that there are three clauses in most all construction contracts which could create significant exposure.

Pay-if-paid:

Getting paid is obviously the most important part of any job. Not getting paid for one’s work is not anything a contractor would ever agree to, right? Well, in most every contract is a pay-if-paid provision stating that payment by the general contractor is specifically contingent on the general contractor’s receipt of payment from the owner. What this means is that if the general contractor isn’t paid for any reason, then it won’t have to pay the subcontractor, even though the subcontractor has done its work and is perfectly entitled to get paid. Such provisions are generally enforceable so long as they are clearly and unambiguously stated.

Applicability of The Prime Contract:

General contractors like to protect themselves – no surprise. One way they do so is to incorporate their prime contract responsibilities into all their subcontracts. All rights, remedies and responsibilities in the prime contract then apply to the subcontractor so that the subcontractor becomes bound to the general contractor to the same extent that the general contractor is bound to the owner.  Subcontractors could therefore find themselves taking on more responsibilities than they actually ever contemplated.

Indemnification:

Risk shifting is not new in construction; it is quite standard and most visible in the indemnification provisions within most subcontracts presented by general contractors to their subcontractors. Many of these clauses not only have the subcontractor indemnify the general contractor, owner, architect and engineer for damages and losses resulting from the subcontractor’s own negligent acts or omissions but surprisingly also include the negligent acts of the general contractor, owner or other third parties. This means the subcontractor is actually agreeing to indemnify the general contractor and other for their own negligence. May not sound fair but this shifting or responsibility is enforceable if clearly expressed.

Depending on the circumstances, subcontractors would do well to reach out to their construction lawyer who can negotiate or even neutralize these clauses.

That always present indemnification provision – what does it mean?

The notion of shifting liability for personal injury or damage to property from one party to another has become commonplace, especially within construction contracts. In its most basic sense, contractual indemnity has someone agreeing to hold another harmless for certain specified claims, losses or damages. While governed by the terms of a given contract, such indemnification provisions may be further defined through judicial interpretation. This article examines a number of key cases, recent statutory implications and the likelihood of enforcement. Indemnity and hold harmless clauses are normally applied at all responsibility levels. The contractor is generally required to indemnify the owner, the subcontractor is then expected to indemnify the contractor and usually the owner, and even the sub-subcontractor may be asked to hold parties harmless. A good starting point in understanding the significance of these often confusing and esoteric clauses is to review how the courts have construed them.

In Camp, Dresser & McKee, Inc. v. Paul N. Howard Co., an engineering firm, after settling a claim brought against it by a subcontractor’s injured employee, sought indemnification from the general contractor.

The indemnity provisions at issue provided:

To the fullest extent permitted by law, CONTRACTOR shall indemnify and hold harmless OWNER and ENGINEER and their agents and employees from and against all claims, damages, losses, and expenses including but not limited to attorneys’ fees arising out of or resulting from the performance of the work, provided that such claim, damage, loss or expense (a) is attributable to bodily injury, sickness, disease or death . . . and (b) is caused in whole or part by any negligent act or omission of CONTRACTOR, any Subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, regardless of whether or not it is caused in part by a party indemnified hereunder. (emphasis added).

The obligations of CONTRACTOR under paragraph above shall not extend to the liability of ENGINEER, his agents or employees arising out of the preparation or approval of maps, drawings, opinions, reports, surveys, Change Orders, designs or specifications.

The engineer also sued the surety which had issued a performance bond for the project. The bond contained a provision indemnifying the owner and engineer, as follows:

[Surety] shall indemnify and save harmless the said Owner and the Engineer and his agents against payments of any and all damages that may happen to persons or property. arising out of any act, neglect or omission of said principal [Contractor], his or its agents, suppliers, subcontractors or employees with relation to the work.

The Court concluded that if the engineer paid all or part of the $3.55 million to settle the claims of the subcontractor’s employee based on potential liability for negligence that was unrelated to design (the exclusion within the contract), then the engineer would be entitled to indemnity from the contractor and its surety for monies paid to the subcontractor’s employee, even if some of the fault could be attributed to the engineer. While indemnifying a party for its own negligence might seem unreasonable or unfair, such clauses are certainly enforceable as long as they clearly express this intent.

Even the Florida Supreme Court has addressed the issue. In Charles Poe Masonry, Inc. v. Spring Lock Scaffolding Rental Equip. Co., a contractor’s employee sued the lessor- manufacturer of scaffolding when he was injured in a fall from the scaffold. The lessor- manufacturer, in turn, sued the lessee-subcontractor, the contractor, and owner for indemnity. The relevant provision at issue stated:

The LESSEE assumes all responsibility for claims asserted by any person whatever growing out of the erection and maintenance, use or possession of said equipment, and agrees to hold the COMPANY harmless from all such claims.

The Court found that such general terms demonstrated nothing more than an undertaking by the lessee (subcontractor) to hold the lessor (manufacturer) harmless from any vicarious liability that resulted from the lessee’s erection, maintenance or use of the scaffold. Courts have found that general language purporting to indemnify someone for his or her own negligence is not sufficient. Therefore, an indemnification clause that includes a general provision indemnifying the indemnitee “against any and all claims” does not sufficiently express an intent to indemnify for consequences solely from the negligence of the indemnitee.

Examples of how Indemnification Clauses Played Out in Court

In Winn Dixie Stores v. D & J Constr., Winn Dixie sought contractual indemnity from D&J for injuries sustained by the contractor’s employee. The employee had fallen in a puddle caused by a roof leak, something not part of the contractor’s work. The indemnity agreement covered

any claim or loss arising in any manner out of the presence or activity of D & J [the contractor] or any of our servants, agents or employees or representatives or out of the presence of such equipment when such persons or equipment are on your premises for the purposes of performing services . . . notwithstanding such accident or damage may have been caused in whole or in part or negligence of you [Winn Dixie] or any of your servants, agents or employees.

Based upon the above language, the Court found that Winn Dixie was entitled to indemnity from the contractor even though the contractor was not at fault, simply because the contractor was on the owner’s premises when the accident occurred.

Since 1972, Florida has had statutorily provided criteria for an indemnification clause in a construction contract.[2] In George’s Crane Serv., Inc. v. Signal Serv. Indus., Inc.,  the Court found that an indemnification agreement which did not meet the criteria of Fla. Stat. 725.06(2)(1999). Specifically, there was no “specific consideration” for the indemnification that was “provided for” in the contract. The Court had earlier concluded that a construction contract which allocated a percentage of the contract,i.e., 1% of the contract price for the contractor’s indemnification obligation satisfied the statutory requirement that indemnification be supported by specific consideration. However, these cases addressed the prior versions of the statute which required either a monetary limitation or specific consideration from the person indemnified.

The current version of the indemnification statute provides that a construction contract which permits one party to indemnify another party for the other party’s own negligence shall be void and unenforceable unless:

(1) there is a monetary limitation on the extent of the indemnification that bears a reasonably commercial relationship to the contract [note: the monetary limitation on the extent of the indemnification provided to the owner of real property by any party in privity of contract with the owner shall not be less than $1 million per occurrence, unless otherwise agreed to by the parties]; and

(2) is part of the project specifications or bid documents.

As well, the current version of the statute provides that a contract which requires one party to indemnify a public agency for that agency’s negligence is void, illegal and unenforceable. Perhaps the fact that most public contracts are not negotiable, while private contracts are, is the reason for this distinction. Also unenforceable are claims or damages resulting from gross negligence or willful, wanton or intentional misconduct of the indemnitee, its officers, directors, agents or employees or for any statutory violation or punitive damages (unless the statutory violation or punitive damages are caused or result from the acts or omissions of the indemnitor or its agents, employees or those working under it).

When entering into a contract with an indemnification provision, several issues should be kept in mind, namely:

• who is indemnifying whom;
• does the contract clearly express an intent to indemnify a party against its own negligence;
• do the terms of the agreement determine whether the indemnitor is obligated to reimburse the indemnitee for a particular claim;
• what is being indemnified, i.e., personal injury, property damage, attorneys’ fees and costs of defense, economic loss;
• is there a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is such monetary limitation part of the project specifications or bid documents, if any;
• is there a provision requiring that the risk be covered by insurance such that the indemnity is limited to the amount of the insurance coverage (contractual liability insurance).
• With such clauses becoming standard issue in construction contracts, it is especially important to understand how much or how little can be negotiated in or out in this regard.

A poorly written provision could lead to the erroneous presumption of protection when none actually exists. Worse, it could result in a litigation nightmare or a very costly claim. Because indemnification is both a sword and a shield, be sure the clause you agree on is one you also truly understand.

[1] Contractual indemnity is distinguished from common law indemnity which is an equitable remedy arising out of obligations imposed through special relationships. In order to prevail on a common law indemnity claim, the following two-pronged test must be satisfied: (1) the party seeking indemnity (the indemnitee) must be without fault and its liability must be solely vicarious for the wrongdoing of another, and (2) the party against whom indemnity is sought (the indemnitor) must be wholly at fault.

[2] The current version was amended, effective as of July 1, 2001, Fla. Stat. § 725.06 (2001).

[3] Fla. Stat. § 725.06 (1987 and 1999), provided that: “Any portion of any agreement or contract for, or in connection with, any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating connected with it, or any guarantee of, or in connection with, any of them, between an owner of real property and an architect, engineer, general contractor, subcontractor, sub-subcontractor, or materialman, or between any combination thereof, wherein any party referred to herein obtains indemnification from liability for damages to persons or property caused in whole or in part by any act, omission, or default of that party arising from the contract or its performance shall be void and unenforceable unless:

(1) The contract contains a monetary limitation on the extent of the indemnification and shall be a part of the project specifications or bid documents, if any, or

(2) The person indemnified by the contract gives a specific consideration to the indemnitor for the indemnification that shall be provided for in his [or her (added in 1997 in order to remove gender-specific references)] contract and section of the project specifications or bid documents, if any.”

[4] Fla. Stat. § 725.06(1) (2001) provides that “Any portion of any agreement or contract for or in connection with, or any guarantee of or in connection with, any construction, alteration, repair, or demolition of a building, structure, appurtenance, or appliance, including moving and excavating associated therewith, between an owner of real property and an architect, engineer, general contractor, subcontractor, sub-subcontractor, or materialman or any combination thereof wherein any party referred to herein promises to indemnify or hold harmless the other party to the agreement, contract, or guarantee for liability for damages to persons or property caused in whole or in party by any act, omission, or default of the indemnitee arising from the contract or its performance, shall be void and unenforceable unless the contract contains a monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any. Notwithstanding the foregoing, the monetary limitation on the extent of the indemnification provided to the owner of real property by any party in privity of contract with such owner shall not be less than $1 million per occurrence, unless otherwise agreed by the parties. Indemnification provisions in any such agreements, contracts, or guarantees may not require that the indemnitor indemnify the indemnitee for damages to persons or property caused in whole or in part by any act, omission, or default of a party other than:

(a) The indemnitor;

(b) Any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees; or

(c) The indemnitee or its officers, directors, agents, or employees. However, such indemnification shall not include claims of, or damages resulting from, gross negligence, or willful, wanton or intentional misconduct of the indemnitee or its officers, directors, agents or employees, or for statutory violation or punitive damages except and to the extent the statutory violation or punitive damages are caused by or result from the acts or omissions of the indemnitor or any of the indemnitor’s contractors, subcontractors, sub-subcontractors, materialmen, or agents of any tier or their respective employees.

Indemnification More Available Than You Might Think

Indemnity is a term familiar to those in construction. Basically, indemnity shifts fault for damages or losses from one party to another. It is generally contractual, where one party agrees to assume responsibility by means of a written agreement, holding another harmless from the consequences of its actions or omissions. And for those contractual indemnification agreements to be enforceable, they generally have to be written very precisely with no ambiguous terms. However, what is not as well known is the legal fact that indemnity may also be available outside of any contract in what is called common law indemnity.

To be entitled to common law indemnity, one must show it is without fault while showing and shifting liability to another who is actually negligent or culpable.

Here’s an example. When a fire occurred inside a building, the owner sued both the general contractor and its painting subcontractor. The owner alleged that the contractor was negligent in performing its work and failing to properly supervise its subcontracted painter, who it asserted was negligent in storing its paints and solvents. Apparently, the painter placed one of its rags soaked with an oil based stain in a plastic bin left inside one of the areas being renovated. This was clearly contrary to the painter’s safety protocol which called for all oil and paint soaked rags to be rinsed and placed in a garbage bag and then removed and disposed of at the painter’s place of business. The rags left in the work space spontaneously ignited and started the fire.

These facts allowed the court to determine that the general contractor’s negligence was merely passive and therefore it was entitled to common law indemnification from the painter who was the party actively negligent party in this circumstance.

The painter went on the argue that because the general contractor had actually settled with the owner, its claim of common law indemnity could no longer be raised. Not so, said the court. Offers of settlement or actual settlements are not considered admissions against interest and do not rule out common law indemnity claims.

To be clear, common law indemnity is not a common place remedy, specifically because a party must be entirely faultless to attempt to shift any liability. And finding a situation where one can be seen to be totally without fault is generally rare. Especially within the setting of a construction project, where multiple disciplines are often working at the same place and at the same time, it is difficult to show that one hasn’t participated to some extent in the matter which has generated the claim.

Indemnification shall always be a critical element in construction. Contractors would therefore do well to understand the significance of any indemnity applicable to their potential exposures on a given job, be it contractual or common law.

The Indemnification Dance – Everyone is Doing It

Indemnity clauses are normally applied at all responsibility levels. The contractor is generally required to indemnify the owner and the subcontractor is then expected to indemnify the contractor and usually the owner. A typical clause looks something like this:

While indemnifying a party for its own negligence might seem unreasonable or unfair, such clauses are certainly enforceable as long as they clearly express this intent. However, an indemnification clause that includes a general provision indemnifying the indemnitee “against any and all claims” does not sufficiently express that intent to indemnify for consequences solely from the negligence of the indemnitee and would not be enforceable.

The current version of Florida’s indemnification statute provides that a construction contract which permits one party to indemnify another party for the other party’s own negligence shall be void and unenforceable unless:

As well, the current version of the statute provides that a contract which requires one party to indemnify a public agency for that agency’s negligence is void, illegal and unenforceable. Perhaps the fact that most public contracts are not negotiable, while private contracts are, is the reason for this distinction.

Also unenforceable are claims or damages resulting from gross negligence or willful, wanton or intentional misconduct of the indemnitee, its officers, directors, agents or employees or for any statutory violation or punitive damages (unless the statutory violation or punitive damages are caused or result from the acts or omissions of the indemnitor or its agents, employees or those working under it).

When entering into a contract with an indemnification provision, several issues should be kept in mind, namely:

With such clauses becoming standard issue in most construction contracts, it is especially important to understand how much or how little can be negotiated in or out in this regard. A poorly written provision could lead to the erroneous presumption of protection when none actually exists. Worse, it could result in a litigation nightmare or a very costly claim. Indemnification is both a sword and a shield; be sure the clause you agree on is one you also truly understand.

Indemnification is both a sword and a shield; be sure the clause you agree on is one you also truly understand.

Drafter Beware – Indemnification Clauses Are Not Always Enforceable

A standard clause in many construction related contracts often requires one of the parties to indemnify and hold the other harmless. This means that if something goes wrong and there is a claim or a lawsuit, one of the parties to the contract will need to be responsible – even if the claim or lawsuit is made against the other party to the contract! Persons who draft such contracts should be forewarned though that there may be statutory requirements that could render the clause void and unenforceable absent certain restrictive language.

For example, one statute in Florida invalidates any indemnification clause unless the contract contains a monetary limitation that “bears a reasonable commercial relationship” to the contract and “is part of the project specifications or bid documents, if any.” If these monetary limitations are not met, the indemnification clause will be useless and have no legal effect.

The statute also holds that the indemnification may not indemnify for acts, omissions or defaults of anybody other than the indemnitor (the one providing the benefit), its contractors, subcontracts and agents or the indemnitee (the one receiving the benefit), its directors, officers, agents or employees. As to contract language that indemnifies for acts, omissions or defaults of the person actually benefiting from the clause, such clauses may not indemnify for their own gross negligence or intentionally wrongful acts.

When are Indemnification Clauses Permitted

Regarding construction contracts with public agencies, indemnification clauses are permitted only to indemnify a party from wrongful acts of the indemnifying party in performance of the contract (as opposed to wrongful acts of other persons). Otherwise, such indemnification clauses are deemed void as against public policy.

To some extent, the cases that interpret the statute serve to limit its scope. These cases generally rule that either the person seeking indemnification did not fall within the class of those types of parties covered by the statute, or that the type of contract under which a party seeks indemnification was not covered under the statute. In each of these cases, the indemnification language in the contract at issue did not contain the required restrictive language.

When an individual plaintiff was injured due to an alleged elevator malfunction and sued the owner who in turn sued an insurance company for indemnification, the court ruled that the statute restricting application of indemnification clauses did not apply because the contract at issue was a service contract, as opposed to a construction-related contract.

In another case, the court held that when an engineering firm was a third party beneficiary (i.e., receiving a benefit in a contract between two other parties) it could sue for indemnification even if the contract did not otherwise comply with statutory requirements. The third-party beneficiary was not bound by the limitations in the statute.

A third case held that the statute would not apply if the party seeking indemnification was not looking to be indemnified for its own active negligence. These interpretations reinforce that parties to construction contracts must be careful to comply when seeking indemnification for another’s wrongdoing. A contractor must have clauses it can enforce, and be sure that all statutory requirements are met. The indemnification must contain a monetary limitation that bears a reasonable commercial relationship to the contract.

Applicable statutes contain limitations as to the types of parties, acts, and omissions that may be subject to indemnification clauses. For example, a statute that has undergone several revisions over the years may contain language that is confusing at first glance.

Always take care to review such clauses with an attorney knowledgeable in this area of the law. Otherwise, a contractor may suffer a painful lesson when faced with claims or litigation for which it thought it was protected under an indemnification clause.

Hold Harmless, Indemnification and Duty to Defend: There is a Difference

They’re usually lumped together. Full of legalese, often impossible to decipher and generally presented on a take it or leave it basis, these hold harmless, indemnification and duty to defend provisions are regularly found in most construction contracts. Most contractors just accept them, hoping for the best and not giving them a second thought. The problem is that each one of these provisions has serious implications.

Though often found together, they each have a very different meaning. A “hold harmless” clause is the provision which, if drafted correctly, has the effect of releasing one from liability. “Indemnification” shifts liability from one party to another. And a “duty to defend” means just that and is a separate and distinct obligation from any duty to indemnify or a duty to hold harmless. This duty to defend requires one to provide a defense and pay the legal expenses associated with such defense – no small obligation, especially when you consider this duty is triggered whatever the merits of the claim may be. The duty to hold harmless and the duty to indemnify only arise if the outcome of a claim is adverse to the indemnitee – the one receiving the benefit of the hold harmless or indemnity.

Because construction disputes so often involve multiple parties and complex issues, the potential costs associated with each of these provisions can be very significant. For example, the cost of a legal defense can quickly outpace the cost of the actual underlying claim. When confronted with any of these clauses, step back.  Read them carefully to be sure what you’re getting into. It may be a lot more than you think.

Three common construction contract provisions—hold harmless, indemnification, and duty to defend—are often found together taking a form something like this:

The undersigned agrees to indemnify, defend and hold harmless [NAME OF PARTY] against all claims related to the work including but not limited to…

Most contractors find them hard to understand, they assume the terms are interchangeable and have the same meaning, and therefore do little to push back thinking that’s just the way it is.

In reality, however, these provisions are not the same, and each one has different and serious implications.

Hold harmless.

If drafted correctly, a “hold harmless” clause has the effect of having the holder avoid liability for certain damages or claims as set out in an agreement. Typically, a contractor would be agreeing to hold the homeowner harmless from liability, or a subcontractor would hold the GC harmless from liability. In either case, if a claim is made, the one in whose favor the hold harmless is written gets to transfer the claim to the one who agreed to hold them harmless.

Indemnify.

This clause not only shifts liability from one party to another but requires the indemnifying party to compensate the indemnified party for any loss. Indemnification clauses, more so than a hold harmless or duty to defend, need to be drafted carefully and in accordance with applicable guidelines which differ from jurisdiction to jurisdiction. Not crafted correctly and they will be unenforceable.

Duty to defend.

This clause means just what it says and is a separate and distinct obligation from any duty to indemnify or a duty to hold harmless. The duty to defend requires one to provide a defense and pay the legal expenses associated with such defense—no small obligation, especially when you consider this duty is triggered whatever the merits of the claim may be.

Because construction disputes so often involve multiple parties and complex issues, the potential costs associated with each of these provisions can be very significant. Indeed, the cost of a legal defense can quickly outpace the cost of the actual underlying claim. For example, a plumber brought in on a house remodel might only have a $10,000 contract to repipe the master bathroom. But when the plumber not only agrees to hold the G.C. harmless but also to indemnify and defend the G.C. if a claim arises associated with the plumber’s work, the plumber might find himself with an obligation many times larger than his contract and his insurance limits.

A general contractor generally seeks to obtain all 3 clauses from his subcontractors. This will provide some cover if the GC is hit with a claim from the owner. A sub will of course want to deflect these clauses, and add that such provisions will only go into effect when the subcontractor’s negligent or wrongful acts or omissions directly lead to the claim.

When confronted with any of these clauses, step back.  Read them carefully to be sure you understand what you’re getting into. It may be a lot more than you think.

Force majeure and other contract protections

The Coronavirus changed our world in so many ways.  Everyone in every industry has been impacted, including construction.  And the one place where contractors have immediately made some changes has been with those previously ignored clauses in fine print within their contracts – clauses dealing with force majeure, delivery delays, price protections and government policies.

Force Majeure

Those force majeure clauses must now be more precise. Parties to a construction contract should give more thought to force majeure definitions. When seeking to limit exposure, contractors must be specific and clear in the language they select when defining the scope and effect of a force majeure event so as to protect themselves from unexpected liabilities.

Before signing any new contract, consider several questions: What events are considered force majeure? Who is responsible for suspending performance? Who can invoke the clause? Which contractual obligations are covered by the clause? How should the parties determine whether the event creates an inability to perform? What happens if the force majeure event continues for more than a specified period?

An effective force majeure clause should specifically include any delay, disruption or suspension of the work due to illness, quarantines, closures, government stay at home orders and other restrictions, and include both owner and contractor directives as well as municipal and governmental orders.  And the result should not only be an extension of time but an equitable adjustment to the contract price.  Finally, such measures should preclude or forgive the assessment of any damages, including liquidated damages.

Supply Chains

The virus has brought into focus the problems caused by interruptions and delays in the delivery of materials caused by the pandemic. As a practical matter, contractors now realize they must develop some flexibility both in their expected completion dates as well as in their supply chains to reduce the potential liability associated with delay.  Notice and regular communication is imperative.  Write into any purchase order or request that a supplier shall notify a customer in writing ten (10) days in advance of any expected delay in delivery and shall thereafter regularly communicate scheduled delivery dates, available product substitutes or replacements, and intended efforts to mitigate the effects of such interruption.  Then have clearly written escape and relief clauses within your contracts to adjust completion times adversely impacted by unforeseen events.

Price Protection

Documentation supporting any cost increases, typically limited to materials, needs to be kept and presented as evidence of any price increases caused by disruptions or delays in the contractor’s supply chain. Include a termination clause as an escape from contracts where the “cost of materials has increased exponentially or the materials themselves have become difficult or impossible to find.”

Government Policies

During the current pandemic, we have seen a variety of inconsistent approaches by local governments. Policies have differed substantially depending on the industry involved and the particular government issuing the directive. The determination of what work is “essential” and what is not affects every industry, including construction. In drafting future contracts, what constitutes a “change in law” is a term to be discussed.

Being more versus less specific is the key.  Add those words and phrases which better define the unforeseen, now that the virus has brought so much into focus.  And take the time to have your legal advisor review any contract before signing it.

Acts of God and Force Majeure: Both Need to be Addressed in Your Contracts

There are terms in every construction contract that folks read but do not fully understand.  Acts of God and force majeure are two of those. You may think they are two ways of saying the same thing. But you would be wrong.

Acts of god are physical environmental events outside of anyone’s control such as floods, earthquakes, tornadoes or other natural disasters. Force majeure, on the other hand, is a human caused event, such as an act of war, a terrorist act, a labor dispute or an electrical system failure, but it does not include a party’s death. Both are ways of describing those unforeseeable circumstances preventing a party from fulfilling an agreement. They are included in construction contracts to excuse one from liability for a lack of timely performance.

These terms should be in every construction contract as they will protect a party from any event that is unforeseen, unforeseeable and out of anyone’s actual control.

Whether you are the contractor with a project to complete, a material supplier with products to deliver, or a subcontractor with a schedule to meet, having both clauses in your contract is a good decision.

3 scary clauses in construction subcontracts

With no letup in sight in South Florida construction, subcontractors in all disciplines are being asked by busy general contractors to bid on both residential and commercial projects. And once their bids are accepted, subcontractors are given a subcontract to sign – a subcontract that is often not read or completely understood.

Subcontractors should know that there are three clauses in most all subcontracts which could create significant risks.

PAY-IF-PAID:

Getting paid may be the most important part of any job, and not getting paid could easily bankrupt a subcontractor. Yet in most every subcontract is a pay-if-paid provision stating that payment to the subcontractor by the general contractor is specifically contingent on the general contractor’s receipt of payment from the owner. What this means is that if the general contractor isn’t paid for any reason, then he won’t have to pay the subcontractor, even though the subcontractor has done its work and is perfectly entitled to get paid. Such provisions are generally enforceable so long as they are clearly and unambiguously stated.

FLOW DOWN:

General contractors like to protect themselves – no surprise. One way they do so is to incorporate their prime contract responsibilities into all their subcontracts. All rights, remedies and responsibilities in the prime contract then apply to the applicable subcontractor so that the subcontractor becomes bound to the general contractor to the same extent that the general contractor is bound to the owner. Subcontractors could therefore find themselves taking on more responsibilities than they actually contemplated.

INDEMNIFICATION:

Risk shifting is not new in construction; it is quite standard and most visible in the indemnification provisions within most subcontracts presented by general contractors to their subcontractors. Many of the clauses not only have the subcontractor indemnify the general contractor, owner, architect and engineer for damages and losses stemming from the subcontractor’s own negligent acts or omissions but many as well include the negligent acts of the general contractor, owner or other third parties. This means the subcontractor is actually agreeing to indemnify the general contractor and others for their own negligence.  May not sound fair but this shifting of responsibility is enforceable if clearly expressed.

Subcontractors need to know these clauses are likely to be in each of their subcontracts. Depending on the circumstances, subcontractors would do well to consider negotiating or even neutralizing these clauses.

Pay-When-Paid provisions in construction contracts

Given the vagaries and uncertainties these days in loan commitments as well as material prices, not to mention the overall state of the construction industry, one can quickly understand why pay-when-paid provisions have become so critical in construction contract negotiations.

A pay-when-paid provision in a construction contract generally means that a contractor is not liable for payment to its subcontractors until such time as it is first paid by the owner. In the context of litigation, a defense based on a contractual pay-when-paid provision might assert that a plaintiff subcontractor is not entitled to receive payment unless the owner first pays the contractor for subcontractor’s fees, or, alternately, that under the relevant contractor-subcontractor agreement a plaintiff subcontractor is not entitled to receive further payment pursuant to its claims until the contractor is paid by the owner for the fees claimed.

In Florida the general rule is that interpretation of contract provisions relating to conditions and time of payment between a contractor and subcontractors (also called risk-shifting provisions) is a question of law that a judge (as opposed to a jury) may decide on his or her own. The Florida Supreme Court has held that risk-shifting provisions are susceptible to only two possible interpretations: (1) if a provision is clear and unambiguous, it is interpreted as setting a condition precedent to the general contractor’s obligation to pay; but (2) if a provision is ambiguous, it is interpreted as fixing a reasonable time for the general contractor to pay (whether or not it has been paid by the owner).

If a contract does not clearly express an intention to shift the risk of nonpayment, payment provisions will be interpreted as establishing a reasonable time to pay by the contractor (as opposed to creating a condition precedent to the contractor’s obligation to pay the subcontractor). When preparing a contract the burden of clearly expressing an intention to shift risk is on the contractor. This is important because courts will not assume the existence of a pay-when-paid provision in a contractor-subcontractor contract unless it is specifically and clearly expressed in writing by the contractor. The reasoning is that small subcontractors, who need to receive payment for their work in order to remain in business, typically will not assume the risk of the owner’s failure to pay the general contractor.

How does a Surety Bond Factor Into Pay-When-Paid Provisions?

All of the above rules relating to risk-shifting provisions presuppose the existence of a written contract. If the contract in dispute is verbal it is not possible to successfully argue a pay-when-paid defense. Stated differently, in order for a contractor to validly assert a contractual provision which shifts the risk of payment such a provision must be in writing.

Additionally, a pay-when-paid defense is not available to a surety on a contractor-subcontractor contract for which it has posted a bond. The reason that a surety may not assert a pay-when-paid defense is because the surety bond is a separate, distinguishable contract from the contractor-subcontractor contract and, as such, an inability to proceed against the contractor should not prevent recovery on the bond. Public policy concerns also militate against allowing a surety to assert a pay-when-paid defense, because to do so would undermine the statutory scheme under which a subcontractor can seek recovery under a bond as an alternative to employing the procedural mechanism of applicable lien laws.

To be clear, liability for payment to subcontractors, when a contractor has not been paid by an owner, will hinge on a clearly expressed pay-when-paid provision in a written contract. If a contract contains an ambiguous pay-when-paid provision, Florida law will require a contractor to pay its subcontractors within a reasonable time, irrespective of payment by the owner.

Non-solicitation, non-competition, non-disclosure clauses

You’ve worked hard – very hard – to build a successful construction business.  You’ve developed an approach and management style that distinguish you from your competition.  You have a solid customer base and great sales.  And you have a number of key employees who have learned your system and who excel at customer service.  All good news, but do you also have the right agreements in place to protect these business assets when a key employee decides to leave you?

Unfortunately, business owners and employers can be easily drawn into a state of complacency, overestimating the loyalty of their employees while underestimating the aggressiveness of their competitors.  In an economic environment where every sale matters, and any advantage can make a difference, companies have little   compunction in raiding their competitors’ employees and customers.  So just like you’d never think of leaving your valuables where anyone could simply take them, you don’t want to overlook those business resources in which you have likely invested the most time and money – your trade secrets, your customers and your key employees.

You need to put in place non-solicitation, non-competition and non-disclosure agreements – all 3 may appear similar, but they actually accomplish quite different goals.

To keep your construction business intact, you must have non-solicitation, non-competition and non-disclosure agreements in place with your key employees.

A non-solicitation agreement prohibits an ex-employee from asking your customers as well as your employees to leave you. A non-competition covenant does exactly what it says – it is a promise by your employees that they won’t go out and compete with you. And a non-disclosure agreement keeps your confidential information private and secret.

While it is bad enough to have an ex-employee go over to a competing company, it is surely much worse to have him or her begin calling on your customers and your current employees, asking that they come over to the competition. Worse, you wouldn’t want that confidential and proprietary information, which you have developed for your business, made available to your competitors. Everything from customer preferences, sales figures, vendor arrangements to unique formulas, proprietary software, and specialized techniques acquired over years of trial and error – all belong to you and need to be protected.  The last thing you want to see is an ex-employee using the knowledge and experience gained at your expense. That’s why a non-disclosure agreement is also critical.

When drafting these agreements, keep in mind that the initial threshold requirement to their enforcement can sometimes be the most difficult – you’ll need to show that there is a legitimate business interest that needs to be protected.  Keeping proprietary and  confidential  information, trade  secrets or  customer lists  from getting  in  the  hands  of  a third  party is such a legitimate interest.  And even after establishing this requirement, you will still need to show that the restriction being imposed is not overly broad but is limited to those geographic areas related to your business. Any restriction should not be unnecessarily long – two years has become customary in many jurisdictions. Finally, the employee must receive some benefit for agreeing to these covenants.  To sum up, the restrictions you impose must be necessary to protect your interests, reasonable in time and scope, supported by consideration or benefit, and uniformly applied if they are to be enforceable.

Remember, each restrictive agreement is fact specific – one size does not fit all.  For example, some employers think they can have employees sign such agreements anytime – even after they’ve been working at the company for a while.   But without providing something of value in exchange, employers may end up with an agreement they can’t enforce.  Also attempting to restrict someone for too long or too far could result in a court finding that the agreements are just too broad and not enforceable.

Don’t fail to recognize how green the grass across the street may appear to your employees and how eager your competitors may be to recruit some of them.

No-Damage-For-Delay Clause – How to Overcome

No damage for delay clauses are standard provisions these days and are valid and enforceable in the state of Florida.

What is a No Damage for Delay Clause?

It a provision that says under no circumstances will you be entitled to recover money if the job is delayed. Well as you know and I know, time is money and if you’re on the job longer than expected, that costs you real dollars. There are several things you can do to overcome the no damage for delay clause in your construction contract.

First, you can strike the provision.

But I’m here to tell you that that’s unlikely to occur. So then the question is what do you do?

There’s one generally recognized exception to the no damage to delay clause.

If the party that you contracted with was wantonly or willfully negligent in its conduct, and that conduct was the cause for the delay on the job you may be able to recover not only time but money.

Documentation of the delay is critical.

Both to support your claim that you are entitled to additional compensation but just as importantly that you were not the cause of any delay on the job. To the extent the Owner or Contractor wants to assert actual or liquidated damages against you, these documents will be critical in proving that it wasn’t you, but others that caused the project to be delayed.

Contract Disclaimers Count

In 1981, and again in 1992, an engineer and municipality entered into General Consulting Agreements. The 1992 Agreement called for the engineer to, among other things, provide “statements of probable cost” to the municipality for a road improvement project. The Agreement also made clear the engineer could not and would not guarantee that its statements of probable construction or operating costs would not vary from actual costs incurred. The 1981 Agreement expressly provided a similar disclaimer. The municipality obtained cost estimates from the engineer and then proceeded to issue bonds to fund the cost of the project — this before the road design was actually completed and before the municipality had ascertained what the final cost would be. The project was let out for bid in the summer of 1993 and was awarded for a price significantly less than the range of costs presented by the engineer. The municipality retired the bonds early, paying the equivalent of a prepayment penalty, and then sued the engineer for breach of contract and professional negligence. After an eight day trial, the jury entered a verdict in favor of the municipality. The engineer appealed, arguing that the jury was incorrectly instructed to ignore the disclaimer language if it found that the engineer did not provide “reasonably accurate estimated costs” — a term that the engineer believed was inherently confusing.

How Contract Disclaimers Can Make a Difference in Court?

The appeals court agreed, determining that the jury should have been allowed to use the disclaimer clause in its analysis. In doing so, the jury could have more properly determined whether the engineer was in fact contractually obligated to provide reasonably accurate cost estimates; whether the engineer provided reasonably accurate cost estimates, in light of the disclaimer; and whether the municipality could merely ignore the disclaimer and rush off to issue the bonds.

Customarily, a design professional, contractor or construction consultant faces the prospect of a claim when it provides too low an estimate. Here the municipality had sued its consulting engineer for providing too high an estimate, a decision which has resulted in long, expensive and uncertain litigation.

Forum Selection Clause

It may not seem very important, that forum selection clause in your construction contract specifying where it is that any legal dispute is to be brought and decided. After all, you think, we’re not going to get involved with lawyers on this project. Maybe think again.

With the amount of construction activity all around us these days, it is inevitable that some projects will end up in litigation. And when they do, those forum selection clauses can make a big difference. After all, would you want to be handed off to a court in another city or would you want to stay in your own backyard to address any issues? Most folks and their construction lawyers prefer the home court advantage.

That said, do you know that if not expressed correctly, the forum selection clause may only be permissive and not mandatory. What this means is that though you thought you were selecting the place where your dispute would be addressed, you may have simply selected a preferred venue but not precluded the selection of a different place by the opposing party. A mandatory clause, on the other hand, states clearly that jurisdiction and venue are appropriate exclusively and only in the chosen location and court.

Just using the term “shall” may appear to be sufficient to establish that the forum selection is mandatory. But many courts have ruled that this is not necessarily so. Stating that one court, say the Circuit Court of Miami Dade County, Florida, should be the forum does not in and of itself mean that other courts do not have jurisdiction.

If the parties want that certainty, then they must state their desire unequivocally and unambiguously. Being precise counts. If you want to be in a particular Court then the forum selection clause in your contract should specifically state that that particular court shall have sole and exclusive jurisdiction to hear any dispute.

Attorney Fee Provision – recovering your legal fees

The prevailing party for the purpose of a contractual attorney’s fee provision is the party that prevails on the significant issues in the litigation. See Moritz v. Hoyt Enters., Inc.; Zhang v. D.B.R. Asset Management, Inc. The test for determining if a party is “prevailing” is whether it was successful on “any significant issue in litigation which achieves some of the benefit the parties sought in bringing suit” Moritz,  citing to Hensley v. Eckerhart; Payne v. Cudjoe Gardens Property Owners Ass’n, Inc.

The trial judge determines who is the prevailing party, based on a determination from the record as to which party has, in fact, prevailed on the significant issues tried before the court. See Moritz, see also Payne, (“…the fairest test for a determination of the prevailing party is to allow the trial judge to determine from the record which party in fact prevailed on the significant issues tried before the court”).

Focus on Results

In making its determination as to which party prevailed, the trial court should focus on the “result obtained”.  As such it is result, not procedure, which governs the determination of who is a prevailing party. See Smith v. Adler (appellants were prevailing party where they “secured most of the relief originally requested in the suit”).

As such, just because a party may have obtained some economic benefit as a result of the litigation does not necessarily mean that it is a prevailing party. See Boxer Max Corp. v. Cane A. Sucre, Inc.,  (“Simply because a party has obtained some economic benefit as a result of litigation, does not necessarily mean that party has succeeded on the major issue in the case”).

Additionally, because a trial court may properly find that neither party has prevailed in a contract action, under compelling circumstances it is possible that there will be no attorney fee award in litigation involving a contractual provision for prevailing party’s attorney’s fees. For instance, there is no prevailing party when a settlement occurs. However, where there is a functional equivalent of a judgment, the fact that a final judgment was not entered is not controlling in the determination of a prevailing party.

Finally, there appears to be a slight variance in the cases to the extent they discuss “significant issues” versus the “major issue”. Compare, e.g., Moritz, discussing “significant issues” with Zhang, discussing whether a party succeeded on the “major issue” in the case. To the extent that “significant” and “major” may be ascribed different meanings, and because one phrase is plural while the other is singular, this variance in language may eventually be of crucial importance in the determination of whether a party is the prevailing party for the purpose of an attorney’s fee statute.

Unenforceable Provisions

It is not uncommon for a company in the business of supplying concrete to use a pumper so that its concrete can get from the truck to the actual pour site. This happens most often when the concrete truck can’t drive close enough to where the concrete is needed.

Agreement with Unenforceable Provision

In one such instance, a concrete company rented a pumper and was using it at a job site when a construction worker was struck and injured by the pumper’s hose. Claims were filed against both the concrete company and the rental company that supplied the pumper. The rental company settled but then sought to recover from the concrete company what it paid out. How could it do that? It relied on the language in its rental agreement with the concrete company. That agreement included an indemnification clause, indemnifying the rental company from claims associated with the use of the pumper.

The concrete company resisted, something the rental company thought was foolish given the language within its rental agreement. But to the rental company’s surprise, the indemnity provision in its rental agreement was found to be unenforceable. It didn’t contain a dollar limit as to the concrete company’s potential liability, and without that limitation, this indemnification was considered too vague by the judge and wouldn’t be enforced.

A good result for the concrete company and a good lesson for all construction companies relying on agreements which may not have been reviewed by their construction lawyer. Not all those indemnification provisions are automatically enforceable.

Acceptance by Performance

It is not uncommon in the construction industry for parties to exchange and revise drafts of written contracts before agreeing on a final version. In some instances, the demands of the project require that the contractor or sub-contractor commence work before all the details of a written agreement can be worked out. Under general contract law, and indeed, often under the wording of unsigned agreements, this commencement can be interpreted as an acceptance by performance.

When one party prepares a contract and submits it to the other for his review and approval, the party who prepares and submits the contract is tendering an offer. The terms of the offer are set forth in the written words of the contract. It has been said that an “offeror is the master of his offer.” Therefore, the party submitting the offer, i.e., the offeror, may dictate the way in which the offer may be accepted. The offer may invite acceptance in writing or by performance, and actually absent an express provision in the contract setting forth the manner of acceptance, an offer may be accepted in either manner.

How is a Contract Defined

A contract is defined as requiring an offer, acceptance and consideration. Therefore, suppose a party – say an owner – submits a written offer to a contractor in the form of a proposed contract. The contractor, as yet unsure whether he wants to do the work under the terms proposed, sits on the contract. He leaves it on his desk and does nothing. A few days later, the owner calls and tells the contractor he really needs to start work immediately. The contractor, not wanting to lose the work, decides to start work on the project. Is there a contract? If the contract contains a clause stating that starting work on the project is a method of acceptance, it could be said that the contractor accepted the offer set forth in the proposed written agreement submitted by the owner. Even if the contract is silent on the method of acceptance, if a court of law finds that commencing work can reasonably be said to be an acceptance, the parties very well may be bound by the terms set forth in the written agreement, even though the contractor never signed the contract and even if the terms of the contract are somewhat unreasonable. This can be especially painful for the contractor if the terms set forth in the unsigned written form are onerous.

Fortunately, a smart contractor can protect himself from this result. Under general contract law, an offer is open until it is accepted, it expires or is rejected. The examples in the previous paragraph are those of an unwitting acceptance. An offer expires if it is not accepted by a particular deadline. For instance, suppose a proposed contract contains a term that requires acceptance by a particular date. If there has been no official acceptance by that date, then the offer can be said to have expired. Rejection, however, is probably the easiest way for a contractor to prevent an inadvertent acceptance by performance.

There are at least two ways that an offer can be rejected. First, is an outright expression of rejection. This can be in the form of an oral, written or electronic communication to the person tendering the offer stating that it is rejected. Words to the effect that “I reject your offer” followed by a description of the proposed contract should be sufficient. A written rejection should also be dated. Keep in mind, however, that the rejection usually is not effective until it is communicated to the person making the offer. Therefore, delivery of a rejection via an overnight delivery service where delivery can be tracked, via facsimile where transmission can be verified, via certified mail, return receipt requested or via email where a receipt is clicked indicating that the correspondence was received are preferred methods of communication. Better yet, before commencing work, if possible, have an authorized representative of the party submitting the original offer sign off on a statement that receipt of rejection of the initial offer is acknowledged.

Another way an offer can be rejected is through submission of a counter-offer. This can be trickier. While a counter-offer is generally considered to be a rejection of an offer followed by submission of a replacement offer, issues can arise if material terms in the first offer can be said to have been accepted.

The bottom line here is that communication is key. Whenever possible, it is always advisable to have a written agreement signed off by all parties before commencing work. By effectively communicating prior to starting work, and backing up communications with adequate written or electronic records, you can save yourself a good deal of grief down the line.

When is a contract completed?

“Am I done with this job?” is a question often asked by contractors and design professionals upon completing their work. Well, until just recently, this was not an easy question to answer.

First, there are those periods of continued responsibility spelled out in the warranties that may be requested or provided. These are generally for one year, but some could be as long as three years.

Then there are certain statutes, commonly referred to as statutes of limitations, which define the period of time someone has to file suit. When it relates to some flaw in the design or construction of an improvement to real property that period is 4 years. Easy enough you think, but when do those 4 years begin to run. The statute reads date of actual possession by the owner, the date of issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract, whichever is latest.

And then there is the statute of repose. This comes into play when the defect or problem being complained about is not immediately discoverable – something called a latent defect. This extends the period of time for a lawsuit to be filed to 10 years after the date of actual possession, the date of issuance of a certificate of occupancy, the date of abandonment of construction if construction is not completed, or the date of completion or termination of the contract, whichever is latest.

The part that gave folks some heartburn was figuring out the actual date the contract was completed.  A recent case had found that this could be the date the owner made final payment to the contractor, and as we all know, that could be both an uncertain and lengthy timeframe.

So just a few weeks ago, Florida’s Governor Scott signed a Bill which made clear that this date – the date that the contract is completed – is the later of the date of final performance of all contracted services or the date final payment becomes due (not when payment is made).

Certainty is always a good thing, especially so when it comes to any continued responsibility or liability for work done.

Breach is a serious thing

If your construction project runs into trouble, you might begin to see a minor disagreement turn into a more serious legal dispute. And in no time, the word “breach” could start to surface in the correspondence you’re receiving. When that happens, should you worry? Probably so.

Breach is a legal term used when one fails to honor a promise or to perform an agreed upon act, one that may be spelled out in a written or verbal agreement. Breach a contract and you will likely be sued to actually perform as obligated, or worse, for damages incurred. Not a good development.

Some of the more common claims raised in a breach of a construction contract are related to delay – a delay in performance, a delay in getting paid, a delay in delivering a project. Others stem from substandard or defective work, not following project plans, and of course, not honoring a warranty.

There may be defenses to these claims.  The contract may be invalid or unenforceable. That could be because either party did not actually agree to all the essential terms. Or because one party lacked capacity to enter into the agreement. Or maybe the contract was unconscionable or illegal – no one can agree to do something that actually violates the law. Other defenses may include mistake – did one or both parties misunderstand what they were agreeing to? Was one of the parties entering into the contract under duress? Has it become impossible to fulfill the obligations required under the contract?  Each of these can be an appropriate defense.

But an allegation of a breach is not something to be taken lightly.  See it and think twice about next steps. The legal system is not especially forgiving when a claim is ignored so best to consult a construction lawyer if you receive one of those breach letters.

Contract Termination

A breakup is often compared to a broken mirror: better to leave the pieces than risk more damage by trying to pick them up. But when it comes to business relationships, that kind of quick, clean split is often impossible and ill-advised. Contractors facing a split with a customer need to deal with the fallout professionally, addressing payments still due, materials ordered but not yet installed, and warranties yet to take effect. Simply walking off a job, tempting as it may be, is never a good idea; rather, it is a sure ticket to a lawsuit and court date. Here are three steps to resolve the dispute or end the contract—while keeping the courts out of it.

Review The Options

Determine exactly where the trouble may be, and decide if a resolution is at all possible. Is the tension a result of miscommunication? Mismatched personalities? Unmet expectations? If a resolution seems unlikely, take out the contract corresponding to the job, and review your options for next steps.

Terminating a job is never pleasant, but knowing what your rights are can help determine a plan of action. Review the termination provision in your contract. What are the permissible reasons for a termination? Is there a notice requirement? Do the parties have an opportunity to cure the problem before termination can be effective? Are there extenuating circumstances? And look at the correspondence—all emails and texts. They will likely provide information on the parties’ intentions, the site conditions, and the performance levels at various intervals on the subject job. All will have an impact on the parties’ respective rights and obligations.

Arrange An In-Person Meeting

Disagreements don’t often resolve themselves. Small differences can fester and become larger problems if  communication isn’t prioritized. Lawyers recommend arranging a face-to-face meeting with the homeowner(s)to discuss any disagreement. Sitting down and talking through a disputed point is often an effective first step.

If direct contact with the customer is not feasible or successful, consider presenting the dispute to a mediator—a mutually selected, independent third party who can coordinate a settlement meeting. Some 40-50% of all matters that go to mediation end up settling, a quicker and less expensive resolution than a court battle.

Obtain A Written Release

If it is determined that a split is the best or only available option, then look to obtain and negotiate a fair but complete abandonment of all claims. This is formalized through a waiver of liability agreement, commonly referred to as a release. The releasor gives up the ability to make further claims in exchange for the releasee providing something of value, such as forgoing payment of a pending obligation.

While you may believe you were treated poorly by your customer and are absolutely in the right to stop work, know that judges don’t always see things the same way. Written and timely notice of a contractor’s intention to quit a job is a must, as is a last ditch effort to communicate with your customer to try and work through any differences.

 Substantial completion defined

Every contractor has heard the term and many have had to figure out exactly what it means.  Substantial completion is a legal term found in construction contracts to define that stage of a contractor’s work which is sufficiently complete in accordance with the applicable construction agreement. And when used in relation to a project as a whole, substantial completion is that point where what was constructed is fit for occupancy and ready to be used for its intended purpose.

It is a critical term in the life of any construction project as any construction lawyer would advise. It signifies the time the owner versus the contractor becomes responsible, when the contractor’s work is done so that the owner can begin to use the contracted work for its planned function,  or in the case of a building, occupy it. That said, it is not necessarily tied to the issuance of a certificate of occupancy.

Importantly, substantial completion is not final completion. There may be any number of minor items left to complete on any given project. These are commonly noted on a punch list. And completion of these items could take several weeks or months, and could sometimes be out of the control of the contractor involved. Generally, final completion is achieved when the architect or engineer on the job has conducted a final inspection. It is then that the contractor submits a final application for payment as well as all related warranties and releases. But final completion does not cancel out the owner’s continuing right to make a claim against the contractor for defective or incomplete work.

Given the importance of this date, it is advisable to specifically define it within any applicable contract. Whether it is to be the date the actual certificate of occupancy is issued by the appropriate building department, the date the owner occupies the subject property or begins to use the work, or the date certified by the project architect or engineer as the date of substantial completion – having this be an actual, definitive and objective date established within your construction agreement minimizes confusion and provides certainty.

No license means no contract

Florida law requires that individuals who work as contractors obtain a state contractor’s license to perform most construction work. The law defines a contractor as anyone who builds, improves on, tears down, or subtracts from any building or structure for compensation. This covers actual construction, as well as structural alterations and plumbing, electrical, or air conditioning work.

Performing construction work without a valid state license, called unlicensed contracting, is a serious offense in Florida. Most unlicensed contracting offenses are punished as misdemeanors, with penalties up to one year in prison or $1,000 fine. Certain unlicensed contracting offenses (such as second time offenses) can be charged as felonies.

Valid License Needed to Enforce Contract

In addition, unlicensed contractors cannot enforce construction contracts. Florida’s Supreme Court recently affirmed its tough stance on unlicensed contracting, holding that an unlicensed subcontractor cannot enforce a contract claim against a general contractor, even where the general contractor knows that the subcontractor lacks a valid license. This means that customers and other contractors may not be required to pay unlicensed contractors for work performed under the contract.

Knowledge is king in every undertaking and it is no different when it comes to Florida Lien Law. Keeping up to date with legislative changes, critical court decisions, and current construction lien law is something construction executives and design professionals must do regularly to remain effective managers as they work hard to turn concepts into drawings and blueprints into well-built projects. Where it now has become common to believe that any discovered deficiency must be the result of someone else’s acts or omissions, the idea of avoiding potential risks is today more important than ever.

Managing job site discrepancies and those unavoidable change orders while correctly interpreting construction contract terms can provide an edge – something much appreciated in this always competitive business. This is but one step in that process.

Working Without a Contract Can Be Dangerous

While most everyone is aware that states have statutes which govern construction or mechanic’s liens, many do not realize the significance of the law of contracts on contractor claims. Making sure that a valid contract is in place before work is commenced can be as important to you as being awarded the actual job.

The most obvious ramification of performing work without a contract is that if you are not paid, you cannot successfully sue the party for whom you performed the work for breach of the contract. At most, you may only be able to recover damages for what is known as “unjust enrichment,” seeking to recover the worth of that work for which you have not been paid and which has benefited the non-paying party. The problem is that this is at best, a fallback position. The measure of damages – that is, the unpaid value of the benefit received for the work performed and materials provided – is usually less than the amount of compensation that the contractor would have been entitled to if a contract were in place, and it requires proof from an independent third party to support the damages sought.

Another, and potentially more troublesome ramification of performing work without a contract is that the contractor will likely lose its rights to place a contractor’s or mechanic’s lien on the property where the work was performed. A lien is an important device to secure payment and increases the contractor’s leverage for getting paid. Using Florida as an example, no lien can arise unless the contractor had a valid contract in place to perform the work or supply the materials. In a recent case, a homeowner entered into negotiations with a tree removal service to cut down a tree on the homeowner’s property and remove it from the premises. The parties had different ideas as to what removing the tree from the premises entailed. The homeowner thought that this meant hauling it away from the property. The contractor thought that this merely meant moving it to another location on the premises. After the tree removal service filed a construction lien, the court ruled that the lien was invalid. Unfortunately because the term “removal” was never pinned down by the parties, the court determined there was never a meeting of the minds or a contract in place. Without a contract, no lien rights existed for the contractor. Worse yet, after the tree removal service lost the case, it was on the hook for the homeowner’s attorney’s fees.

What Type of Construction Contract are you using, Which is Enforceable?

It can be said that there are two types of contracts – written and oral. A written contract contains terms that are set forth in one or more written documents, or in today’s world, electronic documents that can be printed out. A contract can also be formed orally. For example, if a contractor asks a subcontractor to do a job for a set amount of money and the subcontractor orally accepts the proposal, under many circumstances, an oral contract has been created. Oral contracts are valid. They are, however, more difficult to prove in a court of law requiring testimony from witnesses. Indeed, written contracts are the preferred form when possible. However, absent a written contract, if a contractor can prove the existence of an oral contract, and if all other requirements are met, the contractor will retain its lien rights.

There is another concept known as a contract “implied in law.” What this means simply is that even if the parties never reached an agreement, a court can rule as though there was an agreement, simply out of fairness to the one of the parties. However, a contract implied in law only applies to prevent “unjust enrichment,” that fallback position for damages that is not as good as damages under a contract. Again, using Florida as an example, a construction or mechanic’s lien can never arise when the contract is implied in law. There must be a real valid contract between the parties. Otherwise, there are no rights for the contractor to lien the job site.

One final nail in the coffin for those performing work without a contract – there is usually no right for the contractor to recover its attorney’s fees for enforcing the right to get paid for work. Worse yet, the contractor could actually be responsible for the property owner’s attorney’s fees if a lien was improperly filed. A smart contractor will look to get its contract in place and in writing before doing any work on a job.

The uncertainty of letters of intent

In a booming construction economy, work is plentiful and competition is fierce. So fierce in fact that the job you thought you had “locked up” may be “up-for-grabs” even after you begin working onsite. If all you have to secure your place on the project team is a letter of intent, don’t unpack your trailer just yet.

The general rule in most jurisdictions is that where parties so intend, a contract is binding even though the parties also agree that the formal embodiment of its provisions will subsequently be prepared. “Even though all the details are not definitely fixed, an agreement may be binding if the parties agree on the essential terms and seriously understand and intend the agreement to be binding on them. A subsequent difference as to the construction of the contract does not affect the validity of the contract or indicate the minds of the parties did not meet with respect thereto.” 17 C.J.S. Contracts s. 31. Said simply, letters of intent may be enforceable if they contain the necessary essential terms and conditions to show a meeting of the minds. While there are no hard and fast rules, an analysis of certain applicable cases provides useful guidance.

Price, The Essential Term.

The most essential, but not necessarily definitive contract term, is price. “If the parties provide a practicable, objective method for determining the price or compensation, not leaving it to the future will of the parties, there is no such indefiniteness or uncertainty as will prevent the agreement from being an enforceable contract.” 1 Corbin, Contracts s. 97 at 424. Further, “if the parties have concluded a transaction in which it appears they intend to make a contract, the court should not frustrate their intention if it is possible to reach a fair and just result, even though this requires a choice among conflicting meanings and the filling of some gaps that the parties have left.” 1 Corbin, Contracts s. 95 at 400. Whether the parties intended to form a binding contract is determined by examining the language of the document and the surrounding circumstances. 1 Williston, Contracts s. 4:8 at 306-07.

The importance of price as a contract term is illustrated by Irby, M.D. v. Memorial Healthcare Group, Inc., 901 So.2d 305 (Fla. 1st DCA 2005), where the alleged contract was in the form of a letter, setting forth in outline format various terms under which the plaintiff would sell his private medical practice and join Memorial as a medical director. The court found that the letter clearly contemplated future actions which were required before a binding agreement could be reached. The letter stated that the plaintiff would be employed as a medical director, but left out terms of compensation and benefits. Moreover, the letter stated that Memorial would buy the plaintiff’s gynecology practice and facilitate the sale or merger of the remaining obstetrics practice, but it did not provide a price or other terms of the sale or merger. The court found it persuasive that the letter stated that parties must work through legal issues and other details and that the parties can hopefully complete the practice evaluation and close the agreement prior to a certain date. Therefore, the price valuation of the practice, an essential term of the contract, was a contingency that rendered the letter merely a proposal and not a binding agreement.

Other Essential Terms.

In Cushman & Wakefield of Florida, Inc. v. Williams, 551 So.2d 1251, 1253 (Fla. 2d DCA 1989), the court held binding a letter of intent, which set forth the proposed terms and conditions of a lease commitment, along with relevant dates and square footage, stating that “[t]hereafter, the parties executed the document, converting it into a binding letter of intent.” The court seemingly placed an emphasis on the execution of the letter of intent, along with the inclusion therein of essential terms and conditions relevant to the lease.

Housing Authority of the City of Fort Pierce v. Foster, 237 So.2d 569 (Fla. 4th DCA 1970), involved an action by joint venturers against a city housing authority for breach of a construction contract. The court held that a jury question existed as to whether the acceptance of a bid, which contained all the material terms of the contemplated written contract except for unit price of extras or changes, was intended to have a binding effect until a formal contract was executed. The court stated that “it is clear that both parties contemplated the execution of a formal written contract” but that an issue of fact exists as to whether or not the parties also intended their negotiations to have a binding effect until a formal written contract is executed. The court considered the facts that the bid was an offer to build a project for a specific price and that no material term of the contemplated contract was omitted except the unit prices for changes. According to the court, “there was substantial evidence from which the jury could have determined that the negotiations between the parties reached the point of a binding contractual relationship.” Id. Contra Terra Group, Inc. v. Sandefur Management, Inc., 527 So.2d 849, 849-50 (Fla 5th DCA 1988) (recognizing the creation of a valid and enforceable contract when a party clearly communicates assent, even when that assent contemplates the future execution of a contract that is ultimately never executed).

Relying on this decision, the court in Delta Electrical Contractors, Inc. v. McDevitt & Street Company, 262 So.2d 226 (Fla. 2d DCA 1972), held that a general contractor’s letter to an electrical subcontractor with an enclosed contract form, that stated “If you find the enclosed in order, please affix your signature and seal on Page 5 thereof and return all four copies to this office…As soon as the enclosed has been returned to us and processed, we will return an executed copy of the contract to you for your files”, signed by the subcontractor, constitutes a fact issue as to whether the contract was to be regarded as complete when executed by the general contractor, or whether it constituted an offer which the subcontractor accepted.

Agreements to Agree.

An agreement to agree in the future does not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith in an attempt to reach the objective, a contract on the underlying subject matter, within the agreed framework. “What [one party] may demand, however, is that his counterparty negotiate the open terms in good faith toward a final contract incorporating the agreed terms. This obligation does not guarantee that the final contract will be concluded if both parties comport with their obligation, as good faith differences in the negotiation of the open issues may prevent a reaching of a final contract. The obligation does, however, bar a party from renouncing the deal, or insisting on conditions that do not conform to the preliminary agreement.” Stouffer Hotel Company v. Teachers Insurance and Annuity Association, (citing Teachers Insurance and Annuity Association v. Tribune Company,(S.D.N.Y. 1987)).

In John I. Moss, Inc. v. The Cobbs Company, the court explained that the “rule that it is possible for parties to make an enforceable contract binding them to prepare and execute a subsequent agreement is well recognized.” However, the court found that a franchise application was not a franchise agreement, but merely a preliminary negotiation due to the following factors: the application did not contain any of the terms of a complex franchise agreement, such as the duration and the royalty fee; the application was not furnished to the plaintiff at the time he signed the application; and the essential terms of the agreement were not discussed and agreed upon. Id. at 875. Accordingly, the contract that intends to bind the parties must contain all essential terms. Id.

The court in Midtown Realty, Inc. v. Hussain, held that a letter of intent was not a contract, but rather a preliminary understanding. The court first noted that the case dealt with the sale of a gas station, a complex situation that includes environmental concerns, the attainment of licenses and government approval, and the financing of a large sum of money, among other things. Under these circumstances, the court reasoned that it is more than reasonable to conclude that the parties did not intend to be bound by a “skeletal” letter of intent. The court went on and listed several factors that led it to hold that a meeting of the minds did not occur including the fact that the purchaser of the gas station repeatedly called the letter of intent a proposal; the letter of intent provided that if its terms and conditions were acceptable to the seller, the purchaser would present to the seller a more formal purchase agreement; and the purchaser’s response to the seller’s amendment to the purchase and sale agreement that if seller did not accept the amendments, the transaction would not be consummated. The court concluded by specifically highlighting those terms that were not included in the letter of intent such as a proposed purchase price, a proposed plan for financing, a proposed inspection period, and a proposed closing date.

So What Really Matters?

It is safe to say that care must be taken when drafting a letter of intent intended to be enforceable. What seems to be clear are these general rules. First, the price and payment method for the products to be delivered and services to be rendered must be included. Second, the level of detail and scope of the letter of intent should be commensurate with the complexity of the transaction. Some of these additional terms may include the construction start date, the substantial completion date, the scope of work, if a bond will be required or furnished, any special insurance policies (OCIP, CCIP, default insurance, …), the warranty, and change order and extra pricing and procedures. Third, leave out language which may seemingly condition the letter of intent on future conduct including additional negotiations or execution of a subsequent agreement. Fourth, have individuals authorized on behalf of both parties sign the letter of intent. Finally, and most importantly, do not delay in completing any remaining negotiations and executing a full and complete agreement.

Dealing with cost overrun and material shortages

We’ve all noticed that the price of just about everything has gone up in the last year. And if that isn’t bad enough, obtaining many of the materials needed in construction has gotten very difficult. This combination of price escalation and material shortages is significantly disrupting a contractor’s ability to properly price and timely build any project.

But contractors are not without some remedy. They can attempt to address these issues either during the negotiation and bid process or once construction has commenced.

It is obviously easier to attend to such matters before a contract is actually signed. Look to strike any proposed language which has you absorbing the risk and exposure of a price escalation. Rather seek to incorporate the right to adjust the pricing on the job, passing on any unexpected increases, maybe through a change order. Alert your suppliers, advising them you need guaranteed pricing for some extended period and you need written notice significantly in advance of any anticipated increase in pricing or any delay in delivery. You might want to add a provision similar to the following:

If you’ve already entered into a contract, it will surely be more difficult to address these issues. But depending on how the contract is written, an equitable adjustment in both time and price may still be achieved through the exercise of certain existing contract provisions, such as a Force Majeure clause, noting circumstances beyond your control entitle you to some modicum of relief. Pushed to honor your original pricing, you likely will be unable to complete the work – something neither the contractor nor the owner would want to see happen as this will undoubtedly delay the progress of the project and cost them both more than the reasonable price increase you would be quoting. A good faith renegotiation should be attempted.

Be proactive – approach each ongoing and new job with these points in mind.

Dispute resolution litigation vs. arbitration

Arbitration has been a popular dispute resolution option in the construction industry. It is, in fact, a standard provision within many construction contracts. Generally believed to be a simpler, faster and better option to resolve a difference of opinion, this has proven to not always be the case.

These are 4 reasons why.

No Longer So Simple.

It was often thought that discovery had no place in arbitration. That is not true. Discovery in an arbitration proceeding can be as long and as expensive as it is in litigation. While the parties can indeed limit the amount and type of discovery conducted in arbitration, that doesn’t always occur, especially in these days of complicated issues.

Just As Time Consuming.

It is not unusual for a significant arbitration to take as long as a lawsuit from initial filing to final ruling. Scheduling all the parties and then coordinating their availability with that of their lawyers and the arbitrators is a challenge. It is therefore not unusual for arbitration hearings to be spread out over several months. As cases have become more complex, so has the ability to argue any particular position in one continuous presentation.

Not So Cheap.

Parties are often surprised when they learn the amount of filing fees and administrative costs associated with arbitration, not to mention the professional fees charged by the arbitrators – costs that are absent in a state court or federal litigation where filing fees are in the hundreds of dollars and judges are paid by the taxpayers.

Rarely Appealable.

Something not always understood by non-lawyers, an arbitration decision is rarely appealable – even if it is based on an incorrect interpretation of the law. Absent a showing of fraud, bias or a corrupt arbitrator, it is near impossible to overturn a bad decision by an arbitration panel.

Arbitration may have its place in certain construction disputes, but parties need to make such a decision fully aware of the pros and cons of proceeding down this road.

How Handle Construction Disputes

It’s unlikely to be in the construction industry for very long and not run into a dispute. Disagreements between the parties – owners and contractors, contractors and subcontractors, subcontractors and supply houses – can crop up when one party fails to meet its obligations, contractual or otherwise. Sometimes these controversies result from a clear breach of a contract provision; other times they are simply the consequence of a party’s reaction to or disregard of a particular issue.

Maybe it is associated with timing – the job is off track and not moving as quickly as it should. Maybe it is a payment matter – change orders not being paid or payment applications far outpacing the actual progress on the job. Whatever it may be, real or not, a dispute is a serious event on a construction project, often causing progress to screech to a halt. What should you do? Start with a good contract. Negotiate the best terms possible to suit your needs and make sure you understand what you are getting yourself into before you start a job. Then document everything – keep good records as to performance, communication and payment. Corroboration will be needed to either prosecute your position or defend against any claim.

Unfortunately, all too often, dispute resolution alternatives are generally an afterthought for contractors whose attention is generally more focused on scope and price. But it will only take one bad experience with the legal system to bring home the fact that how disputes are addressed is as important as anything else found within one’s contract.

There are essentially four avenues to take when a dispute arises – direct negotiation between the parties, mediation before an impartial intermediary, arbitration before one or three arbitrators, or litigation before a judge or jury in state or federal court. Each comes with benefits and disadvantages, and contractors would be smart to understand the distinctions.

The easiest, and what should absolutely be the first step when any dispute occurs, is a meeting of the parties to discuss their respective positions. It is by far the least expensive and could be the most immediately productive. And if it accomplishes nothing, it at least sets out the actual points of disagreement so the parties know, going forward, where they each stand.

The next, and often the required first step to any eventual arbitration or litigation, is mediation. Often misunderstood as just another form of arbitration, mediation is quite different. It is a private and confidential process where the parties voluntarily agree to meet and, with the assistance of a neutral third-party mediator (jointly selected by the parties), try to work through their disagreement. The process does not involve the evidentiary and testimonial aspects associated with a trial or arbitration, but is rather a mediator’s shuttle diplomacy to seek an acceptable middle ground that both parties might accept. If a settlement is reached, it may be enforceable by law. Many states now require that mediation take place after suit is filed and before trial. It is a very worthwhile step in any dispute resolution procedure and is highly recommended.

Arbitration has historically been the preferred method for contractors and their lawyers to resolve a dispute. It is often noted in their contracts as the way an unresolved claim or controversy is to be addressed. Believed to be a simpler, faster and cheaper option than litigation, this has not always proven to be the case. Depending on the dollars involved in the misunderstanding, an arbitration would be before one, or a panel of three, disinterested and jointly selected arbitrators (generally experts in the field). The process is much like a trial, with discovery being taken and evidence presented. While both may be more limited in arbitration, the fact that construction issues these days may be difficult or intricate could result in any arbitration actually taking more time. The coordination of multiple parties, witnesses, lawyers and arbitrators could easily cause any presentation to be spread out over a number of months versus one continuous hearing. But most importantly, and not often understood by contractors, arbitration decisions are rarely appealable, even if based on an incorrect interpretation of the law. You would need to show fraud or bias to have a good chance of winning at overturning an arbitration.

Then, there is the tried and true method of litigation – suing in state or federal court before either a judge or a jury. This approach has one clear advantage – any decision, judge or jury, can be presented for further appellate review. While costly, it remains an effective way to move a controversy to a resolution. The complexity of the issues can dictate whether a judge or jury would be the appropriate forum. But frankly, more and more cases reach a settled resolution before ever going to trial.

Finally, there is the matter of legal fees and costs. Are they recoverable? Absent a statutory provision and a corresponding claim, the attorney’s fees and costs you incur will not be recoverable, even if you win, unless you have a contractual provision which calls for the prevailing party to recoup his/her incurred legal expenses. Be sure to add such a provision along with your choice of dispute resolution alternatives when finalizing your contract. You’ll be glad you did.

Is Arbitration Right For You?

How does your contract address dispute resolution? It probably says arbitration is the preferred method. And why not? It’s been favored by construction professionals for years. But that popularity may be fading. In fact, the American Institute of Architects contract forms now state that if the parties don’t specifically select arbitration as the way to deal with a dispute, then the choice automatically defaults to litigation.

Problems with Arbitration

Most people don’t realize that arbitration can actually be just as time-consuming and expensive as litigation. Discovery may be limited, but it isn’t eliminated. Document production and depositions remain integral in moving a construction case forward. And arbitrators’ fees—which aren’t cheap—are paid by the parties, whereas judges and juries are paid by the taxpayers.

But what may be the most important distinction between arbitration and litigation is the little-known fact that arbitration decisions are rarely able to be appealed. Short of a showing of bias or fraud perpetuated by the arbitrator, it is unlikely you can have a bad outcome overturned, even a decision based on an incorrect interpretation of the law. That is not true in litigation. You have the absolute right to appeal a judge’s ruling or jury’s verdict if you don’t agree.

So, What Should You Do?

For starters, put a requirement for mediation into your contracts. Many mistake mediation for arbitration. That would be wrong. In an arbitration, an arbitrator hears evidence and renders a decision that is enforceable in a court of law. In mediation, a neutral third party negotiates with the people involved and looks to find a middle ground which might settle the dispute. The mediator makes no decisions and his or her recommendation does not have to be accepted. An arbitration continues to a decision while a mediation can reach an impasse when the sides simply do not agree.

Set a time frame for a mediation to occur before any next steps take place. Courts in most jurisdictions now require mediation before a trial can proceed. If mediation is futile, then litigation, preferably before a judge, should be pursued.

To be clear, none of these options is pleasant. But having no stated path to resolving a dispute is worse.

Finally, make sure to have a prevailing party attorney’s fee provision. You wouldn’t want to go through all this, win your case, and then have no way of recovering some of the legal expenses you have incurred.