The Devil’s in the Details: Dispute Resolution and Attorney’s Fees Contract Clauses

Kent B. Scott | Babcock Scott & Babcock | December 13, 2018

            If you are a business owner, a property owner, or you work in the real estate industry, you have undoubtedly signed, drafted, reviewed, or negotiated many contracts. At their most fundamental level, written contracts are nothing more than the memorialization of the parties’ agreement, and more importantly, the allocation of risk. Much of that risk shifting is often intended to limit each party’s exposure to lost time and money in the future. Considering that, and in an effort to reduce your exposure to risk, there are two key clauses that should be considered in every contract you sign: a dispute resolution clause and an attorney’s fee clause. In this article I will briefly discuss both of those clauses and how they can eliminate uncertainty in business and real estate transactions.

 

Dispute Resolution Clause

 

            Unfortunately, a fact of contracting life is the inevitability of disputes, disagreements, and differing opinions. Even with existing clients or customers with whom you have a good working relationship, disputes undoubtedly arise. Knowing that such disputes are not only foreseeable, but inevitable, if you sign a written contract without any type of clause that addresses a process for resolving those disputes, then you are exposing yourself to the unnecessary risk of a lengthy and expensive legal battle. So, we must first start with the premise that every contract you sign should provide some mechanism for resolving disputes. Unfortunately, little if any time is devoted to the drafting of dispute resolution clause which is the first clause you run to when a dispute does arrive. After all, isn’t everything going to work out just as you planned them? With that in mind, an effective dispute resolution clause will typically address resolving disputes in a graduated manner from the approach you have the most control over, and is least expensive and time consuming, to the approach where you have the least control over, and is most expensive and time consuming. That framework usually follows three general categories: negotiation between the parties, then mediation, then arbitration or litigation.

 

Negotiation. When a dispute arises between contracting parties, the easiest, least expensive, and usually preferable method of resolving that dispute is to get the decision makers in a room together or on the phone and negotiate a solution. At this stage of a dispute, both parties have complete control over the outcome and usually have complete ability to craft whatever solution will make the most business sense for themselves or their companies. They are not beholden to a third-party decision maker (like an arbitrator or a judge) and they are not bound by any formal rules that might limit or affect their decision (like the rules of arbitration or civil procedure). So, in your dispute resolution clause it is wise to state that when a dispute arises, the parties must first make a good-faith attempt at negotiating a solution.

 

Mediation. If negotiations fail, then it is also wise to requires parties take the second step in your dispute resolution procedure: mediation. Mediation is nothing more than non-binding, formalized negotiations with a neutral third party. In other words, in a typical mediation, the parties mutually agree upon a third party (ideally a former judge or an experienced attorney in the applicable area of law) who will meet with the parties together and help both sides understand the pros and cons of their positions with the intent of facilitating a settlement. With few exceptions, there are usually no formal rules or other requirements of how a mediation is conducted, other than the personal preferences of the mediator. Mediation is a consensual, confidential and creative process. Nothing happens in mediation without the consent of both parties. Most mediations end successfully with the parties moving on with their lives having saved some time and money on legal fees. Investing in the resolution rather than the litigation of a commercial dispute benefits all parties. Including a contract provision that requires mediation can go a long way to reducing a lengthy and expensive legal dispute.

 

Arbitration. The final category of dispute resolution to address in your contract is either arbitration or litigation, both of which are generally the more time consuming, expensive, and uncertain methods to resolve disputes (though, in some cases, they may be the best option). Arbitration is more formal than mediation, but less structured than going to court (i.e., litigation). Arbitration is similar to mediation in the sense that the parties get to select who the arbitrator is and, to some extent, the parties get to choose the rules that govern the proceeding. However, Arbitration differs from mediation because typically the parties agree to vest decision making power in the arbitrator and the parties usually agree to be bound by the decision. Arbitration can be an effective method of resolving disputes, but it does take some autonomy away from the parties and it is generally a more expensive and time-consuming process than mediation.

 

Litigation. The other, more involved, option for resolving disputes is litigation in court. To be sure, keeping litigation as an option for dispute resolution may be a wise choice, depending on the type of contract and the parties to that agreement. But, litigation is generally the most expensive and time-consuming option. And it’s also the option where the litigants have the least amount of control over the process: you don’t pick your judge, you don’t pick the rules, and you don’t set the schedule. Nevertheless, the judicial system in the United States may provide certain benefits that you want to have available such as the option of a jury trial. So, depending on your circumstances, you may want to either keep litigation open as an option, or keep it off the table entirely.

 

By including a dispute resolution clause in every contract you sign, and by understanding the pros and cons of each method of resolving disputes, you can be better equipped to evaluate the risks you face with foreseeable disputes, and the risks you are comfortable with regarding the resolution of those disputes.

 

Attorney’s Fees Clause

 

In our system of jurisprudence. the “American Rule”, both parties to a lawsuit pay their own way, no matter who wins. There are reasons for this rule. For one, we as a society do not want to discourage individuals from bringing meritorious claims for fear of having to pay the other side’s attorney’s fees. Related to that is the possible benefit society may lose if the party with a meritorious claim did not bring that claim because it did not want to risk paying the other side’s attorney’s fees. Whether we agree with these reasons is a debate for another day. But whatever the reason, the rule means that a plaintiff can file a lawsuit against a defendant, which the defendant may spend tens of thousands of dollars to successfully defend, and the defendant will be required to pay all of its own attorney’s fees.

 

There are two exceptions to the American Rule that each party is responsible for their own attorneys’ fees. The first is the statutory exception. This exception is that a prevailing party can recover its attorney’s fees (i.e., make the losing party pay for them) if a statute allows for it. For example, Utah’s mechanic’s lien statute states that the prevailing party on any action to foreclose a mechanic’s lien is entitled to an award of the reasonable attorney’s fees it incurred to prevail in that action. There are many statutes that similarly provide for attorney’s fees, but the problem is those statutes are out of your control. In other words, your situation may or may not fall within a governing statute, which is why the second exception should be your default approach.

 

The second exception is that a prevailing party can recover its attorney’s fees if a contract says so. This exception is entirely within your control, which is why, if you are concerned about being liable for another party’s attorney’s fees, you should seriously consider whether every contract you sign should state that the prevailing party in any lawsuit or dispute that arises out of that contract will be entitled to be paid its attorney’s fees by the losing party. To answer that question—whether it is in your best interests to include an attorneys’ fee clause in your contract documents—we recommend that you discuss this matter with legal counsel. Cases may vary depending upon the nature of the contract relationships involved and the particular business interests of the parties.

 

 

 

Conclusion

 

A fact of life in the world of construction, real estate, or owning a business involves inherent risks. There are risks that you will end up in a lengthy and expensive dispute with the party you contracted with. Also, there is the risk that you will prevail in a lawsuit, but still be stuck with a legal bill that far exceeds anything you gained by prevailing in that suit. By recognizing these foreseeable risks and ensuring that every contract you sign has a dispute resolution clause and addresses attorney’s fees to address your company’s needs, you will significantly reduce your exposure to these all-too-common risks, which should help you continue to survive and thrive in an uncertain industry.

 

Kent Scott is a shareholder in the construction

Law firm of Babcock Scott & Babcock. He may

Be reached at kent@babcockscott.com

Waiver of Consequential Damages in Florida May Have Unintended Consequences

Jared Gillman | Construction Industry Counselor | December 7, 2018

In Florida, parties often negotiate and include a waiver of consequential damages in construction contracts and design professional contracts.  However, based on a recent decision by one Florida appellate court, waiving the right to recover consequential damages may have a broader impact than intended.

In Keystone Airpark Authority v. Pipeline Contractors, Inc., No. 1D17-2897, 2018 WL 6174666 (Fla. 1st DCA, Nov. 27, 2018), Florida’s First District Court of Appeals held that the concept of “consequential damages” in a contract between an owner and supervising architect included all damages caused by a non-party contractor, even foreseeable damages resulting from an architect’s or engineer’s failure to supervise construction.

Keystone Airpark Authority (“Airpark”) contracted with Pipeline Contractors, LLC (“Contractor”) to build airplane hangars and taxiways on its property.  Airpark entered into a second contract with Passero Associates, LLC (“Passero”) to provide engineering services, inspections, material testing, and observation of Contractor’s work.  The contract between Airpark and Passero contained a waiver by Airpark of consequential damages.

After construction was complete, Airpark discovered that Contractor used substandard material for below-grade support underneath the hangars and taxiways.  Ultimately, the structures and subgrade needed to be removed, repaired and replaced.  Airpark sued Passero and Contractor in the same case.  Airpark alleged that Passero had a contractual duty to ensure the materials Contractor used were proper and that Passero had breached that obligation. Airpark sought to recover from Passero and Contractor the cost to remove, repair and replace the hangars, taxiways and underlying subgrade.

Passero argued that the damages sought by Airpark were not a direct result of Passero’s alleged failure to supervise, but instead were caused by a combination of the alleged failure to supervise and the contractor’s improper work.  Passero took the position that Airpark’s damages were consequential damages, excluded by its contract with Airpark.  Passero contended a claim for damages against it was limited to the contract value for the engineering services.

Airpark responded that the repair costs were general damages, not consequential, because those damages were foreseeable.  Airpark argued that the failure to properly supervise the construction clearly could have resulted in construction defects going undetected, and as a result it was foreseeable that the defects would later require repair.

Agreeing with the trial court, the Appellate Court held that foreseeability was not the dispositive issue.  Instead under Florida law, direct damages are the direct or necessary consequence of the breaching party’s actions.  Consequential damages stem from losses incurred by the non-breaching party in its dealings, often with third parties, which were a proximate result of the breach and that were reasonably foreseeable by the breaching party at the time of the breach.  The consequential nature of loss is not based on the damages being unforeseen by the parties, but those damages that are caused by a third party, while still reasonably foreseeable at the time of contracting.

The Appellate Court ruled that Contractor could have completed its work correctly without Passero’s supervision, and therefore the need for repair did not arise within the scope of the immediate transaction between Passero and Airpark.  Rather, the need for repair stemmed from the loss incurred by Airpark in its dealings with Contractor, a third party.  While the damages were reasonably foreseeable, they were consequential and not general or direct damages as to Passero.

The First District Court of Appeals stated that this issue was a question of great public importance and asked the Florida Supreme Court to address the matter.  The Florida Supreme Court has not yet determined whether it will accept the case.

Based upon this ruling, it is important for all parties to understand what a waiver of consequential damages might mean in the context of an architecture contract or design/engineering professional contract.  A party should take care to pay close attention to these waivers and be sure the contract language accurately reflects its true intent on the types of damages that are recoverable and those that are not.

.  However, based on a recent decision by one Florida appellate court, waiving the right to recover consequential damages may have a broader impact than intended.

In Keystone Airpark Authority v. Pipeline Contractors, Inc., No. 1D17-2897, 2018 WL 6174666 (Fla. 1st DCA, Nov. 27, 2018), Florida’s First District Court of Appeals held that the concept of “consequential damages” in a contract between an owner and supervising architect included all damages caused by a non-party contractor, even foreseeable damages resulting from an architect’s or engineer’s failure to supervise construction.

Keystone Airpark Authority (“Airpark”) contracted with Pipeline Contractors, LLC (“Contractor”) to build airplane hangars and taxiways on its property.  Airpark entered into a second contract with Passero Associates, LLC (“Passero”) to provide engineering services, inspections, material testing, and observation of Contractor’s work.  The contract between Airpark and Passero contained a waiver by Airpark of consequential damages.

After construction was complete, Airpark discovered that Contractor used substandard material for below-grade support underneath the hangars and taxiways.  Ultimately, the structures and subgrade needed to be removed, repaired and replaced.  Airpark sued Passero and Contractor in the same case.  Airpark alleged that Passero had a contractual duty to ensure the materials Contractor used were proper and that Passero had breached that obligation. Airpark sought to recover from Passero and Contractor the cost to remove, repair and replace the hangars, taxiways and underlying subgrade.

Passero argued that the damages sought by Airpark were not a direct result of Passero’s alleged failure to supervise, but instead were caused by a combination of the alleged failure to supervise and the contractor’s improper work.  Passero took the position that Airpark’s damages were consequential damages, excluded by its contract with Airpark.  Passero contended a claim for damages against it was limited to the contract value for the engineering services.

Airpark responded that the repair costs were general damages, not consequential, because those damages were foreseeable.  Airpark argued that the failure to properly supervise the construction clearly could have resulted in construction defects going undetected, and as a result it was foreseeable that the defects would later require repair.

Agreeing with the trial court, the Appellate Court held that foreseeability was not the dispositive issue.  Instead under Florida law, direct damages are the direct or necessary consequence of the breaching party’s actions.  Consequential damages stem from losses incurred by the non-breaching party in its dealings, often with third parties, which were a proximate result of the breach and that were reasonably foreseeable by the breaching party at the time of the breach.  The consequential nature of loss is not based on the damages being unforeseen by the parties, but those damages that are caused by a third party, while still reasonably foreseeable at the time of contracting.

The Appellate Court ruled that Contractor could have completed its work correctly without Passero’s supervision, and therefore the need for repair did not arise within the scope of the immediate transaction between Passero and Airpark.  Rather, the need for repair stemmed from the loss incurred by Airpark in its dealings with Contractor, a third party.  While the damages were reasonably foreseeable, they were consequential and not general or direct damages as to Passero.

The First District Court of Appeals stated that this issue was a question of great public importance and asked the Florida Supreme Court to address the matter.  The Florida Supreme Court has not yet determined whether it will accept the case.

Based upon this ruling, it is important for all parties to understand what a waiver of consequential damages might mean in the context of an architecture contract or design/engineering professional contract.  A party should take care to pay close attention to these waivers and be sure the contract language accurately reflects its true intent on the types of damages that are recoverable and those that are not.

What Is the Christian Doctrine and Why Should You Care?

Merle M. DeLancey Jr. | Blank Rome | November 19, 2018

The Christian Doctrine

The Christian doctrine provides that a mandatory statute or regulation that expresses a significant or deeply ingrained strand of public procurement policy shall be read into a federal contract by operation of law, even if the clause is not in the contract. G. L. Christian & Associates v. United States, 312 F.2d 418 (Ct. Cl. 1963). The doctrine is an exception to the general rule that the government must put vendors on notice of contract requirements, whether expressly or through incorporation by reference. It also is an exception to standard commercial contracting practices and contract interpretation principles. The rationale for the doctrine is that procurement policies set by higher authority cannot be avoided or evaded (deliberately or negligently) by lower government officials.

The Federal Circuit’s recent decision in K-Con, Inc. v. Secretary of the Army, No. 17-2254, 2018 WL 5780251 (Fed. Cir. Nov. 5, 2018), is a reminder to government contractors that the Christian doctrine is alive and well. In K-Con, relying on the Christian doctrine, the Federal Circuit read bonding requirements into construction contracts even though no such requirements were included in the contracts. K-Con argued the contracts were commercial item contracts, not construction contracts; therefore, the bonding requirements for construction contracts did not apply. The Federal Circuit disagreed. The court found the contracts and underlying solicitations contained provisions that were patently ambiguous as to whether the contracts were for construction or commercial items. Because K-Con never sought clarification of the patent ambiguity prior to award, the court held that K-Con was barred from arguing that the contracts were not construction contracts.

The court then addressed whether bond requirements are read into construction contracts regardless of whether the requirements are expressly included among the contract’s terms. Applying the Christian doctrine, the Federal Circuit found that the Miller Act and FAR 28.102-1 require a contractor to furnish performance and payment bonds for any construction contract exceeding $150,000. Thus, the court found the bonding requirements to be mandatory and that they reflect a longstanding strand of public procurement policy dating back to the 19th Century and subsequently strengthened by Congress and repeatedly addressed by regulators.

Why You Should Care about the Christian Doctrine

First, the Christian doctrine, as applied in K-Con, is a reminder that, just because you do not see certain clauses that you normally would expect to see in a contract, does not mean such clauses are not applicable. A contractor should ask the Contracting Officer about the missing clauses and, even then, the contractor may need to assume such clauses, even though not in the contract, still apply. This is because, regardless of whether the parties intentionally or deliberately agreed to exclude a certain clause from a contract, if the clause is mandatory, courts and boards have read such clauses into a contract by operation of law.

Second, while there is no defined list of clauses covered by the Christian doctrine, courts and boards have held that the following clauses meet the significant or deeply ingrained strand of public procurement policy standard: Disputes, Termination, Changes, Payment, Equal Opportunity, Affirmative Action, and clauses implementing provisions of the Buy America Act, Truth in Negotiations Act, Miller Act, and Davis-Bacon Act.

Rethinking the Boilerplate: Alternative Dispute Resolution Procedures in Construction Contracts

Robert Alfert, Jr. and Edward R. Philpot | Nelson Mullins Riley & Scarborough LLP | November 2, 2018

“Litigation is a basic legal right guaranteeing every corporation its decade in court.” Attributed to David Porter, Executive Vice President of Microsoft.

Most courts and juries are ill-equipped to handle complex business and technical litigation matters, yet most construction contracts fail to address dispute resolution and do not have provisions customized to the subject matter and unique needs of the parties. Unlike litigation, ADR allows parties to define nearly all aspects of their dispute resolution process. Overall, only ADR allows parties the full right of self-determination over the resolution of disputes, while litigation often exposes business parties to greater risk, costs, delays and uncertainties.

Taking full advantage of ADR means understanding each available process – whether mediation, arbitration, dispute review board or a combination – and the options for customization before executing a contract.

MEDIATION

Although success, and finality, are never guaranteed with mediation, it allows for control over the final settlement. Parties can craft a settlement otherwise impossible through trial verdict, as the parties can specify customized non-monetary terms. But, even if no settlement is reached, early mediation adds value. Through mediation, parties learn more about the strengths and weaknesses of various positions to move forward.

Mediation does not have to be a one-off. Most complex construction disputes will mediate more than once, and, if suit is initiated, most courts will order mediation regardless. Likewise, private arbitration services encourage mediation before a final hearing. If the parties engage an active mediator, it is also typical for that individual to continue to serve as a conduit for settlement talks, and to explore settlement possibilities throughout the course of the dispute.

Although mediation is driven by each party’s willingness to participate, the process is customizable. The mediation provision can specify a timeframe, identify a particular mediator, require exchange of claim and defense information and reaffirm confidentiality requirements.

ARBITRATION

Arbitration offers the most finality and control of ADR. In contrast to mediation, in which the third party is merely a facilitator, arbitration places the decision in the third party’s hands. In most circumstances, the court’s only role is to confirm the arbitrator’s decision or award, on an exceptionally deferential standard.

Final arbitral awards in less than one year are not uncommon, whereas trial to verdict in less than one year is exceptionally uncommon. A well-crafted arbitration provision and parties who treat arbitration like arbitration, rather than litigation, will ensure a faster and more cost-sensitive result.

Like mediation, the arbitration provision can specify the timeframe, a decision maker, confidentiality, discovery and other procedural characteristics. Parties can specify each to ensure that disputes are quickly and efficiently handled. With the active presence of an arbitrator, compliance with procedural requirements is mandatory. For example, discovery may be limited to written discovery and depositions, saving a large amount of time and cost – or may be more expansive, for costlier, more complicated projects – the parties control these parameters, which will be enforced by the arbitrator and respected by the court.

DISPUTE REVIEW BOARD

DRBs offer a middle ground between mediation and arbitration, providing recommendations in a manner akin to arbitration, but with the goal of assisting the parties to resolve a dispute themselves like mediation. This particular ADR process has been employed on billions of dollars’ worth of infrastructure projects in the United States, including, the Big Dig in Boston and the South Terminal program at Orlando International Airport.

DRBs usually consist of panels of neutral, seasoned construction professionals who render nonbinding recommendations to assist contract parties in resolving disputes. DRB members tend to be empaneled for the duration of a project and are familiar with the work and issues that arise. The DRB’s recommendations may be accepted by the contract parties, resolving the dispute, or may offer the starting point for negotiations.

One of the primary benefits of the DRB process is its availability to resolve disputes as they arise, versus when parties are already headed to litigation. The DRB process may be customized for the project and the parties. Additionally, the parties may specify submission and hearing requirements, procedures for acceptance and rejection of DRB recommendations, the admissibility of DRB-related materials in later legal proceedings and payment structures of DRB members.

Underscoring the flexibility of the processes described above, each may be used individually, or in combination with the others. In all cases, the parties design the process and exercise control in a manner not afforded to them in court.

Given the panoply of options available, it is incumbent on the construction executive to carefully negotiate the mode of ADR specified in each contract, and to customize it to the needs of the parties and the project. No two projects are alike.

Construction Contracts in the USA

Craig Ledet, Martha Buttry Daniels, Scott A. Greer and Mike Stenglein | King & Spalding LLP | September 11, 2018

Contracts and performance

Standard contract forms

What standard contract forms are used for construction projects in your jurisdiction? To what extent do parties deviate from these standard forms?

U.S. construction projects do not rely on one standard contract form. In fact, even when a form is used, the parties often make revisions. The most commonly used forms are those developed by the American Institute of Architects (AIA) and the American Society of Civil Engineers (ASCE), or are state-specific. AIA forms are popular in commercial real estate and are considered architect-friendly, so owners and contractors often push for a negotiated AIA. ASCE forms are more common in the industrial context. Residential construction contracts, such as for single-family homes, often rely on forms established by individual states. While forms from the International Federation of Consulting Engineers are popular in Europe, they are typically not used in the United States.

For larger projects, the parties often find it advantageous to negotiate their own contract, without relying on a standard form.

Definition of ‘construction work’

How is ‘construction work’ legally defined?

There is not one single definition for ‘construction work.’ Generally, individual states’ lien, anti-indemnity, or other construction-related statutes define construction broadly. The scope of work is usually defined by contract and will vary in specificity from project to project.

Governing law

Are there any rules or restrictions on the governing law of construction contracts?

Many states have ‘home court’ rules specific to projects constructed in the respective state. While the language in each statute differs, the general rule is that a provision in a construction contract is void or voidable if it requires litigation to occur in, or be subject to the laws of, another state. To get around the venue rules, parties may agree to arbitrate, rather than require litigation in a specific court system. That said, any contractual provision purporting to require the application of the laws of a state other than the state where the project is being built could still run afoul of the home court rules. These governing law restrictions can be complicated when horizontal construction occurs across borders, such as a pipeline running through different states.

Formalities

Are construction contracts subject to any formal requirements?

Construction contracts are subject to state-specific requirements. Many states have requirements on issues such as retainage, anti-indemnity provisions, prompt payment, and waivers of negligence or gross negligence—to name a few. These requirements often differentiate between the type of project: residential, commercial, or industrial. When drafting a construction contract, the best practice is to review the contract law of the relevant state.

Mandatory/prohibited provisions

Are there any mandatory or prohibited provisions in relation to construction contracts?

Whether a construction contract has prohibited provisions is subject to state-specific requirements. Every state has some restrictions on risk-shifting, but the extent of those restrictions varies. Similarly, the states scrutinize waivers of rights and responsibilities, as well as limitations of liability. Some states also restrict or prohibit the use of design-build delivery systems for public projects, although this method is becoming increasingly more popular in the public space. While there are restrictions, the states do not have mandatory contract provisions. When drafting a construction contract, the best practice is to familiarize oneself with the relevant state’s contract law.

Implied terms

Can any terms be implied in construction contracts?

The terms most commonly implied in construction contracts are warranties, which are subject to state law. Both owners and contractors may be subject to implied warranties. Under the Spearin Doctrine—effectively adopted by all 50 states—there is an implied warranty of accuracy for any information that the owner shares with the contractor. This can be critical for engineering, procurement and construction (EPC) contracts, but the majority of states allow the parties to waive this implied warranty. Various implied warranties apply to the contractor’s work, such as the implied warranty of merchantability and the implied warranty of fitness for a particular purpose.

In addition to implied warranties, state-specific products liability and consumer protection laws may be implied by law into contracts.

Risk allocation

How are risks typically allocated between parties to construction contracts?

The contract delivery strategy dictates how liabilities are handled. A traditional design-bid-build model is one liability set that consciously separates the liabilities (e.g., the construction contractor is not responsible for design errors unless the contractor discovers the error and fails to report it). In the EPC context, greater risk falls on the EPC contractor. There are many ways to allocate risks between parties to construction contracts (e.g., indemnities, limitations of liability, risk of loss provisions, performance guarantees, etc.), and that allocation often depends on the parties. The liability structures also depend on the industry, what is being built, who can bear the risk, each parties’ financial wherewithal, economic undercurrents, geography, issues with union labor, and political considerations.

Limitation of liability

How and to what extent can parties to construction projects contractually limit or exclude their liability?

There are many ways to contractually limit or exclude liability, through clauses such as limitations of liability, risk of loss provisions, waivers of consequential damages, and waivers of implied warranties. The states have their own restrictions on such limitations. For example, most states will enforce a limitation of liability provision only if it is explicit, prominent, clear, and unambiguous. Indemnities are also used to limit liabilities, but the drafter should take into account construction anti-indemnity statutes. Because each state has its own requirements, one should always analyze the relevant state-specific rules when drafting a construction contract.

In addition to the aforementioned mechanisms to limit or exclude liability, the parties may also shape their liabilities with warranties and representations, as well as contractual limitations on when and how relief may be sought.

Liquidated damages

How are liquidated damages typically calculated and to which liabilities are they usually applied?

Liquidated damages are traditionally used as a remedy for delay (including the contractor’s failure to mobilize or failure to complete its scope of work by a specified date), but they may also address performance elements. Interim liquidated damages can be based on delivery dates for multi-prime coordination.

Most states have specific case law on how liquidated damages should be determined and when they will be held unenforceable. Generally speaking, most states require liquidated damages to be calculated based on a genuine pre-estimate of what the party believes its damages would be in the event of breach by the other party. The damage amount may consider lost profits related to failure to start up. For commercial real estate, it may be calculated based on lost real estate rental income. Liquidated damages amounts can also take into account debt service and the extension of corporate and on-sight overhead.

Force majeure

How are force majeure clauses treated in your jurisdiction? Is there a legal definition of force majeure events?

There is not a single legal definition of force majeure events in the United States, as these clauses are analyzed on a state-by-state basis. As a general rule, a force majeure event must be beyond the reasonable control of the party, or unforeseeable at the time the parties entered into the contract. Force majeure typically allows only for schedule relief, rather than cost relief.

The parties may choose to define force majeure in the construction contract as they see fit, and they may agree that cost relief will be available in certain limited circumstances. Force majeure is negotiated differently depending on the industry, location, what is being built, and how the parties want to handle risk. In many contracts, the parties will negotiate and agree upon an exclusive list of events that qualify as a force majeure event, rather than relying upon a general definition.

General performance obligations

What are the general performance obligations of contractors and employers?

The parties’ general performance obligations depend on many factors, including what is being built, how the delivery system is set up, the expectations for the project, and the express terms of the contract.

Construction professionals are subject to various ethical and professional obligations. For example, engineers generally have a duty to perform to the standard of a reasonably prudent engineer, although the relevant contract may establish an even higher standard. For example, if the contract is an EPC contract, the standard in the industry is that there shall not be any defects in design or engineering, rather than relying solely on the standard of a reasonably prudent engineer. Contractors may also be subject to agency rules and fiduciary duties.

Project delays

How are project delays typically handled? Do any set rules, restrictions or procedures apply in this regard?

Project delays are one of the most commonly litigated construction issues in the United States. Well-drafted contracts establish clear grounds for entitlement to relief for delay. Disputes often arise regarding who caused the delay and how to calculate the relief for such delay. The modern trend in most U.S. jurisdictions is to allow apportionment of fault for delays. Additionally, contractors often challenge liquidated damages for delay as unenforceable penalties. To overcome that challenge, the party seeking to recover liquidated damages must generally be able to show that the amounts were a genuine, good-faith pre-estimate of the damages that would be incurred in the event of delays.

Contract variations

To what extent can the parties make variations to the contract? Do any set rules, restrictions or procedures apply in this regard?

A well-written contract will prohibit contractual variations unless it is done through a formal amendment or approved change order. Contract provisions are often found ambiguous, though, in which case most courts will allow some extrinsic evidence to resolve the ambiguity. In practice, this sort of evidence can change many core components of the parties’ arrangement. For this reason, even if the contract seems perfect, parties to a construction contract must stay engaged and ensure that the trail of paperwork properly reflects the contractual intent. The rules on contract variations exist on a state-by-state basis.

Termination

What are acceptable grounds for the termination of a contract?

Typically, a contract may be terminated for convenience or cause. Termination for convenience is common in construction contracts and is usually available only to the owner. When properly described in the contract, it allows an owner to terminate its contractor at will, and pay for costs incurred by the contractor up to the termination date. These costs largely depend on the industry and contract.

The contract should also define when an owner may terminate a contractor for cause. Termination for cause can be for many reasons, including, but not limited to, the contractor’s failure to perform the work, refusal or failure to supply enough skilled workers, failure to pay its subcontractors, and insolvency. Sometimes the owner may replace the contractor for safety reasons or because the contractor has repeatedly disregarded applicable laws.

The contractor can also terminate the contract for default, but that right is typically narrower.  Justified reasons for doing so generally include the owner’s failure to pay undisputed amounts under the contract after a grace period has expired.

Remedies for breach

What remedies are available for the breach of construction contracts?

The owner generally has several different remedies for the contractor’s breach, including liquidated damages, termination of the contractor (for convenience or cause), and withholding payment. In certain circumstances, the owner may also pursue injunctive relief or specific performance. Under express and implied warranties, the owner can require the contractor to correct defects to its work, or pay for a third party to do so, then pass that cost on to the contractor.

The contractor’s remedies are often more limited, but may include termination for cause if the owner defaults. The contractor’s primary remedy is an entitlement to additional cost or schedule extension when an owner breaches its obligations. In the event of non-payment, the contractor may also lien the project. This often requires the contractor to satisfy specific requirements, defined by each individual state.

Either party may proceed under standard breach of contract theories. All of these remedies should be defined by the contract and may be addressed more generally by state law.