Josh M. Leavitt – February 25, 2014
Clients are often surprised to find out that contract provisions they thought protected them are, in fact, not enforceable. This certainly can be because the contract wasn’t prepared by a seasoned construction lawyer. But even the most sophisticated clients can be caught by surprise when they discover that the enforceability of many critical risk-shifting provisions often depends on the state where a construction project is located, and on trends and changes in the law of the applicable state. It can be a mistake to think there is such a thing as a “one state fits all” model form construction or design contract.
For example, over time, legislatures have responded to lobbying efforts by passing laws to protect contractors with so-called fairness legislation. These include laws such as prompt payment acts (designed to protect contractors from slow-paying public and private owners), anti-indemnity acts (which limit the enforceability of broad indemnity clauses requiring contractors and designers to reimburse or defend project owners and other “upstream parties” from claims), and choice of law and forum statutes (which prevent parties from requiring the applicable law to be the law of another state rather than the state where a project is located).
Similarly, appellate courts have imposed judge-made law or interpreted statutes and contracts to yield certain results they deem fair or “intended” by the legislature or parties to contracts. Examples include judicial decisions curbing the enforceability of liability limitations clauses (which limit an owner’s liability to specific amounts such as the fee paid to a designer), no damages for delay clauses (which are intended to prevent “downstream” contractors and designers from asserting claims for damages caused by delays and disruptions), and pay when paid clauses and pay if paid clauses (which condition payment to a downstream party such as a subcontractor on receipt of payment from an upstream party such as an owner).
Sometimes the exceptions to the enforceability of traditionally enforced clauses are so wide that, without well-drafted clauses, courts will not readily enforce them or may only enforce them after facts are proven at expensive trials or arbitrations. Sometimes courts will not enforce certain types of clauses at all, no matter how they are drafted. Sometimes negotiating an effective clause so exposes issues to the other party that, as a practical matter, the protections being sought become difficult to negotiate. Sometimes the law is simply not clear whether a contract right can or cannot be enforced.
Knowing these rules, and where and how they apply, can be critical. Over the next year, in a series of articles, we will discuss ways to identify some of these troublesome issues, describe their disparate treatment in different jurisdictions and offer potential strategies for addressing them.