Primer Piece - "No Damage for Delay" Clauses

Posted by Jennifer M. Horn on April 06, 2012

By: Jennifer M. Horn

As part of an ongoing series, Construction Law Signal will examine basic construction contract clauses and offer tips for navigating the nuanced arena that is the negotiated construction contract.

“No Damage for Delay” Clauses On Public Projects: In the Mid-Atlantic Region, Geography Matters

A “No Damage for Delay” provision is a classic construction clause that, if present in the contract, provides that where a contractor is delayed by an event that is not the contractor’s fault, the contractor’s remedy in that instance is limited to an extension of time – and no additional money is provided. However, more time can be little consolation to the contractor when every dollar counts. A myriad of issues can result in delay on a job site. Unforeseen subsurface site conditions can cause delay. These could include:

  • Inclement weather;
  • Acts of God;
  • Design changes;
  • Problems with obtaining access to one’s work site;
  • Strikes and/or labor disputes; and
  • Failure to have timely delivered material and equipment.

In addition, poor project coordination, the inability to mobilize adequate labor and/or delays caused by the actions or failure of another contractor to act on a project also frequently result in delay.

As a consequence, costs associated with delay may occur. These costs may manifest in the form of wage escalation, extended equipment costs, or inefficiency. Also, increased finance costs, extended job supervision and field overhead costs, and reduced profits are typical costs associated with delay.

In the realm of public contracts, where the contractor can not negotiate the terms of the contract, different states have reached different conclusions about the validity of the “no damage for delay” clauses that limit a contractor’s ability to recover money in addition to being granted an extension of time in which to perform the work. For instance, in New Jersey and Virginia, legislation provides that “no damage for delay” clauses are void against public policy.

In Maryland, Pennsylvania and Delaware, however, the validity of “no damage for delay” clauses has been upheld in various courts of law.In short, one must be cognizant of the controlling contractual jurisdiction before jumping to conclusions regarding the force and effect of “no damage for delay” clauses in a construction contract.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Breaking Bad: Top Signs That The Subcontractor Is In Trouble

Posted by Jennifer M. Horn on March 09, 2012

It goes without saying that subcontractor management is a tricky businPA- Pay if paid.jpgess for those who select and contract with subcontractors in these interesting economic times. The earlier a general contractor can recognize the warning signs of a subcontractor’s financial troubles, the better. Early diagnosis of a subcontractor’s potential financial troubles can give a general contractor a chance to better protect itself from claims by unpaid vendors, sub-subcontractors and other entities. The following are some, but not all, of the warning signs that your subcontractor may be headed towards serious financial trouble:

  • Falling Behind Schedule – The subcontractor fails to complete scheduled activities and/or satisfy project milestones in a timely manner;
  • Late Deliveries - Material is delivered to the project site late and/or the wrong material is delivered to the project site;
  • Inquiries from Suppliers and Vendors Regarding Payment – Suppliers, Vendors, Sub-sub contractors and/or other entities contracting with the subcontractor begin to complain about late payment or non-payment;
  • Inadequate Manpower – The subcontractor fails to adequately man the project as it anticipated at the time the subcontractor bid the work;
  • Failure To Document – The subcontractor fails to submit required documentation in a timely manner, such as daily reports;
  • Equipment – Equipment the general contractor expects to see at the project site is absent or, if it appears at the project site, fails to function properly;
  • Excessive Claims – The subcontractor begins to submit an excessive number of claims and/or notices of potential claims; and
  • Asks for advance payment - The subcontractor requests advance payment and/or expresses concern about the flow of payment.

The presence of one or several of these factors on a particular project site may indicate that a subcontractor is headed for financial trouble. In this event, a savvy general contractor who has the right provisions in its contract can employ certain policies and procedures at the jobsite to minimize or protect itself from claims by vendors, suppliers and/or other sub-sub contractor entities. For instance, the general contractor may be able to pay by “joint check” (i.e. checks that name the subcontractor as well as the sub-subcontractor or supplier for whose work or materials are at issue). Also, the general contractor might be able to mandate that releases of all claims to date be executed before making any payment. Finally, the general contractor might, if necessary, call on the payment and performance bonds provided by the subcontractor. In order to utilize these strategies, however, critical contract provisions that address each of these issues must have been made part of the parties’ contract. In the coming months, we will examine the force and effect of specific contract provisions.

 

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Unlicensed Subcontractor's Claim Against General Contractor Valid

Posted by Jennifer M. Horn on November 03, 2011

By: Jennifer M. Horn

For over ninety years, Maryland's Court of Appeals has refused to honor the claims of unlicensed entities, including those of subcontractors and contractors who failed to adhere to the applicable regulatory licensing requirements. In late October, however, Maryland's high court upheld the reversal of this precedent and allowed an unlicensed subcontractor to enforce its contract against a general contractor on home improvement work.

In Stalker Brothers, Inc. v. Alcoa Concrete Masonry, Inc., subcontractor Alcoa Concrete did not obtain the proper license in accordance with Maryland law, yet performed residential home improvement work pursuant to its contract with general contractor Stalker Brothers. Stalker Brothers promised to pay Alcoa for the concrete work Alcoa performed; however, ultimately withheld payment. It was undisputed that Alcoa was not licensed with the State of Maryland Department of Labor, Licensing and Regulation prior to March 26, 2008, and the Maryland Home Improvement Commission confirmed Alcoa’s status as an unlicensed entity. On this basis, Stalker Brothers moved to dismiss Alcoa’s plea for payment, asserting that contracts made by an unlicensed entity are “illegal” and “will not be enforced.” The Circuit Court agreed.

In overturning the Circuit Court opinion, the Court of Special Appeals and, most recently, the Maryland Court of Appeals determined that the contract between Stalker Brothers and Alcoa was enforceable despite Alcoa’s status as an unlicensed subcontractor. In so doing, the high courts recognized that Maryland Home Improvement Law was intended to protect consumers from unlicensed contractors – not licensed general contractors from their unlicensed subcontractors.

Of course, every contractor should be licensed to perform their work in every appropriate jurisdiction in accordance with Maryland law. However, Maryland Home Improvement Law, according to the Alcoa case, is not intended to serve as a shield for contractors like Stalker Brothers who seek to elude payment for their just debts. For those reasons and others, the contract between Stalker Brothers and Alcoa was enforceable.

As contractors expand their geographic jurisdictions to gain more work in other areas, the Alcoa case serves as a reminder to all companies to update all appropriate professional licenses.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

The Perils of Contracting with Public Entities in Maryland

Posted by Jennifer M. Horn on September 16, 2011

By: Jennifer M. Horn and Robert Ruggieri

A September 1, 2011 decision by the Maryland Court of Special Appeals reminds us of the critical importance of strictly following contractual and procurement procedures before performing change order work for a pubic entity; and of the perils of proceeding with work outside the scope of a contract without formal approval, even where employees and agents of the public entity request gavel.jpgand provide informal, and even written authorization, for the additional work.

Baltimore County, Maryland v. AECOM Services, Inc., f/k/a DMJM H&N, Inc.

This case concerned a dispute between Baltimore County (County) and DMJM H&N, Inc., now known as AECOM Services, Inc. (DMJM) over payment for services performed by DMJM for the County in connection with the expansion of the Baltimore County Detention Center (Project). DMJM entered into a contract with the County to provide architectural and engineering services for the Project. The County sued DMJM seeking damages for an alleged breach of contract and negligence. DMJM countersued, seeking payment for services provided both under the “base contract” and for “additional services” performed outside the scope of the base contract. After trial, the jury found that DMJM did not breach its contract, and had not been negligent. More importantly, the jury awarded DMJM damages in the amount of $1,653,600, the majority of which included payment for the additional services. Appeals followed, with the most important issue being whether DMJM was entitled to payment for the additional services where DMJM had not obtained a formal contract amendment approved by the County Council for the additional services.

Language in the contract required not only written authorization by the County, but also approval by the County Council before the contract amount could be increased. DMJM claimed that during the course of the Project it had performed significant additional services valued at $1,471,498, that were authorized and requested by County officials, but had not been formally approved by a contract amendment.

The Court’s “Harsh” Ruling

The Appeals Court, relying on a strict interpretation of the contact, the Baltimore County Charter, the Baltimore County Code, and prior Maryland case law, reversed the jury’s award to DMJM for the additional services, and held that DMJM was not entitled to payment for any of the additional services because they were not formally approved by the County and County Council in a written amendment. First, the Court stated that the contract language unambiguously required written authorization from the County to obligate the County to pay for the additional services. Second, the Court found that the Baltimore County Code and Baltimore County Charter required that a contract amendment had to be approved by the County Council to be enforceable; because the County Council never approved an amendment for the additional services, the County could not be liable for payment. Finally, the Court relied on prior Maryland case law that set forth the principle that “a government entity may never have an obligation imposed upon it except in the formal manner expressly provided by law.” The rationale behind this principle, the Court provided, is that public funds must be protected by stringent procurement procedures, not only against outside parties, but even against its own employees and agents.

The Court was not persuaded by DMJM’s argument that County Council approval was only required for the underlying contracts, but not for changes to existing contracts. Nor did the Court accept DMJM’s argument that the County had waived its right to rely the strict procedures of the contract and Baltimore’s code and charter by acting and proceeding as if all the requirements had been met and informally approved and authorized the additional services.

The Court acknowledged that its ruling was harsh, but insisted that it was not unjust, and that there are sound policy reasons for its harshness. The Court reasoned that DMJM knew, or should have known, by the terms of the contract, that County Council approval was required for all amendments, and that the law imputes upon the party contracting with the municipality knowledge of the municipality’s limitations. The Court’s decision makes it abundantly clear that even if the additional services were done at the express request and direction of the County’s employees and agents, DMJM would still not be entitled to payment because the exact contract requirements were not fulfilled. The Court reasoned that it is more reasonable that an individual contractor or design professional occasionally suffer from the mistakes of public officials and agents who improperly authorize additional work than to risk detriment or injury to the public. The Court also reiterated that no state more rigidly enforces these principles than Maryland, and that those who deal with employees and agents of a Maryland municipality must, at their peril, take notice of the limits of the powers of both the municipality and those who assume to act as its agents and officers.

Not all states are as unforgiving as Maryland when it comes to allowing payment to contractors and design professionals who have performed work not approved in 100% accordance with contract requirements. States such as Pennsylvania, in certain circumstances, will consider other factors, such as whether the municipality was prejudiced and/or whether the municipality, though its conduct of requesting and informally approving additional work, waived its right to rely on strict contractual procedures to avoid payment obligations. Nonetheless, this case provides an important lesson to all contractors and design professionals, in any state, of the importance of strictly following procedures for changed or extra work and the perils of not doing so, especially when contracting with public entities.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Robert Ruggieri is an associate at Cohen Seglias and a member of the Construction Group. He concentrates his practices in the area of complex construction litigation.

The Third Circuit Weighs In On Pay-If-Paid/Pay-When-Paid Clauses

Posted by Jennifer M. Horn on August 12, 2011

By: Jennifer M. Horn

In a precedential opinion that overturned a Pennsylvania District Court ruling, the United States Court of Appeals for the Third Circuit (the Third Circuit) interpreted several important provisions of a construction contract. This blog post addresses the Third Circuit’s discussion of the payment provisions commonly referred to as “pay-if-paid/pay-when-paid.” Future posts will highlight other aspects of the Third Circuit’s recent decision in Sloan v. Liberty Mutual Insurance Company including the force and effect of liquidating agreements in construction contracts.

What Are Pay-If-Paid/Pay-When-Paid Clauses?

As the Third Circuit noted, in construction contract parlance, a “pay-if-paid” clause means that a subcontractor is entitled to payment from the general contractor only if an owner pays the general contractor for the work. Pay-if-paid clauses shift the risk of an Owner’s non-payment to the subcontractor and, where sophisticated construction entities have so agreed, the Third Circuit held that there is nothing inherently unfair about such clauses.

A “pay-when-paid” provision, on the other hand, “does not establish a condition precedent, but merely creates a timing mechanism for the general contractor’s payment to the subcontractor.” Importantly, when certainty is lacking as to whether a provision is pay-if-paid or pay-when-paid, “Pennsylvania courts tend to interpret payment provisions as pay-when-paid.” Unfortunately for subcontractor Sloan, the Third Circuit upheld the pay-if-paid and, as discussed below, other risk-shifting language.

What Happened in Sloan?

Isla of Capri Associates LP (IOC) owned and sought to develop waterfront condominiums in Philadelphia and, in this regard, contracted with general contractor Shoemaker Construction Company (Shoemaker) to build the project. Shoemaker, in turn, entered into subcontracts with various entities, including drywall and carpentry subcontractor Sloan & Company (Sloan). Sloan performed work; however, Shoemaker failed to pay the balance on its Subcontract. Sloan made a claim under the payment bond provided by Liberty Mutual Insurance Company (Liberty Mutual).

Liberty asserted that Sloan was not entitled to payment because one of the provisions in the parties’ Subcontract, paragraph 6.f, conditioned Sloan’s right to payment on Shoemaker’s receipt of payment from the Owner. In particular, paragraph 6.f of the Subcontract provides, in relevant part,

“Final payment shall be made within thirty (30) days after the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final payment . . .”

* * *

[IOC] shall have accepted the Work and made final payment thereunder to [Shoemaker]

* * *

[Shoemaker] shall have received final payment from [IOC] for [Sloan’s] Work

In short, Liberty Mutual argued that this provision was a “pay-if-paid” clause. Sloan, on the other hand, contended that the provision was a “pay-when-paid” clause and pointed to a second subparagraph of 6.f which described a process whereby Sloan could sue Shoemaker for final payment if IOC fails to make final payment.

In ruling for Liberty Mutual, however, the Third Circuit found that the provision was a “pay-if-paid,” not “pay-when-paid” clause, and read the first part of paragraph 6(f) in conjunction with a pass-through or liquidating agreement in paragraph 20 of the same contract. In other words, the Third Circuit held, among other things, that IOC’s payment to Shoemaker was a “condition precedent” to Shoemaker’s obligation to pay Sloan and the risk of nonpayment was properly shifted to Sloan in accordance with the intent of the parties when they entered into the Subcontract.

Impact Moving Forward

All parties to a construction contract, whether owner, general contractor, or subcontractor, would be wise to study the Third Circuit’s recent opinion in Sloan and compare the language in their standard form contracts to that which the Court upheld in Sloan. For all involved, a clear understanding of payment provisions and the risk each party will suffer in the event payment is not made, is best clarified and understood before a job goes bad.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Delaware Construction Legislation Stalls in the Senate

Posted by Jennifer M. Horn on August 05, 2011

By: Scott T. Earle

House Bill 109 (HB 109), which was passed by the House of Representatives, has stalled out in the Senate. This Bill was a proposed amendment to Title 6, Chapter 35 of the Delaware Code Delaware2.jpgBuilding and Construction Payments section (the Act).

What Would HB 109 Have Changed?

HB 109 would have changed the name of the Act to the “Building Construction Procedures Act” and expanded the scope of the Act to apply to all forms of construction, not just construction related to buildings or structures. The amendment would have also made it against public policy to apply any other law but Delaware law to construction contracts performed in the state. It also would have required an in-state contractor to participate in any legal proceedings inside the State of Delaware.

Additionally, HB 109 would have consolidated and amended the contract clauses currently contained in Sections 3506 and 3507 into one section to harmonize the timing of events set forth in these Sections, which are presently inconsistent.

Finally, the amendment would have also changed the time in which a contractor or subcontractor has to dispute an invoice from 7 days to 15 days.

Next Steps for HB 109

HB 109 was passed by the House on June 22, 2011 and received no opposition. The amendment was passed with forty out of a possible forty-one votes in its favor. After being passed by the House, the amendment was introduced to the Senate on June 23, 2011 where it stalled out in the Executive Committee and expired when the General Assembly recessed on June 30, 2011. HB 109 is anticipated to be reintroduced next January when the General Assembly reconvenes.

We will monitor HB 109 and update you when the General Assemble reviews the legislation.

Scott T. Earle is a Senior Associate with Cohen Seglias and a member of the Business Transactions Group.

Pennsylvania Contractor and Subcontractor Payment Act: Contractor Awarded Attorneys' Fees Incurred During Collection Proceeding

Posted by Christopher A. Cafardi on November 24, 2010

Owners and contractors should be aware of a significant October, 2009 Pennsylvania Superior Court decision, Zimmerman v. Harrisburg Fudd I, L.P., which clarifies the standard for the award of post-judgment interest and attorneys’ fees under the Pennsylvania Contractor and Subcontractor Payment Act (CASPA). In this case, the Superior Court held that a contractor who has obtained a judgment against an owner under CASPA may recover post-judgment interest and penalties, as well as attorney’s fees and expenses incurred to collect the money owed.

blank check.jpg

The Pennsylvania Contractor and Subcontractor Payment Act

CASPA is a Pennsylvania statute that dictates the proper timing for payment for construction work. CASPA also provides for interest, penalties (when appropriate) and attorneys’ fees when owners or contractors fail to comply with these payment obligations. According to the Zimmerman Court:

The underlying purpose of [CASPA] is to protect contractors and subcontractors... [and] to encourage fair dealing among parties to a construction contract . . . The statute provides rules and deadlines to ensure prompt payments, to discourage unreasonable withholding of payments, and to address the matter of progress payments and retainages. Under circumstances prescribed in the statute, interest, penalty, attorney fees and litigation expenses may be imposed on an owner, contractor or subcontractor who fails to make payment to a contractor or subcontractor in compliance with the statute.

Background of the Zimmerman Case

In this case, Zimmerman, a contractor, entered into a construction contract with Fudd, an owner, for the installation of floor and wall improvements for a new restaurant that Fudd was building. Following completion of its work, Zimmerman submitted an invoice for $10,108.70. Over 4 months later, he was still waiting for payment.

Refusing to wait any longer, Zimmerman elected to invoke CASPA, and filed a claim for breach of contract against Fudd. On the day the matter was scheduled for compulsory arbitration, the parties agreed to the Board’s entry of a stipulated award in favor of Zimmerman for $21,673.99, consisting of the $10,108.70 contract claim plus $11,565.29 of statutory interest, penalty and attorneys’ fees.

 

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Pennsylvania Court Decision Limits Unjust Enrichment Claims for Subcontractors

Posted by Robert Ruggieri on October 14, 2010

It is not uncommon, especially in today’s economy, for a subcontractor to perform work on a project but not get paid. Under Pennsylvania law, there are several courses of action a subcontractor can take to recover payment. One option is for a subcontractor to seek payment unjust.jpgdirectly from the general contractor under a breach of contract claim. When bringing such a claim, it is important to remember that, even if successful, a subcontractor may not be able to recover payment for many reasons, including bankruptcy or non-payment from the project owner. Accordingly, it is wise for a subcontractor to seek other avenues for payment, such as filing a mechanic’s lien against the project or asserting an unjust enrichment claim against the owner and possibly even the project lender.

Valid mechanic’s liens ensure that a contractor has a secured interest in the property where the work was performed, whereas a successful unjust enrichment claim allows a contractor to obtain payment from a third party, such as an owner or lender, when that third party benefits from the work performed under the contract.

In order for an unjust enrichment claim to be successful, a subcontractor must prove:

  • That there was an enrichment, i.e., a benefit conferred by the claimant, and
  • That an injustice will result if the claimant is denied recovery for the enrichment

A recent Pennsylvania Superior Court decision has further defined and clarified the requirements of an unjust enrichment claim, and in doing so, has severely limited the situations in which a subcontractor can recover payment from an owner or lender.

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Governor Christie and New Jersey Legislature Resolve New Jersey Department of Transportation Stop Work Order

Posted by Elise M. Carlin on October 04, 2010

Governor Chris Christie’s decision to halt work on all projects funded by the New Jersey Department of Transportation (NJDOT) led to a total cessation of work on nearly 100 construction and 200 design projects today. Governor Christie stopped the work in response to the Legislature’s Stop.jpgreluctance to approve a $1.25 billion sale of bonds to refinance up to $500 million for the nearly bankrupt Transportation Trust Fund (TTF).

A NJDOT press release issued Friday blamed inaction of the Legislature for the stoppage of work. According to NJDOT Commissioner James Simpson:

We have been forced to implement this work stoppage due to the Legislature’s failure to approve a routine bond transaction for the fifth and final year of a transportation program that was approved under the previous Administration. Because of the Legislature’s failure to act, thousands of engineers, planners, designers and construction workers will be put out of work and project schedules will be disrupted.

Earlier today, after a hearing that lasted almost two hours, members of the State Joint Budget Oversight Committee and representatives of the Office of the Governor finally reached an agreement and those projects previously put on hold will continue tomorrow, allowing thousands of contractors to get back to work. Four of the six committee members voted to approve the sale, Assemblyman Louis D. Greenwald (D-Camden), co-chairman, voted against the sale, while Senator Paul Sarlo (D-Bergen) abstained.

The stoppage stood to impact $1.7 billion of projects throughout New Jersey. In addition to the NJDOT construction projects and design projects, Local Aid county and municipal projects would have been affected as well. Projects funded solely with federal funds would not have been affected.

Although the NJDOT projects have been spared, the future of the ARC Tunnel project remains in limbo, pending the outcome of the review ordered by Governor Christie.

Background of the ARC Tunnel Project

Over the last two decades, New Jersey has focused intensely on how it can better meet the vastly growing demand for transportation to and from New York City. The situation was extensively studied by economists, geologists, planners, engineers, environmental and transportation experts, as well as government officials at the local, state, regional and federal levels. The collaboration of these great minds has resulted in a project known as Access to the Region’s Core (ARC) Tunnel project. Construction on the ARC Tunnel, also known as the Hudson Tunnel, began last summer, and the project is currently the largest public works project in the nation. Just a few weeks ago, advocates of the project were alarmed when Governor Christie ordered a review of the ARC Tunnel’s cost over concern that it could cost more than the latest estimate of $8.7 billion. Supporters of the project feared that Governor Christie would stop the project entirely to divert funds to the TTF.

Benefits of the ARC Tunnel Project

The ARC Tunnel project is expected to greatly benefit New Jersey. A report entitled the ARC Effect, released by the Regional Plan Association in July 2010, elaborates on these expected benefits. According to Arthur D. Silber, Project Chief:

The RPA study highlights how the ARC tunnel will create wealth and grow our economy. The tunnel creates more than 6,000 jobs in the short term and [will] ultimately boost a soft real estate market by increasing home values by billions of dollars.

According to a Fact Sheet about the ARC Tunnel Project the project will run nine miles from Kearny Yards, New Jersey to 34th Street in Manhattan, effectively breaking the trans-Hudson traffic bottleneck. The project will offer direct, transfer-free service to Manhattan for tens of thousands of residents of New Jersey and New York. In addition, the project will increase intrastate service. Proponents of the tunnel believe that, “[t]he economic and environmental benefits make this a project that will grow our economy, preserve our quality of life, and improve the environment.” Some other benefits expected from the ARC Tunnel project include:

• 6,000 construction jobs
• Reduced traffic congestion
• Reduced pollution
• Shorter commuting times
• Increased suburban property values

We will continue to closely monitor both the situation with the Hudson Tunnel, as well as the status of state-funded construction projects in New Jersey, and will provide updates accordingly.

The Danger of Performing Work Without A Complete, Signed Copy of Your Contract

Posted by Jennifer M. Horn on September 30, 2010

contract in hand.jpgThe New Jersey Superior Court recently issued an opinion that serves as a cautionary tale for all parties in a construction project who perform work without complete, signed copies of their contracts on hand. In the case of City of Union City v. AC Construction Corp., the Court addresses the dangers to parties who proceed with construction work when the terms of their contract are ambiguous, unidentified, and in draft – not final – form.

In reality, many contractors, eager to meet tight schedules and start a project, proceed with the work without signing their contracts or having complete copies of all of the documents that make up the contract. The danger of this is that if a dispute arises over issues such as the quality or scope of work, the situation is made much worse by the lack of a signed contract that clearly identifies and attaches every document that makes up the agreement.

Background of the Case

The Union City case involved the construction of an amphitheater. During the course of construction, AC Construction Corp. (AC), the contractor, encountered contaminated soil at the project site that required significant remediation. A dispute arose between Union City and AC regarding the excess costs of the soil remediation.

Union City and AC could not agree to the terms of their contract or even what documents comprised their agreement. Specifically, the parties could not agree as to what the dispute resolution procedures in the contract actually provided for – litigation or arbitration. In litigation, Union City’s preference, the parties would appear before a judge or jury in a court of law. In arbitration, AC’s preference, disputes would be resolved by an individual or panel of selected arbitrators, some of whom could be experts in construction. Since the contract was unclear, the parties were forced to litigate the question of which dispute resolution procedure applied – litigation or arbitration – rather than litigate the main dispute – contaminated soil remediation.

The Court concluded that AC not only failed to satisfy its burden of proving that the parties agreed to arbitrate – not litigate – any dispute, but that the contractor also failed to establish what documents actually made up the contract agreement itself. The Court concluded that a “significant factual dispute existed” with regard to the precise terms of the agreement between Union City and AC, and remanded the case for further proceedings, pointing to the absence of a signed contract that attached and incorporated all documents. The Court also found it significant that some of the documents were marked “draft” not final. In the end, the contractor in Union City remains in limbo. AC will be forced to participate in additional proceedings about the dispute resolution issue while the heart of the dispute – soil contamination and remediation – remains unresolved.

Outcome of the Union City Case

This decision illustrates the dangers of sloppy contracting. All parties – owners, contractors and subcontractors – must thoroughly review and understand what documents comprise their contracts and ensure that all parties sign any agreements before work begins. The Union City case makes clear that when a dispute occurs, parties who understand the force and effect of their agreements are much better equipped to defend and ultimately resolve disputed issues than those who fail to sign and retain complete copies of their contracts. Although this case dealt with the dispute resolution clause of the parties’ agreement, a similar, unfortunate outcome could result with many of the other provisions typically contained in a construction contract.

Construction Contracts: The Basics

Posted by Rene David Quinlan on August 27, 2010

In the world of construction litigation, everything begins and ends with your contract. Although contract drafting and negotiation may feel like a burdensome process that stands in the way of commencing work and earning profits, it is probably one of the most important aspects of your business, and one that can make or break your success on a project—regardless of whether or not a dispute arises during the course of your work.

Contract DisputesiStock_contract.jpg

When contract disputes arise, the first thing your attorney will request is the entire contract, including all of the conditions and specifications, as well as any addendums and change orders. All of these documents are important because when read together, they determine the rights and obligations of the parties. Many times the contract is silent on an issue—either because the parties did not foresee a particular issue arising during the project, or because they simply wanted to avoid the issue. Sometimes, it is appropriate for contracts to remain silent on an issue in order to permit “interpretation” if a dispute arises.

Aside from the facts of your particular dispute, and any relief that may be available under applicable law, your contract is the entire legal landscape of your claims and defenses. Not all contracts have to be in writing to be valid, and even if they are in writing, they don’t have to be signed in order to be binding. In fact, some courts have determined that the parties’ actions alone may be enough to modify the terms of a written contract.

Avoiding Contract Disputes

Clarity is the key to a good contract—regardless of whether it is oral or written. Because it is your business, it is critical that you notify your attorney of any issues that have arisen on other projects, and to consult with your attorney about how those issues are addressed in the contract you are about to sign. Your attorney should also advise you of provisions that may expose your company to business risks.

Each day, contractors and subcontractors assess the costs and benefits of making business decisions. These decisions involve risk, and in the construction industry, such choices revolve around two things: legal obligations and contractual obligations. You cannot change the legal obligations, but you do have the ability to shape your contractual obligations. In order to do so, it is critical to understand your position on all of these issues.

In the world of construction, contracts drive business. Your attorney should help you understand how courts have interpreted particular contractual and legal provisions, and how to properly assess the risks and benefits of those obligations in your particular business.