Additional writing by John Davis, Schwabe, Williamson & Wyatt
The unfortunate fact in a bear market is that a higher percentage of construction projects fail. But when a deal goes sour, few things make for smoother sailing than having a well-written construction contract that really works for you.
There are a number of contractual provisions that can help contractors weather the storm. Scrutinizing the clauses you are using may take a little time, but it could save you time and money in the long run.
Alternative dispute resolution
One thing is for sure – lawsuits are expensive. A dispute resolution clause can help parties resolve disputes quickly, privately and with less expense.
Common dispute resolution clauses require mediation and/or arbitration as the sole mechanism for resolving disagreements. If you are leery of the effectiveness of dispute resolution clauses, you can opt for a hybrid – requiring mediation to occur before either party can file a lawsuit. This way, parties can attempt to resolve their disputes, but also allow for litigation if a settlement is not possible.
Indemnity
An indemnification clause requires another party to step in and take your place in litigation. General contractors often require their subcontractors to sign an indemnity clause requiring them to defend if the owner sues the general contractor for a construction defect caused by the substandard work of a subcontractor.
But in Washington, contractors must pay special attention to how these clauses are drafted because the contractors cannot absolve themselves of all responsibility. It is in your best interest to make your indemnity clauses narrow and specific.
Attorney’s fees
Many contractors include attorney’s fee clauses in all of their contracts as a matter of course. These clauses typically require the winning party in litigation to pay the other side’s attorneys. However, when contracting with an owner, you should seriously consider whether including an attorney’s fee clause makes sense.
As a contractor, you have an alternative to the contractual attorney’s fee clause when a property owner can’t or won’t pay you. As most contractors know, you can file a lien against the property if you are not paid. A successful lien foreclosure comes with the statutory (as opposed to contractual) right to collect your attorney’s fees.
As a result, you will likely be reimbursed for your attorney’s fees even without including a fee provision in your contract.
Liquidated damages
A liquidated damages clause presets the amount a party must pay when a contract is breached, and can spare you from arguing about the calculation of damages in a lawsuit. A liquidated damages clause is extremely helpful in situations where actual losses are hard to determine.
However, the liquidated damages amount must be roughly proportional to the actual damages the owner owes.
Termination
Disagreements can arise about whether or at what point the parties had a right to terminate the contract. Save yourself the trouble and make this clear in your contract – will termination be allowed for convenience (at any time) or only in the event of a material breach of contract?
Perhaps you wish to allow termination if either party delays performance or payment for a certain period of time. A termination clause can be quite effective when drafted in conjunction with your liquidated damages provision.
Change orders
The message here is simple – if you don’t write it down, don’t expect to get paid. Contractors frequently fall into the trap of doing the work first and documenting it later. This can be a major pitfall if the owner balks at your proposed change order.
Take the time and draft the change order – and have both parties sign it – before you do the work. Also, make sure your contract specifies the procedure for making change orders.
Verify your licensing
Finally, I encourage you to verify your licensing with the state before beginning each new major project. It only takes a single phone call, and a lapse in your license can be disastrous if you later have to recover from the owner.
I also encourage you to have a lawyer review your contracts before having owners sign them. It will only take a little time and could save you from having to call that same lawyer when a deal goes south.
Kelly Walsh is an attorney in the Vancouver office of Schwabe, Williamson & Wyatt, focusing her practice in the areas of commercial and business litigation and construction law. She can be reached at 360-905-1432 or kwalsh@schwabe.com. John Davis is a third-year law student at the Willamette University College of Law, clerking in the Vancouver office.
