Agree to What?

Image courtesy of Flickr (Licensed) by © Debra Hendrix Photography
Image courtesy of Flickr (Licensed) by © Debra Hendrix Photography

In this competitive environment, all too often contractors are presented with incredibly lengthy, unfair and unbalanced form contract from out-of-state contractors or overreaching owners.  Many are so biased that you lose the fight before the first controversy ever arises.  Despite initial posturing these agreements are frequently negotiated.  Most often, the drafters know that their form is unfairly biased and expect modification requests.  Being able to recognize and avoid the worst parts of these subcontracts, before signing on the dotted line, helps you avoid disputes and can save you significant money.

Work it Out or RUN AWAY?

Subcontract provisions fall into several categories.  The first being what  I call, “Negotiable.”  Parties can usually work together to re-write these clauses to a mutually acceptable form.  In some cases, the clauses present so much risk, unfairness or danger that the subcontractor is best served by walking RUNNING away.  Particularly thorny contract provisions include liquidated damages, venue, change orders, schedule adjustments, withholding, dispute resolution, damages, attorney’s fees, and the general contractor’s, architect’s or owner’s discretion.

1.  Venue

Don’t agree to litigate or arbitrate your disputes in another state.  The remote location will not only prove to be more costly and inconvenient (an intentional deterrent to ever filing suit) but the jurisdiction will invariably be the hometown of your opponent (where they are likely to know the judge and be familiar to the jury).  If a profit can be made by constructing a project in Texas, disputes arising out of that project should be decided in the same location.  If they won’t agree, run away.

2.  Change Orders

While contract change order procedures are sometimes overlooked in the field, at a minimum the subcontract should prohibit oral directives and require:

  • Agreement in Writing
  • Signed by both parties
  • Process for Pricing

If no agreement can be reached on price the subcontract should include a change directive procedure that results in reasonable payment and profit for the work.

3.  Litigation or Arbitration

Pay close attention to how your disputes will be resolved.  Arbitration requirements are common but not always less expensive than litigation.  However, arbitration presents an opportunity for you to have a voice in the type and number of persons that will decide your fate.  Someone with experience and  knowledge of your industry may be more skilled at coming to a fair decision than an average jury.  Be certain that you share decision making control with respect to dispute resolution.

4.  Performance Standards

Without exception either an industry standard exists that defines the standard for your performance or the contract specifies the standard.  Don’t agree to arbitrarily raise your standard of performance.

  • Highly Skilled Manner  – NO
  • Top in the Industry – NO
  • Best Practices – NO
  • Good and Workmanlike – YES
  • First Class Manner – NO
  • Conformance with Industry Standards – YES

5.  Liquidated Damages

Common to most construction contracts is the assessment of liquidated damages in the event work is not timely completed.  In addition to reviewing whether the dollar amount of predetermined damages seems fair, you should make sure that the liquidated damages clause apportions responsibility between you, other subcontractors and the general contractor.  More importantly, the liquidated damages provisions should be reviewed in context with other clauses that address the time of performance, the project schedule and delays as these directly influence liquidated damage risks.

6.  Damage Limitations

While limits on remote or punitive damages may be acceptable, you should always determine whether the agreement unfairly restricts your right to recover typical breach of contract damages.  Clauses that automatically convert a wrongful termination for default to a termination for convenience will usually eliminate damages for lost profits.  You will find that the recovery of attorney’s fees and expert witness expenses are addressed.  Many times the contract will permit full recovery of damages by the contractor and limit the remedies available to the subcontractor.  I usually aim for the contract to follow the default (common law) damage rules.  At a minimum both parties should be entitled to recover the same types of damages.

You Don’t Have a Choice

Some of your freedom to contract has been limited by the Legislature.  Most statutory limitations are fair and came about as the result of compromise between owners, contractors and subcontractors.   Statutes define or control:

  • Waiver & Release
  • Contractual Indemnity
  • Contingent Payment
  • Payment Timing
  • Trust Funds
  • Out of State Venue

RUN…FAST

Some contracts present too much risk and uncertainty and should not be given any consideration.  If the contracting party won’t agree to delete these clauses, you should consider not making the deal.

  • Don’t agree to work overtime without compensation when delays were caused by others
  • Don’t agree to comply with unilateral and unreasonable schedule adjustments
  • Don’t agree to use the law of other states or out–of–state venues
  • Don’t agree to allow payment withholding from a good project if problems arise on an unrelated bad project
  • Don’t give an owner or general contractor sole control over dispute resolution
    • litigation vs. arbitration
    • selection of the arbitrator
    • place of arbitration/litigation
    • Don’t grant an Owner or General Contractor unchecked decision making power.  Frequently this power is hidden using words like  “sole discretion” or “good faith”
      • Substitute “reasonable”  discretion

Remember, while Texas is currently a competitive marketplace, there is no reason to buy problems.  If you are unsure about your next agreement, having a competent attorney assist with your review will likely reduce risks, improve profitability and help avoid expensive litigation.