Construction Contracts
Understanding Common Contract Provisions That Will Impact Your Business.
Stephen G. Test
Commercial construction contracts are complex documents intended to anticipate all possible events that can arise in project development, design, construction and completion, and then fairly allocate those risks between the parties. Standard form documents, such as AIA, EJCDC and Consensus all provide excellent forms ready to use for nearly all types of projects. Typically though, the drafting party, whether the owner/developer, the designer, the general or the subcontractor, will modify standard provisions in these forms intending to shift the risks and burdens associated with common issues, including forum selection, choice of law, dispute resolution, recovery of costs and fees and waivers of claims and damages.
FORUM SELECTION
Be watchful for a provision that provides for resolution of disputes in a location other than the location of the project, perhaps the home town of one party or the home state of a party’s corporate office. To protect general contractors, the Virginia General Assembly enacted §8.02-262.1 which requires that Virginia must be the forum of any arbitration required under a contract where a Virginia-based business contracts to do work in Virginia. Any contract provision calling for arbitration outside of Virginia is unenforceable. This statute is preempted by the Federal Arbitration Act though so it will not apply to projects involving federal law or claims involving interstate commerce. No such statute applies when litigation is chosen as a dispute resolution mechanism. The United States Supreme Court just decided that forum selection clauses were enforceable in Atlantic Marine Construction v. United States District Court.
CHOICE OF LAW
In addition to selection of a location for dispute resolution, contracts usually contain a provision where the parties agree to use the law of a particular state for interpretation and enforcement of the contract. For example, a contract for a project in Roanoke may require the application of the laws of Massachusetts rather than those of Virginia. The selected jurisdiction must be reasonably related to the purpose of the agreement. If that is the case and it is not against a public policy of Virginia, a Virginia judge will be required to resolve claims by applying the laws of the selected foreign state. Those laws may vary dramatically from those of Virginia in substantive areas such as indemnification, burden of proof and calculation of damages or the Statute of Limitations.
ONE-SIDED ARBITRATION CLAUSE
Usually, arbitration provisions are mutually agreed on and fully enforceable. Sometimes, the clause is drafted to give the power of selection of litigation or some method of ADR to one party. In effect the parties have agreed that there is no agreement to arbitrate or litigate. If a dispute arises, and one party files a claim in court or in arbitration, the party with the power of selection can move to stay or dismiss the claim and demand that it be filed in a forum of its own choice, thereby controlling the process to its advantage.
ATTORNEY & CONSULTANT FEES
Resolving construction disputes is expensive. Virginia follows the “American Rule” which provides that a party may only recover its attorney's fees if the contract makes specific provision for recovery or it is allowed by statute. If you want to recover attorney's fees as the prevailing party, be certain to provide for it in your contract, and consider adding language to include recovery of consultant or expert witness fees.
WAIVER
You should always carefully read any contract, looking for key terms like “waiver” and “release”. Often you will see that certain claims or rights are “waived” entirely or are made subject to stringent conditions precedent. In Virginia, a waiver is the intentional relinquishment of a known right, claim or privilege. Common waivers, include:
> “Pay if Paid” – you only have the contractual right to claim and recover payments from the other party if the other party has received funds to pay you as a condition precedent;
> Consequential damages – those damages that are a consequence of a breach of contract (acceleration, delay impacts, loss of use, lost profits, etc.), leaving only the right to collect direct damages – those that result directly from the breach (costs of repair or replacement, etc.);
> No damages for delay, leaving only the right to extension of time to complete
> Right to file and enforce a mechanic’s lien;
> Claim is waived if a particular form of notice is not timely made;
> Claims are waived by acceptance of payment
CONCLUSION:
Virginia courts can be counted on to enforce construction contracts as written, allowing parties the freedom of the marketplace to contract at arm’s length. Courts generally will not set aside a contract or strike a provision or term absent fraud or violation of public policy. Your time and treasure are well spent reviewing your contracts closely to understand their impact and enforceability.
The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.
SOURCE: www.williamsmullen.com