In the midst of this pandemic, not to mention social upheaval, political chaos, and events of historic ramifications, everyone in the world right now is dealing with risk and uncertainty. Personal, family, professional, public, private, cultural, economic, it seems that if it is a noun, it is uncertain. We are coping, mitigating, avoiding, researching, practicing, worrying, preventing, ignoring, obsessing, arguing, placating, working… you can insert your verb here. Everything is at once stagnant and in flux. In this environment, it can be tempting to take work under any terms whatsoever, let alone unfavorable ones. But it is in an uncertain climate that the terms of the work have never been more important. While it may be anecdotal, I personally have seen an increase in the disputes arising out of back of the napkin agreements or purchase orders in lieu of contracts, or sometimes even with no written terms at all.
So, here is my Public Service Announcement (PSA): It may be one that's fallen by the wayside in the face of more daunting and justifiably immediate concerns. Contractors, if you are fortunate enough to have work and the ability to perform it, you still need to read and negotiate your contracts, upstream and down. Deciding ahead of time exactly what will happen when things go sideways has never been more important.
This practice starts with understanding what is and is not in your contract, both before and after finalization. The attractiveness of locking down work in an uncertain environment seems to have made the usual list of bad habits more frequent and extreme. These are the mistakes we at the firm routinely counsel against:
- Relying on the bid as a contract document when it explicitly is not;
- Failing to review contract exhibits;
- Failing to identify and propose the exhibits that you want included;
- Failing to receive an actual signed copy of the contract (assuming you have not failed to obtain a written contract in the first place);
- Beginning work without a signed contract, or without having read what's in it;
- When applicable, failing to get a copy of the payment bond, or confirming that there is one;
- Signing a contract that makes false statements;
- Failing to observe and record notice provisions (How, to whom, when, and under what circumstances is written notice required to avoid waiving certain rights and privileges?);
- Failing to understand where you fit into the chain of contracts, i.e., what tier are you?
- Failing to have your insurance broker review the requirements to verify you actually have them (as opposed to breaching the agreement before you even start the work);
- Failing to document the status of your work daily;
- Failing to respond to formal written notice.
While nothing in this list is as interesting or gratifying as doing the work and getting paid, finding yourself at the wrong end of a dispute and paying an attorney to tell you what you should have done is even less so, I can assure you.
Beyond making an effort to avoid common pitfalls, every contractor should also expect to encounter and evaluate routine provisions that answer important questions. The goal here does not always need to be to "win the contract"; that would violate the Golden Rule of Contracting ("Whoever has the gold make the rules"). It is still important to identify the following provisions if only to know what they say and how they work on your particular job. How else can you understand, and more importantly, put a price on your level of risk?
- Flow Down / Flow Through: Do any or all of the upstream contract terms flow through to yours? If so, what rights and remedies are incorporated by reference?
- Unforeseen Conditions: What happens if unforeseen difficulties are encountered? Did you agree to do a site inspection and assume the risk of unforeseen conditions thereafter?
- Scope of Work: It should go without saying that the contract needs to define the scope of the work to be completed. This isn't just necessary to define your responsibility, but also to define what is not your responsibility.
- Indemnity: An indemnity is any agreement where one party assumes the liability of another, and there are strict and fairly recent rules regarding what an indemnity agreement in a construction contract may do, and what it may not. You should know every part of the contract where you might agree to take on the liability of another, and under what circumstances.
- Changes / Claims: Always read and understand your change provision, and be aware of what notice might be required, as well as what supporting documentation. Usually, failure to adhere to these basic principles waives any claim for a change before even getting to its merits. And of course, do not do additional work without either receiving a written change order, or having preserved your right to make a claim for a denied change order.
- Delay: What does the contract say about a schedule, and liability for failure to meet that schedule? Often, contracts will contain a "no-damages-for-delay" clause, which is exactly what it sounds like. They may provide that a time extension is the sole remedy for a non-contractor caused delay.
- Consequential Damages: If the agreement waives "consequential damages," you likely cannot make any recovery for lost profit, overhead, or lost opportunities as part of a claim, should one arise.
- Force Majeure: This provision defines an agreement by the parties as to what might be an excused interruption in work due to factors beyond anyone's control, such as, oh I don't know… maybe a global pandemic? Conversely, a Force Majeure provision may not provide the protection you'd think, and there might be other provisions that do a better job of addressing your circumstances.
- Lien Waivers: What does the contract say about mechanics and materialman's liens? Many might try to prohibit your ability to lien your work, altogether. Be aware that in Texas, such a provision is simply void and unenforceable. However, it would be a mistake not to strike any form of atypical lien waiver from an agreement, regardless. You likely will be required to provide a partial release of lien in exchange for progress payments, and one upon final payment, which is typical.
- Backcharges / Offsets: Look for provisions that define when the upstream party can withhold payment or even require you to pay them.
- Termination: How does the agreement define termination and/or default, and what are the rights of the parties in that event? Is there an opportunity to cure an event of default? Does the agreement differentiate between a termination for convenience and one for cause?
- Payment: When and how often are you to be paid? What do you have to show in order to receive payment? Is there a contingent pay (often called "pay-when-paid" or "pay-if-paid" clause)? These require an upstream party to receive payment for your work before they have any obligation to pay you, but each clause functions differently depending on its own verbiage.
- Warranty: What kind of warranties are you providing, and what types of warranties might be excluded? Just as importantly, what is being warranted to you?
- Dispute Resolution: Have you waived a right to a jury trial, or made an agreement to arbitrate any disputes? Is there project engineer that plays a role in resolving disputes? Are you required to mediate your dispute before filing a lawsuit? Where must you litigate any claims? All important questions, regardless of the answer.
There are likely to be any number of additional provisions that vary in size, complexity, and amount depending on the nature of the project. Knowing what's in your agreement can help you determine how to negotiate, your means and methods for performance, and how to resolve any disputes.
Contractors stand by their word and their work. Honesty and integrity tend to be a construction lawyer's most favorite things about their clients, and the main reason why we do what we do. But a handshake deal has never been a good idea. Now that nobody can shake hands and we're all under some form of quarantine, there's never been a better time to insist on a written contract, and to read the whole thing.
J. Michael "Mike" Schiff is senior counsel at Andrews Myers law firm. His practice focuses on both construction litigation and alternative dispute resolution, in which he represents general contractors, subcontractors, suppliers and owners in a variety of construction related disputes.