Litigation has become part of the life cycle of many construction projects, both during the project and after completion. The course of most construction litigation is dictated by the terms of the project contracts. These contracts affect everybody on the project from developers, to contractors, subs, insurers, buyers, sellers—basically the entire gamut of those involved in a project. All too often, dense construction contracts with boilerplate fine print and poorly defined terms cause confusion that leads to lawsuits. Sometimes these often overlooked terms which we are bound to by law can “make or break” the case, resulting in a judgment that seems entirely unfair.
Given this potential impact on the parties, it is critical to spend some time and legal savvy on contract terms before signing on the dotted line. Having a clear understanding of each side’s rights and responsibilities can go a long way toward preventing future issues and putting yourself in the most advantageous position if things go wrong. No matter what your role in the project, you should give some careful thought to these three common points, each of which usually plays a major role in litigation:
Dispute Resolution—If and when things go wrong, the first terms of engagement in a legal battle are the dispute resolution provisions. The terms of dispute resolution are commonly buried in boilerplate language that is easily overlooked. Some common things to consider: Will the case be decided through arbitration or litigation? Are the parties required to mediate beforehand? Are there attorney’s fees provisions? What may seem like innocuous terms can alter the course of litigation by shifting costs. This is particularly the case in contracts where the parties have a disparity in financial backing, such as those between a smaller local guy and a national developer with deep pockets.
Indemnity—Indemnity provisions are commonplace and often overlooked in construction contracts. Put simply, an indemnity provision lays out who is going to have your back when a loss occurs. Sometimes these provisions also provide that you might be responsible for somebody else’s losses. Do you really want to back the horse that got sued ten times last year? Unfortunately, the smaller guys often fall victim to draconian indemnity provisions. An example of this occurred in the case of Centex Golden Const. Co. v. Dale Tile Co. (2000) 78 Cal.App.4th 992, where a small tile subcontractor was liable for the acts of a large general contractor, even though the jury found the subcontractor was not negligent. However, changing just a few words in the clause, such as shifting your liability allocation, can be a game changer in the event of a dispute.
Scope of Work—These terms are critical in litigation, both during the project and after completion. It is important to have a clear definition of the exact work each party is expected to perform or expecting to have someone perform for you. In many contracts, especially those pre-printed forms that are common amongst subcontractors, there are 3-4 lines defining the Scope of Work. Seriously, think about it; “furnish and install back hill retaining wall” is not the same as defining delivery, storage handling; ASTM standards; materials such as wall rock, infill and base material; responsibility for excavation, grading, foundation soil preparation, etc. Just remember, the more specific you are now, the less room for argument later.
These are just some of the critical components of any construction contract. The important lesson is that you should spend the time and effort to really understand the scope of the project, scope of your duties, responsibilities, and expected benefits, and what will happen if things go wrong. The parties that spend this time up front are the parties that maximize their benefits from each project, tend to have better relationships with their developers, contractors and subcontractors, and spend less of their precious time in litigation and more of it making money. Don’t you want to be that party?