The Best Defense to Construction Litigation – Don’t Get Sued

Dan Norris Headshot
Daniel J. Norris
Director, Corporate Department
January 1, 2005

It has become a cliche to say that we have a society that is pre-conditioned to file lawsuits to resolve business disputes. Many contractors, to their misfortune, have first-hand experience as plaintiffs or defendants in construction-related litigation. As anyone who has been involved in construction litigation, as plaintiff or defendant, would attest, there is rarely a true “winner” in litigated disputes. The costs of construction litigation to both parties can be oppressive, and key employees of the parties to the litigation need to devote significant time responding to interrogatories and attending depositions, hearings and trial instead of developing new business and overseeing the company’s operations. It is an easy case to make that contractors should make efforts to avoid having to sue or being sued to resolve construction disputes. Although, this point, you would think, is a matter of common sense, there are too many examples of contractors routinely entering into bad contracts or working with no contracts at all, which sets the stage for costly lawsuits to resolve disputes over construction work. Although even the best contracts will not provide an impenetrable shield against litigation, proper contracting practices are an essential element of risk management and litigation avoidance practices for contractors, large or small. The paragraphs below spot some common areas of construction law dispute and introduce critical issues in contract formation and enforcement. (Note, however, that this article is not legal advice and you should consult your own legal advisors for advice about contracting.)

Always Use Written Contacts. Contractors should routinely use written contracts with subcontractors and owners. I have heard some contractors say they do not need written agreements with certain subcontractors because it is only a small amount of work or they have worked with a particular contractor for years and have never needed a written agreement. These beliefs are wrong. A well written contract defines basic elements of a contractor’s relationship with its subcontractors and owners and should provide essential liability limitation, regardless of the size of the contract. You should also not rely upon a long-standing relationship with a subcontractor to justify not having a written agreement. When a deal goes bad, those relationships may not be as solid as you believed. Bankruptcy, death of a business owner or the sale of a business also might cause you to have to deal with parties with whom you do not have a friendly relationship.

Debunking “Boilerplate.” Contracting should be efficient and reliable, so that a contractor should not have to reinvent the wheel for every owner or subcontractor. Be aware, though, that all contracts are not the same. The act of entering into a contract is not just “a technicality.” Each contract requires careful thought and review to make sure that the written agreement reflects the business deal and the agreement is internally consistent. With the assistance of your advisors, you should develop a well-organized system of samples and templates that you can use a your starting point for preparing a written agreement. The starting point for many contractor-owner agreements is The American Institute of Architects (AIA) forms. The AIA forms are comprehensive and widely accepted. There are a variety of AIA forms (over 80), though, and many of the so-called “forms” have been significantly revised from deal to deal or get revised to reflect changes or development in the building or construction industry. So unless you are starting with a form that originated from your office, the agreement needs to be compared with your accepted form and the differences reviewed.

Key Areas for Contract Review. Contractors should create and utilize a checklist of key contract provisions when preparing and reviewing written agreements. Spending time making sure these key provisions are right often provides the best insurance against costly litigation over ambiguous agreement language.

Description of the Work – Make sure that the work specifications you are agreeing to undertake as a contractor are clearly described. The description should be clear not just for you but for someone who does not have any construction industry experience, which would be the case for most judges and jurors who might have to interpret the contract for you someday.

Warranties – It should be clear who is standing behind what? Whatever warranties you are willing to offer should be expressly stated in the agreement. The contract should also include a clear exclusion and waiver of all other warranties. Some warranties are implied by operation of law, even if they are not included in a contract, and these implied warranties need to be waived too.

Remedy Provisions – In the event of a breach of contract by the owner, a well-written remedy provision should allow a contractor to receive payment for all work executed and for proven losses sustained upon materials, equipment, tools, and construction equipment and machinery, including reasonable profit and applicable damages. The contractor should also be able to recover any costs of collection, including attorneys’ fees.

Pre-suit Notice or Mediation – Litigation can often be avoided if the parties to a contract have to provide notice to the other party before filing litigation. This gives the parties the opportunity to resolve the dispute before suit is filed. The agreement can also require the parties to mediate a dispute as a precursor to a law suit. Mediation is generally much less expensive than litigation and disputes are often settled through mediation conducted by an experienced mediator with construction industry knowledge.

Arbitration Clauses – Arbitration is often thought to be a less expensive dispute resolution alternative than litigation. This is, in part, because the parties can agree to limit the discovery, number of witness, appeals and other procedures that contribute to the cost of litigation. Many construction contracts with owners or subcontractors require arbitration as the exclusive means of dispute resolution.

Subcontractors – In subcontractor agreements, the contractor should include “pay when paid” provisions so that the contractor will not have a legal obligation to pay the subcontractor until the contractor gets paid by the owner.

There are other topics that should make the checklist such as caps on damages or types of claims, who is responsible for purchasing what insurance, and indemnification obligations that you should discuss with your own legal advisors. Your contracting practices play an important role in minimizing the occurrence of litigation for your company and the losses or recovery, as the case may be, from litigation. Devote the time and attention to your contracts that it takes to keep your company out of the courtroom.