The Construction Advantage
The Contract Provisions Most Contractors Ignore
Over years of reviewing proposed construction contracts for clients, it has become clear to me that contractors and their lawyers tend to focus on different contract provisions.
This is entirely understandable, as contractors must necessarily focus on the business terms contained in the contract, including price, payment terms and scope of work. As construction attorneys, we tend to leave these terms to our clients, who are better situated to ensure that they accurately reflect the deal they have made.
Contractors tend to skip over many other important contract terms, however, either because they consider them “boilerplate,” or because they fear they will not understand them, or because they assume they will never come into play. There is risk, however, in ignoring these provisions, which is why construction attorneys focus on them.
When reviewing any contract, one of the provisions I look at is the one governing change orders. As all contractors know, changes in scope during the course of a project are virtually inevitable, and how they are implemented and how contractors are compensated for them will have an impact on how the contractor ultimately fares on any project.
I also look carefully at provisions relating to suspension and termination, either for cause or for convenience. These provisions come into play in many construction projects and the rights of the parties as set forth in the contract tend to vary greatly from one contract to another.
In my experience, contractors tend to ignore provisions relating to the resolution of disputes, undoubtedly because they assume that disputes will not arise. Construction attorneys assume just the opposite, and so we review these provisions carefully with respect to what form or forms of dispute resolution – mediation, arbitration and/or litigation – will be utilized, the forum where these proceedings will take place and which state’s law will be applied.
Perhaps most importantly, we look at indemnification provisions. These are provisions included in almost all construction contracts that shift the risk of loss under certain circumstances. These provisions are dangerous, as they may allocate the risks inherent in any construction project in ways that contractors would never anticipate. Yet, all too often, contractors reviewing proposed contracts pay little attention to these critical terms.
Contractors should never overlook “boilerplate” provisions in contracts, as the outcome of many projects from the contractor’s perspective may well depend on them. Instead, contractors would be well advised to familiarize themselves with the most common forms of these provisions to position themselves to recognize when the other party is overreaching. After reviewing these provisions, contractors should not hesitate to push back against, and seek to negotiate, unfair or unreasonable contract terms or to consult with experienced construction counsel.
Hidden Arbitration Clause
An arbitration clause is a common legal tool that deals with parties to a contract’s rights and options in the event of a legal dispute over the contract. In an arbitration clause, the parties agree not to sue each other, and instead resolve their disputes through arbitration. Although most non-lawyers might like the idea of not having to engage in a lawsuit, the ability to sue in court is a powerful right. In fact, because arbitration clauses involve the waiver of a party’s right to access the legal justice system, they must satisfy several requirements in order to be valid and enforceable. A recent case from Oklahoma highlights the limits of their enforceability.
In Williams v. TAMKO Bldg. Prod., Inc., 2019 OK 61, ¶ 2, the plaintiff homeowners filed suit against a manufacturer of roofing shingles to recover damages for the defective shingles, which they purchased. The manufacturer tried to stay the court case and compel arbitration. Id. ¶ 3. It argued that the arbitration agreement, which was printed along with a limited warranty on each package of shingles, was binding on the homeowners. Id. It also argued that the homeowners had the opportunity to read the agreement and that by purchasing and installing the shingles, the homeowners had agreed to arbitration. Id. For their part, the homeowners asserted that they never read the arbitration provision and never agreed to be bound by it. Id.
The Supreme Court of Oklahoma noted that ordinarily, courts presume that a purchaser who had the opportunity to read a contract, but chose not to, is still bound by it. Id. ¶ 9. Here, however, the Court implied that the arbitration agreement’s placement on the shingles’ packaging was plainly insufficient to afford the homeowners the chance to read it. Id. ¶¶ 9, 18. It held that a contract provision which requires a party to surrender a constitutional right and is “intentionally printed on material that will be opened and discarded by the contractor who is likely not the owner” is unconscionable and unenforceable. Id. ¶ 18.
Additionally, the Court ruled that the contractor – whom the homeowners hired to install the shingles – did not have the authority to bind the homeowners to the arbitration agreement despite likely seeing the provision on the packaging. Id. ¶¶ 12-13. The Court reasoned that the homeowners only hired the contractor to install the shingles, not negotiate a contract. Id.
Although it is unclear whether a ME court would rule as the Oklahoma Supreme Court did in this situation, the Williams case does highlight the truism that courts are often reluctant to enforce arbitration agreements where it appears the party seeking to enforce the agreement has tried to sneak it past the other party.