|In our fourth issue of The Construction Advantage, we depart from summaries of regional and national case law to provide you with some helpful information from George Burns, David Ray and Michael Bosse on contract drafting, choices for alternative dispute resolution, and collecting receivables through the use of mechanics liens. These primers are starting points for your review, and we hope will focus your thinking in these areas as you embark on increased work during the Spring and remainder of 2014.
Five Questions to Ask When Drafting or Reviewing a Contract
By George Burns
Contractors, owners and designers in the construction industry want to build and complete projects. They don’t really want to be buried in mountains of paper. However, one of the most important first steps on any construction project is to make sure that the contract documents match the project that you are about to build. If you cannot answer the five questions below because the draft contract is not clear, or you don’t understand portions of the draft contract, you likely should seek legal advice before signing anything. It is far less expensive to ask for advice before you sign the contract than after you sign it—or, worse yet, after a serious crisis arises on the project.
1. Are you really buying or selling what you think you’re buying or selling?
If you are the owner, have you accurately and completely described all of the benefits that you are to get under the contract for the amount you are going to pay? Conversely, if you are the contractor or supplier, is the description of the benefits so open-ended that my fixed price may not be adequate to cover your costs and leave you a profit? Many cases arrive in our office and head to litigation in which the scope of work is indeterminate or at least arguably vague.
2. What doesn’t the contract cover?
Is the contract comprehensive or does it leave holes that you have to fill in some other way? For example, as an owner, you must ask whether this contract delivers all of the goods and services you need to yield the project outcome that you desire? As a general contractor does your subcontract pass on to the subcontractor all of the obligations that you owe to the owner? To the extent that there are gaps in the coverage of the various contracts, are you willing to take the risk that those gaps will continue to be unfilled? Have you adequately priced the project knowing that those gaps exist?
3. Does the contract have warranty provisions that make sense?
As an owner building a power plant, you have to know that the plant will actually work. Do you have warranty rights against the contractor or designer if it fails to work? As a general contractor are you taking on too much warranty liability even in cases in which you build the plant exactly as you are told to build it?
4. Does the contract mesh with other project contracts?
Do all of the contracts provide for the same dispute resolution mechanism (See how to pick your poison below by David Ray)? Do all of the contracts dovetail with each other in terms of specifying who is to perform what work and in terms of coordinating the various work assignments and schedules?
5. Is the other party to the contract financially capable?
If the other party to the contract fails to perform, and breaches the contract, are they creditworthy? Does it have anything to lose? You can have the best contract in the world but if the other party is insolvent, you don’t have a practical remedy. To some extent, the ability to collect can be enhanced through the requirement of insurance for designers and contractors, and payment and performance bonds. A large retainage is another way of managing uncollectibility risk.
Mediation, Arbitration or Litigation: How to Pick Your Poison
By David Ray
Probably the last thing on your mind at the beginning of a job is considering how and where you will prosecute or defend claims arising from the project. But it is highly likely that, buried somewhere in the agreement you are about to sign, there is a provision that makes a selection of a method and forum for resolving disputes. If you don’t understand or pay attention to it, you may find yourself in a dispute resolution forum that is not of your choosing. Before signing a contract, consider these three common methods of dispute resolution:
Mediation is a preliminary and non-binding procedure that is often used in conjunction with both arbitration and litigation. Mediation is a settlement conference facilitated by an independent professional selected by the parties. The mediator will bring the parties together, listen to all sides of the dispute, assess each parties’ relative strengths and weaknesses and use his or her mediation skills to try to cajole, convince and persuade the parties’ to settle the issues. Mediations typically are completed in one day. If successful, there will be no need to arbitrate or litigate; the claim will have been resolved by agreement of the parties.
If unsuccessful, the parties will have to proceed with some form of binding dispute resolution. Arbitration and litigation are binding processes and are mutually exclusive. Arbitration is a non-judicial process where the disputes between or among the parties is submitted to one or more arbitrators – usually persons experienced in construction – for final, binding resolution. The arbitrators hold hearings where witnesses testify and evidence is submitted and then issue an award. The arbitration award is enforceable in court and, except in extremely limited circumstances, cannot be appealed, challenged or overturned. AIA forms generally include mandatory arbitration clauses.
Litigation means that a court – with or without a jury – will be the forum for resolving disputes arising from the project. Because the typical construction or design case is complex and involves multiple issues, trial by jury is rarely a wise choice. If you have chosen litigation, you will be at the mercy of the court’s schedule which, in ME, typically means that you will have a hearing on your claims less quickly than an arbitration hearing.
So, which poison do you pick? Generally, arbitration is less expensive and faster than litigation and, when the issues are complicated construction or design claims, it is usually possible to find arbitrators with sufficient experience and knowledge to facilitate the presentation and resolution of claims. On the other hand, some observers believe that arbitrators tend to compromise claims more readily than judges.
Over my career as a construction lawyer, I have had the opportunity to litigate extensively, act as both a mediator and arbitrator many times, and have taken part in many, many mediations and arbitrations. As I have explained, each choice has different benefits and burdens. Whatever your preference, you should make sure that the contract you are signing is consistent with your expectations.
Getting Paid: Mechanics Liens
By Michael R. Bosse
Springtime is upon us and everyone in the construction industry is gearing up for increased work over the next several months. Doing good work though isn’t enough to make you profitable at the end of the year. Your receivables need to be managed in a smart and efficient manner. Many of you have heard members of our Construction Law Practice Group remark that ME has one of the strongest mechanics lien statutes in the country. Contractors, subcontractors and suppliers who are not timely paid on a project must be vigilant about their mechanics lien rights if they are to turn their hard work into bottom line profitability.
In advance of the busy season, it is useful to review a list of pointers that everyone must remember, understanding that every situation is different. It’s important to secure legal counsel in order to timely and properly file your mechanics lien. The law has too many traps for the unwary to go it alone.
The following are some of the greatest hits from ME’s Mechanics Lien statute:
- As a subcontractor you have 90 days from your last date of substantial work in order to record a mechanics lien in the correct Registry of Deeds. Don’t assume that you have a contract with the owner and have the longer 120 day time period. You may not know the actual owner of the property (you deal with Jim Smith, but the property is actually owned by Acme Corp.), so you should always assume that you have only 90 days from your last date of substantial work in order to record a mechanics lien. Getting the owner wrong will be fatal to your lien.
- Do not rely on punchlist or warranty work as constituting the last date of substantial work. The last date of substantial work means the last date of substantial work. That is also not necessarily the date that you sent an invoice. Be sure you know the last date that you really did substantial work on the property for your measurement of the 90-day deadline. Be careful here, there is usually little to be gained by waiting until the last minute.
- Mechanics liens are not easy to draft and the statute is not easy to follow. One should hesitate before recording one’s own mechanics lien, you are better off getting counsel. If a mechanics lien is done incorrectly and the 90 days expires, the lien is dissolved by operation of law and cannot be revived. Not doing a mechanics lien correctly can be costly, and once the deadline passes, it can’t be fixed.
- Mechanic liens deadlines are state specific. Just because a subcontractor or supplier has 90 days to record in ME, that has nothing to do with the requirements in New Hampshire or Massachusetts. In fact, the mechanics lien deadlines and procedures in these states are very different from ME (our attorneys regularly record liens in ME, Massachusetts, and New Hampshire, but we can assist you with deadlines in any state in which you are working).
- If you are past your mechanics lien deadlines, this does not mean that you have no claim. You almost certainly still have a contract claim against the contractor if you are a subcontractor or supplier, or if you are the contractor, against an owner. Even if you have lost your mechanics lien, all is not necessarily lost. That said, those who timely and properly record mechanics liens are much more likely to be paid on a project than those who do not.
These five tips will help to ensure that all your good work on projects is paid in a timely manner. All of the attorneys in Bernstein Shur’s Construction Law Practice Group are available to answer any of your mechanics lien questions.
We hope that you have found these tips and pointers in the fourth issue of the Construction Advantage helpful to you in your daily business. Each of the attorneys in our Construction Law Practice is available to answer the day to day questions of your business as you work on projects over the next many months.