Construction Contract Drafting Strategies

Crafting Enforceable Payment, Performance, Termination and Damages Provisions June 12, 2012 Construction Contract Drafting Strategies

Craig F. Martin, Partner LAMSON, DUGAN AND MURRAY, LLP cmartin@ldmlaw.com

Drafting Enforceable Damages Provisions in Construction Contracts DAMAGES

Liability under contract. • All losses arising naturally from breach. • This includes: • Direct. • Indirect, a/k/a Consequential. Breach of Contract Damages

What are Consequential Damages?

Owner’s Perspective. • Increased financing costs. • Lost profits. • Lost rental income. • Contractor’s Perspective. • Supplying extended on-site supervision. • Increased labor costs. • Rental expenses. • Subcontractor claims. Consequential Damages

Secondary damage caused by construction defect. • Interior water damage, both to building itself and personal property. Examples of Consequential Damages

A party agrees to waive the right to recover consequential damages from the other. Waiver of Consequential Damages

Is the waiver one sided or mutual? Waiver Considerations

AIA A201 Section 15.1.6. • Owner and Contractor waive consequential damages. • Concerns. • Owner waives damages caused by delay. • Remedy. • Incorporate liquidated damages for delay. Frequently Used Provisions

Section 6.6 -- Mutual waiver except for liquidated damages as agreed and losses covered by insurance required by the contract. • Differs from AIA. • Expanded definition of consequential damages. • Creates an exception for insurance. ConsensusDocs 200

Strike the waiver provision. • Negotiate a limited waiver. • Identify those damages allowed or excluded. • Negotiate a not to exceed cap on damages. • Limit delay damages to liquidated damages. Alternative Contract Provision

Predetermined damages generally invoked when a contractor fails to meet deadlines. BUT, WHAT ARE Liquidated Damages

Limits the amount of delay damages that may be recovered. Avoids the obligation of proving actual damages, i.e., lost profits, loss of use. Advantages to Liquidated Damages

Maybe. • If it is a penalty, it is not enforceable. • Courts take two approaches: • Was the estimated amount of damages reasonable at formation, regardless of actual damage? • Prospective. • Is there a reasonable relationship between estimated liquidated damages and actual damages? • Retrospective Are Liquidated Delay Damage Clauses Enforceable

AIA A201 • No form language, but reference to liquidated damages. • This could be because architects’ insurers hate liquidated damages clauses. • Consensus Docs 200 • Paragraph 6.5. • Liquidated damages are in lieu of liability for any and all extra costs, losses, expenses, claims, penalties and any other damages. Frequently Used Provisions

Require payment only if the delay is caused solely by someone other than the owner. • Incorporate a bonus for early completion. • GC pays if project delayed, Owner pays if project is completed ahead of schedule. Alternative Contract Provisions

A delayed party will be compensated only with an extension of time, no monetary compensation. Risky for all parties. “No Damage for Delays” Clause

AIA A201 • 8.3 Delays and Extensions of Time. • If GC is delayed by Owner, Contract Time shall be extended by Change Order. • Does not preclude damages for delay, but 15.1.6, Waiver of Consequential Damages will impact recovery. No Damage for Delays Frequently Used Provisions

ConsensusDocs 200 • 6.3.1 If GC delayed, entitled to extension of Contract Time. • 6.3.2 If GC incurs additional costs, shall be entitled to adjustment in Contract Price. No Damage for Delays Frequently Used Provisions

Prohibit recovery of damages for delay unless active interference. Clarify the number of days before delay damages are triggered. No Damage for Delays Alternative Provisions

Pay-if-Paid / Pay-when-paid

Pay-if-Paidprovisions excuse payment until GC has been paid by the owner. Pay-when-Paid provisions allow reasonable amount of time to pay. Pay-if-Paid / pay-when-paid provisions

Pay-when-Paid provisions are generally enforceable. • Pay-if-Paid provisions may be enforceable. • Must be narrowly drafted. • States differ on enforceability. • Yes—New Jersey, Connecticut, West Virginia. • No—New York, Nevada, California. Are they enforceable?

Must be drafted to clearly and unambiguously show the parties’ intent to shift the risk of nonpayment from the general contractor to the subcontractor. Pay-if-paid clauses

Subcontractor agrees to assume the risk that the owner may fail to pay for the Subcontractor’s work. The Contractor shall have no obligation to pay the subcontractor for its work unless the owner has first paid Contractor for the Subcontractor’s work. Sample Language

What are your options? • Arbitration. • Mediation. • Litigation. Dispute Resolution

No good answer. It depends more on the circumstances. Which one is best?

AIA A201 • Provides a menu to select. • Arbitration. • But must pursue mediation first. • Litigation – default. • Other – whatever the parties decide. Contract Provisions

ConsensusDocs 200 • Resolution menu. • Direct Discussions. • Mediation. • Arbitration. Contract Provisions

Great flexibility in resolving conflicts, but you must address it. Resolution Procedures

Craig F. Martin, Partner LAMSON, DUGAN AND MURRAY, LLP cmartin@ldmlaw.com Construction Contractor Blog: http://www.constructioncontractoradvisor.com Thank You

Construction Contract Drafting Strategies