When a Handshake Isn’t Enough

March 26, 2015

By David Anderson, attorney

construction handshakeThe construction industry is entering an exciting new season with numerous projects hatching throughout the city. Those projects will begin with great enthusiasm, with many agreements made by merely a handshake and each party’s sincere commitment to the deal. A thoughtful written contract is nonetheless essential to these agreements between even the most ethical parties, because litigation is the product of ambiguity – what was really agreed upon? – and money.

Contracts are not solely defensive. They provide a road map so that parties can quickly resolve any misunderstandings or disputes that may arise. Construction contracts should contain essential terms that record each party’s promises and also terms that tell the parties what to do when the unexpected occurs. How should a change be handled? Who is responsible for what kinds of delays? How will the parties know when a contract has been performed fully? When is the right to payment earned? How will the parties communicate? And how will disputes be resolved between the parties?

Essential terms

If the parties cannot agree on the scope of work and the amount of money that is to be paid for that work, there is a problem. Although defining those two terms should be a basic component of a construction contract, parties do not always clearly define the amount of money that should be paid for the scope of work.

If those terms are not clearly defined, a dispute will arise. It should be self-evident that contracting parties should know the scope of work and amount to be paid for that work. But this frequently occurs when parties are accustomed to doing business with each other and are lulled into a sense of complacency. That informality has benefits, but it also carries risks.

Management terms

Management terms help to identify how to handle unexpected events over the course of the contract. Change order instructions and advance agreements regarding delays provide the parties with a process for knowing how the essential terms have been modified based on events or circumstances unforeseen at the time of contracting.

As with the essential terms of scope and payment, strictly complying with contractual change order procedures can seem unnecessarily cumbersome, particularly when the contracting parties know and are comfortable with each other. However, the gains associated with cutting corners on complying with a change order procedure can be quickly lost when the parties realize that they did not share an understanding with respect to a particular change order.

Payment processes defined in the contract provide additional help managing the contract. This is an area where statutory gap fillers respecting the timing for payment are mandatory. However, if the payment processes are reduced to writing, contractual management is easier. Plus, the parties can tailor the payment processes to their own business practices by directing payment to a specific office location, invoices to the attention of a specific person, and the necessary protections related to lien waivers.

Finally, an often litigated management issue is how the parties should know that the project is completed. It is not uncommon for a contractor or owner to dispute whether a project is completed. The parties in that event often sweep the dispute under the rug after some back and forth and then move on without agreeing that the project has been completed.

As a consequence, an owner may hold some retainage that is due and elect not to pursue a claim for incomplete performance. The contractor might elect not to seek retainage and simply walk away from the project. This is a problematic standoff between the owner and contractor.

The parties in such a problematic standoff may think that by simply walking away from the dispute, they saved headaches and money. But the date of completion triggers other deadlines, such as the time that a claim for defective performance can be asserted. By walking away from the project without identifying completion conclusively, a contractor may lose the benefit of protection of the applicable statutes of limitation and repose. A contractual term calling for a third party to decide when the project is complete can avoid the problematic standoff.

Dispute resolution terms

When there is no dispute, it can be easier for parties to accept a dispute resolution procedure that saves money and time. When the dispute has already popped up, parties are prone to focus on asserting their view of court-sanctioned rights. Therefore, dispute resolution terms selecting mandatory mediation or arbitration of disputes can lead to a more efficient dispute resolution between the parties in appropriate circumstances. Likewise, there is no presumed right for a prevailing party in litigation to recover attorney fees, but the parties can contract for such a right.

Whether to incorporate an attorney fee provision into a contract is, like all of the other optional contractual terms outlined, a case-specific decision that requires consultation with an expert. Planning in advance of a project can protect important rights and preserve business relationships by reaching agreements in advance of a dispute erupting if that planning is done with appropriate assistance.

David Anderson is an attorney with the law firm of Schwabe, Williamson & Wyatt. He practices in the firm’s litigation and construction groups. Contact him at 503-796-2456 or at danderson@schwabe.com.

As published Daily Journal of Commerce, March 23, 2015

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