Construction disputes often result from
misunderstandings between the parties involved over the interpretation of the design and construction contracts.
But, many disputes can be avoided by paying early attention to those contracts. A surprisingly small change in language can create
a significant change in result.
“Form design and construction contracts
have appropriate uses, but wholesale
reliance on them can lead to expensive
and time-consuming disputes,” says Stan
Dobrowski, an attorney with Calfee, Halter &
Griswold LLP. “They may even create additional liability and risk. It is usually far cheaper to create or revise contracts to comply
with the law at the outset of a project than to
suffer a nasty surprise later by relying upon
void or ineffective contract provisions.”
Smart Business spoke with Dobrowski
about construction contracts and how to
avoid the pitfalls that come with them.
Why do contract misunderstandings occur?
Unfortunately, it is almost a point of honor
for many construction participants to ignore
their contracts. If there ever was an era when
this made good business sense, it is over.
Those who do this are leaving money on the
table, spending too much, or taking on
unnecessary liabilities. In many cases, they
are betting their businesses. Projects are
more complex, solutions are more expensive
and time-consuming, and disputes are more
common than ever before. While good management can reduce or even eliminate problems, contracts provide the tools to manage
projects and the frameworks for establishing
and maintaining relationships.
Why is understanding contracts so vital?
Failure to understand and follow the provisions of a contract can breed perceptions
about competence and create mistrust. Thus,
relations between parties, who should be
working toward a common goal, deteriorate.
Parties to a contract lose the opportunity to
cure and mitigate problems informally,
which is often the most profitable approach.
To mitigate dangers, people often resort to
using familiar contract forms. Since they
‘know’ what the forms say, they believe they
can sign the forms without careful review.
What dangers can come from relying on a
First, the ‘familiar’ documents may have
been amended for the project, often by supplementary or special conditions but also by
specifications, bid documents or documents
incorporated by reference. Second, the
forms may look or sound familiar but may
actually be a different set of documents.
Third, the ‘familiar’ documents may actually
be ‘new and improved’ versions, which
include significant changes. Finally, the contracts for design professionals, such as architects and engineers, must be coordinated
with the contracts of any construction managers, general contractors or trade contractors. Failure to do so will lead to overpayment, duplication or gaps in services.
What provisions don’t conform to Ohio law?
Among the most common provisions in
standard design and construction contracts
that do not conform to Ohio law are indemnification clauses. Indemnification claims
involving personal injury or death and damage to tangible property are limited to those
caused by the negligence of the person giving
the indemnification. Ohio courts have suggested that this permits indemnification only when negligence is the sole cause of the
injury, death or damage. As a result, a clause
that provides for indemnification for partial
negligence may be void.
Another common provision is a clause that
prohibits a contractor from obtaining monetary damages if the project is delayed. Such
‘no damage for delay’ clauses have been
enforceable, but, since 1998, Ohio law has
prohibited the enforcement of them when
the cause of the delay is a proximate result of
the owner’s failure to act.
Also, many form contracts permit a choice
of the law that will apply and a choice of
where litigation will occur. Companies routinely require that their states’ laws apply and
that litigation take place in their states. But,
Ohio law voids the application of any state’s
laws but Ohio’s and requires litigation and
dispute resolution to occur in Ohio for any
design or construction contract related to a
project in Ohio.
What else needs to be considered?
Form subcontracts often provide that payment is not due until invoices have been
approved and paid by a person higher in the
chain of contract, usually the project owner.
One way to assure that payment will be made
is to file a mechanics lien. But, Ohio’s
mechanics lien laws can be traps for the
unwary. Typically, form contracts provide little, if any, guidance for the proper means to
address them. The statutes contain different
provisions for public and private projects.
Failure to follow the proper procedures can
create liability or eliminate otherwise proper
liens. In addition, in an era of public-private
partnerships and economic development
financing involving public money, it can be
difficult and costly to determine which procedures should apply. Including those procedures, or at least references to them, in the
contract can protect against costly mistakes.
Also, subcontracts on public projects must
comply with Ohio’s prompt payment act or
risk liability for 18 percent interest, attorney
fees and court costs. And, most public construction contracts must include the payment of ‘prevailing wages’ and limits on
amounts retained from payments.
STAN DOBROWSKI is an attorney with Calfee, Halter & Griswold LLP. Reach him at (614) 621-7003 or [email protected].