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 contract form?
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 SDobrowski@Calfee.com.