How to Prevent Frequent Contract Errors in Large Construction Projects

ISTOCK/FERMATE

By Judge Chad Allred (Ret.) of JAMS

Fantastic news! The deal has come together—for construction of the steel bridge or for placement of the exterior panels on the downtown high-rise or for the dirt work at the site of the new energy plant. All the hard work, planning, bidding, and negotiation have reached a culmination! Well, not quite. There’s still a contract to wrap up. And too often contract mistakes can undermine everything that went into landing the deal. Here are remedies to three errors that—as a judge with many years of experience in construction dispute resolution—I have seen with surprising frequency.

  1. What is the contract? Be clear about contract formation.

Too often, even among sophisticated parties, I see deals that lack a central, written contract. We all know there are legal doctrines that allow attorneys to come to the rescue—that is, to argue about when and how a contract was formed. At times, bids, quotes, purchase orders, specifications, and other documents can—separately or in combination—constitute the parties’ contract. But why leave it open to argument—and attorneys’ fees—once a problem arises? The best practice is to prepare a contract, even if it’s short and simple, that is signed and executed on a specific date. In the alternative, make a written record of when the parties have reached final terms and what documents form the parties’ contract.

  • How do multiple documents relate to each other? Be clear about incorporating other documents and agreements.

I also see deals that reference other documents but lack clarity about the force and effect of those documents. In a recent public works case, there was a brief, written contract that made a passing reference to payment in accordance with “the prime contract”—presumably the general contractor’s agreement with the public agency. And plan drawings referred to the standard specifications of the state Department of Transportation (DOT). When a dispute arose, one side argued that the contract incorporated both the prime contract and the DOT specifications. The other side argued that the contract did not incorporate either. Again, why leave the matter open to argument? If you intend to incorporate into your contract another document, state that clearly in the contract. Conversely, if you refer to another document but do not intend incorporation, be clear about that as well.

  • Which claims are included? Be clear about which claims and disputes you are including (or excluding) in dispute resolution provisions.

Whether it’s a provision that requires arbitration, selects a particular state or county forum, or provides for attorneys’ fees, attorneys commonly draft provisions that pertain to claims or disputes “hereunder,” “under this agreement,” or “arising out of the agreement.” Often it appears that the drafter did not deliberately decide how broad the provision should be or analyze it to understand its scope. As a result, some contracts require arbitration, a specific forum, or attorneys’ fees only in regard to the contract, but not in regard to noncontractual claims related to the very deal that the contract pertains to (for example, negligence, fraud, and common law indemnity claims). If you intend to exclude certain claims from your provision, so be it. But make a deliberate choice and don’t inadvertently exclude some related claims or disputes because you failed to analyze or draft carefully.

It can be frustrating for a company to work hard for business and finally land a great deal, but then have the work and the deal overshadowed by costly litigation. Some disputes will entail unavoidable litigation costs. But counsel can help their clients mitigate those costs on the front end by following the steps outlined above. Backing up a winning deal with the right level of support is always key.

Republished from the JAMS ADR Insights blog.

Judge Chad Allred (Ret.) is a mediator, arbitrator, and discovery master at JAMS, where he resolves complex and challenging civil disputes. He is part of the JAMS Global Engineering and Construction Group, which provides timely, cost-effective ADR services to the U.S. and global construction industries. Judge Allred has resolved claims involving construction and design defects, critical-path disputes, engineering standards, change orders, delay, disruption, loss of productivity, liquidated damages, nonpayment, construction and mechanic’s liens, sureties, and safety violations. Before joining JAMS, he served for a decade on the King County (Washington) Superior Court, where he presided over more than 200 trials, as well as numerous appeals from state agencies. Before joining the bench, Judge Allred handled trials and appeals in federal and state courts, litigating disputes around the country.