Article – Protect Your Business With A Few Key Contract Terms

Protect Your Business With A Few Key Contract Terms

By Christopher J. Olson, Esq.

Unfortunately, in today’s world litigation has become a component of far too many construction projects – large and small, both during and after completion of a project. The course, and ultimate outcome, of such litigation is most often dictated by the terms of the project contracts – affecting everyone from the owner down through the designer, contractor, subcontractors and suppliers. Boilerplate fine print and onerous, poorly defined or overlooked terms and conditions of the contract (or no written contract at all) can make or break your case and may lead to an unfavorable (and often times “unfair”) result. Consequently, it is critical that you have the basic elements of your agreement in writing and, to the extent possible, have certain terms and conditions included (or not included) in the agreement to put yourself in the most advantageous position in the event something goes wrong and litigation results.

In addition to more obvious provisions such as price and schedule (and the statutory requirements for home improvement contracts), the following are three important aspects of a construction contract that are sometimes overlooked but often play a major role in construction disputes and litigation:

1. Scope of Work. It is critical to have a clear description of the exact work each party is expected to perform. Many standardized forms leave extremely limited space to define the scope of work, often resulting in an ambiguous summation of what work is to be performed – a trap for the unwary. The scope of work must be sufficiently detailed. Any exclusions and assumptions should be clearly set forth in the contract. The more specific you are on the front end, the less room for costly argument later.
2. Indemnity. Indemnity obligations can have significant implications, including long after the project is completed, and must not be overlooked or ignored. In simple terms, an indemnity provision allocates risk and sets forth who is going to pay whom (through indemnity and/or legal defense obligations) and for what when a loss occurs arising out of or in connection with your work on a project. What triggers your indemnity obligations, e.g., your work or your negligence? Are the indemnity obligations truly “comparative,” i.e., each party is responsible for its own fault, or are they skewed to obligate one party to effectively be responsible for all losses of the other party (except for the “active” or “sole” negligence or willful misconduct of that other party)? Indeed, if you are not careful you could end up indemnifying another party for its negligence even if you are only one percent at fault for the loss! These are important questions to consider when negotiating your contract, realizing that changing just a few words can dramatically shift your liability allocation and be the difference-maker in a dispute.
3. Dispute Resolution. It is also important to know how your disputes will be resolved if and when things go wrong. Will your dispute be litigated in court before a judge or jury, or will it be decided through private arbitration. If arbitration, who will facilitate the arbitration, where will the arbitration take place and what rules will your dispute be subject to? Each forum has certain advantages, disadvantages and cost implications that should be considered when negotiating your contract. Moreover, whether or not the contract includes an attorneys’ fees provision should also be taken into consideration. To facilitate payment, it is often times advantageous to include a provision requiring the payment of attorneys’ fees and costs to the prevailing party in the event collection efforts are necessary. This is especially important when there is a significant disparity in the financial wherewithal of the parties to fund a protracted dispute. These are just a few of the important components of a construction contract that should be considered prior to execution. Failure to do so could be catastrophic, leaving you unprotected or at a serious disadvantage in costly litigation – litigation that may have been prevented had the time and effort been expended on the front-end to recognize and understand the key terms and conditions and appropriately allocate the risks in the contract.

For more information regarding construction contracts or other construction matters, please contact Christopher J. Olson, Esq. (colson@smwb.com), Joseph M. Sweeney, Esq. (jsweeney@smwb.com) or Scott A. Mangum, Esq. (smangum@smwb.com).

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The information provided in this issue of “Legal Notice” is general in nature and is not intended to answer every question that may arise under different fact situations and should not be relied on in the place of professional advice in a given case. If you have specific questions, please contact Sweeney, Mason, Wilson & Bosomworth.

SWEENEY, MASON, WILSON & BOSOMWORTH is a Professional Law Corporation located at 983 University Avenue, Suite 104C, Los Gatos, California, 95032, (408) 356-3000. This notice is designed to assist our clients and other business owners in spotting issues which may result in costly litigation and court awarded damages if allowed to continue unaddressed.

SWEENEY, MASON, WILSON & BOSOMWORTH’s philosophy is that by educating our clients, and other businesses, about their legal obligations, including changes in the law, we best serve our legal goal of minimizing or preventing expensive litigation.