The best defense against litigation: Don’t get sued

Many contractors, to their misfortune, have first-hand experience as plaintiffs or defendants in construction-related litigation. As anyone who has been involved in construction litigation — as plaintiff or defendant — would attest, there is rarely a true “winner” in litigated disputes.

The costs of construction litigation to both parties can be oppressive, and key employees of the parties to the litigation need to devote significant time responding to interrogatories and attending depositions, hearings and trial instead of developing new business and overseeing the company’s operations.

It is an easy case to make that contractors should make efforts to avoid having to sue or being sued to resolve construction disputes. Although, this point, you would think, is a matter of common sense, there are too many examples of contractors routinely entering into bad contracts or working with no contracts at all, which sets the stage for costly lawsuits to resolve disputes over construction work.

While even the best contracts will not provide an impenetrable shield against litigation, proper contracting practices are an essential element of risk management and litigation avoidance practices for contractors, large or small.

While you should consult your own legal advisers about contracting, here are some key issues in contract formation and enforcement:

• Contractors should routinely use written contracts with subcontractors and owners. I have heard some contractors say they do not need written agreements with certain subcontractors because it is only a small amount of work or they have worked with a particular contractor for years and have never needed a written agreement. These beliefs are wrong.

A well-written contract defines basic elements of a contractor’s relationship with subcontractors and owners and should provide essential liability limitation, regardless of the size of the contract.

You also should not rely on a long-standing relationship with a subcontractor to justify not having a written agreement. When a deal goes bad, those relationships may not be as solid as you believed.

Bankruptcy, death of a business owner or the sale of a business also might cause you to have to deal with parties with whom you do not have a friendly relationship.

• Contracting should be efficient and reliable, so that a contractor should not have to reinvent the wheel for every owner or subcontractor. Be aware, though, that all contracts are not the same. The act of entering into a contract is not just “a technicality.” Each contract requires careful thought and review to make sure that the written agreement reflects the business deal and the agreement is internally consistent. With the assistance of your advisers, you should develop a well-organized system of samples and templates that you can use as your starting point for preparing a written agreement.

The starting point for many contractor-owner agreements are the American Institute of Architects forms, which are comprehensive and widely accepted. There are a variety of AIA forms (over 80), though, and many of the so-called “forms” have been significantly revised from deal to deal or get revised to reflect changes or development in the building or construction industry. So unless you are starting with a form that originated from your office, the agreement needs to be compared with your accepted form and the differences reviewed.

• Contractors should create and use a checklist of key contract provisions when preparing and reviewing written agreements. Spending time making sure these key provisions are right often provides the best insurance against costly litigation over ambiguous agreement language.

• Make sure that the work specifications you are agreeing to undertake as a contractor are clearly described. The description should be clear not just for you but for someone who does not have any construction industry experience, which would be the case for most judges and jurors who might have to interpret the contract for you someday.

• It should be clear who is standing behind what, so whatever warranties you are willing to offer should be expressly stated in the agreement. The contract also should include a clear exclusion and waiver of all other warranties. Some warranties are implied by operation of law, even if they are not included in a contract, and these implied warranties need to be waived too.

• In the event of a breach of contract by the owner, a well-written remedy provision should allow a contractor to receive payment for all work executed and for proven losses sustained upon materials, equipment, tools and construction equipment and machinery, including reasonable profit and applicable damages.

The contractor also should be able to recover any costs of collection, including attorneys’ fees.

• Litigation can often be avoided if the parties to a contract have to provide notice to the other party before filing litigation. This gives the parties the opportunity to resolve the dispute before suit is filed.

The agreement also can require parties to mediate a dispute as a precursor to a lawsuit. Mediation is generally much less expensive than litigation and disputes are often steered through mediation conducted by an experienced mediator with construction industry knowledge.

• Arbitration often is thought to be a less expensive dispute resolution alternative than litigation. This is, in part, because the parties can agree to limit the discovery, number of witness, appeals and other procedures that contribute to the cost of litigation. Many construction contracts with owners or subcontractors require arbitration as the exclusive means of dispute resolution.

• In subcontractor agreements, the contractor should include “pay when paid” provisions so that the contractor will not have a legal obligation to pay the subcontractor until the contractor gets paid by the owner.

There are other topics that should make the checklist, such as caps on damages or types of claims, who is responsible for purchasing what insurance, and indemnification obligations that you should discuss with your own legal advisers.

Remember: Your contracting practices play an important role in minimizing the occurrence of litigation for your company and the losses or recovery, as the case may be, from litigation. So devote the time and attention to your contracts that it takes to keep your company out of the courtroom.

Daniel J. Norris is a director and shareholder of the law firm of McLane, Graf, Raulerson & Middleton in Manchester.