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Define the Forum and Scope of Recovery in Contract Disputes

By Phillip L. Sampson Jr. and Richard F. Whiteley

Part one of a two-part series for Construction Executive on understanding pivotal dispute terms in construction contracts. Part two – “Understand and Define Key Substantive Contract Provisions” – helps contractors understand and define key substantive provisions. 

Private and public companies spend billions of dollars every year on construction projects. For these projects, time is money, and incorporating the most advantageous legal terms in the construction contract can minimize the number and extent of disputes, and ultimately save money.

It is important to remember that the provisions in construction contracts are negotiable. In a common scenario, the contractor and owner informally agree to the scope of a construction project and its cost. When it is time to reduce the deal to writing, the contractor and owner decide to use an AIA contract that appears to be a standard form. The document looks to be on point, and the parties simply need to fill in a few blanks with the cost and scope-specific information. Presuming that the AIA provisions are mutually protective and beneficial, the parties do not think about altering the “standard” terms. They sign the contract, and the project begins.

Months later, the owner and contractor end up disputing delays on the project, entitlement to various payments, and whether certain aspects of the work are defective. At this point, the parties realize that some of the contract’s terms could have been drafted a bit more favorably—but by that time it’s too late. So remember, construction contracts are negotiable, even provisions within “standard” AIA contracts.

The first part of this series will specifically focus on provisions dealing with dispute resolution, venue, damages limitations and the recovery of attorneys’ fees. Stay tuned for part two next week, which will help contractors understand and define key substantive provisions.

Some Myths Surrounding Arbitration Provisions

When a dispute arises, one of the most important considerations is how that dispute will be resolved. The standard AIA contract allows the contracting parties to choose among arbitration, litigation or “other” as the method of binding dispute resolution. The parties should consider whether binding arbitration—with the ultimate decision ordinarily being made by industry professionals—is more beneficial than litigating in court through a trial by jury.

Many believe arbitration is cheaper and faster than being in court. However, this is not always true. In an arbitration, the arbitrator (and sometimes there is more than one) is paid by the parties, and attorneys ordinarily use a discovery process that is very similar to discovery in litigation. An important difference between arbitration and litigation is that arbitration disputes generally remain confidential, while lawsuits pending court are obviously fought out in a public setting.

Though it may seem that arbitrating construction disputes is the standard route, remember that if a contractor prefers the concept of a jury trial, the dispute resolution provision in the AIA contract is negotiable, and it can insist on litigation.

Choose Wisely: Venue and Jurisdiction

It is always preferable to have the home field advantage. The AIA contract normally requires that any mediation or arbitration take place where the project is located. Depending on a contractor’s preference and circumstances, and for the avoidance of any doubt, consider specifying the actual location for any dispute resolution proceeding, whether mediation, arbitration or litigation. If claims will be litigated, it is helpful to have a written agreement of mutual consent to venue and jurisdiction in a particular court.

Recovery of Consequential Damages

The AIA contract contains a mutual “waiver of consequential damages” provision. Consequential damages are losses that result naturally, but not necessarily, from a breach of contract. Some examples of consequential damages might be a contractor losing out on another project because of delays on a current project, or an owner’s lost profits or business interruption.

The parties may consider trying to improve their contractual position by modifying the damages limitation provision to expand their counterparty’s damages that are waived and to reduce their own damages that are waived. If a contractor intends to expand the damages allowed under the contract, one way to do that is to include as many important details about the project as possible in the contract’s “description of project” section. This is because items and harm specifically accounted for in the contract are arguably direct damages, and not consequential, and therefore might not be disclaimed through the “waiver of consequential damages” provision.

Recovery of Attorneys’ Fees and Costs

The ability to recover attorneys’ fees in a construction dispute varies depending on the jurisdiction. Accordingly, it is important to make sure the construction contract contains a provision requiring that the loser in any construction dispute pays the other party’s attorneys’ fees and costs. The risk of one party potentially having to pay the other party’s attorneys’ fees often serves as a deterrent to the filing of frivolous claims and can be used as leverage in dispute negotiations.

Reprinted from ConstructionExec.com, Nov. 29, 2019, a publication of Associated Builders and Contractors. Copyright 2019. All rights reserved.