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Tips for Subcontractors: Avoiding Bad Contract Provisions - Part 1.


Construction in framing stage

When clients bring us a new matter, usually the first thing we ask about is the contract. Virtually every commercial transaction you engage in operates on the foundation of a written, verbal or implied contract. The contract lays out the terms of the transaction - what is being provided, in exchange for what consideration (e.g., payment terms), delivery timeframe, the details and specifications of the product or service being provided, warranty terms, and a disputes provision. Contracts can be brief or extensive, plainly worded or convoluted. There is no such thing as a contract applicable to all situations. The terms of the contract need to reflect the needs and desires of the parties making the agreement, the laws in place at the time, and industry standard. However, the primary goal of any contract is to avoid disputes in the first place. We often find that the mere act of both parties agreeing to clear, fair contractual terms prevents most conflicts at the outset, and assists with speedy, inexpensive resolution of conflict when it does arise.

However, when parties sign bad contracts - contracts with unclear provisions, or provisions which strongly favor the interests of one party over another, or have hidden provisions that eviscerate some protections otherwise legally provided to a party - the contract can be the source of conflict, and can result in serious monetary losses. The expense of signing a bad contract can easily wipe out a year or more of income, or can even drive a company out of business. For this reason, we always encourage our clients to have us look at contracts before signing them. A few hundred dollars paid to your attorney before signing a contract can easily prevent losses in the hundreds of thousands of dollars, not to mention the strain of litigation. Additionally, we encourage all of our clients to have their own contracts signed at the outset of transactions, and to ensure that the provisions of these contracts are crafted to their needs and will serve in their best interests.

Presumption of Understanding

Although some consumer protection laws can render the provisions of some contracts unlawful, in general, the terms of the contract will govern the transaction. This is particularly the case when businesses contract with one another. A party has the right to enter into contracts of its choosing, and it has the right to choose to enter into bad contracts. Accordingly, if you sign a contract that later turns out to contain unfavorable provisions, you may not be able to avoid the enforcement of those provisions on the grounds that you didn't understand the terms or that those provisions were unfair.

An ounce of prevention is worth a pound of cure, and in construction the financial

repercussions of a deal gone bad can be devastating. We would be thrilled if more of our business centered around helping our clients avoid problems through establishing a strong legal footing, and fewer of our clients suffered from contractual arrangements gone bad. We hope you'll take a look at the information below and learn some ways to avoid major problems. Below are examples of common problems we encounter with contracts. Keep an eye out for the following:

1. Contracts found and adapted from the internet

We spend a lot of time encouraging our clients to have their clients/subcontractors/contractors/buyers/etc. sign contracts. However, this diligence can backfire if you use the wrong contract. Too often, a new client will contact us with a problem and we will find that the contract they've been using not only fails to contain the provisions which would have helped them, but may actually contain provisions which hurt them. (For example, a contract lacking penalties for non-payment but strict in laying out completion timelines strongly favors homeowners over contractors. Additionally, by failing to include non-payment penalties, it fails to assist as a deterrent for non-payment.)

Most contracts are prepared with some degree of bias in terms of who the contract is designed to protect - usually, the contract favors the drafter. Ideally a contract will include language that protects both parties, but many contracts that can be found online will be strongly tailored in one direction, as fact which may not be obvious to a person unfamiliar with the provisions typically available within a contract. Additionally, contracts available online may be lacking in key provisions, may not be up-to-date, and they may not comply with the legal situation in your region. While it may not be readily transparent the ways in which the contract fails to clearly address your needs, when a problem arises those provisions (or lack of provisions) can have serious financial implications for you.

We strongly encourage working with an attorney to develop a contract which will protect your unique interests, best serve you and your clients, and which will hold up in court if needed.

2. Mandatory Arbitration Clauses

Arbitration clauses have become ubiquitous in contracts. Mandatory arbitration forces you to give up your rights to conflict resolution through the courts. Essentially, you waive your right to sue. Arbitration judges are not real judges, and they are not required to follow the law in reaching their decisions. There is no transparency and no accountability, and no right to appeal. Arbitration is expensive, often costing more than taking the case to court, and taking just as long. Arbitration procedures strongly favor the larger corporate client over the individual, and are usually only binding on the individual while still allowing the corporate entity to make recourse to the courts. A Public Citizen investigation of arbitration decisions showed that the arbitrator sided with the corporate client 94% of the time.

While many corporate clients have found arbitration to be an effective way to remain unaccountable to employment and consumer protection laws - simply by forcing or tricking people into waiving their right to the courts - when entering into contracts you do have a choice. Arbitration is unlikely to serve your best interests, and you should never entirely waive your right to sue through the courts.

3. Waiver of Lien Rights

Mechanic's liens are a security interest that any person performing work or supplying material for improvements on a property can place on that property if they have not been paid for their work. The law recognizes that once material improvements have been made on a home, if payment is not made then the person making the improvements "owns" those improvements until receiving payment. The law memorializes this ownership by granting them a right to place a lien against the property for the amount of those improvements.

Mechanic's liens provide an important recourse for any construction professional in

the event of non-payment. However, it has become increasingly common for the contracts builders have with subcontractors to include provisions to waive rights to mechanic's liens. The problem with this is the mechanic's lien is an invaluable tool of the construction professional for getting paid for their work. Subcontractors must be diligent in ensuring that they do not waive those rights until they've been paid, as doing so can make recovery more difficult, and may reduce amounts available for recovery.

Sometimes the language is obvious and sometimes it's not. Always make sure you fully understand what you are signing.

4. Insufficient Default and Dispute Provisions

Despite everyone's best efforts, conflicts will arise. It is extremely helpful for your contract to contain provisions that explain what the terms will be in the event of dispute. The contract should anticipate things such as: payment terms and timeline, failure to pay, interest on unpaid balances, attorney and collection costs, payment of litigation expenses, warranty claims procedures, warranty and repair terms, timeframes and limits, the established construction standard to which the work will conform, in addition to provisions which will be specific to you and your business.

Failure to include default provisions can make it harder to collect interest on unpaid

balances or attorney's fees in the event of litigation. If the construction standard to which work is to be performed is clearly established in a contract, this provides the contractor and the homeowner a clear reference as to what the end product will be, preventing disagreements and unrealistic expectations on either side. Clearly defining warranty, what is required of the homeowner for warranty to be valid, and what kinds of things may void warranty, can go a long way to establish who is financially responsible for repairs, and protecting a contractor from being asked to take financial responsibility for things that they had no control over or which were not included within the scope of a contract.

To the extent that the purpose of a contract is to avoid problems at the outset, the conflicts and default provisions are huge. These provisions govern the situations which are apt to devolve into litigation and if everyone is on the same page about what the expectations and remedies are, these conflicts can be resolved by a simple reference to the terms of the contract.

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