What's not in your contract can hurt you

June 6, 2012
There are certain stand-alone provisions that can be added to most any contract to help protect your company. Here are a few.

What do you do when you receive a contract for signature? Do you read it? Mark it up? Try to change unfavorable langue? These are all good practices, but do you know what's missing?  What should be in there, but isn't? You can’t rely on the other party to make sure you are protected, so you have to add what may be missing. This is not easy. And sometimes adding language in one part of the contract can affect rights and remedies in another part. At a minimum, though, there are certain stand-alone provisions that can be added to most any contract to help protect your company. Here are a few.

Interest on unpaid funds:If none is stated, a contractor can end up financing construction work because it is cheaper for the owner to stall the contractor than borrow money. The rate should be high enough to compensate the contractor for its borrowing and administrative costs in the event that payment from the owner is delayed. Even in these days of historically low interest rates, it's not uncommon to see 9% or higher as the interest rate on unpaid funds.

Right to terminate for non-payment:A great interest rate doesn’t help if the entity that owes the money goes out of business. So, if the threat of interest penalties isn’t enough, what do you do? The key is to never get too far behind in payments. One way to enforce this approach, besides threats, is to make sure you have the right to stop work and ultimately terminate your contract if the owner or general contractor fails to make payment within a certain amount of time. Depending on the project, this can be anywhere from 30 to 60 days.

Right to verify that the customer has funds to pay the bills: Some form contracts give the contractor the right to demand evidence at the start of the job that the customer has money in the bank or arranged to borrow the full amount of the contract, and to receive similar information later if the contractor has reason to worry (such as slow pay or increasing scope through change orders).

Who decides when the work is done:Many contracts provide that funds will be released upon completion, or similar terms, but don't go on to say how that determination is made. Will it be up to the customer or a third-party inspector? Or will it be decided jointly by the contractor and the customer? What constitutes completion? Does a subcontractor have to wait until the project is substantially of fully complete? Contractors often spend a lot of time trying to meet unreasonable demands to get their retainage released. 

Dispute resolution: If you are an Ohio contractor doing tenant finish work in Alabama for a retail chain out of Montana, where will you have to go to collect your last $1,000? If it's Montana, you'll probably not spend the money to collect. Generally, the most acceptable middle ground is to provide that disputes will be resolved in the city where the project was constructed. 

Acceptable lien waiver, insurance certificate, surety bond: Many contracts require all these kinds of documents, but don't say what will be acceptable. This can cause a significant waste of time down the road, and can interfere with the timely commencement of the work and timely payment. Make sure the contract contains forms of the type you are comfortable with, perhaps ones your lawyer has reviewed for you.

A force majeure:It's easy enough to say that performance will be excused by events that are out of your control, but when they really occur, parties often have very different ideas about their severity or what to do about them. Is a price increase really something that a contractor shouldn't have to anticipate? How much does the price need to increase before it's an extra cost? How unusually severe is snow in April? What about equipment breakdown, shouldn't that have been anticipated? What if it's a difficult to replace crane?  The more that these events can be articulated and quantified, the fewer problems later.

Liquidated damages for delays:It is often better to pay an agreed amount of liquidated damages than some unknown amount of actual damages. With liquidated damages, at least you know what your exposure is ahead of time, even though having a liquidated damages provision makes it more likely you will pay something if you delay the project. If the contract does contain a liquidated damages clause, make sure the rate is reasonable and something you can pay. And don't forget about caps. You can negotiate a limitation on the total amount of liquidated damages for which you will be responsible if you breach tour contract. Combine the use of a cap with a statement that liquidated damages are the owner's or general's "exclusive remedy" for delays or late delivery, and you can limit your ultimate exposure in the event you miss a deadline or delay the project. 

These are just a sampling of the many items that are frequently not addressed in a written contract. In some cases, a statute may provide a default position, such as the rate of interest on unpaid funds (the statutory rate) or how disputes will be resolved (in court). Every state has different laws, however, and you can't assume what it will be. It is always in your interest to get agreements pinned down as much as possible, to avoid unpleasant surprises and wastes of time later on.

Michael Callahan is a partner at Stinson Morrison Hecker LLP (the same firm as long-time columnist Susan McGreevy) where he assists clients with all aspects of their construction law needs, including litigation. Contact him at [email protected].

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