The goal of contract drafting is to create a written instrument that leaves no doubts regarding the parties’ obligations; however, construction contracts often contain language that leaves too much up to interpretation. This may arise from the use of form contracts not tailored to the project at hand, or from negotiated language that the parties have not considered closely enough to avoid misinterpretations. Either way, contractors should be wary of uncertain terms in their contracts and insist on language that is clear, concise, and undebatable.
UNCLEAR CONTRACT PREVENTIVES
The first step in creating a contract is to document all of the duties and obligations of the parties. A standard contract between an owner and a contractor should specifically detail the contractor’s scope of work, including all aspects of construction. It should also detail the owner’s obligation to make payment for the work, including the payment schedule and any conditions that must be met to trigger payment.
UNDEFINED COULD MEAN A PORTION UNPAID
Lawyers frequently see contracts where the parties have left crucial scope or payment information unclear or unexplained. For example, consider a contract where the contractor agreed to perform a certain scope of work and the owner promised to pay a lump sum in exchange. The payment section of the contract states the owner is only obligated to pay of 90 percent of every pay application; the contract does not explain what happens to the other 10 percent. Most contractors would recognize that the 10 percent is intended to be withheld as retainage, payable at the end of the project. Unless this is specifically stated in the contract, there is a potential for dispute.
It might be absurd to read the contract literally and suggest that an owner should only have to pay 90 percent of the value of the work, but the court system is no stranger to absurd claims. Even if unsuccessful, claims cost money and time; commodities contractors are not in the business of wasting. By clearly and completely describing the duties and obligations at the very beginning for both parties in the contract, many disputes can be entirely avoided. In addition, industry terms used in the contract—even if familiar and customary—should always be defined. A definition of “retainage,” for example, is vital in a contract where retainage is to be withheld.
ADDITIONAL DOCUMENTS ADD TO UNCLARITY
Sometimes uncertainty over contract obligations arises due to conflicts in the contract language rather than a lack of specificity. The most common cause of such conflicts is the incorporation of outside documents that have terms or conditions at odds with the original contract. Many construction contracts incorporate various other documents—e.g., subcontract bid proposals, qualifications, manufacturer’s instructions, etc. Unfortunately, such documents often contain terms that are in direct conflict with the terms of the original contract. Once incorporated, the conflicting terms are just as much a part of the agreement as any other language. Accordingly, it is important to closely review all incorporated documents to identify and resolve any potential conflicts before signing a contract. In addition, the contract should expressly state which document controls in the event of a conflict.
Another cause of obscurity in contract documents is the inclusion of broadening language which makes the contractor’s obligations and scope of work less certain. Owners are generally fond of such language, because it increases the burden on contractors and makes it less clear exactly what the contractor must do to satisfy its end of the bargain. Two prime examples of this type of language are “gap” clauses and satisfaction clauses.
GAP CLAUSES
Gap clauses exist solely to apportion the risk of omissions in the scope of work to the contractor. For example: “Contractor is responsible for all items which may be reasonably inferred to be required for the completion of the Work.” Clearly, this clause blurs the definition of the scope of work, and an unclear scope is the bane of a good contract.
Contractors should avoid clauses of this nature and avoid words like “inferable” or “contemplated.” It is a far better practice to explicitly state that the contractor’s obligations are only those expressly defined in the contract documents.
SATISFACTION CLAUSES
Satisfaction clauses also operate to expand the contractor’s obligations, but they do so by making the contractor’s performance subject to the owner’s satisfaction. For obvious reasons, contractors do not want payment or completion contingent upon such a subjective standard. The courts often agree—in Texas and Kentucky, for instance, satisfaction clauses are subject to a “good faith” requirement, while in California and other states, the courts apply an objective test (i.e., “satisfactory to a reasonable person”).
Contractors should be familiar with the law in their state before agreeing to such a clause, but removing the clause entirely is a better strategy.
These are just a few examples of common contract issues that can hinder contractors. Fortunately, these and many other issues can be avoided by a dogged adherence to the goal of clarity in contract construction. When drafting or negotiating contracts, every contractor should strive to be clear, concise, and consistent. Clarity will not solve every dilemma, but it is powerful protection against misunderstandings that could have been avoided. ■
About The Author
David L. Tolin, Jr. is a construction attorney in the Houston office of Ford Nassen & Baldwin P.C. (www.fordnassen.com), which is nationally recognized in the industry and is one of the largest construction law firms in Texas. His practice focuses on all aspects of the construction process. He can be reached at dltolin@fordnassen.com or 281.953.7704.
Modern Contractor Solutions, November 2014
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