- limit risks
- increase the costs and decrease the rewards for those who bring groundless claims
- defend your business from costly lawsuits.
Before you invest time in drafting a contract, remember that some jobs just aren’t worth the risk. Customers who want you to build the impossible – overnight, on a very tight budget – will be trouble. If you think the customer is destined to be unhappy, you are probably right. Walk away. The profit you might make on the project is tiny compared to what you could spend in a lawsuit or defending a Registrar of Contractors complaint.
This article describes four types of provisions that, in a construction contract, can protect you from costly and business-threatening disputes.
Contract Provision #1: Attorneys’ Fees. Even without a specific contract provision, Arizona law allows the winner in contract litigation to ask the judge to award attorneys’ fees against the losing side. However, the award is entirely discretionary. The law allows the judge to award all, part, or none of the winner’s fees. (Note that this law does not apply in proceedings before the Registrar of Contractors, because the Registrar has no power to award any party its attorneys’ fees.)
In a lawsuit, a good contract can remove the judge’s discretion to deny fees to the winner. A contract that says that the judge “must” or “shall” award the winner’s attorneys’ fees requires that fees be awarded. The judge can still reduce the award if the fees aren’t reasonable, but there is no discretion to reduce the award because it was a close case or the losing party might have trouble paying.
On that issue, a client of our firm recently won a case on appeal. Disgruntled homeowners had sued over a $12,500 bathroom remodel. Our contractor client prevailed in the lawsuit but incurred over $110,000 in attorneys’ fees. After the trial judge awarded our client less than half of its fees, based on the homeowners’ complaint that they couldn’t pay that much, the Court of Appeals reversed, and the trial court reinstated the full fee award – because our client’s contract required an award of fees to the winner.
“Winning” a case where you can’t recover your attorneys’ fees is often hardly winning at all. A good attorneys’ fees contract provision can reduce the chances of costly “victories.”
Contract Provision #2: Damage Waivers. A good contract can include a list of types of damages that the parties agree they won’t seek against each other – often types of damages that are covered by insurance.
Generally, there are two types of contract damages:
direct
and
indirect.
Direct damages are intended to give the damaged party the benefit of their bargain. If a homeowner pays $15,000 for a new roof, and the roofer takes the money and quits before the job is completed, the homeowner can sue for the money to complete the roof with a new roofer – even if the new roofer will charge more to finish the job.
Indirect damages are damages caused by the breach but go beyond the subject of the contract. A roofer who builds a leaky roof can be sued both for direct damages – the cost to repair the roof – as well as indirect damages, such as water damage inside the home.
A contract can waive the right to recover such indirect damages by waiving “incidental” or “consequential” damages. A well-drafted contract can identify specific categories of indirect damages that are waived, tailored to the particular type of work to be done. For example, a roofing contract could waive claims not only for water damage, but also for expenses like travel and lodging for the homeowners while repairs are being performed. Such a waiver is reasonable because homeowners typically have insurance to cover water damage and associated costs, such as replacement housing, and don’t need to recover those costs from contractors. (A properly drafted “subrogation waiver” can protect your business against claims from the homeowners’ insurance company.)
Such waivers can dramatically reduce risks to contractors and subcontractors. It’s easy to imagine that a mistake in a small roof repair job could lead to tens of thousands of dollars in claims for damage to furnishings, lodging costs, travel, meals, etc.
Contract Provision #3: Jury Trial Waiver.
While the Arizona Constitution guarantees parties the right to a jury trial, state law allows that right to be waived in a well-drafted contract.
Jury trials have benefits to society, especially in the criminal context. But in a civil case, a jury trial is almost always more expensive, time-consuming, and uncertain than a trial to a judge. Parties with weak claims often rely on this cost and uncertainty to force an unfair settlement.
A jury trial waiver can reduce the power of threatened litigation. Combined with good attorneys’ fees provisions and damage limitation clauses, a jury trial waiver can convince a disgruntled customer that a lawsuit is not their best option.
Contract Provision #4: Notice and Opportunity to Cure. Angry owners and short-tempered general contractors often want to fire contractors, banish them from the jobsite, and get replacements started right away. Meanwhile, good contractors and subcontractors want a chance to stay on the project and fix problems. The law generally sides with the good contractors and subcontractors, allowing them an opportunity to rectify issues themselves. But that opportunity isn’t guaranteed.
A well-drafted contract can solidify the right to notice and opportunity to cure. Contract provisions can require the owner or general contractor to provide a detailed notice, together with a clearly defined, reasonable time to cure. Without such provisions, the parties are left to argue in court over what details were required and what was a reasonable time to cure.
Conclusion: A Good Contract Works.
We have seen how a good contract can stop many problems even before they start. Recently, one of our subcontractor clients accidentally damaged a water heater on a residential project. As soon as they were notified of the issue, our client promptly paid the full cost, about $4,000, to replace the water heater.
The matter should have ended there, but the general contractor demanded an additional $21,000. Its demands included fifty hours of time (at an absurd $250/hour) to “supervise” the water heater replacement, even though the replacement was fully performed by the plumber. The general contractor also claimed profit and overhead on the fully paid plumber’s invoice, plus reimbursement of airfare for interrupting his California vacation to travel to the jobsite.
Our client’s response pointed out the provisions in the client’s contract (drafted by our firm) that barred the general contractor’s overreaching claims. The net result was that, after a few snarky emails, we never heard from the general contractor again.
Lang Thal King & Hanson assists contractors and subcontractors in drafting effective, enforceable contracts to protect their rights. Contact
George King (480-534-4875) or
Mike Thal (480-534-4873) to schedule an appointment.
