ConstructionPro Week, Volume: 5 - Issue: 31 - 08/12/2016

Judicial and Legislative Control Over Construction Contracts: Implied Obligations and Impermissible Clauses

By Stephen Hess, Esq.

 

Believe it or not, a construction contract with scores of provisions that runs dozens of pages does not actually define the entire legal relationship between the parties, regardless of how thorough the contract may seem or how much time and expense they invested in its drafting. Instead, courts and legislatures have always found it necessary to tinker with negotiated agreements. In some cases, this insulation into the contracting process takes the form of prohibitions on the use of particular types of contract clauses. In other cases, courts find that the very nature of the parties’ relationship “implies” obligations that are just as enforceable as if they had been written out in the contract itself.

 

There are many reasons that courts and legislatures get involved in contract formation, and it is not always as insidious as some believe. The provisions on sales of the Uniform Commercial Code, for example, serve an important function in fleshing out the parties’ rights and obligations in circumstances in which they are quick to consummate transactions but do not have the time, the interest, or the skill necessary to negotiate or to document the finer points of their deal in advance. In the context of construction, the UCC can be vital with respect to the purchase and sale of materials, and the UCC’s sales provisions are not particularly alarming or controversial.

 

Not all legislative participation in construction contracts is accepted with the same equanimity, perhaps because parties perceive that the legislature is intruding on arms-length negotiations. For example, more and more states are enacting laws that regulate the extent to which an indemnification clause – a clause requiring one party to bear the financial burden of another party’s financial losses or litigation costs – can be enforced. These “anti-indemnification” statutes do not usually serve as complete prohibitions on indemnification clauses. Rather, they allow enforcement of such clauses only to the extent that the party providing the indemnification is somehow at fault for causing the loss, or conversely, they prevent indemnification where the indemnified party is responsible in whole or in part for the loss. In addition, these anti-indemnification statutes often provide exceptions to the extent that a contract clause requires that a party purchase insurance to cover another party’s losses. Legislatures have also been active in the regulation of payment clauses, remedies related to defective construction and the right to repair, and payment obligations, among others.

 

Courts are also active in policing contracts so as to prevent what the courts perceive to be the dangers of over-reaching or oppression by one party. A common clause in subcontracts states that a subcontractor is not entitled to be paid for its work until the contractor actually receives payment from the owner. Many courts have struggled with these clauses because they perceive that contractors are generally in a better position to control the payment process with the owner and because contractors are sometimes thought to have undue bargaining power in the drafting of subcontracts. As a consequence of these considerations, some courts have simply prohibited the enforcement of such “pay-if-paid clauses.” More courts have refrained from such blanket prohibitions on pay-if-paid clauses, but have provided relief by construing such clauses against contractors so that they merely allow the contractor a “reasonable” time to pay after due allowance for collection efforts against the owner. These courts often allow pay-if-paid clauses only when the contract clause itself makes it unmistakably clear that the subcontractor bears the risk of nonpayment by the owner.

 

In addition to policing contracts by prohibiting or limiting certain types of clauses, courts often “imply” obligations that cannot otherwise be found on the face of the written agreement. As but one example, the United States Supreme Court issued a watershed decision almost a century ago in finding that an owner’s delivery of plans and specifications to a contractor implied – as a matter of law – that the plans and specifications are suitable for construction. That principle – now called the Spearin doctrine – is a fundamental part of the legal relationship between owners and contractors, even though it is rarely found in the language of construction contracts themselves. The same may be said of several other implied obligations, such as the implied duty of good faith and fair dealing, implied warranties, and other obligations.

 

In a nutshell, the negotiation, performance, and resolution of disputes concerning construction contracts requires an appreciation of the most common legislative and judicial prohibitions on construction contracts and the imposition of obligations that do not appear on the face of agreements.

 

Learn more about implied clauses and obligations in construction contracts in Implied Obligations & Impermissible Clauses webinar to be presented by Stephen Hess on Tuesday, August 23 at 1:00 PM EDT - click here for details.

 

About the Author

 

Stephen A. Hess, Esq., has been identified as a Best Lawyer in America in "Construction Law" and in "Litigation — Construction," through his practice with Sherman & Howard, LLC in Colorado. In addition to serving clients on matters around the country, Mr. Hess is an active author, scholar, and speaker. He is an immediate past Editor of the American Bar Association's law review The Construction Lawyer, previously served as Editor of Construction Briefings, a national construction law review, and has edited national construction law treatises.

 

Mr. Hess has written numerous law review articles on topics covering the breadth of construction law and litigation, has spoken nationally at construction law programs, and is an Adjunct Professor at Sturm College of Law (University of Denver), where he teaches a Construction Law Seminar. He is a member of the American Arbitration Association’s National Roster of Construction Arbitrators.

 

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