II. Limiting Contractual Obligations and Various Contractual Terms
Several terms commonly appear in construction contracts.
Amount of the Construction Contract
The first issue relates to how the Project will be priced. One way is to establish a “fixed” or set price that will be paid regardless of cost. Another is to have a “cost plus” contract which means the owner will pay the contractor for the cost of the work plus an additional agreed upon percentage. “Cost plus” contracts will sometimes include a guaranteed maximum price that can be charge regardless of the cost.
Time for Completion of the Construction Project
After agreeing on the price, a first issue relates to the time of completion of the project. First, the parties should set a date as to when construction should be completed. In addition to the completion date, the parties should aggress on and address how delays that inevitably arise will be handled. Everyone wants an early completion time and delays in the completion can cost money to all involved. The parties should decide how delays that arise from bad weather, changes in the work, labor strikes, changes in the plans, and unforeseen conditions will be addressed. Issues to consider are whether the construction contract will allow for an extension of completion time and whether the delay will provide for additional compensation to the contractor.
Parties sometimes will limit the amount of damages that can be levied against them in an action for delay. "Given [the harsh effect of such a provision], courts will strictly construe[,] but generally enforce them absent delay (1) not contemplated by the parties under the provision, (2) amounting to an abandonment of the contract, (3) caused by bad faith, or (4) amounting to active interference." E. C. Ernst, Inc. v. Manhattan Const. Co. of Texas, 551 F.2d 1026, 1029 (5th Cir. 1977) (applying Alabama law). In Ernst, the court upheld a contract provision that limited the subcontractor's claim for delay damages against an owner to an extension of time for the subcontractor. Id.
Along this line, construction contracts typically contain provisions that seek to set an amount for damages related to certain types of breach; such provisions are called "liquidated damage" clauses or provisions. "Liquidated damage provisions in contracts are enforceable under Alabama law as long as the contractual stipulation is reasonable and the measure of damages at the time of the contract was conjectural and uncertain." E. C. Ernst, Inc., 551 F.2d at 1038 (allowing liquidated damages per the contract and rejecting the argument that the owner could not recover liquidated damages since owner also was at some fault for delay); see also, Ray Sumlin Const. Co., Inc. v. City of Mobile, 519 So.2d 511 (Ala. 1988) (provision in building contract, that for each day's delay in completion beyond fixed date, contractor would be liable in the sum of $3,051.61 on a total contract of $9,254,000, was not a penalty, but rather, was valid provision for liquidated damages); Alpine Const. Co. v. Water Works Bd. of City of Birmingham, 377 So.2d 954, 955 (Ala. 1979) (upholding liquidated damages provision of $100 per day). Therefore, Alabama courts will generally enforce liquidated damage provisions as long as (1) they are a reasonable measure of damages, and (2) at the time the contract was formed, potential damages were difficult to determine.
Payment terms in the Construction Project
In addition to establishing how much a contractor is to be paid the parties must also decide when and under what conditions payment is to be made, how much retainage should be withheld and when it should be released. The construction contract likely also will address what conditions must be satisfied before payment is made. These conditions can include things such as the approval of the work by an architect or the submission of lien releases. Another condition to payment, in a contract between a contractor and subcontractor, is a “pay when paid” or “pay if paid” provision that makes payment to the subcontractor by the contractor conditional upon payment by the owner to the contractor. Pursuant to Alabama construction law, these provisions will not be construed to allow for non-payment by a contractor unless they are written so as to specifically create a condition precedent to payment by the general contractor. Federal Ins. Co. v. I. Kruger, Inc., 829 So. 2d 732 (Ala. 2002); but see, James E. Watts and Sons Contractors v. Nabors, 484 So.2d 373 (Ala. 1985) (finding clause enforceable under Alabama law if the clause can be said to be a dependant covenant).
Conditions on the Construction Project
Additionally, the parties should consider how they will handle conditions that arise on the project that are different from what might have been expected. Typically, this involves conditions that are either not what was apparent from the plans and specifications or not what was indicated by a visual review of the site. This could include things such as hidden rocks or unexpected soil conditions.
Warranties and Limiting the Remedy to an Opportunity to Repair
A contractor may attempt to limit the warranty that will be given to an owner. The decision of the Alabama Supreme Court in Turner v. Westhampton Court, LLC, 903 So. 2d 82 (Ala. 2004) is instructive in explaining Alabama construction law on this issue. That case involved a homeowners claim involving synthetic stucco. The court found court considered and enforced a one year homeowners warranty and limited terms of the homeowners warranty claims to problems that were discovered in the first year. That is the court found that a contractor could limit the written one-year warranty it gave to purchasers by requiring purchasers to give written notice of any latent defect within the warranty period. Also, the court found as matter of first impression, purchasers effectively disclaimed implied warranty of habitability. It should be noted that Turner discusses Alabama construction law related to the disclaimer of warranties and this is not necessarily binding on other jurisdictions.
A contractor also may try to limit an owner's remedy to having the contractor repair whatever damage may exist. In such a case, the remedy set forth in the contract is the only one available to the owner. Courts addressing Alabama construction law in this area have recognized that "[c]ontracting parties may, and often do, limit by agreement the non breaching party's remedies in the event of breach." McDonald v. Schwartz, 706 So. 2d 1230, 1232 (Ala. Civ. App. 1997) (involving a suit over faulty construction of a residence); see also, Ala. Code § 7 2 719(a) (allowing for parties to limit remedies "to repair and replacement of nonconforming goods or parts"). That is, "[w]here the parties have set out in a written contract the warranties agreed upon and have provided a remedy in case of a breach of warranty, the remedy thus provided is exclusive." McDonald, 706 So.2d at 1232; Morgan Building and Spas. Inc. v. Gillett, No. 2980788, 2000 WL 264247, *24 (Ala.Civ.App., Mar 10, 2000); see generally Mann v. Bank of Tallassee, 694 So.2d 1375, 1380 (Ala. Civ. App. 1996) (the party seeking recovery under an agreement must first show their own performance).
In McDonald, cited above, the court addressed the argument of a contractor that (1) the owner's claim should be limited to requiring the contractor to make repairs and (2) that the owner could not sue for money damages for the contractor's breach. The court found that since the contractor did "not modify or limit the homeowners' remedies in the event of a breach" then "the homeowners were entitled to treat the contractor's admittedly defective workmanship as a breach of contract and to resort to the usual remedies for breach." Id. at 1232. Therefore, in the absence of a limiting provision, the courts will not limit an owner's remedy.
Limiting the Contractor's Duties to Complying with Plans and Specifications
Some contracts attempt to limit a contractor's duties to simply conforming to certain plans and specifications. At least one court attempting to explain Alabama construction law in this area has found that such a provision invokes an implied duty that the workmanship involved has been performed in accordance with reasonably acceptable standards of the area. See C.P. Robbins & Associates v. Stevens, 53 Ala. App. 432, 301 So. 2d 196 (Ala. Civ. App. 1974); see also, Turner v. Westhampton Court, LLC, 903 So. 2d 82 (Ala. 2004) (“The law implies a duty upon all contracting parties to use reasonable skill in fulfilling their contractual obligations. This obligation manifests itself in the implied warranty of workmanship. While improper or faulty construction constitutes a technical performance of the contract and may survive a pure breach-of-contract action, an action alleging the breach of an implied warranty, such as the implied warranty of workmanship, can overcome this obstacle.”). As a general rule, an owner is presumed to warrant that the plans he supplies are not defective. See United States v. Spearin, 248 U.S. 132 (1918).
It is not uncommon for construction contracts to contain indemnity provisions which address instances when one of the parties will indemnify or handle claims against the other party. One example of a situation that an indemnification provision would address is when an owner is sued for personal injury because of faulty or defective work of a contractor or otherwise because of the acts of that contractor. Another common example is when an owner is sued by a subcontractor that is trying to perfect a mechanics or materialmans lien filed by a subcontractor. In those instances the owner will want to rely on an indemnity provision in the contract to require the contractor to provide a defense for and handle the claims.
Arbitration or Court
Another issue is whether disputes will be handled in arbitration or in court. This is a decision that should be made by the parties as determined based upon their preference and experience. Typically those wanting to avoid being before a jury would be parties that are contracting with an out of state or out of town entity and are seeking to avoid have their disputes settled before a jury that may have sympathy with one of its own residents.
Termination of the Construction Contract
The parties should also consider the conditions that allow for, and the ramifications of, terminating the contract. The termination can be for “convenience” which contemplates ending the agreement by one of the parties due to no fault by the other. Alternatively, the termination provision could address ending the arrangement if there is a breach or default by one of the parties. In any instance, most construction contracts establish various notice provisions before termination.
The question of whether or not to terminate a contract should be made carefully. If the contract is terminated without proper grounds the terminating party could be liable for damages. In Zippy Mart of Alabama v. A & B Coffee Service, 380 So.2d 833, 834-35 (Ala. 1980) the court found that a contractor that prematurely terminated a contract is liable to damages of the profit lost on the uncompleted portion of the contract. On the other hand if the contractor does not terminate quickly enough they could expose themselves to greater potential losses from the breaching parties conduct.
The contractor should first closely review the contract to make sure that they are following the terms of the contract. See Ex parte Woodward Construction & Design, 627 So.2d 393 (Ala. 1993) (court found that general contractor breached contract by failing to follow termination procedure); McFadden Brothers v. Henderson, 128 Ala. 221, 29 So. 640 (1901) (if there is no time of the essence clause then contractor must give reasonable notice of its intent to terminate contract); Bank of Brewton, Inc. v. International Fidelity Ins. Co., 827 So. 2d 747 (Ala. 2002) (Bank never terminated the contractor’s right to finish the project, thereby triggering the bonding company, IFIC's responsibility as surety to act to complete the project).
Next, in seeking to terminate every effort should be made to fully document the reasons for events surrounding, and the reasons for, termination. Examples are as follows:
- Superintendent's job notes or diaries;
- Daily progress reports;
- Safety meeting minutes or reports
- Architect/engineer reports of inspection;
- NOAA weather date reports;
- Pictures and videotapes; and
- Documents of Subcontractors or other third-parties,
Insurance and Bonding
The construction contract also should address the the required types and amounts of insurance and bonding of the contractor and various subcontractors.
Pay When Paid Clauses
Most subcontracts contain a provision that the Contractor is not obligated to pay the subcontractor unless or until the contractor gets paid by the Owner/Government. These will not be construed to allow for non-payment by a contractor if they are not written so as to specifically create a condition precedent to payment by the general contractor. Federal Ins. Co. v. I. Kruger, Inc., 829 So. 2d 732 (Ala. 2002); but see, James E. Watts and Sons Contractors v. Nabors, 484 So.2d 373 (Ala. 1985) (finding clause enforceable under Alabama law if the clause can be said to be a dependant covenant).