By Jeffrey W. King, Outside General Counsel for the WFCA
A customer claims there is a problem with their new flooring. You agree to make the needed repairs, but the customer insists they are due an additional $10,000 for loss of use of the home while the repairs were being made. Are you liable?
And what about when you have completed the installation of flooring in a condominium development, there are no claims or any problems, but the general contractor refuses to pay you by claiming it has not been paid by the developer? Can they legally withhold your payment?
The answers depend on what is in your contract. Whether contracting directly with the customer or working as a subcontractor, it is important to understand the terms in your contracts, and what terms are needed. There are many forms a contract can take. Some companies use a standardized form such as the American Institute of Architects (AIA) or ConsensuDOC forms, while others have their own versions. Either way, there are some important construction contract clauses you will need to understand to avoid problems.
Discussed below are some of these key clauses:
- Scope of Work: A scope of work, also commonly referred to as a Performance Duties Provision, is meant to provide you with a clear description of the work to be performed by the general contractor and subcontractors. The most common issue with this provision is it will contain incomplete descriptions. For example, who is responsible for moisture testing—the foundation subcontractor, the flooring contractor or the general contractor? Similarly, is there a contingency for unforeseen site problems, such as water intrusion or mold when the existing floors are removed? These issues should be set out in the contract to avoid problems after the work begins.
- Reasonably Inferable: In a construction contract, the term “reasonably inferable” is used in the general conditions portions of contracts. This means you agree that the design documents are not perfect, and you must reasonably construct a project that substantially matches design intent. Problems come up when the design documents so incomplete that you are required to make too many inferences. For example, does the design specify the mastics to be used? If not, are you required to use the mastics recommended by the flooring manufacturer? Is a material specified that is not appropriate for the area? When these questions are left unanswered the contractor may start constructing with materials and methods that do not match the intent of the design, or the contractor begins relying on change orders to cover mounting, unforeseen costs.
The best defense against falling prey to the reasonably inferable clause is through a thorough review of the design documents, looking for completeness and materials that are appropriate. It is better to clear these matters up before beginning the job.
- Payments: It is important to include a description of the payment process in the contract. This should include the timing, documents required, approval process and the terms of final payment. This clause should specify how often payments are to be made on an ongoing project. Important dates, such as the invoice due date and when payment is due, should also be included in this clause. These dates are important for all parties to be aware of, as penalties such as interest and lien rights are dependent on them.
One of the most common issues with the payment provision is it leaves out how the owner or general contractor will certify what amount of the work has been completed to warrant payment. There is no easy solution other than agreeing to a third party to inspect the status of the work. A partial solution is requiring the owner or general contractor to pay for all the work done that is not in dispute.
- Right to Withhold Payment: These clauses usually refer to withholding payment for delays, potential liability claims, work that does not meet contract specifications and other risks. Owners and general contractors may already have some protection in the form of retainage. Accordingly, the right to withhold payment should be limited to very specific situations. Installation contractors should also make sure the contract language does not allow withholding payment for “anticipatory breach of the contract.”
- Change Orders: Terms will include details about general contractor and subcontractor markups on changes, how long the contractor has to notify the owner of any changes, how that notification is to take place and what to do if there is a disagreement. Failure to understand and follow the process can result in you not being paid for completed work that did not receive prior approval.
- Waiver of Consequential Damages: Consequential damages or special damages, are damages that are a foreseeable consequence of the actions of a defendant. For example, if you are in a car accident, your direct damages are the repair of the car and your medical bills. The consequential damages could be for lost wages while you were out of work as a result of the accident.
In a flooring installation contract, the most common consequential damages are for the loss of use of the premises while the repairs or replacement of defective floors are being completed, damage caused by replacing the defective flooring, and delays that result from the need to correct the flooring. These damages can be costly. For example, if an owner of a commercial property claims loss of use, these damages can be for lost profits, increased overhead and similar issues. For a residence, consequential damages can be for rental value of the home. What consequential damages are allowed will often depend on your state laws, but consequential damages can often exceed the cost of replacing or repairing the floors.
Accordingly, floor contractors should ensure the contracts they sign include a waiver of consequential damages. Such a clause should include the following:
In no event shall either party be liable for consequential damages, including but not limited to loss of use, loss of profits, interruption of business or any incidental, special, indirect, exemplary, consequential or punitive damages of any kind arising out of or relating to this agreement.
Be aware, however, the waiver of consequential damage will mean the flooring contractor also cannot collect damages for delays or other events that may make a job more expensive.
- No Damages for Delay: Akin to and a possible alternative to a waiver of consequential damage waivers, a no-damages-for-delay clause typically provides that, if there is a delay caused by the owner or others, the subcontractor will not be entitled to any additional compensation for that delay. It is a clause that owners and general contractors insert because it limits their liability for delays on the project.
Flooring contractors need to carefully read these clauses. First, they should make sure the clause also protects them if they are delayed in completing the installation of flooring. This is especially important when there may be a delay in getting flooring and materials from manufacturers and suppliers. Second, a delay by the owner or general contractor can cause problems and costs to the flooring contractor. If the contract includes a no damages for delays clause, try to limit the delays to those which you have control over.
- Indemnify, Defend and Hold Harmless: It is important to review the indemnification clause to see what it covers. If you agree to “indemnify,” it means you will reimburse the other party to the contract when there is loss or damage. When you agree to “defend” another party, you are agreeing to pay what it costs to defend them against a suit brought by a third party, including their attorney fees. You are immediately on the hook for these fees when a third-party files a claim. When you agree to hold harmless, you are saying you will not make a claim against the other party.
The two most important things about “indemnify, defend and hold harmless” clause is: (1) you would only indemnify risks you have control over; and (2) it also protects you; that is, the other party agree to indemnify, defend and hold you harmless for anything it has control over, That way, you are not offering to pay for losses and damages someone else caused.
- Pay If Paid or Pay When Paid: These provisions are generally understood to shift the risk of an owner not paying from the prime contractor to the subcontractor. The fact, however, is there may be a significant difference between a paid-when-paid and a paid-if-paid clause.
The courts in most states consider a “pay-when-paid” clause as simply a timing mechanism and generally will not excuse the prime contractor from paying the subcontractor, whether or not the owner pays the prime contractor. The risk of non-payment is on the prime contractor, and the courts will generally require payment to the subcontractor within a “reasonable time” after the work is completed.
In contrast, courts generally have found that a “pay-if-paid” clause constitutes a condition precedent to the subcontractor’s payment. A pay-if-paid provision means exactly what it says: the prime contractor has no obligation to pay subcontractors unless the owner first pays the prime contractor. This can create a dilemma for a subcontractor. Since the subcontractor has no contract with the owner, courts will generally hold that the subcontractor cannot claim a breach of contract against the owner. Some courts have held the subcontractor’s sole remedy is against the prime contractor, who is not obligated to pay until the owner pays it.
- Master Contract: If you are a subcontractor, your contract will often refer to and incorporate the general contractor’s agreement with the property owner or developer. It is advisable to determine whether any of your rights and responsibilities in the subcontract are affected or modified by the terms in the master or prime contract.
- Governing Law: This provision is often overlooked, but it can have a significant impact on your rights, remedies and liabilities. First, the state law that governs the contract will determine what are your obligations, rights, remedies and liabilities. For example, some states allow loss of use claims only if the entire premises are not able to be used, while others allow a claim for the partial loss of use. Second, many governing law provisions state where any lawsuits can be filed, and that could be in another state or location within your state. This could add to the cost of pursuing or defending any lawsuit arising from the contract.
- Dispute Resolution: The dispute resolution clause will determine how conflicts are settled if the parties cannot agree on an issue. Arbitration, mediation and litigation are the three main types of dispute resolution. Arbitration and mediation are where the parties submit the dispute to a third party for resolution. In arbitration the decision is binding, while mediation the decision is not. Litigation is filing claims in court. It is important that the installation contractor consider which is best for it. The AIA and many other contracts generally require that all disputes be submitted to arbitration, often designating the project’s architect to initially resolve disputes. Many contractors and subcontractors believe the architect should not be responsible for handling disputes due to their close relationship with the owner and project developer. If possible, you should opt for a neutral third party, such as a construction expert or a certified flooring inspector, to review the issues.
CONCLUSION
These construction contract clauses should be reviewed in every contract. The contracts provide the basis of the relationship between the owner, the general contractor and the subcontractor. The contract should properly lay out responsibilities and expectations. It is often the first document reviewed if a dispute arises, and will generally determine the outcome of the dispute. Given the potential liability, every flooring contractor should review their contracts BEFORE they sign them, with competent legal counsel to ensure that risks are fairly allocated and potential costs are minimized.
Editor’s Note: The information contained in this article is abridged from legislation, court decisions and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.
This article originally appeared in Premier Flooring Retailer and has been modified and reprinted with permission.
