Almost every company draws up a contract before a job starts to protect itself while the work is being completed. In the rush to get the work started, however, most folks overlook important details in the contracts that they sign. Specifically, I’ve seen a lot of construction contracts missing three important clauses.

No Attorney’s Fees Provision

If you have to incur legal fees to prosecute or defend a claim, whether it goes to trial or not, the ability to recover those fees from the other side can dictate how hard you fight or how quickly you settle. So when reviewing a contract, make sure it includes a provision that allows the prevailing party, hopefully you, to recover incurred attorney’s fees.

If your agreement is not in writing (big mistake) or if it is not signed, then the ability to recover legal fees becomes much harder, if not impossible. We see this commonly with construction clients who have “terms and conditions” on their delivery tickets or invoices but who never get those documents signed. In many cases, unsigned terms and conditions are useless.

Missing Merger Clause

A “merger clause” makes verbal agreements or unsigned written agreements unenforceable; basically, it says that unwritten and unsigned agreements don’t exist.

Here is an example that happened to a contractor client recently. In the course of his negotiations with the property owner, emails were exchanged that said the contractor would be paid every week for his work. However, the contract he signed said that he would be paid every 30 days, subject to lender funding. Surprise, surprise: A dispute between the property owner and lender over additional funding arose and the lender stopped funding. The property owner argued that since the agreement required lender funding as a precondition, the owner did not have to pay. Because the contract contained a merger clause, the property owner prevailed—that is, the court did not allow the contractor to introduce evidence of those prior emails regarding payment terms.

As far as the court is concerned, if the contract has a merger clause then it will not consider any negotiations or discussions about agreements that aren’t written into the contract that you actually sign. As the previous example shows, a merger clause can cut both ways, so it is important not only to include one, but to ensure that all significant terms of the contract are fully spelled out. If not, you may find yourself spending a great deal of time and legal fees fighting over terms that are based on notes and emails that preceded the contract.

No Waiver of Consequential Damages

Consequential damages are damages that flow from a breach of the contract but are not directly related to the breach. Consequential damages an owner may suffer include lost rental income or higher loan payments associated with a construction loan that wasn’t converted to a permanent loan. Always try to limit these types of damages in your contracts; doing so is an easy way to limit your financial risk if a job does not go as planned. In fact, many standard contract forms, such as those published by the American Institute of Architects, include waivers of consequential damages.

Construction is a very risky business. Lots of things that can go wrong, and it can be very expensive when they do. It pays to be vigilant when reviewing your agreements to avoid stepping onto any of the above landmines. Doing so will help ensure a more successful project.

Read more >