1
Contracting & Construction Law
Construction Contracts
How contracts work: Offer and acceptance: let’s make a deal
A building and construction contract must fulfill the same requirements as any other type of
contract in regard to matters such as offer and acceptance, sufficiency of consideration,
certainty, etc. Such a contract generally provides not only for the construction of the project,
but also for many matters that are incidental to the project. Thus, it may provide for the
carrying of liability, workers' compensation, and fire insurance policies, designating which
party is responsible for obtaining particular insurance. A building and construction contract
will typically specify the duties, responsibilities, and liabilities of each of the parties, as well as
those of any employed architect or engineer. The amount and method of compensation is, of
course, an important part of such a contract.
A building or construction contract, like other contracts, must be based upon an offer and acceptance
between two or more competent parties
must be for a sufficient consideration, and
must be sufficiently certain.
However, even if a construction contract were to be so vague and indefinite as to be
unenforceable when it was formed, the contractor's performance would make it mutual and
enforceable against the Owner
s.
What constitutes a reasonable time for the acceptance of an offer in the building industry
must be determined by the nature of the contract, the work to be performed, the materials to
be supplied, the weather conditions, the coordination of work to be done with the other
activities of the bidder's business, the usages and customs in the trade, and all the other
circumstances of the case. 1
Written agreements: integration and merger
When the parties to a building contract have orally agreed to the terms of performance and
the price, there is an express contract. A building contract does not come under the statute of
frauds as a contract incapable of being performed within a year, even when the time for the
performance is fixed at a period of over a year, since this does not prevent the contract from
being capable of performance within a year. Therefore, in the absence of a statute providing
otherwise, a contract to erect an addition to a building may be oral. However, a contractor's
failure to provide a homeowner with a written construction contract may be a violation of a
state's consumer-protection statute.
1 13 Am. Jur. 2d Building and Construction Contracts § 1
2
In the absence of a statute requiring a contract to be written or evidenced by writing, a valid
contract may be partly written and partly oral. A verbal acceptance of a written offer forms a
valid contract that is partly written and partly oral. The rule that all preliminary negotiations
and agreements are to be deemed
mergedin the final settled instruments executed by the
parties does not prevent a contract from being partly oral and partly in writing. This rule does
not apply, however, where it appears from an inspection of the instrument that it was
intended to express the full and complete agreement and intentions of the parties. 2
Sample Contract Clause
Entire Agreement
This Agreement shall constitute the entire agreement between the parties and any prior
understanding or representation of any kind preceding the date of this Agreement shall not
be binding upon either party except to the extent incorporated in this Agreement. Mutuality and consideration: can I enforce this?
Mutuality of obligation has been defined as the consent by both parties to a contract to pay,
yield, or give up something in return for the benefits received. It has been held that there
must be mutuality of obligation to form a contract or to render it enforceable, and mutuality of
obligation is sometimes listed as an element required for the formation of a contract. 3
However, it has also been held that a requirement of mutuality of obligation to every contract
is too broad. and that mutuality of obligation is the same as consideration thus making
mutuality of obligation is unnecessary if the contract is supported by consideration. Also, it
has been held that, because a promise by one person is merely one of the kinds of
consideration that will support a promise by another, mutuality of obligation is not an
essential element in a contract unless the lack of mutuality would leave one party without a
valid or available consideration for his or her promise.
According to the Restatement, if the requirement of consideration is met, there is no
additional requirement of mutuality of obligation.
If the requirement of consideration is met, there is no additional requirement of (a) a gain,
advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or
(b) equivalence in the values exchanged; or (c) "mutuality of obligation." 4
However, there is authority that says mutuality is essential to the validity of a contract for
services. Mutuality is present in such a contract where the parties are bound by reciprocal
obligations, and where one party agrees to perform services and the other to accept and pay
for them, the contract is mutual. 5
2 17A Am. Jur. 2d Contracts § 171
3 17A Am. Jur. 2d Contracts § 21
4Restatement of Contracts (Second ) §79
5 17 C.J.S. Contracts § 114
3
A contract for services may be mutual even though the obligations undertaken on one side
are not equal to the obligations undertaken on the other side. Ordinarily, Courts do not
consider the adequacy of the consideration given for a promise. On the other hand, where
neither party or only one party is bound, mutuality is absent. Thus, where there is an
agreement to perform, with no obligation to accept and pay, the contract is lacking in
mutuality. Likewise, where one party is bound to perform work, but the other party is not
obligated to furnish work for him or her to do, there is no mutuality.
6
Mutuality (consideration) is required in building and construction contracts; there must be an
obligation on the part of the builder to do the work, and an obligation on the part of his or her
employer to pay for the work.
Expressed and implied obligations: did I say that?
Express and Implied Warranties
Warranties define a contractor's liability for construction defects. Warranties included in a
construction contract are known as express warranties, while warranties that apply to all
construction contracts, regardless of whether or not they are set forth in the contract, are known as implied warranties. Contractors may be sued for the breach of both express and
implied warranties. 7
Express warranties may set forth specific promises or general guarantees of quality and
good workmanship. For example, a plumbing subcontractor may warrant new pipes against
leakage for a period of twenty years. Conversely, a construction contract may simply include
a general warranty of quality. A warranty of quality ensures that a builder will proceed with
the proper materials and will use due care in completing the specified project.
Implied warranties include the Implied Warranty of Accuracy and the Implied Warranty of
Suitability. The Implied Warranty of Accuracy warrants the precision of information contained
within a project's plans and specifications. The Implied Warranty of Suitability warrants that a
project's plans themselves are proper.
To establish a cause of action for breach of an implied warranty of habitability, the plaintiff
must prove that the defendant built and sold the residence that the plaintiff purchased .
8
There must normally be privity of contract. A builder-vendor is generally one who owns
land and builds or assembles a residence on that land for the purpose of sale to the general public .
9 Thus, the plaintiff must prove that the defendant constructed the residence and sold
the residence and the lot on which it is located as a package. If the alleged defect is in the lot ( e.g. bad drainage) on which the residence is located, an implied warranty of habitability may
not apply if the lot was purchased from someone other than the defendant. When the
6 Id.
7 13 Am. Jur. 2d Building, Etc. Contracts § 30
8 Theis v Heuer, 264 Ind 1, 280 NE2d 300 (1972); Smith v Old Warson Dev Co, 479 SW2d 795 (Mo
1972); Humber v Morton, 426 SW2d 554 (Tex 1968); Rothberg v Olenik, 128 Vt 295, 262 A2d 461
(1970).
9 67A Am. Jur. 2d Sales § 631
4
doctrine of implied warranty of habitability is recognized, the builder-vendor of a new
residence impliedly warrants that the residence will be that the home will comply with all
normal expectations of the average home buyer.
The implied warranty of habitability is absolutely binding on the builder-vendor, absent valid
defenses. Liability for breach of the warranty occurs irrespective of any fault on the part of
the builder-vendor.
10
The reasons for implying a warranty of habitability in the sale of a new
house are:
The primary purpose of the transaction is to provide the purchaser with a habitable
dwelling.
The transfer of land is secondary;
the seller holds itself out as an expert in such construction; and
the prospective purchaser is forced to a large extent to rely on the builder's skill. 11
An ordinary purchaser is precluded from making a knowledgeable inspection of the
completed house, not only because of expense and unfamiliarity with building construction,
but also because defects are usually hidden, rendering inspection practically impossible and
rendering the purchaser at the mercy of the builder- vendor. The implied warranty of
habitability applies whether the new structure is purchased prior to construction, during
construction, or after construction but before occupancy. 12
The implied warranty of habitability of a builder-vendor has not been extended to remote
purchasers, except with regard to latent defects .13
A builder-vendor of a new dwelling may also be liable for breach of the warranty of
workmanlike construction. The implied warranty of workmanlike construction does not render
a builder-vendor liable for relatively minor imperfections.
An "as is" provision in the contract for the sale of a new home may preclude recovery for
breach of implied warranties. Also, a builder-vendor may disclaim implied warranties if the
disclaimer is printed conspicuously on the contract where it can be noticed by anyone signing the contract. 14
Sample Contract Clause
Waiver and Disclaimer of Implied Warranty of Habitability
This waiver- disclaimer is attached to and made part of a contract dated (date) between
(name of seller-builder), referred to herein as Seller-builder and (name of Buyer) , referred to
herein as Buyer, for the sale of property located at (address of property) and the construction
of a single-family home.
10 Id
11 77 Am. Jur. 2d Vendor and Purchaser § 283
12 Id.
13 Id.
14 Id.
5
1.
IMPLIED WARRANTY OF HABITABILITY
Under the laws of (name of state), every contract for the construction of a new home
carries with it a warranty that, when completed, the home will be free of defects and will be fit
for its intended use as a home. This law further provides that this implied warranty does not
have to be in writing to be part of the contract and that it covers not only structural and
mechanical defects but also any defect in the quality of work that may not be seen easily by the Buyer
. However, the law also provides that a seller-builder and a Buyer may agree in
writing, that this implied warranty is not included as part of their particular contract.
2. WAIVER-DISCLAIMER Seller-builder disclaims and Buyer waives the implied warranty of habitability
described in paragraph 1 above and they acknowledge, understand, and agree that it is not a
part of the contract.
3. EXPRESS WARRANTIES
Included in the contract are express written warranties that are contained in
paragraph(s) {list numbers) on page(s) (list numbers) . Seller-builder agrees to comply with
the provisions of the express warranties and Buyer accepts the express warranties as a
substitute for the implied warranty of habitability described in paragraph 1 above.
4. EFFECT AND CONSEQUENCES OF WAIVER-DISCLAIMER Buyer acknowledges and understands that if a dispute arises with Seller-builder and
the dispute results in a lawsuit, Buyer will not be able to rely on the implied warranty of
habitability described in paragraph 1 above as a basis for suing Seller-builder or as the basis
of a defense if Seller-builder sues Buyer. Buyer may, however, rely on the express written
warranties referred in paragraph 3 above.
5. The undersigned Buyer has read and understands this document and had an
opportunity to seek professional advice concerning its contents.
WITNESS our signatures as of _____the day ________,20_____. (Name of Seller-Builder)
________________________ By:________________________________ (Printed name) (Printed name & Office in Corporation)
(Signature of Buyer) (Signature of Officer)
Breach and Enforcement: finding materiality and damages
Standard contract law Breach and Remedies
A breach of contract is a failure to perform the contract in the manner called for by the
contract. A party is entitled to contractual remedies if the other party breaches a contract.
6
A breach does not always result in a lawsuit or mean the end of a contract. One party may
be willing to waive or ignore the breach. A waiver can be by words or by conduct. Accepting
a late payment on a note would be an example of a waiver by conduct. It is possible to make
a waiver by silence. For example, failure to object to the manner of performance in a timely
manner would be a waiver by silence.
A party who waives a breach gives up the right to damages or remedies regarding such
breach, and cannot use the breach as a reason for not performing the contract.
A waiver may be express or implied. An example of an implied waiver would be accepting a
defective performance without objection. A waiver only applies to the specific matter waived.
A party is entitled to require the other party to strictly perform all other contractual obligations
set forth in the contract.
If a party repeatedly breaches a contract in the same manner, and the other party repeatedly
waives these breaches, this conduct may indicate that the parties have modified the contract.
However, there may be a statute of frauds or Parol evidence problem in such a situation.
A party retains the right to recover damages caused by another party's breach if the party
expressly reserves the right to damages at the time the party accepts a defective
performance. The reservation of right should be, but does not have to be, in writing.
A contractor departed at a number of points from the specifications in a contract to build a
house. The cost to put the house in the condition called for by the contract was
approximately $10,000. The contractor was sued for $15,000 for breach of contract and
emotional disturbance caused by the breach. How should the court hold? The
Owner
could
recover $10,000 on the basis that that $10,000 would have to be spent in order to achieve
the same position had there been no breach of contract. The Owner is not entitled to recover
for mental or emotional pain or suffering. Generally, damages are the sum of money
necessary to put a party in the same or equivalent financial position as the party would have
been had the contract been performed. A party may recover compensatory damages for any
actual loss that the party can prove with reasonable certainty.
Punitive damages are designed to punish. A Court uses punitive damages to make an
example of a defendant in order to keep others from doing a similar wrong. Punitive
damages are rare in a breach of contract case except bad faith insurance claims. Consumer
protection laws sometimes permit consumers to recover punitive damages for breach of
certain types of contracts.
Consequential damages would arise in a situation where the failure to deliver the truck
harmed the business of the plaintiff since the plaintiff lost a delivery contract. In this
situation, the plaintiff could possibly get consequential damages for loss of the delivery contract.
A non-breaching party has a duty to mitigate damages. In other words, a non-breaching
party has the duty to take reasonable steps to minimize damages. The failure to mitigate
damages may cause the victim to only be allowed to recover damages that would have
resulted if mitigated. In our truck example, say the truck was purchased and was to be
7
delivered on January 5, to allow the buyer to do a hauling job for $500.00. Delivery was late.
The hauling contract was lost. However, the buyer could have rented a truck for $150.00.
However, he failed to do this. Therefore, his damages would only be $150.00.
In May, a homeowner made a contract with a roofer to make repairs to her house by July 1.
The roofer never came to repair the roof and heavy rains in the fall damaged the interior of
the house. The homeowner sued the roofer for breach of contract and claimed damages for
the harm done to the interior of the house. Is the homeowner entitled to recover such
damages? The homeowner can recover damages for the breach of contract, which ordinarily
would be the difference between the contract price specified in the contract with the
defendant and the reasonable cost of having another roofer perform the work. It is likely that
the homeowner cannot recover for the rain damages unless the homeowner can show that it
was not reasonably possible to procure any other roofer to repair the roof. In the absence of
such proof, the duty to mitigate damages would bar the homeowner from recovering for the
rain damages, as the Owner could have avoided such damage by hiring another roofer to
perform the contract. As it was the rainfall that damaged the interior of the house, it is
obvious that the homeowner had sufficient time to take steps to avoid the consequences of
the roofer’s breach of contract.
An appropriate remedy for a breach may be rescission of the contract. This places the
parties in the position they would have been had the contract never been entered into. For
example, money is returned to the buyer and the buyer returns the property to the seller. If
performance has been involved, the performing party may get the reasonable value of his
performance under an unjust enrichment theory. Suppose that pursuant to a contract for the
sale of land, a buyer has taken possession and made substantial improvements. If the
contract is rescinded, the buyer will return the land and the seller will return the money.
However, the seller must pay the buyer the reasonable value of the improvements.
Specific performance is an action to compel a party who breached a contract to perform the
contract as promised. The subject matter of the contract must be unique, or an action for
damages would be the proper remedy. Actions for specific performance are usually allowed with regard to:
A contract involving the sale of particular real estate; and
A contract for sale of a particular business.
Specific performance is not allowed regarding a contract for the sale of personal property
unless the property is unique in some way like an antique, coin collection, or art objects.
In general, a contract may limit the remedies that a non-breaching party may obtain. For
example, Johnston purchases a new truck from Acme Truck Sales. The contract may limit
Johnston's remedies to having Acme repair the truck or replace the truck if it is defective.
Sample Contract Clause
NOTWITHSTANDING ANYTHING TO THE CONTRARY, IN NO EVENT SHALL
CONTRACTOR LANDLORD OR TENANT BE LIABLE TO THE OTHER FOR ANY
INDIRECT, SPECIAL, INCIDENTAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES OF ANY KIND, INCLUDING WITHOUT LIMITATION ANY LOSS OF PROFITS,
LOSS OF BUSINESS, LOSS OF USE OR DATE, INTERRUPTION OF BUSINESS,
8
WHETHER BASED ON CONTRACT, TORT (INCLUDING NEGLIGENCE), WARRANTY,
GUARANTEE OR ANY OTHER LEGAL OR EQUITABLE GROUNDS, EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
A contract may state the amount of liquidated damages to be paid if the contract is breached.
Upon a party's breach, the other party will recover this amount of damages whether actual
damages are more or less than the liquidated amount. For example, the parties to a
construction contract stipulate that damages are to be paid of $1,000.00 per day that the
construction exceeds its contracted completion date. Another example would be with regard
to a contract for the sale of land where the contract provides that the earnest money paid will
be the sole remedy upon breach of contract by the buyer.
Courts will honor liquidated damage provisions if:
(i) Actual damages are hard to determine (e.g., breach of a restrictive covenant).
(ii) The amount is not excessive when compared with probable damages.
If the agreed-upon liquidated damage amount is unreasonable, the Court will hold the
liquidated damage clause to be void as a penalty. In such situations, you have to prove the
actual damages if the clause was declared to be void.
Breach and enforcement: find materiality and damages
Failure of Owner to make payment: A failure by the Owner to pay an installment of the
contract price as provided in a building or construction contract is a substantial breach of the
contract, and gives the contractor the right to consider the contract at an end, to cease work,
and to recover the value of the work already performed. Rescission is a remedy for the
unjustified failure to make progress payments due under a construction contract, since the
failure to make payments for work in progress goes to the root of the bargain, and defeats
the object of the parties in making the agreement. However a slight deviation, either in the
time or the amount of progress payments, does not justify the rescission or abandonment of
a building contract. 15
Effect of payment That the Owner has paid for a building constructed does not prevent him or her from
recovering for defects subsequently discovered, although such payment is evidence to be
considered on the question of waiver. Payment does not amount to a waiver of known
defects, when it is made in reliance on the builder's promise to remedy them. 16
Effect of payment—Partial payment; progress payments
In the absence of any stipulation in the contract specifically governing the question, whether
a partial payment of a private building or construction contract constitutes an acceptance or
waiver of defects is dependent on the circumstances. 17A partial payment may be considered
in connection with other conduct of the party employing the contractor in determining whether
15 13 Am. Jur. 2d Building, Etc. Contracts § 107
16 13 Am. Jur. 2d Building, Etc. Contracts § 65
17 Id.
9
there has been a waiver. A partial payment, without more, does not constitute an acceptance
or waiver of defective construction.
18
On the other hand, a partial payment with actual or constructive knowledge of the defect may
constitute an acceptance or waiver of the defects, depending on the circumstances of the
case. If the defects are known at the time of the partial payment and the payment is made without the Owner's consent to the defects and under protest, or pursuant to the contractor's
agreement to remedy the defects, there is no acceptance or waiver of the defects. 19
Economic waste rule
Some authorities hold that the measure of an Owner's damages for a contractor's breach of
the contract is the cost of repair or completion in accordance with the contract, unless such
repair or completion would result in economic waste.
The economic waste doctrine in general means that the cost of completion as required by the
contract greatly outweighs the benefit to the Owner to do so; for example, where the cost of
replacing the plumbing in a completed building costs might greatly outweigh the benefit to the Owner. 20
When repairing or reconstructing a structure would constitute unreasonable economic waste,
the usual measure of an Owner's damages for the contractor's breach of contract is the
difference in value between the structure as built and the structure as contracted for. 21
Failure of Owner to make payment
As indicated above, a failure by the Owner to pay an installment of the contract price as
provided in a building or construction contract is a substantial breach of the contract, and
gives the contractor the right to consider the contract at an end, to cease work, and to
recover the value of the work already performed. However a slight deviation, either in the
time or the amount of progress payments, does not justify the rescission or abandonment of
a building contract. 22
Regarding accepting late or partial payments, an agreement like the following may be helpful: Non-Waiver Agreement between Contractor and Owner Regarding
Accepting Late Payments
Agreement made on the (date), between (name of Owner) of (street address, city, county,
state, zip code) , referred to herein as Owner, and (Name of Contractor), a corporation
organized and existing under the laws of the state of ______________, with its Principal
office located at (street address, city, county, state, zip code) , referred to herein as
Contractor.
18 Id.
19 13 Am. Jur. 2d Building, Etc. Contracts § 66
20 13 Am. Jur. 2d Building, Etc. Contracts § 82
21 Id.
22 13 Am. Jur. 2d Building, Etc. Contracts § 108
10
Whereas,
Owner is three months behind in payments pursuant to the construction
agreement with Contractor; and
Whereas, Contractor has the right to cease work on the project and sue Ownerfor breach of
contract; and
Whereas, Owner has offered to pay 50% of the amount due in the next ten days and the
balance ten days after that if Contractor will continue work on the project;
Now, therefore, for and in consideration of the mutual covenants contained in this
agreement, and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties agree as follows: Owner understands and agrees that Contractor's continuing to work on the project is not a
waiver of the payment requirements under the contract. Owneragrees that any further late
payments other than those made pursuant to the agreement may result in a breach of
contract action against Owner by Contractor and the abandonment of the project for such
breach.
WITNESS our signatures as of the day and date first above stated.
(Name of Contractor)
________________________ By: _________________________ (Printed name) (Printed name & Office in Corporation)
(Signature of Owner) (Signature of Officer)
Delay
A delay in the performance of a building contract does not terminate or justify
rescinding the contract, and, as a general rule, the rescission of a contract for delay will not
be permitted unless time has been made the essence of the contract. 23However, when time
is of the essence of a contract, and one of the parties is not ready and able to perform his or
her part of the agreement on the day fixed, the other party may elect to consider it at an end,
unless he or she has previously waived the performance within the agreed time. When the
contractor is obligated to complete the construction of a building by a time certain but fails to
do so, the purchaser is not limited to the remedy of rescission; he or she may instead affirm
the contract and seek damages. 24
Bevis Const. Co. v. Kittrell, 139 So. 2d 375 (Miss.1962)
.
In Bevis Construction Co. v. Kittrell,
243 Miss. 549, 139 So. 2d 375 (1962), this Court
stated:
[S]ubstantial performance is not literal, full or exact performance in every slight or
unimportant detail, but performance of all important particulars; and that substantial
23 Id
24 Id
11
performance exists where the building or structure as a whole is not impaired, where it
can be used for its intended purpose after erection, where the defects can be remedied
without any great expenditure and without material damage to other parts of the structure
and may without injustice be compensated for by deductions from the contract price.
Id.
at 558-59,
Generally; conditions precedent to action
An action lies for the payment of installments accruing under an entire building contract as
they become due, so the contractor need not wait until the building is completed before
bringing the suit for them. 25
When a construction contract does not require the Owner to allow the contractor an
opportunity to cure defects, the Owner is not required to offer the contractor such an
opportunity before bringing suit for breach of contract. 26
Upon the breach of a building or construction contract by the Owner, the contractor may elect
to pursue one of three remedies:
acquiesce in the breach, treat the contract as rescinded, and recover in quantum
meruit so far as he or she has performed;
refuse to acquiesce in the breach, keep the contract alive for the benefit of both
parties, being at all times ready and able to perform, and at the end of the time
specified in the contract for performance, sue under the contract; or
treat the breach or repudiation as terminating the contract and sue for the profits he
or she would have realized if he or she had not been prevented from performing. 27
Sample count in suit for rescission
COUNT SIX
RESCISSION AND RESTITUTION
30. Plaintiff re-alleges paragraphs 1 through 23 of this complaint. 31. On or about (date of contract) , when the contract was executed, both plaintiff and
defendant were mutually mistaken as to the accuracy of defendant's plans and specifications
and the accompanying topographical site survey. Acting on this mutual mistake, plaintiff and
defendant entered into the subject contract anticipating that the cost of the (description of
project) and the time for its completion as set forth in the contract were reasonable.
32. In actuality, defendant's plans and specifications and accompanying topographical site
survey contained serious inaccuracies which have caused the construction period and cost
25 13 Am. Jur. 2d Building, Etc. Contracts § 113
26 Id
27 13 Am. Jur. 2d Building, Etc. Contracts § 112
12
of construction to substantially exceed that which was contemplated by the parties at the
time of the execution of the contract.
33. Because of the above-mentioned mistake, the parties, in effect, abandoned the contract of
(date of contract) , and proceeded to construct the project on a day-to-day basis,
substantially redesigning and implementing new plans and specifications as the [description
of project] progressed.
34. By reason of the above, the contract should be rescinded and plaintiff should recover
$______________, which amount is the reasonable value, over and above amounts
previously paid to plaintiff, for its services in furnishing the labor, materials, subcontracted
work, and overhead expenses in constructing the (description of project)..
Petition for Rescission of Contract
Failure of Contractor to Obtain Building Permit
3. On (date of contract) , plaintiff and defendant entered into a written contract in which
defendant agreed to provide all labor and materials and to construct (description of building),
on real property located at (street address of property) , in the City of (name of city), State of
(name of state) .
4. In return and compensation for defendant's labor and materials, plaintiff agreed to pay
defendant the sum of $____________, payable in progress payments on the following terms: (terms of payment) . Plaintiff made the first payment under the contract on (date of first
payment) , in the amount of $___________. A copy of the contract is attached as Exhibit A,
and incorporated by reference.
5. The contract provides, in Paragraph _______, that defendant, as the contractor, was
required to comply with all applicable governmental laws, rules, and regulations relating to
the work described in the contract. Defendant was further required to obtain all necessary
permits, at the expense of the Owner
.
6. On (date), defendant attempted to obtain a required permit from the building department of
the City of ________, _______County of to commence construction of the described building
for plaintiff. However, the building permit was denied by the building department on (date of
denial) .
7. Defendant failed to perform his part of the contract by failing to obtain the required permit
to be able to commence construction of plaintiff's building. 8. On (date)
, plaintiff notified defendant that plaintiff was rescinding the contract due to
defendant's failure to obtain the required permit. A copy of the notice of rescission is attached as Exhibit B , and incorporated by reference.
9. On ( date of request) , plaintiff requested that defendant return to plaintiff the amount of the
initial payment made by plaintiff, in the amount of $___________. However, defendant
refused, and continues to refuse, to pay any part of that sum to plaintiff.
13
WHEREFORE, plaintiff requests judgment against defendant:
1. Rescinding the contract between plaintiff and defendant, dated
(date);
2. Awarding damages in the amount of $__________, with legal interest on that amount from (date) ; ;
3. Awarding costs incurred; and
4. Granting such other and further relief as is just and equitable.
Specific performance
Contracts for building or construction will not be specifically enforced, partly because
damages are an adequate remedy at law, and partly because of the incapacity of the court to
oversee the performance, especially if the performance of the contract would extend over a
considerable period of time and would include a series of acts.
However, it has also been
held that specific performance of construction contract should not be denied simply because
it involves the construction of a building. The critical inquiry in an action by a plaintiff seeking
specific performance of a construction contract is whether, if specific performance were
granted, the court would be required to become involved in the prolonged supervision of the
building's construction if disputes arose .
28
Even if specific performance of a promise to build a building on property is not awarded, the
court may order specific performance of the promise to convey the premises, and enter a
monetary decree for the cost of the completion of the improvements in accordance with the contract. 29
Complaint for Damages, Specific Performance of Contract, and
Appointment of Special Master to Oversee Construction against Contractor and Agents
Breach of Contract to Construct House
4. On (date of contract) , defendants entered into a contract with plaintiff for the purchase
and construction of a home on real property situated in (location of property), and more
particularly described as follows:
(legal description of property) .
5. A copy of the contract is attached, marked “Exhibit [designation of exhibit],” and
incorporated by reference.
28 Id
29 13 Am. Jur. 2d Building, Etc. Contracts § 114
14
6. On
(date), and prior to the signing of the contract, defendant real estate agent
informed plaintiff that defendant contractor was the moving force behind the corporation and
that defendant contractor would be involved in the construction of plaintiff's home.
7. On (date)
, all defendants, as Principals of defendant contractor, accepted from
plaintiff check No. __________ drawn on (name of bank) in the amount of
$________________, as payment for the house plans for the house. A copy of the check is attached, marked Exhibit A and incorporated by reference.
8. On (date), all defendants, as Principals of defendant contractor, wrongfully accepted
and deposited in (name of bank) check No. _________ in the amount of $_____________
from plaintiff, as payment of an earnest money deposit for the house.
9. At various times between (begin date of meeting), and (last date of meeting) ,
defendants met with plaintiff and discussed their joint responsibility, progress, and
involvement in building plaintiff's house pursuant to the terms and conditions of the contract.
10. On (date)
, defendant contractor informed plaintiff that plaintiff would need to agree to
pay approximately $__________________over the purchase price called for in the contract
or defendant contractor would not construct the house. Plaintiff refused to pay the additional
$___________________ and demanded that the house be constructed pursuant to the
terms and conditions of the contract.
11. By virtue of defendants' statements, actions, and acceptance of monetary gain,
defendants real estate agent and real estate broker are parties to the contract by ratifying it.
12. Defendants never commenced construction of the house in accordance with the
terms and conditions of the contract, despite repeated demands by plaintiff.
13. Plaintiff has performed all parts of the contract to be performed by [him/her]
and all
contingencies were met under the contract. Plaintiff remains ready, willing, and able to
perform under the terms of the contract.
14. The contract concerns a specific and unique parcel of land. The construction of a house
on such parcel of land is the type of duty that the court can oversee through the appointment
of a special master. Plaintiff is entitled to specific performance under the terms and
conditions of the contract.
SECOND CAUSE OF ACTIONCLAIM FOR DAMAGES
16. As a direct and proximate result of the actions of defendants, plaintiff has suffered
damages in the amount of $______________, if he were to buy a comparable parcel of land
and engage another contractor to build the house in accordance with the terms and
conditions of the contract.
Wherefore, plaintiff requests relief from the court as follows:
15
1. Appointment of a master to supervise the construction of a home in accordance with
the terms and conditions of the contract;
2. Compensatory damages of $
[dollar amount of compensatory damages] ;
3. Costs of suit; and
4. Such further relief as the court deems just and equitable. B. Allocating responsibility and risk
Allocation of Risk
The contractor, architects or design professionals, and Owners need to know how to balance
the contingencies of risk with their specific contractual, financial, operational and other
contractual requirements. In order to achieve this balance, proper risk identification and risk
analysis is required. The parties to a construction contract tend to look at risks individually
with a lack of foresight and do not realize the potential impact that other associated risks may
have to them in the event of a breach of contract. An Owner tends to focus on the financial
aspects of the contract. The contractor attempts to limit the risks associated the quality of
work through insurance or through indemnification, The design professional attempts to limit
his or her financial obligation for mistakes to errors in the plans and specifications, negligent
inspection of the contractors work, and his or her negligent approval of payment to the
contractor during the course of a project. While the deign professional attempts to shift their
or risk for defects in the sufficiency of the construction plans and specifications for a project,
and the contractor is required review and verify the adequacy of the plans and specification,
the Owner is ultimately the party that suffers in event a mistake or error causes a delay. The
construction contract should apportion responsibility and accountability between the parties
and provide adequate recourse in the event a dispute arises. Construction contracts should
be designed and written to allocate risk between the parties to the contract
1. The contract documents: what’s in, what’s out?
A building and construction contract often incorporates by reference the plans, drawings, and
specifications and the general conditions of the contract and, thus, does not need, in itself, to
be a long and complicated document. In such a situation, it is sufficient to state the
agreement, describe the project, identify the parties, set the price and the method of
payment, designate the time for completion, and specify the other documents involved,
incorporating them into the contract by such reference.
At some point, whether in the contract itself or in a collateral instrument, there must be
spelled out many details, such as the duties of the contractor in regard to liability insurance
and workers' compensation insurance, the responsibility for supervision of the project, and
the contractor's liability for his or her decisions. Provisions may be inserted for damages for
delay, with or without a corresponding bonus for early completion. Other provisions that may
be included relate to changes in the project, adjustments in the contract price, arbitration of
disputes, and the conditions under which subcontractors may be used. 30
30 4 Am. Jur. Legal Forms 2d Building, Etc. Contracts § 47:39
16
2. Scope and price: what are you doing and how much is it worth?
In drafting the provisions of a building and construction contract relating to the payment of
the contract price, attention must be given to the conditions that the contractor must fulfill to
entitle him or her to receive payment, the frequency of payment, and the amount of each
payment. The contract should also provide for retention by the Owner of a portion of the
contract price for settlement of claims.
3. Payment provisions: when do you pay? Payment Clause and Variations
There are several key provisions in every construction contract that need to be considered in
addition to risk allocation and it is important to define the meaning of such terms and to touch
on the differences of each of term in the context of the construction contract. Price
The cost of the project is vital to a construction project and an
Owner needs to understand
the different payment variations and types of contracts in determining whether a bid proposal
for a contract is economically feasible for an Owner. Below is a definition of three types of
variation of price in a construction contract: (i) cost plus; (ii) lump sum payment; and (iii)
guaranteed maximum price contracts.
Cost Plus
Cost-plus agreements have the contractor’s profit defined in the contract itself, as well as the
estimated construction expense. If the actual expenses come in lower than the estimate,
then the Owner reaps a savings. In the event of a cost overage, the Owner has to pay more
for the project. Cost plus contracts places the risks of cost overruns upon the Owner, not the
contractor, who enjoys the security of knowing his exact profit. In this type of contract the
contractor may have little incentive to be efficient on-site, but the Owner has the satisfaction
that the ultimate project will be to his exact standards even if the expenses run high. Lump Sum
In Lump-sum contracts the contractor provides his services for a set price, and the Owner
agrees to pay that agreed upon price either upon completion of the work or pursuant to a
schedule. If a lump sum contract is utilized, the Owner will pay a set amount, and the
contractor bears the risk of loss if there are unexpected expenses, or the possibility of gain if
the project comes in under-budget. There is incentive for the contractor to be more efficient
in this type of contractual arrangement because of the possibility of economic gain in the
event a project comes in under budget.
Guaranteed Maximum Price Contracts
A guaranteed maximum price contract is a contract under which the contractor is
compensated for actual costs incurred plus a fixed fee subject to a ceiling price. The
contractor is responsible for cost overruns, unless the guaranteed maximum price has been
increased based on formal change orders as a result of additions or alterations to the scope
of work requested by the Owner
. Any savings resulting from cost savings are returned to the
Owner . In other words, if the actual cost for performing the work, plus the contractor’s fee
exceeds the guaranteed maximum price contract, the contractor is responsible to pay the
difference. If the cost for the work plus the contractor’s fee is less than the guaranteed
maximum price contract, the contractor returns the total savings to the Owner. As with the
17
lump sum contract, the
Owner knows the total cost of construction prior to the beginning of
construction. However, unlike the lump sum contract in which any savings are kept by the
contractor, the Owner receives the benefit of any savings due to efficient project control.
Scope of Work
The intent of the plans, specifications, and special provisions of a construction contract is to
set forth the obligations of the contractor undertakes to do, in full compliance with the plans,
general conditions, and specifications, together with all authorized alterations, supplemental
agreements and extra work orders.
The Contractor should perform all items of the work covered and stipulated in the contract,
specifications, and plans, in a satisfactory and acceptable manner. The scope of work is in
essence the contractor’s obligation which outlines the amount he or she is to be paid for that
work. The description of the work to be performed by the contractor is critical to the
construction contract. The scope of work should be clear, precise and complete. Generally,
the scope of the work can best be described by reference to drawings and specifications that
have been issued to the contractor for work. The scope of work for a construction contract
will vary based on whether there is one contractor that is responsible for the entire project or
whether there are several contractors that are responsible for different phases or certain
aspects of the scope of the work. The terms that are important in relation to the scope of
work are design build and design-bid build contracts. Design Build
Design-Build is a construction project where in contrast to "design-bid-build”, which will be
discussed below, is where the design and construction aspects are contracted for with a
single entity known as the design-builder or design-build contractor. The design-builder is
usually a general contractor, but in many cases it is also the design professional (architect or
engineer). This type of contract or project is used to minimize the risk for an Owner and to
reduce the delivery schedule by overlapping the design phase and construction phase of a
project. Where the design-builder is the contractor, the design professionals are typically
retained directly by the contractor, which could create added risk for the Owner. Cost
estimating for a design-build project is sometimes difficult because design documents are
often preliminary and may change over the course of the project. As a result, design-build
contracts are often written to allow for unexpected situations without penalizing either the
Design-Builder or the Owner. This uncertainty requires the Owner to rely a great deal on the
competence of the design professional. The opinion of the construction professionals must
be trustworthy, accurate, and reasonably verifiable in order to minimize the Owner’s risk.
Design Bid-Build
Design-Bid-Build is a method by which the completion of the project is by several different
contractors, in which there is one general contractor who contracts with several sub-
contractors for each aspect of the design and construction of a project. The Owner usually
retains a design professional to design and produce plans and specifications. The design
professional will work with the Owner to identify the Owner’s needs, and develop based on
those needs a conceptual or schematic design. This design is then developed, and the
design professional will usually bring in other professionals such as a mechanical, electrical,
and plumbing, a fire engineer, structural engineer, sometimes a civil engineer, and often a
18
landscape professional to help review and complete the documents, which will become the
drawings and specifications.
These documents are circulated by the design professional or the Owner to various general
contractors who will submit bid proposals on the project based on the complexity of the
design. The various general contractors bidding on the project obtain copies of the
documents, and seek bids from multiple sub-contractors, on the various sub-components of
the project. Sub-components include items such as the concrete work, structural steel frame,
electrical systems, and landscaping. Based on the bids submitted to the contractor by the
subcontractors, the contractor puts together one comprehensive bid to submit to the Owner
and design professional. Once bids are received from the contractors, the design
professional and Owner review the bids. If the bids fall in a range acceptable to the Owner,
the Owner and design professional discuss the suitability of various bidders and their
proposals. The project is usually awarded to the lowest bid by a qualified contractor.
Completion and Close Out Provisions
The completion and closeout of a project means different things to each party to a
construction contract. To the contractor, it means completion of its duties and obligation
under the contract by completing the punch list, and collecting the final payment. To the
design professional it should mean that the design results in a completed project that
substantially conforms to the plans and specifications, and that the completed project
functions as intended to meet the
Owner
’s needs. To the Owner, however, closeout means
the transfer of the project and building into their hands which could bring about anxiety about
the operation and Ownership of the completed project.
Some construction contracts have a “best efforts” completion date while others have a
specific completion date which the contractor is obligated to meet. In very large or complex
contracts or projects the contractor is usually required to meet different milestone dates
throughout various phases of the project. Closeout provisions and completion dates should
be considered together with any delay provisions or time extensions. All construction projects
inevitably suffer something or some event that causes delays in the completion of work.
However long the delay is, the parties to the construction contract need to allocate who bears
the risk of any delay in completion of the project, and what, if any, time extensions will be
granted to the contractor before they will be liable for damages to the Owner
or will be held in
breach of the contract.
In any event the contractor usually gets final payment when there is “substantial completion”
of the project and the project can be used for its intended purpose, which should be
approved based on the inspection of the design professional. Some Owner
s have specific
requirements that have to be met as part of “substantial completion” which based on the
specific needs of the Owner, may extend beyond the use of finished project for its intended
purpose. Any specific requirements should be built into the contract or such requirements will
not be part of the contractor’s obligation.
Pay if Paid and Pay When Paid
Parties are generally free to negotiate the terms of their contracts, and are generally
permitted to negotiate and allocate the risks under their contracts, including the risk of non-
19
payment. The terms “pay-when-paid” and “pay-if-paid” are commonly used in the
construction industry and are distinct clauses.
Under a “pay-if-paid” provision in a construction contract, receipt of payment by the
contractor from the
Owner
is an express condition precedent to the contractor’s obligation to
pay the subcontractor. A “pay-if-paid” provision in a construction subcontract shifts the risk of the Owner ’s non-payment under the subcontract from the contractor to the sub-contractor.
Under a “pay-when-paid” provision in a construction contract, a contractor’s obligation to pay
the subcontractor is triggered upon receipt of payment from the Owner. The contractor’s
obligation to make payment to the subcontractor is suspended for a reasonable amount of
time for the contractor to receive payment from the Owner. A “pay-when-paid” clause creates
a timing mechanism only, it does not create a condition precedent to the obligation to make
payment, and does not shift the risk of the Owner’s nonpayment to the subcontractor.
Change Orders
The Architect generally will prepare Change Orders for the Owner's approval and execution
in accordance with the Contract Documents, and shall have authority to order minor changes
in the work not involving an adjustment in the Contract Sum or an extension of the Contract
Time which are not inconsistent with the intent of the Contract Documents, provided,
however, that the Architect shall give prompt notification of such minor changes to the
Owner 's designated representative. Change Orders which increase the Contract Sum, or
Contract Time, or change the intent of the Contract Document shall be submitted by the Architect to the Owner for approval before any action is taken.
Contracts should include the following change order provisions: treating the Owner’s right to add or subtract from the scope of the work or to change
the work;
the form of change orders;
the Contractor’s obligation to respond to a request for a change order;
the procedure for adjusting the Contract Sum, including the profit and overhead to which the
Sample Construction Contract Change Order
No.: (change order number)
Dated: (date of change order)
Owner 's Project No.: (Number)
Engineer's project No.: (Number)
Project: (Name of Project)
Owner : (Name of Owner)
Contractor: (Name of Contractor)
Contract date: (date of contract)
Contract for construction of (Give a Brief Description of Building to be built)
To: (Name of Contractor)
You are hereby directed to make the changes noted below in the subject contract. Witness my signature this (date).
____________________________________
20
Name and Signature of Owner
Nature of change: (Give a description of change).
Enclosures: (Describe amended plans, drawings, and specifications accompanying
the Change Order) .
Changes resulting in the following adjustment of contract price and contract time: (Describe)
Contract price prior to this change order: $________________.
Net (increase or decrease) resulting from this change order: $_________________
Current contract price including this change order: : $_________________
Contract time prior to this change order : (number) calendar days.
Net (increase or decrease) resulting from this change order: (number)calendar
days.
Current contract time including this change order: (number)calendar days.
The above changes are approved this (date).
______________________________________
Name and Signature of Architect or Engineer
The above changes are accepted this (date).
______________________________________
Name and Signature of Contractor
Warranties and standards of care: it's not my fault
The standard of care
Unless the parties expressly agree otherwise, the contractor will normally be to expected to exercise reasonable skill. The law implies a warranty of adequacy on the builder’s services.
A common mistake is to confuse this warranty of adequacy with the builder’s “call-back
warranty. The warranty of adequacy, in general terms, is the builder’s guarantee that
construction materials and equipment are new and free from defects, and that constructions
services are of a good and workmanlike quality. The call-back warranty is the builder’s
agreement that if defects in the project should become apparent after completion, most
commonly for a period of one year following mechanical completion, the builder will return to
the site to make any necessary repairs or adjustments.
The call-back warranty is for a limited period of time, but the warranty of adequacy has no
time limit. If a latent defect does not manifest itself until two years after completion of the project, the Owner
should still have a claim for breach of the warranty of adequacy. This
warranty attaches at the time that the defective work was incorporated into the project and
does not expire except as set forth in the applicable statutes of limitations.
Time: is it “of the essence”?
21
Some contracts will provide that "time is of the essence", which may support an action for
breach of contract where the contract is not completed within a reasonable (or specified)
time. This is often seen in construction contracts, where it is important that work be resolved such that a home
owner or business can return to normal life or operations. For example,
Time is of the essence for the completion of the work described in this contract. It is
anticipated by the parties that all work described herein will be completed within two
(2) weeks of the date of execution, and that any delay in the completion of the work
described herein shall constitute a material breach of this contract.
Others may specifically provide that time is not of the essence. For example:
The parties agree that time is not of the essence in the completion of the work
described in this contract. All parties shall act to complete the work described within a
reasonable time. 31
It has been stated that the tendency of judicial authority at law as well as in equity is to
regard the question as one of construction to be determined by the intent of the parties, and
to hold that time is not ordinarily of the essence of the contract unless made so by express
stipulation or unless there is something connected with the purpose of the contract and the
circumstances surrounding it which makes it apparent that the parties intended that the
contract must be performed at or within the time named. 32
In other words, as in other cases
of contract construction, the ultimate criterion as to whether time is of the essence of a
contract is the intention, actual or apparent, of the parties, and before time may be so
regarded there must be a sufficient manifestation, either in the contract itself or the
surrounding circumstances, of that intention. 33
As a general rule, time is not of the essence of a building or construction contract, in the
absence of a provision in the contract making it so; the mere statement of a date in such a
contract does not make time of the essence. Thus, a failure to complete the work within the
specified time does not, by itself, terminate the contract, but only subjects to contractor to
damages for the delay. 34
The non-completion of a building within the time specified by the contract does not forfeit a
right to recover the contract price when the contract provides for liquidated damages to be
deducted from the price if the building is not completed within the specified time because,
under such a provision, time is not of the essence of the contract in the sense that a failure to
complete within a fixed period forfeits the right to recover for work already done at the date
fixed for completion, or yet to be done at that time. 35
Subcontracting : accepting pass-through responsibilities and rights
31 Common Contract Clauses b y Aaron Larson,
http://www.expertlaw.com/library/business/contract_clauses.html 32 17A Am. Jur. 2d Contracts § 471
33 Id
34 Id
35 Id
22
The construction industry has witnessed a proliferation of claims for damages for delay,
acceleration and other impact costs arising out of problems relating to the scheduling and co-
ordination of design and construction. These types of damages are difficult to assess, from
both factual and legal perspectives, and require an analysis of causation and responsibility.
The review process may be further complicated where a contractor not only puts forward his
own claim against the
Owner
, but also seeks to “pass through” the claims of his
subcontractors.
A “pass-through” claim may be defined as a claim by a party who has suffered damages (in
this case, a subcontractor) against a responsible party with whom he has no contract
(namely, an Owner
), and which are presented through an intervening party who has a
contractual relationship with both (namely, a contractor).
The respective rights and obligations of both the contractor and the subcontractor, and the
procedures for presenting a pass-through claim to an Owner
, are often contained in a “pass-
through agreement”, which purports to allocate both the expenses incurred and the benefits
derived when such a claim is advanced. Among other things, the terms of the agreement
may provide specifics as to how the claim is to be presented to the Owner, and how the
obligation to pay legal fees is to be shared. The agreement may also deal with authority and
control issues relating to the conduct of the litigation, including decisions regarding appeals;
may outline settlement rights and obligations; and may establish terms as to how and when
any monies recovered from the Owner
will be paid to the subcontractor. Significantly, the
agreement may also contain an acknowledgment of the subcontractor’s claim, and often
contemplates a preliminary partial payment by the contractor to the subcontractor.
BE AWARE OF KILLER CLAUSES
Conditional payment: pay-if-paid vs. pay-when-paid
“Pay when paid” and “pay if paid” clauses are contingent payment clauses. “Pay when paid”
clauses mean that payment from the general contractor to the subcontractor is conditioned
upon prior receipt of payment from the Owner to the general contractor. Typically, the
subcontract provides that that payment is due to the subcontractor within a certain period of
time after receipt by the general contractor of payment from the Owner. For example, a
typical “pay-when-paid” clause might read: “Contractor shall pay subcontractor within seven
days of contractor’s receipt of payment from the Owner.”
A “pay if paid” provision in a subcontract provides that the general contractor is only
obligated to pay the subcontractor if it is paid by the Owner. For example, a typical “pay-if-
paid” clause might read: “Contractor’s receipt of payment from the Owner is a condition
