Liability for Defects in Construction Contracts

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 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 Owners.

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.

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.

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

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.

However, it has also been held that a requirement of mutuality of obligation to every contract is too broad.

According to the Restatement, if the requirement of consideration is met, there is no additional requirement of mutuality of obligation.

However, there is authority that says mutuality is essential to the validity of a contract for services.

Express and Implied Warranties

Warranties define a contractor's liability for construction defects.

Express warranties may set forth specific promises or general guarantees of quality and good workmanship.

Implied warranties include the Implied Warranty of Accuracy and the Implied Warranty of Suitability.

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.

There must normally be privity of contract.

Sample Contract Clause

Waiver and Disclaimer of Implied Warranty of Habitability

This waiver-disclaimer is attached to and made part of a contract dated between referred to herein as Seller-builder and for the sale of property located at and the construction of a single-family home.

1. IMPLIED WARRANTY OF HABITABILITY

Under the laws of , 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.

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) on page(s)

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.

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 ,

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 breach does not always result in a lawsuit or mean the end of a contract.

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.

Punitive damages are rare in a breach of contract case except bad faith insurance claims.

A non-breaching party has a duty to mitigate damages.

Sample Contract Clause

Non-Waiver Agreement between Contractor and Owner Regarding Accepting Late Payments

Agreement made on the between of referred to herein as Owner, and

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.

Specific performance

Contracts for building or construction will not be specifically enforced.

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

On defendants entered into a contract with plaintiff for the purchase and construction of a home on real property situated in

A copy of the contract is attached, marked “Exhibit ,” and incorporated by reference.

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.

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.

Scope and price: what are you doing and how much is it worth?

Payment provisions: when do you pay? Payment Clause and Variations

Price

Cost Plus

Lump Sum

Guaranteed Maximum Price Contracts

Scope of Work

Pay if Paid and Pay When Paid

Change Orders

Sample Construction Contract Change Order

No.: Dated: Project:

Owner: Contractor:

Nature of change:

Contract price prior to this change order:

Net increase/decrease resulting from this change order:

Current contract price including this change order:

Warranties and standards of care: it's not my fault

The standard of care

Time: is it “of the essence”?

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 weeks of the date of execution.

The parties agree that time is not of the essence in the completion of the work described in this contract.

Subcontracting : accepting pass-through responsibilities and rights

Conditional payment: pay-if-paid vs. pay-when-paid

Delay damages: limitations, waivers, and impossible notice requirements.

No Damage for Delay

Waiver of Lien and Bond Rights

Acceptance of Final Payment as Waiver

Delay damages: liquidated damages, Eichleay damages, and the cost of time

Eichleay damages

Differing Conditions: Knowing What You Don’t Know.

Indemnification and Defense of Claims: Insuring Others from their Own Acts

Effect of Indemnitee's own fault

Dispute Resolution: Making Strategic Choices

Contractual stipulation for arbitration or alternative dispute resolution

Sample contract clause

Payment Security: Waiver of Future Lien and Bond Claims

Attorney fees: the American Rule and Reciprocal Contract Rights

Payment security: waiver of future lien and bond claims

A Surety bond is a three-party contract.

Labor and Material Payment Bond

Agreement made on the between and

Owner: Amount:

Selecting the Right Contract Forms

Contract For Construction of a Commercial Building

Agreement made on the between and

I. Description of Work

II. Contract Price

Owner agrees to pay Contractor, for the work described, the total price of

III. Progress Payments

Progress payments may be withheld if: defective work, nonpayment to subcontractors, claims or liens are filed.

IV. Final Payment

V. Starting and Completion Dates

Begin on: Completed by:

VII. Contract Documents

VIII. Duties and Authority of Architect/Engineer

IX. Responsibilities of Owner

X. Responsibilities of Contractor

XI. Time of Essence; Extension of Time

XII. Subcontractors

XIII. Mandatory Arbitration

XIV. Insurance

XV. Correcting Work

XVI. Work Changes

XVII. Termination

XVIII. No Waiver

XIX. Governing Law

XX. Notices

XXI. Entire Agreement

XXII. Modification of Agreement

XXIII. Assignment of Rights

XXIV. Counterparts

AIA contract Documents: the Architects’ Tried and True Forms

EJCDC Contract Documents – the Engineers’ Alphabet Soup

Strategic considerations: who has the money?

Remedies and Procedure in Actions Involving Building and Construction Contracts

Mechanic’s Liens

The Owners’ Remedies for Non-Performance

Statutory Framework for Residential Construction Defect Disputes

Special Problems: Licensing Violations; Residential Defect claims; Claims against Design Professionals

Types of Construction Defects

Construction Defect Litigation

Design Deficiencies

Material Deficiencies

Construction Deficiencies

Subsurface Deficiencies

Legal Theories

Negligence

Breach of Contract

Breach of Warranty

Strict Liability Claims

Fraud and Negligent Misrepresentation

Remedies Against Subcontractors and Vendors

Licensing Problems in Mississippi

E-discovery

Electronic Message Archiving

Claims against Design Professionals