Fact or Fiction: Construction Law, Vol. 1

As a construction attorney, I field many of the same questions on a regular basis.  I will periodically use this “Fact or Fiction”  blog to feature some of those common questions and their answers. If you have questions you would like answered on the blog please email me at constructionlaw@northriskpartners.com.

Waivers or limitations on damages clauses in agreements are not enforceable.

Fiction. These clauses are enforceable if they are properly worded and limited to claims related to negligence.  Courts generally will uphold these types of clauses unless they are too broad and attempt to release a party in advance for claims related to willful or intentional conduct.  Most state laws also prohibit construction contract clauses that require a party to be liable for someone else’s negligence.

A construction bid is an offer, and if it is accepted, a legal contract is formed.

Fact. A contract is a promise, or a set of promises, to which the law attaches a legal obligation. For a contract to be enforceable there must be an offer and an acceptance of the offer. There must also be a consideration, which is usually money exchanged for services or products, but can be any promised right, interest, profit, or benefit.  If you submit a bid and it is accepted, a contract has been formed.

As a subcontractor or supplier to a general contractor, if you do not preserve lien rights you may still sue the property owner if you are not paid.

Fiction. Unless your contract was directly with the property owner, in virtually all cases your only recourse against the property or the property owner is a mechanic’s or construction lien.  If you do not preserve those lien rights, unless there are special circumstances you may only pursue the party that hired you or that purchased the materials from you.

Contract clauses stating that the general contractor is not required to pay subcontractors or suppliers unless the property owner pays the general contractor are enforceable.

Fact. A contingent payment clause (or “pay-if-paid” clause) shifts the risk of nonpayment by the property owner (“Owner”) from the general contractor (“GC”) to the subcontractors and suppliers (“Subs”).  This means if the Owner does not pay the GC, legally the GC never owes payment to the Subs.  However, the clause must clearly and unequivocally state that the Owner’s payment is an absolute condition to the GC’s obligation to pay the Subs.  For example, a clause that simply states that the GC must pay the Subs within seven days after the Owner pays the GC does not eliminate the GC’s duty to pay the Subs.  Instead, it only states the timing for payments (sometimes called a “pay-when-paid” clause). A pay-if-paid clause is only enforceable if it unequivocally states that the GC’s duty to pay the Subs is conditioned upon the Owner’s payment.