Four Best Practices for Negotiating a Construction Contract

When you begin negotiating with design professionals and contractors on a construction project, there are several pitfalls you should avoid. Here are four important issues to keep in mind:

1. Avoid arbitration provisions.

“Don’t enter into a contract that contains an arbitration clause for dispute resolution,” advises Pearson Legal, P.C. founder Matthew R. Pearson. “Arbitration is promoted by many as fast and inexpensive. In our experience, arbitration more often costs more, is slower, and is more burdensome than resolving your dispute at the courthouse.” In reality, arbitration takes just as much, if not more, time as a lawsuit, requires the same costs of representation by attorneys, and requires that the parties pay for the same judicial services they could access at no cost at their local courthouse.

In addition, and equally important, arbitration does not protect your legal rights the way a court proceeding does. An arbitrator or arbitration panel is not bound by the same rules of evidence and procedures as a court. Furthermore, except in very limited circumstances, arbitration decisions are final and binding, whereas litigation provides the parties an opportunity to appeal unfavorable decisions which fail to comport with the material facts and applicable law.

2. When using AIA forms, do not alter the warranty provision.

Within the current AIA Form Document A201 (the General Conditions of the Contract for Construction), the American Institute of Architects has established particular warranty language at Section 3.5.1 that is designed to protect the owner as well as the contractor.

Any deletion or amendment to this particular warranty provision may significantly change the standard warranty’s length of applicable coverage, thereby decreasing or eliminating certain owner’s rights to pursue remedies from contractors who provide defective materials and/or work for a construction project.

3. Do not waive consequential damages.

Within its current AIA Form Document A201 (the General Conditions of the Contract for Construction), the American Institute of Architects has included a waiver of claims for consequential damages provision at Section 15.1.7. This provision prevents both the owner and the contractor from seeking and recovering consequential damages arising out of or relating to the construction project, and as to the owner, it specific prevents recovery of damages for rental expenses, for losses of use, incomes, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons.   However, keep in mind that, with construction projects that are defective, the owner, and not the contractor, typically suffers consequential damages. For example, if a school gymnasium is built with significant defects, the School District may incur consequential damages related to loss of full use of the building, loss of sports-related revenues, and the incurrence of additional costs to travel to and use alternative venues.

“The contractor may pressure you for this waiver, but don’t agree to it,” says Mr. Pearson. “We’ve had clients who unknowingly waived the provision and found themselves on the hook for additional damages beyond mere repairs of the defects.”

4. Do not agree to mediation as a “condition precedent.” 

Mediation is generally a good practice and encouraged in all cases, but you should not agree to mandatory mediation before filing a lawsuit.

A key disadvantage to agreeing to mediation as a condition precedent to filing a lawsuit is that one party may use the mediation process as a delay tactic instead of participating in good faith. Then, only if the mediator recognizes the stalling party’s misuse of the mediation process can the other party get clearance to go ahead and file suit.

In addition, even if both parties participate in required early mediation in good faith, the mediation often is unsuccessful because the parties have no meaningful discovery and exchange of material information and documents prior to engaging in the formal discovery process provided by litigation rules of procedure and evidence. As a result, mediation as a condition precedent to litigation rarely leads to a full and final settlement that is acceptable to all parties.

Pearson Legal, P.C., specializes in representing project owners when their contractors provide defective or deficient construction. They have a long record of success in resolving disputes by trial and settlements.

Pearson Legal, P.C.’s clients include:

• School Districts
• Cities/Counties/Municipalities
• Apartment Complexes
• Hospitals
• Museums
• Government Housing
• HOA Communities
• Hotels/Lodging
• Senior Living Centers
• Retail Shopping Centers
• Commercial Buildings

If you find yourself at odds with your contractor or builder over construction defects, contact the experts at Pearson Legal, P.C.