New Year Contract Tune-Up

By Andrew Guess, Attorney

This article originally appeared in the December 21, 2018 issue of the Daily Journal of Commerce Oregon. 

If your company's construction crews are reduced or idle as mid-winter arrives, you are likely not alone. January through March is traditionally a slow period for the construction industry, even in this strong economy. Consider using this downtime to your advantage and revisit your company's strategic plan, follow up with past clients, and tune up your contract documents. The beginning of a new year is a great time to review and improve your standard agreements. 
 
If you are still using the same contract from years ago, a brand new agreement that reflects the most up-to-date laws may be most cost effective. Otherwise, minor revisions may be sufficient. Depending on your role as an owner, contractor, or subcontractor, risk that you carried in the past may now be pushed to others without reducing the contract price. 
 
Consider the examples below. Each of the following provisions have become part of the "boiler plate," standard terms in every contract. However, a more thoughtful approach to the inclusion or exclusion of these terms is warranted. In light of the nature and value of the work, the payment structure, and your position in the contracting chain, your goal should be to structure your contract to shield you and your business from unnecessary risk where possible.
 
Attorney Fee Provisions
 
In litigation, each party is responsible for their own attorney's fees unless this expense is shifted to the other party by contract or statute. Under this default rule, the cost of litigation may make claims for unpaid contract funds impractical. For example, no contractor can invest a dollar for every dollar of recovery, or worse. To avoid this economic bar to court access, many contracts contain a prevailing party attorney’s fee clause that requires the loser to pay the winner's attorney’s fees in addition to any principal damages.  Whether cases settle, as they often do, attorney’s fee provisions typically provide important leverage to achieve a favorable outcome. In either scenario, this term is always important and by default is generally thought a necessary part of any construction contract. However, contractors and owners alike should consider whether Oregon law already provides the protection they seek before including an attorney’s fee clause.
 
In the event of a common payment dispute, provided the contractor gives adequate notice and meets other statutory deadlines for recording and foreclosing on a mechanic’s lien, Oregon's lien laws require the loser to pay the prevailing party's fees. That is, if a contractor is not paid, and must lien the project, it already has a right to attorney’s fees for the most likely kind of dispute: a dispute over payment. Contractors also have similar rights to recover attorney’s fees for bond claims on public projects, and under state and federal prompt payment acts. For claims of less than $10,000, there is another statute allowing recovery of attorney’s fees.  In any of these instances, the contractor gains nothing from a contractual attorney’s fee clause if it must collect unpaid contract funds, but the owner now has a right to fees for causes of action it is likely to bring, such as warranty claims or claims for construction defects.
 
On the other hand, owners may consider requiring each party to waive the right to fees altogether as opposed to including a right to fees for both parties. If the project is particularly challenging or the owner has some other reason to believe the contractor may assert claims for delay, productively loss, or other impacts, a proactive waiver may best serve their interests.
 
Arbitration Clauses
 
Most construction contracts require the parties to resolve disputes in arbitration as opposed to state court. The thought is that arbitration is less expensive, faster, and more flexible to address the unique needs of the parties.
 
In practice, arbitration is rarely less expensive and an ill-defined arbitration provision can actually prolong a dispute. Opponents argue about whether the term applies in light of the particular claims at issue, whether the Oregon Rules of Civil Procedure apply, and even the location of the arbitration, to name a few issues. On the other hand, arbitration provides privacy to the parties if that is important and unlike state court actions arbitration is not appealable.
 
In the end, use this quiet time of the year to your advantage to hone your contract documents. There is no crystal ball on what terms will serve each party best if litigation arises, but the size of the contract, the nature and scope of the work, and the relationship with the upstream contractor and owner should all guide a more thoughtful consideration about these and other "boiler plate" terms.