Do You Know Your Construction Contact - Part I

DO YOU KNOW YOUR CONSTRUCTION CONTRACT - Part I

By Harry Malka, Esquire

Time and time again we meet with clients who are involved in a dispute with another party because one side thought they had agreed to one thing and the other party thought they had agreed to something else. These types of disputes can often be avoided by having a well-drafted construction contract. We often find that when a construction contract is not prepared or reviewed by an experienced construction attorney, the contract may be unclear or totally silent on very important issues. Sometimes, a single omission (either a clause not read or misunderstood) can result in a major financial loss. This article is part of a series of articles which are designed to identify several key clauses that every party to a construction contract should carefully review and understand prior to entering into a contract.

One of the clauses we often see in subcontracts is the infamous "Pay-if Paid" clause, also known as a "contingent payment clause". This type of clause provides that a subcontractor is not entitled to payment from the general contractor unless and until the general contractor receives payment from the owner for the subcontractor's work. This means that the subcontractor assumes the risk of nonpayment by the owner. The general contractor is not liable until the owner pays for the work. Under Florida law, these clauses are legally enforceable. However, the Florida Supreme Court has stated that it does not generally favor these contractual provisions. In many cases, Florida Courts have refused to uphold these clauses on the grounds that the provisions were "unclear" or "ambiguous." As such, if you are a general contractor and want a "Pay-if Paid" provision in your contract, it is important to make sure that the provision is well worded so that it will be enforceable. On the other hand, if you are a subcontractor about to sign a contract containing a "Pay-if Paid" clause, you should have clear understanding of the significance this provision can have on your business.

Another provision that we often see in construction contracts is the "No Damages For Delay" clause. Under this clause, the contractor waives the right to seek additional compensation when a job is delayed due to someone else's fault. There is significant financial risk in entering into a contract which includes a "no damages for delay" clause. For example, a job is significantly delayed (due to a design error over which the contractor has no control) and, when the job resumes, the cost of certain materials doubles, or even triples. If the "no damages for delay" clause is properly drafted, the contractor will have to absorb the additional cost of the materials and cannot pass that cost increase to the owner. As with "Pay-if Paid" clauses, a "no damages for delay" clause is legally enforceable in Florida so long as it is clear and unambiguous. However, there are certain instances where a "no damages for delay" clause will not be enforced, such as where there is "active interference", "concealment", or fraud by the party seeking to enforce the provision.

As Your Construction Law Firmtm, we cannot emphasize enough the importance of understanding your contract before you sign it. Our philosophy is that preventative legal services in the form of careful contract preparation, review, and negotiation is the most economical and effective use of legal services.