Oles Morrison is Published in the International Comparative Legal Guide – Construction & Engineering Law 2021
Oles Morrison’s attorneys Douglas Oles and Alix Town have once again been published in the International Comparative Legal Guide: Construction & Engineering Law 2021, the Eighth Edition.
This legal guide is released annually, and includes a practical cross-border insight into construction and engineering law in various countries. The USA section covers common issues in construction and engineering laws and regulations —including making construction projects, supervising construction contracts, and dispute resolution — in 20 jurisdictions.
1. Making Construction Projects
1.1 What are the standard types of construction contract in your jurisdiction? Do you have: (i) any contracts which place both design and construction obligations upon contractors; (ii) any forms of design-only contract; and/or (iii) any arrangement known as management contracting, with one main managing contractor and with the construction work done by a series of package contractors? (NB For ease of reference throughout the chapter, we refer to “construction contracts” as an abbreviation for construction and engineering contracts.)
With 50 separate states, public and private entities in the United States utilize a wide variety of contract types. Before the 1980s, there was a general preference for fixed-price design-bid-build contracts, based on an employer advertising a fully completed set of design documents. Time-and-materials arrangements have also long been used, especially where it is difficult to estimate a fixed price or when construction must begin before there is time to complete a design. In recent decades, however, statutory changes have facilitated a much increased use of design-build contracting and its variations such as engineer-procure-construct (EPC) contracting. The evolving technologies used in construction have led to an increased use of design-build contracting in specialty trades. Although public-private partnerships (P3) and Integrated Project Delivery (IPD) have had a relatively slow start in the United States, their use seems to be increasing gradually. Nonetheless, many segments of the U.S. construction industry remain largely unfamiliar with those project delivery systems. On IPD, see Bruner & O’Connor on Constr. Law, §6.18.10 et seq. (2020).
There is no standard form of construction agreement in the United States. The contract forms provided by the International Federation of Consulting Engineers (FIDIC) are rarely if ever used. Federal construction projects are generally governed by the Federal Acquisition Regulation (FAR), a book containing numerous clauses mandated on various types of jobs. On local government projects and private construction, the A-201 General Conditions and other forms published by the American Institute of Architects (AIA) are probably the most widely used. Other well-known suites of contract forms are published by ConsensusDocs, the Engineers Joint Contract Documents Committee (EJCDC) and the Design-Build Institute of America (DBIA). All of these forms make an effort to achieve a degree of balance between the various parties that typically participate in a complex construction project, although that balance can easily be lost when the forms are heavily modified to favour the interests of a particular party. In the U.S., construction management contracting is typically handled by a construction manager. Some of them (“at risk”) also hold direct agreements with trade contractors, while others (“not at risk”) merely ask as advisors to an employer (usually referred to as the “owner” in the U.S.).
1.2 How prevalent is collaborative contracting (e.g. alliance contracting and partnering) in your jurisdiction? To the extent applicable, what forms of collaborative contracts are commonly used?
On design-build or P3 projects, contractors commonly partner with design firms, either through a joint venture agreement or conventional subcontracting. On large civil projects, it is also common for two or more general contractors to bid for the work together, either as a temporary alliance team or a formal joint venture entity. See, e.g., ConsensusDocs 298.
1.3 What industry standard forms of construction contract are most commonly used in your jurisdiction?
See answer to question 1.1 above.
1.4 Are there any standard forms of construction contract that are used on projects involving public works?
The Federal Acquisition Regulation (FAR) is perhaps the most standardized contract for public works in the United States. Any public works project for the federal government is required to use FAR clauses. At the state level, many states have adopted procurement codes that establish how public works contracts are awarded but leave the forms of the public works contracts up to the individual agency or municipality. Therefore, the form for public works contracts can vary widely within a state and between states.
1.5 What (if any) legal requirements are there to create a legally binding contract (e.g. in common law jurisdictions, offer, acceptance, consideration and intention to create legal relations are usually required)? Are there any mandatory law requirements which need to be reflected in a construction contract (e.g. provision for adjudication or any need for the contract to be evidenced in writing)?
Although U.S. states are generally common law jurisdictions, some of them (e.g., California and Louisiana) have adopted civil codes that include many principles applicable to construction law. Purchase of equipment and other goods is typically governed by the Uniform Commercial Code (UCC), which provides rules for sales, security interests, warranties and remedies when those terms are not specified by contract. Where a state lacks applicable case law on a particular subject, its courts often look to federal case law or to decisions in neighbouring states. Under U.S. common law, a binding contract typically requires an offer, acceptance, and economic consideration. Consideration can be very minimal (including the mere exchange of reciprocal obligations). Most requests for proposals are written as invitations for tenders, so that they do not constitute offers in them-selves. Employers typically treat the tenders as offers and try to reserve broad discretion in deciding which one (if any) to accept. The individual states have various requirements as to which kinds of contract must be in writing to be valid (so-called “statutes of frauds”). Some terms can be implied from industry practice or from previous dealings between the parties. On some facts, acceptance may be inferred where an employer allows work to proceed without a signed agreement. However, if the evidence indicates no “meeting of the minds” with regard to essential contract terms, a binding contract is unlikely to exist. Even without a written agreement, a contractor may have an equitable right to payment if it performs work in good-faith reliance on what it reasonably understood as an employer’s offer to contract (e.g., implied contract, quasi-contract, quantum meruit, and equitable estoppel).
1.6 In your jurisdiction please identify whether there is a concept of what is known as a “letter of intent”, in which an employer can give either a legally binding or non-legally binding indication of willingness either to enter into a contract later or to commit itself to meet certain costs to be incurred by the contractor whether or not a full contract is ever concluded.
Enforceability of agreements is likely to depend more on their substance than on their form. A letter of intent may be unenforceable if it is nothing more than an agreement to agree. It is not uncommon, however, for parties to enter what they intend as a binding “memorandum of understanding” or “memorandum of agreement”, while leaving details for later negotiation. It is also common for employers to issue a limited notice to proceed or execute a limited-scope agreement that allows certain preliminary and/or long-lead activities to begin while the parties continue negotiating to price the balance of the planned project.
1.7 Are there any statutory or standard types of insurance which it would be commonplace or compulsory to have in place when carrying out construction work? For example, is there employer’s liability insurance for contractors in respect of death and personal injury, or is there a requirement for the contractor to have contractors’ all-risk insurance?
Applicable statutes generally require contractors to hold a licence in the state where work is done, and such licences usually mandate some level of insurance. There are many insurance products and insurance approaches available. Employers typically require contractors to provide coverage for general liability and excess liability, which covers at least personal injury, death and property damage. Applicable laws also typically require insurance for losses caused by automobiles and for workers’ compensation. Contracts including design responsibility are likely to require professional liability insurance. It is also common to require insurance against environmental pollution and coverage for completed operations. Employers often procure builder’s risk or all-risk insurance covering damage to the project as it is constructed. On some jobs, prime contractors may purchase insurance against defaults by lower-tier contractors. To avoid the cost associated with multiple tiers of contractors procuring overlapping policies, it is common for projects to have a single consolidated Contractor Controlled Insurance Program (CCIP) or Owner Controlled Insurance Program (OCIP).
1.8 Are there any statutory requirements in relation to construction contracts in terms of: (a) labour (i.e. the legal status of those working on site as employees or as self-employed sub-contractors); (b) tax (payment of income tax of employees); and/or (c) health and safety?
(a) In the U.S., labour relations between workers and employers are primarily governed by federal statutes and regulations, creating substantial uniformity between the states. The Immigration Reform and Control Act of 1986 prohibits the knowing hire of workers who lack legal status to work in the U.S. Other laws prohibit discrimination, such as Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. Minimum wage rates are established by the Wage Rates Requirements (formerly under the Davis-Bacon Act) and other laws, as are rules for paying premiums for overtime labour. Separate union agreements often govern the bene-fits that must be paid to construction workers or to their labour unions.
(b) In the U.S., most taxes are assessed either by the federal government or by the individual states. Contractors must usually withhold sums from worker compensation to assure payment of applicable taxes and employee benefits. State tax rates vary considerably. There is no federal sales tax or VAT, but most states charge sales and excise taxes that apply to many construction projects. The federal government charges income tax on individuals, as do most state governments. The federal government also charges a corporate income tax, although it was substantially reduced in 2018. The federal government also charges taxes to support Social Security (retirement), Medicare (medical care for seniors), and unemployment insurance.
(c) Health and safety are heavily regulated, both at a federal and state level. The federal Occupational Safety and Health Act (OSHA) and its implementing regulations are probably the best-known. Individual states have their own occupational safety laws, and the federal Jones Act has specific remedies for injuries occurring during work on a ship or barge.
1.9 Are there any codes, regulations and/or other statutory requirements in relation to building and fire safety which apply to construction contracts?
Each of the 50 states and the District of Columbia have adopted the International Building Code. The International Fire Code and the International Energy Conservation Code have also been widely adopted. However, each jurisdiction has the authority to make alterations to the codes as it deems appropriate. There are several websites that include a compendium of the codes for each state, including the one found at https://www.buildings-guide.com/blog/resources-building-codes-state. Federal public works projects must comply with these local codes in addition to any special requirements that the federal government may have for the project.
1.10 Is the employer legally permitted to retain part of the purchase price for the works as a retention to be released either in whole or in part when: (a) the works are substantially complete; and/or (b) any agreed defects liability period is complete?
U.S. employers are generally entitled to withhold a portion of a contractor’s price as security for final completion of a construction project. Such withholding must be authorised by contract, and it is typically in the range of 5% to 10% of the contract price. Many contracts provide that the percentage of retention declines after the work is at least 50% complete, and it is often possible for the contractor to obtain release of the retention balance by posting a special bond as substitute security for the employer. It is not common to allow retention after final completion, e.g., as security for performance of post-completion warranty claims that have not yet arisen. For specialty contractors performing early stages of work (e.g., foundations, shoring, or ground improvement), it is common to provide for release of their retention when their work is done, rather than holding back money until a much later date when the rest of the project is completed.
1.11 Is it permissible/common for there to be performance bonds (provided by banks and others) to guarantee the contractor’s performance? Are there any restrictions on the nature of such bonds? Are there any grounds on which a call on such bonds may be restrained (e.g. by interim injunction); and, if so, how often is such relief generally granted in your jurisdiction? Would such bonds typically provide for payment on demand (without pre-condition) or only upon default of the contractor?
Performance bonds are commonly used in the United States, and most contractors have established relationships with surety companies that provide bonding when necessary. Banks are not typically involved in providing performance bonds, and letters of credit are much less common as project security than in many other countries. U.S. employers also typically require payment bonds (like the “Miller Act” bonds on federal contracts and the similar “little Miller Act” bonds on state contracts). Forms of bond are generally not prescribed by law, although some forms (like the ones published by the AIA) are widely used.
1.12 Is it permissible/common for there to be company guarantees provided to guarantee the performance of subsidiary companies? Are there any restrictions on the nature of such guarantees?
When the successful tenderer is a new joint venture entity or a specially formed project company, it is not unusual for the employer to require guarantees from parent companies, and U.S. law will not substantially restrict the validity of such guarantees. On most projects, however, the employer relies on bonds and retention as the principal guarantees of contractor performance. Parent guarantees are particularly likely on contracts (e.g., P3) with long-term project operating responsibilities.
1.13 Is it possible and/or usual for contractors to have retention of title rights in relation to goods and supplies used in the works? Is it permissible for contractors to claim that, until they have been paid, they retain title and the right to remove goods and materials supplied from the site?
If a commercial contract is silent as to ownership of delivered materials and equipment, the contractor’s ownership rights in those “goods” are likely to be governed by the Uniform Commercial Code, which includes a mechanism for establishing security interests in delivered products until the employer pays for them. On most commercial projects, however, contracts provide that title passes upon installation (or even earlier, when goods are delivered and paid for). Contracts often provide that employers may take over the materials purchased by a defaulting contractor as needed to complete the job. The contractor’s right to payment is generally protected by statutory lien rights in the improved property, or by some form of payment bond.
2. Supervising Construction Contracts
2.1 Is it common for construction contracts to be supervised on behalf of the employer by a third party (e.g. an engineer)? Does any such third party have a duty to act impartially between the contractor and the employer? If so, what is the nature of such duty (e.g. is it absolute or qualified)? What (if any) recourse does a party to a construction contract have in the event that the third party breaches such duty?
Relatively few employers have sufficient in-house experience to manage a complex construction project with their own personnel. Therefore, they often hire a construction manager for that purpose. Sometimes, a more experienced agency like the U.S. Army Corps of Engineers will manage work for other agencies that have less experience. Construction managers typically do not owe a duty to act impartially between employer and contractor. Where an employer retains its architect to perform this role, however, the architect may be bound to act impartially by contract or by Rule 2.4 of the National Council of Architectural Boards (or similar provisions in state codes of professional responsibility for architects).
2.2 Are employers free to provide in the contract that they will pay the contractor when they, the employer, have themselves been paid; i.e. can the employer include in the contract what is known as a “pay when paid” clause?
Subcontracts often provide that the employer’s prime contract payments are a “condition precedent” for lower-tier contractors getting paid (“pay if paid”), and it is also common to see clauses indicating that lower-tier contractors should wait to get paid after the prime contractor is paid (“pay when paid”). The enforceability of “pay if paid” clauses was challenged success-fully in California on the theory that it conflicted with statutory lien rights. Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882, 938 P.2d 372, 64 Cal.Rptr.2d 578 (1997). Many state courts have not yet specifically addressed this issue, but they are likely to hold that a subcontractor may at least be required to wait for a reasonable time while the prime contractor pursues payment from the employer on the subcontractor’s behalf. In federal contracts, FAR 52.232.27 generally requires prime contractors to pass progress payments through to subcontractors within seven days after receiving money from the government. State governments generally have similar “prompt payment” statutes for their own projects.
2.3 Are the parties free to agree in advance a fixed sum (known as liquidated damages) which will be paid by the contractor to the employer in the event of particular breaches, e.g. liquidated damages for late completion? If such arrangements are permitted, are there any restrictions on what can be agreed? E.g. does the sum to be paid have to be a genuine pre-estimate of loss, or can the contractor be bound to pay a sum which is wholly unrelated to the amount of financial loss likely to be suffered by the employer? Will the courts in your jurisdiction ever look to revise an agreed rate of liquidated damages; and, if so, in what circumstances?
Liquidated damages are widely used on U.S. projects to deter-mine the price that a contractor will pay for unexcused delays in completing its work, especially where it will be difficult to fore-cast the employer’s resulting financial damages. When fore-seeable delay costs are unusually high (e.g., from high-revenue- producing facilities like power plants and casinos), liquidated delay damages are also used to cap monetary liability for delay because it would be difficult to attract fixed-price tenders without such limitations. Employers will generally be unable to enforce liquidated damages that are held to be a penalty, i.e. that do not represent a reasonable forecast of fair compensation for anticipated delay-related costs. The reasonableness of liquidated damages is typically determined as of the time of contracting, rather than later when a breach occurs. Liquidated damages are usually not recoverable by an employer who has caused concur-rent delays during the time period at issue. Liquidated damages are also used to determine contractor liability for other types of breaches. On power plants, for example, liquidated damages are typically used to limit liability based on failure to achieve key performance guarantees such as heat rate and overall power output. When a prime contract fixes the amount(s) of monetary damages for delay or for some other breach, those damage rates typically preclude a separate claim for “actual” damages arising from the same breach.
3. Common Issues on Construction Contracts
3.1 Is the employer entitled to vary the works to be performed under the contract? Is there any limit on that right?
Almost every construction contract contains language giving the employer a right to increase or decrease the contractor’s scope of work by issuing a written variation, normally called a “change order” in the U.S. Where the parties cannot agree on such a variation, employers often reserve a right to issue a unilateral directive to perform the variation. There are, however, normally some limits on this power. If it fundamentally changes the nature or scope of work, it may be treated as a “cardinal change”, i.e. essentially a breach of contract by the employer. A major deletion may also be treated as a partial termination for convenience rather than a deductive change, which may affect the mechanism used to price the adjustment. Variations normally have to be exercised in good faith, and an employer may be constrained from inviting tenders on a broad scope of work and later using deductive changes to remove only the easiest or most profitable portions of the scope.
3.2 Can work be omitted from the contract? If it is omitted, can the employer carry out the omitted work himself or procure a third party to perform it?
Where an item of work is unintentionally omitted from a contract (e.g., a “scope gap”), employers may typically add it by issuing a variation (see question 3.1 above). Alternatively, the employer may generally perform the omitted work with its own forces or with another prime contractor. On power plants and other major infra-structure, it is common for employers to supply some of the major long-lead equipment themselves, in part to expedite the schedule and also to avoid paying mark-ups to the installing contractor. In some cases, union agreements may restrict the ability of the employer to use its own labour on site.
3.3 Are there terms which will/can be implied into a construction contract (e.g. a fitness for purpose obligation, or duty to act in good faith)?
In the U.S., every contract party owes an implied duty of good faith and fair dealing. As a corollary to this duty, parties are typically held to owe an implied duty that they will not hinder or delay each other.
An employer who provides plans and specifications for use in construction impliedly warrants that they are suitable for use, and employers are typically held responsible for errors and omissions in their contract documents unless the contractor assumes responsibility for reviewing and completing the design as a design-builder (and even in that case the contractor may be able to place some degree of reliance on the employer’s partial design and/or site information). Many courts have held that an employer owes an implied duty to disclose any non-public “superior knowledge” about the site or the project that a court finds should have been disclosed to the contractor. When furnishing materials or equipment for a construction project, the seller typically owes implied duties that the goods will be of “merchantable” quality and that they will be reasonably fit for their intended purposes. See U.C.C. §2-314, 315. Such implied warranties may, however, effectively be disclaimed by contract. State statutes may provide that home builders owe an implied duty that the resulting residences meet certain standards for “habitability”. In construction service agreements, contractors are generally held to an implied duty that they will perform in a “good and workmanlike” manner. And in design contracts, architects and engineers may be held to an implied obligation to perform to the “prevailing standard” established for similar services in the area where the work is done. In multi-prime contracts, employers may owe an implied duty to coordinate their various prime contracts, and prime contractors will probably be held to an implied duty to coordinate their various subcontractors and suppliers.
3.4 If the contractor is delayed by two concurrent events, one the fault of the contractor and one the fault or risk of the employer, is the contractor entitled to: (a) an extension of time; and/or (b) the costs arising from that concurrent delay?
If the delays are truly concurrent and cannot be segregated, the most common approach is that neither party may recover monetary delay damages from the other party during the period when both of them were independently causing delay. In some cases, however, courts and arbitrators will make an effort to apportion delay costs between the two parties. If a party can show that it slowed parts of its work after realizing that the job was already being delayed by the other party, it may overcome the concurrent delay defense.
3.5 Is there a statutory time limit beyond which the parties to a construction contract may no longer bring claims against each other? How long is that period and when does time start to run?
State laws typically include a “statute of repose”, setting the number of years in which a construction-related claim must accrue (i.e. the time in which they must generally be discovered). After a claim has accrued, states have separate statutes of limitations that define the number of years in which the discovered claim must be filed (in court or arbitration).
3.6 What is the general approach of the courts in your jurisdiction to contractual time limits to bringing claims under a construction contract and requirements as to the form and substance of notices? Are such provisions generally upheld?
Some construction contracts and agreements with insurers or sureties will specify shorter time limits for making claims than the periods allowed under state statutes. Many construction contracts specify that contractor claims need to be asserted before accepting final payment from the employer. Courts are likely to uphold these shortened filing times as long as the contractor has a reasonable time to bring the claim. Most jurisdictions apply a reasonable notice standard to the form and substance of notices without requiring strict compliance with the notice requirements of the contract. A few states (including Washington), however, require strict compliance in both form and timing of contract notices.
3.7 Which party usually bears the risk of unforeseen ground conditions under construction contracts in your jurisdiction?
Most U.S. commercial construction contracts assign the risk of unforeseen subsurface conditions to the employer, assuming that the employer normally has more time and opportunity to study the ground that will be excavated. This is typically handled by a Differing Site Conditions clause. See, e.g., FAR 52.236-2. Such clauses typically allow compensation if a contractor encounters latent site conditions that differ materially from those indicated in the contract documents (“type 1”) or latent conditions of an unusual nature that would not normally be expected at the site (“type 2”). Contractors must usually give prompt notice of such conditions and should take reasonable steps to mitigate their impacts. Contractor rights to claim Differing Site Conditions may be limited if the contractor is paid to conduct its own independent pre-bid investigation of subsurface conditions or if a particular contractor had knowledge of the condition based on prior work at the site.
3.8 Which party usually bears the risk of a change in law affecting the completion of the works under construction contracts in your jurisdiction?
The risk of unforeseen post-tender changes in laws, regulations or building codes is often allocated by contract. The AIA General Conditions typically assign responsibility to the employer, except for legal changes that were already known or foreseeable when tenders were submitted. This issue has become a source of much dispute since state laws and decrees imposed major temporary restrictions on construction during the COVID-19 pandemic that began in 2020.
3.9 Which party usually owns the intellectual property in relation to the design and operation of the property?
Many contracts treat project-specific design as “work for hire” that belongs to the employer. Absent a contract clause to the contrary, an architect probably has copyright protection for its plans, drawings and other design work product as stated in the Architectural Works Copyright Protection Act of 1990. In negotiated contracts, designers often retain ownership but grant a royalty-free perpetual licence to the employer and its successors for use on the project site.
3.10 Is the contractor ever entitled to suspend works?
Under U.S. common law, contractors generally have a right to suspend based on an uncured material breach by the employer (e.g., failure to make progress payments). Such rights are, however, often restricted by contract and should be exercised only after giving written notice and opportunity to cure. On federal projects, a contractor must generally continue working unless the government contracting officer has ordered a cardinal change (i.e. a substantially different or larger scope than originally awarded). Contracts often require work to proceed despite a pending dispute, e.g., regarding compensation for an employer variation.
Other circumstances that may justify a contractor’s temporary suspension of work may include an employer’s failure to provide permits or site access, discovery of unforeseen hazardous materials in the ground that impede progress, the employer’s failure to make key required decisions (e.g., approving submittals), encountering unexpected archaeological remains, or other unanticipated force majeure events outside the contractor’s reasonable control.
3.11 Are there any grounds which automatically or usually entitle a party to terminate the contract? Are there any legal requirements as to how the terminating party’s grounds for termination must be set out (e.g. in a termination notice)?
Employer-drafted contracts sometimes provide that contracts are automatically terminated if the contractor files for bankruptcy protection, although such rights are likely to be limited by federal law. Contracts typically authorise termination for default, however, only if a party fails to cure a breach within a specified time after receiving written notice from the other party. Underlying defaults most often include failure to: make required payments; prosecute work; correct defects; provide required bonds or insurance; and provide essential permits or site access.
3.12 Do construction contracts in your jurisdiction commonly provide that the employer can terminate at any time and for any reason? If so, would an employer exercising that right need to pay the contractor’s profit on the part of the works that remains unperformed as at termination?
U.S. construction contracts often allow employers and prime contractors to terminate lower-tier agreements “for convenience” at any time. Such rights must generally be reserved by contract because they do not arise from common law. Applicable clauses usually provide that a terminated contractor may not recover profit that would have been earned on the unperformed balance of the work.
3.13 Is the concept of force majeure or frustration known in your jurisdiction? What remedy does this give the affected party? Is it usual/possible to argue successfully that a contract which has become uneconomic is grounds for a claim for force majeure?
The concept of force majeure is well known in U.S. construction contracting. Although some contracts allow compensation to a contractor whose progress is interrupted by such unexpected events, most contracts merely allow only an uncompensated extension of time. Force majeure events are typically defined to include only unforeseen events outside the control of both contract parties, and labour strikes may be excluded from this category if they arise from specific acts or omissions of the affected contractor (i.e. to be distinguished from national or regional strikes). The fact that a project becomes more difficult or costly due to rising costs of labour or materials is generally not regarded as a force majeure condition, although courts may regard sudden and extreme price escalations in this category. Many U.S. employers have argued that the COVID-19 pandemic is a force majeure event for which no resulting costs are recoverable, but contractors counter that claims for changes in work and lost efficiency are compensable even if pure delay costs are not. This area of U.S. construction law is likely to undergo substantial development as a result of economic burdens imposed by the pandemic. In some limited cases, performance may also be excused (i.e. effectively allowing its termination) on force majeure principles if the contractor can show that the specified work was frustrated by impossibility or commercial impracticability.
3.14 Is there any legislation or court ruling that has been specifically enacted or handed down to provide relief to parties to a construction contract for delay, disruption and/or financial loss caused by the COVID-19 pandemic? If so, what remedies are available under such legislation/court ruling and are they subject to any conditions? Are there any other remedies (statutory or otherwise) that may be available to parties whose construction contracts have been affected by the COVID-19 pandemic?
At the time of this writing, U.S. courts have not yet clarified the relief that will be available to employers, designers, contractors or suppliers impacted by the COVID-19 pandemic. The federal government provided substantial support through the Paycheck Protection Program that effectively paid a wide range of companies to retain their employees during the COVID-19 crisis. Most public construction projects were also designated as “essential” and thereby allowed to continue work during the pandemic, although subject to substantial health-related restrictions. The Paycheck Protection Program ended on May 31, 2021, and no similar program seems likely in the near future. To the extent that contractors experienced delays or inefficiencies due to changes to operating procedures (e.g., social distancing, added cleaning requirements, etc.), they have asserted rights to compensation based on clauses relating to compensated variations, partial suspension of work, or compensable changes in law. Further, although force majeure clauses generally offer only time extensions as a remedy, an employer’s failure to grant such time may support a claim for compensable acceleration cost.
3.15 Are parties, who are not parties to the contract, entitled to claim the benefit of any contractual right which is made for their benefit? E.g. is the second or subsequent owner of a building able to claim against the contractor pursuant to the original construction contracts in relation to defects in the building?
Under U.S. common law, third parties may possess rights under agreements between two other parties if such rights were clearly intended. For example, a prime contractor may effectively require a subcontractor to indemnify the employer for third-party claims based on errors in the subcontractor’s work. Warranties on special materials and on installed equipment are often set up to flow directly from the manufacturer or supplier to the end customer. Lenders and employers may require subcontracts to be assignable to them if the prime contractor defaults on its obligations. Residential developers generally require builders to make direct warranties to purchasers of new homes. Alternatively, residential purchasers may have rights against contractors based on tort law or state statute.
3.16 On construction and engineering projects in your jurisdiction, how common is the use of direct agreements or collateral warranties (i.e. agreements between the contractor and parties other than the employer with an interest in the project, e.g. funders, other stakeholders, and forward purchasers)?
Collateral warranty is not a familiar term in U.S. construction law, although many warranties from sub-tier parties run directly to employers, and contracts often provide that warranties may be assigned by the employer. Also, contractor indemnity clauses often protect both the employer and its engineer(s).
3.17 Can one party (P1) to a construction contract, who owes money to the other (P2), set off against the sums due to P2 the sums P2 owes to P1? Are there any limits on the rights of set-off?
It is generally understood that a party’s payment obligations on a particular contract may be set off against monetary obligations owed by the payee under the same contract (e.g., progress payments being withheld to pay costs of curing defective work). U.S. common law may also allow an employer to withhold payments based on sums owed by the payee on a separate project. Common law rights of set-off may be limited by contract if not by law. For example, contracts commonly provide that the employer’s progress payments should be treated as a “trust fund” in favour of persons providing labour or materials on the job, which is inconsistent with the idea of diverting the funds to pay one of the contractor’s obligations on another job. A prime contractor’s power to withhold money from a subcontractor based on debts on another job may also be limited by an applicable “prompt payment” statute.
3.18 Do parties to construction contracts owe a duty of care to each other either in contract or under any other legal doctrine? If the duty of care is extra-contractual, can such duty exist concurrently with any contractual obligations and liabilities?
Obligations generally arise either by contract, or in tort, or by statute. With regard to implied obligations, see answer to question 3.3 above.
3.19 Where the terms of a construction contract are ambiguous, are there rules which will settle how that ambiguity is interpreted?
Following the principle of contra proferentem, U.S. courts often tend to construe ambiguous contract terms against the party who wrote them. Normally, an ambiguity only exists if it is reasonably susceptible to at least two alternative meanings. Once a clause is found to be ambiguous, courts in most states may consider evidence outside the written contract (“parol evidence”) to assist in interpretation. For example, courts often look at the parties’ course of performance before a dispute arose, common understanding of certain terms in the construction industry, a desire to give meaning to every term, and a desire to avoid interpretations that result in an inequitable forfeiture by one party. Some states may also allow the use of parol evidence to help clarify (but not flatly contradict) a written contract even if it does not immediately seem ambiguous on the face of it. Many contracts seek to minimise ambiguities by establishing an “order of precedence” that can be applied if various contract documents are found to be inconsistent. Some contracts also require the contractor to review the various documents and provide prompt written notice if and when conflicts or ambiguities are discovered.
3.20 Are there any terms which, if included in a construction contract, would be unenforceable?
As discussed elsewhere in these answers, a number of commercial terms are unenforceable or void in U.S. construction contracts. The unenforceability may result from a statute or from common law case decisions. The invalid clauses will vary from one state to another.
Terms that tend not to be enforced include: a) requirements to indemnify another party against its own fault; b) clauses requiring waiver of fundamental rights guaranteed by constitutions or statutes; c) pre-construction waivers of statutory lien rights; d) liquidated delay damages set higher than the contractee’s reasonably anticipated damages; e) damages precluding one party from recovering any damages for delays or breaches by the other party; f) “pay if paid” clauses making a subcontractor’s payments absolutely conditional on corresponding payments from the employer to the prime contractor; and g) clauses that violate any other law or public policy.
3.21 Where the construction contract involves an element of design and/or the contract is one for design only, are the designer’s obligations absolute or are there limits on the extent of his liability? In particular, does the designer have to give an absolute guarantee in respect of his work?
Although some design contracts attempt to impose a standard of defect-free design, most designers will insist on applying the common law standard under which claims of professional negligence require proof that the defendant violated the prevailing standard of professional care for comparable services. That prevailing standard clearly allows for some level of error or imperfection, and cases alleging professional negligence typically require evidence from a licensed professional who can explain how prevailing standards apply to the facts. Design contracts often specify that the designer will correct errors in design at its own cost, but most designers will not agree to an unqualified guarantee that their work is free of defects. Design contracts also typically include an aggregate cap on monetary liability for breach of contract by the design professional.
3.22 Does the concept of decennial liability apply in your jurisdiction? If so, what is the nature of such liability and what is the scope of its application?
U.S. law generally has no direct counterpart to “decennial liability” of the sort required in France and some other civil law countries. Approximately half of the states, however, have long statutes of repose that can create a risk of liability for latent defects discovered many years after substantial completion of a construction project. See, e.g., California Civil Code §895.
4. Dispute Resolution
4.1 How are construction disputes generally resolved?
Under a federal government contract, disputes are ultimately subject to resolution in a federal court or agency board, without a jury. Under state, local or private contracts, disputes are ultimately subject to resolution in a court (often with a right to jury) unless the parties have agreed otherwise. Although some federal agency boards have significant experience in construction disputes, most courts have little such experience, and parties often agree by contract that disputes will be referred to mediation and ultimately to binding arbitration by a person with construction industry expertise.
Many contracts initially refer disputes to high-level executives of the parties before they may be submitted to a court or arbitration panel. Many large complex projects also establish a Dispute Review Board that helps to resolve issues while the job is being performed. Non-binding mediation is also very commonly used to resolve complex construction disputes.
A number of companies provide mediation and arbitration services. Two of the largest providers are the American Arbitration Association (AAA) and JAMS, each of which publishes detailed rules for mediation and arbitration.
4.2 Do you have adjudication processes in your jurisdiction (whether statutory or otherwise) or any other forms of interim dispute resolution (e.g. a dispute review board)? If so, please describe the general procedures.
The U.S. has not yet adopted “adjudication” of the kind that is now widely used in the United Kingdom. On large complex projects, however, many contracts require submission of disputes to a Dispute Review Board (DRB), typically a panel of three individuals who have substantial construction industry experience. Although DRB recommendations are usually subject to appeal, they resolve many issues and are often given consider-able deference.
4.3 Do the construction contracts in your jurisdiction commonly have arbitration clauses? If so, please explain how, in general terms, arbitration works in your jurisdiction.
Many of the most widely used construction contract forms provide for mediation and ultimately for binding arbitration as a means of resolving construction disputes, especially on private projects. Arbitration is generally not, however, an available remedy under federal government construction contracts. Where an unpaid contractor or supplier seeks to enforce security rights against real property (e.g., under a statutory lien), that lien foreclosure action must generally be prosecuted in a court. Arbitration is typically commenced when a claimant files a demand for arbitration with the administrative entity in charge of handling the arbitration. The respondent may answer in detail (and may serve a counterclaim), and its failure to do so will generally be treated as a denial of the claims asserted. Responding parties may also assert cross-claims against third parties who have consented to arbitration. The arbitral administrator may assess filing fees based on published rates, and parties will generally be required to deposit sufficient additional funds to cover the expected charges of the arbitrator(s). Unlike international arbitration, domestic arbitrations in the U.S. generally allow at least a limited number of depositions, although pre-hearing discovery tends to be more limited in arbitrations than in courts. Courts give considerable deference to arbitration. Arbitral awards are generally final and enforced in the U.S., although statutes allow very limited appeals in extraordinary cases (e.g., arbitrators who fail to disclose conflicts, going beyond the parties’ contractual submission to arbitration, obvious partiality, or funda-mental denial of due process).
4.4 Where the contract provides for international arbitration, do your jurisdiction’s courts recognize and enforce international arbitration awards? Please advise of any obstacles (legal or practical) to enforcement.
The United States is a signatory nation to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), and the U.S. complies with this agreement by enforcing arbitral agreements and awards issued in signatory countries. Consistent with Article V of the New York Convention, defenses to enforcement of a foreign award include lack of due process, a conclusion that enforcement would be contrary to public policy, and other listed defenses. Chapter 2 of the Federal Arbitration Act provides terms under which courts of the United States shall enforce foreign arbitration awards in accordance with the New York Convention.
4.5 Where a contract provides for court proceedings in your jurisdiction, please outline the process adopted, any rights of appeal and a general assessment of how long proceedings are likely to take to arrive at: (a) a decision by the court of first jurisdiction; and (b) a decision by the final court of appeal.
Federal courts typically allow jurisdiction only to limited categories of cases (e.g., claims for damages over $75,000 between parties located in different states). State trial courts exercise broader jurisdiction, extending to all parties doing business within their borders. Parties in courts are often entitled to demand use of a jury.
Court actions typically begin by filing a written “complaint” identifying parties, key facts, and basic legal claims. Defendants are generally required to file a written “answer” to the complaint, and the answer may also assert one or more counterclaims. A responding party may also assert cross-claims against third parties who are subject to the court’s jurisdiction. After the parties’ initial exchange of written positions, they are typically required to exchange relevant documents and produce witnesses for pre-hearing oral examination (depositions). Parties are also generally allowed to require opposing parties to answer a limited number of written questions (interrogatories). Discovery in a U.S. court is usually much more extensive than would be allowed in an international arbitration or litigation.
The delay between filing of a case and commencement of the hearing will vary significantly from one jurisdiction to another. Some courts have much heavier schedules than others, and a long backlog can delay the scheduling of a hearing. Larger cases with more witnesses and complex issues are likely to experience significantly longer delays in getting a trial date. The COVID-19 pandemic also magnified the delays inherent in the U.S. court system. Except during the pandemic, most court cases are set for a trial hearing between one and two years after a complaint is filed. Depending on the jurisdiction, it can then take several months or years to receive a decision, after which the losing party generally has a right of appeal. U.S. court rules allow for purely legal issues to be resolved prior to trial, under what is called a summary judgment motion.
4.6 Where the contract provides for court proceedings in a foreign country, will the judgment of that foreign court be upheld and enforced in your jurisdiction? If the answer depends on the foreign country in question, are there any foreign countries in respect of which enforcement is more straightforward (whether as a result of international treaties or otherwise)?
The United States has not signed any general agreement to enforce foreign court judgments that would be equivalent to enforcement of foreign arbitral awards under the New York Convention. The Federal Arbitration Act also contains no general requirement that U.S. courts must recognize a foreign court judgment. Several states have nonetheless adopted the 2005 Uniform Foreign Money-Judgments Recognition Act, which sets forth criteria under which signatory states agree to enforce judgments from foreign courts. As under the New York Convention, principal concerns are assuring that the foreign proceeding allowed due process and that its ultimate judgment does not violate U.S. public policy. However, U.S. courts are likely to give reasonable deference to judgments rendered by courts in other countries that have signed the New York Convention, and the U.S. has bilateral agreements with various countries that facilitate enforcement of foreign judgments and awards. Some individual states have their own bilateral agreements with other jurisdictions that facilitate enforcement of court judgments. See the 1962 Uniform Foreign Money-Judgments Recognition Act and the 2005 Uniform Foreign-Country Money Recognition Act, which have been adopted in 23 states and the District of Columbia.