Contractors: Choose Your Words Carefully

It should go without saying that construction contractors succeed or fail based on the terms of their contracts. After all, they are not called “contractors” for nothing. Thus, one would think that contractors are always keenly aware of what particular terms they want or don’t want in their contracts. In reality, however, contractors regularly face the unintended consequences of their own contracts.

Often we hear contractors utter the familiar words, “we’ve been using this form for years and never had any problems.” But then the day comes when adding or subtracting a sentence or two from the standard form contract could have saved the contactor many thousands of dollars in either damages, attorneys’ fees, or both. It’s the old “penny wisdom, pound foolishness” scenario. Contractors are naturally eager to avoid incurring legal fees during contract negotiations. After all, most deals work out without litigation, so why waste money and time on lawyers? However, thrift during the negotiation process sometimes results in paying vastly more in fees and damages when a deal goes sour. 

Every project is different, so there is no singular “right” or “wrong” way to draft a construction contract. However, here are a few quick tips that can generally save contractors big money in the event of a dispute.

Consider an arbitration clause. Mediation, arbitration and other alternative dispute resolution methods are generally less costly and less time-consuming alternatives to court litigation. Moreover, while court verdicts are subject to appeal, arbitral awards are generally final, absent extraordinary circumstances. Guam courts will strictly enforce arbitration clauses pursuant to the Federal Arbitration Act and the local arbitration statutes.

Consider an attorneys’ fees clause. A “loser pays” provision (allowing the prevailing party to recover its fees as part of any damages award) tends to deter parties from bringing frivolous lawsuits while at the same time helps prevent the prevailing party from winning a hollow victory (paying their attorneys as much as the amount in dispute).

Insert a “no privity” clause. Normally each contractor or subcontractor contracts with only one other party. Yet, the typical construction project relies on layers of prime and sub-contracts covering different aspects of the project. When a mishap occurs, the finger pointing begins; and the contractors and subcontractors wind up bringing claims, counterclaims and crossclaims against each other, claiming that each had a duty to the others to avoid the mishap. One way to avoid contractual liability is to insert a clause in your standard contract providing that the parties signing the agreement expressly agree that the contract only inures to the benefit of the contracting parties and does not create third-party beneficiary rights in others working on the project.

Think twice before agreeing to “indemnify” someone else. Many standard contracts contain provisions by which one party agrees to indemnify or “hold harmless” the other in the event that he is sued by a third party for negligence. Such clauses can be the tail that wags the dog in the event that litigation breaks out because the obligation to indemnify generally includes the obligation to defend (pay the attorneys’ fees incurred by the other contracting party). If not carefully worded, indemnification clauses can expose a party to indirect negligence liability even where the risk of direct liability is slight.

Find a good form. There is no need to reinvent the wheel. Industry associations and attorneys can often suggest time-tested contract form language for entire contracts or particular clauses. Many a deal has run off the rails based on ambiguous contract language hastily inserted.

​These and other simple tips can help reduce risks and save legal fees when disputes arise. If in doubt, have an experienced lawyer check it out.

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