Legal Talk: Modernizing your Construction Agreements

Agreements needs Modernizing TooBy: Andrew Prior, Shareholder, Pihl Law Corporation

Changes in technology, construction practices, and building codes are the primary focus of modernization within the construction industry.

However, companies should also take the time to periodically review their construction agreements to ensure the agreements: (a) are up to date on changes in the law; (b) reflect how the company expects a job to proceed; and (c) take into account lessons learned from past jobs or disputes.

Larger industry contracts typically have procedures in place to review and periodically incorporate changes in the law in a timely fashion. However, companies that draft their own contracts or modify templates often neglect this step.

The last ten years have seen important developments in areas that impact construction contracts. The obligation of good faith has been strengthened and may limit some clauses or conduct that used to be seen as standard within the industry. Due to a number of cases interpreting representations and warranties, the importance of precise contractual language has greatly increased.

As there have been many other changes in the past ten years, the failure to undertake a periodic review and revision process may mean a company is incurring significant unknown risk — risk that could have been avoided.

There is often a significant disconnect between how a company thinks an agreement is drafted and how a court is likely to interpret a given agreement. I have seen contracts that are entitled “Construction Management Agreement” yet have terms that are far more consistent with a head contract relationship.  Companies often attempt to contract out of the Builders Lien Act, but this is not allowed at law. More importantly, I often see deposit and billing clauses that are not followed in practice and would be burdensome for a company given their banking relationship or when and how they pay sub-trades or material suppliers. Yet failure to follow these clauses could be seen as a significant enough breach as to entitle an owner (or subcontractor) to terminate a contract. Some companies are giving away, in essence, free arguments if a dispute arises. Periodically reviewing your agreements to ensure you understand the procedures that apply can help with this risk.

Finally, when jobs go well it is understandable that a company pays little attention to the written agreement. Written contracts are often ignored on a well-run job site. However, well-written contracts provide the majority of their value on difficult job sites by managing and limiting the dispute and possible fallout from the dispute. However, regardless how well-written an agreement, situations can arise that were not anticipated by the company or by the contract and a company may learn some hard lessons from that dispute. A final reason for periodically updating your construction agreements is to take into account those lessons. Modifying an agreement from time to time allows a company to prevent those problems by relying on real world experience.

Every company — not just within the construction industry — will also have general business agreements that should be periodically reviewed and updated. For example, written employment contracts can minimize severance obligations. If an owner is thinking of selling the business or introducing new partners, the absence of written employment agreements may negatively impact the value of the business.

As business owners undertake steps to modernize construction practices and technology, consideration should also be given to seeking legal and accounting advice with respect to existing agreements and to take into account current and future strategic plans.

Andrew Prior, Shareholder, Pihl Law Corporation 

This article first appeared in the Spring 2017 issue of SICA's Construction Review Magazine. To read the entire magazine click here.

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