A Word of CautionA Word of Caution

These materials are presented with the understanding that the

information provided is not legal advice.  Due to the rapidly

changing nature of the law, information contained in this

presentation may become outdated.  Anyone using information

contained in this presentation should always research original

sources of authority and update this information to ensure

accuracy when dealing with a specific matter.  No person

should act or rely upon the information contained in this

presentation without seeking the advice of an attorney.

Contract Documents…Contract Documents…What You Don’t KnowCAN Hurt You!

Presented By:

Carl L. Fletcher, Jr., Esquire

Review of Fundamental Review of Fundamental Contract PrinciplesContract Principles

Two Principal Functions Two Principal Functions of Contractsof Contracts

• Sets the terms of the parties’ agreement:– Scope– Quantity– Time– Price– Quality

• Assigns risk between the parties

If The Terms of A Contract Are If The Terms of A Contract Are Unambiguous, The Courts Will Unambiguous, The Courts Will

Simply Enforce Its TermsSimply Enforce Its Terms

• A court will not concern itself with the fairness or inequity of those terms, or how their application affects the parties.

• This principle is called “Freedom of Contract.”• The only limits on Freedom of Contract

are where the contract violates law or contravenes public policy.

The W. Va. Supreme Court of Appeals The W. Va. Supreme Court of Appeals Has Said, Regarding Freedom of Has Said, Regarding Freedom of

Contract and Public Policy:Contract and Public Policy:

[Y]ou are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred, and shall be enforced by courts of justice. Therefore, you have this paramount public policy to consider, – that you are not lightly to interfere with this freedom of contract.

Wellington Power Corp. v. CNA Surety Corp., 614 S.E.2d680, 685 (W.Va. 2005), quoting Baltimore & OhioSouthwestern Railway Co. v. Voight, 176 U.S. 498 (1900).

Some Arguments That Are Some Arguments That Are Easy To Assert But Almost Never Easy To Assert But Almost Never

Work To Negate The Terms of Work To Negate The Terms of A Commercial AgreementA Commercial Agreement

• Duress

• Contract of Adhesion

• Fraud in the Inducement

• Unconscionability

Given that we are most likely Given that we are most likely going to be bound to our going to be bound to our

construction contracts, what are construction contracts, what are some important provisions that some important provisions that

are often overlooked?are often overlooked?

““Incorporation By Incorporation By Reference” ProvisionsReference” Provisions

ExamplesExamples

• The Contract Document consists of this Agreement; any Drawings, Specifications, or Addenda issued prior to execution of this Agreement; Exhibit A: Scope of Work; Exhibit B: Guaranteed Maximum Price; other Exhibits attached or referred to in this Agreement; other documents listed in this Agreement; change orders or amendments issued after execution of this Agreement; all of which form the Contract and are as fully a part of the Contract as if attached to this Agreement or repeated herein, and are hereby incorporated by reference.

ExamplesExamples

ExamplesExamples

Incorporation By ReferenceIncorporation By Reference

• Can be located in various areas of the agreement.

• No special language necessary.

• Applies whether documents are attached or not.

• Applies whether you read/review the documents or not.

Implied Covenants & Implied Covenants & ObligationsObligations

Implied Covenants & Obligations Implied Covenants & Obligations

• These are duties not explicitly stated in the contract documents, but are as binding as if they were.

• They arise generally out of obligation, implied in every contract, of Good Faith and Fair Dealing.

ExamplesExamples1) Implied Warranty of Plans and Specifications2) Implied Duty of Good Faith and Fair Dealing3) Implied Duty to Share Material Information4) Implied Duty to Provide Access, Duty to Coordinate and Duty to Not Interfere5) Implied Warranty of Fitness for a Particular Purpose or Habitability6) Implied Warranty of Workmanship7) Implied UCC Warranty of Merchantability8) Implied UCC Warranty of Fitness for a Particular Purpose9) Implied Standard of Care10) Implied Duty to Construct According to the Plans and Specifications11) Implied Duty to Construct According to Legal Requirements

such as Building Codes, Ordinances, Consent Decrees and Regulations

12) Implied Duty to Complete the Work in a Reasonable Time and For a Reasonable Price

Implied Covenants & Obligations Implied Covenants & Obligations

• These implied obligations can be modified by express contractual provisions.

• Conceptually, express provisions are used to assign or shift risk.

• Conversely, these implied obligations arise in the absence of the parties’ assignment of risk.

Implied CovenantsImplied Covenants

• Can be imposed by law.

• Where imposed by law, may require specific language to modify or negate.

• Some implied covenants may override express contractual terms.

Pay-If-Paid ClausesPay-If-Paid Clauses

Pay-if-Paid ClausesPay-if-Paid Clauses

• By their nature, appear in subcontracts, or contracts where owner is not a party.

• Shift the risk of owner’s non-payment to subcontractor.

• Require specific language to be effective:– “Condition Precedent” – “Subcontractor Accepts Risk of Non-Payment By

Owner”• Different than a “Pay-When-Paid” clause.• Can affect the owner.

ExamplesExamplesIf the Subcontractor is making satisfactory progress with the Work (in the Contractor’s reasonable opinion), is not in default under any provision of the Subcontract and the Contract Documents, and if the Contractor, as a condition precedent to Subcontractor’s right to receive such payment, has received payment from the Owner for such Work, the Contractor will, subject to other provisions of this Subcontract, make monthly payments to the Subcontractor as set forth above in subparagraphs b and c of this Article 2. Subcontractor agrees to look solely to such funds received by Contractor from Owner for payments to Subcontractor hereunder, and payment by the Owner to the Contractor shall be a condition precedent to payment by the Contractor to the subcontractor. As a clarification and further definition of the condition precedent for any and all payments under this Subcontract, the Subcontractor acknowledges and agrees that in the event payment is not made to Contractor for any reason, including but not limited to default by the Owner, Subcontractor shall look exclusively to Owner for payment of any and all funds due under this Subcontract, whether or not such non-payment is related to Subcontractor’s work. Subcontractor further agrees that delay in payment or non-payment by the Owner does not create any separate obligation of Contractor to pay regardless of the extent of the delay. Final payment shall be made after Subcontractor’s Work has been accepted by Owner, satisfactory proof of payment of all amounts owed by Subcontractor in connection with this Subcontract has been provided, the Subcontractor’s Work is completed, all waivers and releases required by Contractor has been provided by Subcontractor, and Contractor has been paid in full for the Subcontractor’s Work. Contractor may withhold any amounts otherwise due under this Subcontract, or any other contractual arrangement between the parties, to cover any costs or liability Contactor has incurred or may incur for which Subcontractor may be responsible hereunder.

ExamplesExamples

Contractor’s receipt of payment from Owner shall be an express condition precedent to Subcontractor’s right to payment for any Work performed. In the event the Owner’s nonpayment is due to Contractor’s failure to meet its obligations set forth in the Prime Contract, and such failure is not due to Subcontractor’s failure to meet its obligations pursuant to the Contract Documents, the Contractor accepts the risk of nonpayment by the Owner, and Subcontractor will be paid within a reasonable amount of time. In the event the Owner’s nonpayment is due to any other reason, Subcontractor accepts the risk of nonpayment. Nothing contained in this provision affects the rights of the Contractor to assert any deducts, offsets or back charges under other provisions of this Subcontract.

Pay-If-Paid ClausesPay-If-Paid Clauses

• Valid in West Virginia, Virginia, and Maryland.

• Have been declared void in some jurisdictions.

• Are “classic” risk-shifting provisions.

• Require specific language to be effective.

• Although not included in owner’s contracts, they can affect owner’s interests.

ConclusionConclusion

• Construction contracts are a vehicle for assigning/shifting risk among parties.

• The courts will generally enforce the parties’ contracts unless they violate public policy: “Freedom of Contract.”

ConclusionConclusion

• “Incorporation by Reference” clauses help determine what is included in the contract:– Apply whether incorporated document is

attached or not.– Apply whether incorporated document is read

or not.

ConclusionConclusion

• Implied covenants arise out of implied Duty of Good Faith and Fair Dealing.– Apply in the absence of specific shifting of risk

in contract.– To the extent those terms are imposed by

statute, parties must take care in efforts to avoid them.

– May override express contract terms.

ConclusionConclusion

• Pay-If-Paid Clauses shift risk of owner non-payment to subcontractors.– Directly affect subcontractors and contractors,

but indirectly affect owners as well.– Are enforceable in some states, but not in

others.

Thank You!Thank You!

For more information, contact:

Carl L. Fletcher, Jr., Esquire

Bowles Rice McDavid Graff & Love LLPcfletcher@bowlesrice.com

(304) 347-1149