A good contractor has a plan about how its problems will be resolved. A good contract is the first step to ensuring you have a protocol for handling the claims of your customers and your problems with your subcontractors and vendors.
In the past it was simple, choose a governing law and a forum - hope for the best. Nowadays, contractors are provided with a multitude of options, some binding and some suggestive. But, in any event there are several mechanisms that allow you as a contractor to set an operating procedure for dealing with potentially damaging legal disputes.
In turn, and briefly, we want to discuss some of the terms that might be helpful to you as a contractor:
Claims Periods
As long as they are reasonable and fair, contractors can set claims periods within which their customer or subcontractor must raise an issue that it believes may lead to damages, back charges, or other credits.
A claim period is exactly what is says it is: a period of time to make a claim. The theory is simple, if you learn (or should have learned) of an issue which leads to a claim of damages, you must raise it within a certain amount of time. If the claim is not raised timely, it is barred by agreement.
In order to have an effective clause, you must solve these problems:
(1) What is a claim? How do we define a claim?
(2) When does the claimant learn of the claim, or when should it learn of a claim?
(3) What is a reasonable amount of time to make notice of the claim?
(4) What is the most efficient means of making notice of the claim?
A notice clause is extremely helpful with regard to claims for additional compensation, changes in the work and delays on the project.
Liquidated Damages
One of the most important items to resolve in a contract is the methodology you will use to calculate damages. Eliminating speculative calculation methods is vital to streamlining dispute resolution.
In the case of delays and overruns - liquid damages (LDs) is a very useful tool. LDs are used to stipulate to a specific amount of damages per time unit. Both parties will agree to this damage as fair and reasonable prior to beginning work on the project.
An example would be a daily LD for project overruns. This is not only useful for the project owner, but also for the contractor, as it can now predict amounts that will be back charged against it.
A useful LD clause will be coupled with an effective change order provision which allows the contractor to extend the time for completion, in order to avoid LDs. But the clause is effective for all parties involved and reduces the need for speculation and protracted dispute resolution.
Records Maintenance
Often the largest challenge in resolving a dispute is locating documentation and then shuffling through papers. We would advise that you reduce this burden by requiring an affirmative duty to maintain and routinely produce documentation.
A clause which obligates your customer or subcontractor to provide weekly or monthly production of logs, time sheets, applications for payment, change orders, invoices, receipts, etc. - will drastically reduce the length and costs of your dispute resolution.
Furthermore, the obligation should be affirmative, thus limiting your customer's or subcontractor's ability to raise a claim or defense based upon an unknown fact which is not documented (i.e. change order or alternative agreement).
Dispute Resolution Methods
There are various dispute resolution options available these days. Mediation, Arbitration and Litigation are all possibilities which might be attractive to you and your business. There are various outfits that can provide the alternative dispute resolution that you might want.
First off - the American Arbitration Association is not the only mediation and arbitration body on the market. In fact, due to their high costs, slow dockets and excess administration, they might not be the right choice for you. Alternatives, such as the Metairie, Louisiana outfit, ADR, Inc., provide more streamlined, expedited and cost-effective options.
There are also individuals who provide their services through their own individual companies. If you are in Washington state, one such option is Christopher J. Soelling, PLLC. Mr. Soelling is highly productive mediator who does a wonderful job of meeting the needs of adverse parties, assuaging those needs and finding an acceptable compromise.
Whatever your choice, you need to control it in your contracts. Mediation, Arbitration, and Litigation might be used singularly or in conjunction with one another. A contractor might wish to utilize non-binding mediation for pre-termination disputes while the work is on-going, but elect for arbitration for post-termination disputes.
You may also want to reserve the option to select your forum after a dispute arises. In some cases, a contractor's cleverly drafted contract might obligate a party to bring an action before a court of law, but reserve the contractor's right to remove that action to arbitration, if it so elects. Whatever your choice - make certain that you understand your protocol and plan accordingly.
Stipulations for Alternative Proceedings
When a party utilizes litigation as a dispute resolution tool, the rules are set by the courts. Alternative dispute methods such as mediation and arbitration have some simple rules, but much is left to the determination of the parties and the arbitrator or mediator.
It is very helpful to think about your litigious needs beforehand and stipulate to some safeguards in your contract.
One of vital importance is the level of discovery you want to allow. In most cases, you will not be provided with the right to proceed with depositions and advanced discovery in an arbitration. If you foresee the need to obtain admissions, interrogatories (questions with written answers) or production of documents - stipulate to the same in your contract. If you think that you will need to obtain the deposition of parties - elect to permit that examination in your contract.
The costs and fees and methods of paying those fees, should also be a concern. Generally, the claimant is required to front fees and costs. You might want to obtain an agreement that both parties will split costs, pay up front and be entitled to recoup those fees if they are successful.
Fee and Costs
By now this should be a staple in your contract - recovery of fees and costs. But how much?
Every contract should have a clause which provides you with recovery of your fees and costs in the event that you are successful in your claim. But, contracts often do not define the extent of those fees and costs.
You may want to stipulate to a liquidated damage of a certain percentage of the recovery (say 25% of the damages awarded) or, if you want to cover all bases, you might want to define the time period and types of fees and costs that are recoverable. For instance, a contractor can elect to recover all fees incurred since the date notice of the claim was made, including in house attorney time, collection agency costs, and attorney fees and expenses.
However you seek to recoup these losses - this clause is vital.
Review and Appeal
One of the major reasons that people and entities are detracted from alternative dispute resolution is because of the binding nature of arbitration awards without the benefit of appeal or review.
One way to fax this problem is to provide for a direct and immediate appeal of any arbitration award to the applicable court of appeals. A clause should limit appeals to matters of law, which is a permissible and appealable issue.
Contracts are vital to the success of a contractor. It is important to think ahead and limit your exposure to difficult, costly and lengthy proceedings. Contact your attorney and iron out your contracts.
