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Too often, construction professionals engage with each other to handle a project or series of projects and instead of memorializing their terms in writing, the agreement between the parties consists of nothing more than a conversation and a handshake. Both parties put their trust in each other that the terms they discussed will be honored. Nevertheless, one (or both) of the parties may eventually determine that their trust was misplaced, resulting in a big-money, big-headache dispute.

By having a written contract at the commencement of their relationship, these issues could have been avoided. Here are nine reasons to have a written contract.

1. The Agreement Is Actually Enforceable

An oral agreement might not be enforceable. There is a legal doctrine known as the “statute of frauds” that covers certain kinds of promises and transactions. While each state has slight variations to their statute of frauds, it is universally true that—if the agreement takes longer than a year (or is expected to take longer than a year) to complete—it’s unenforceable. This is also the case for contracts for the sale of goods which are valued at $500 or more.

For example, a developer and general contractor entered into a handshake agreement for a large condominium project. While they joked that it would be completed in a couple of months, both parties knew it was a massive undertaking that would take at least two years. After the certificate of occupancy was issued, the two sides battled over a number of allegedly agreed-upon terms. However, because of the statute of frauds, both parties had trouble enforcing the agreement. 

2. The Scope of Work Is Not a Gray Area 

Absent a contract, parties are left to rely upon conversations and industry standards when tackling a project with an ambiguous scope of work. As an example, one party may think that the other party, in this instance a general contractor, is tasked with painting a large commercial building. There might have been a conversation about it, but it is not documented.

Regardless, when it came time to paint the property, the general contractor explained that the quoted price did not include painting. Because no one in the construction industry works for free, the general contractor further explained that the work required a change order and extra funds. The developer reminded the general contractor that painting was included in the original quote and told the contractor that the longer the dispute took, the more the project would be delayed. Neither of the parties relented, and the dispute cost a significant amount of time and money. 

This scenario could have been avoided if the parties agreed to a written contract with a clearly defined scope of work. 

3. Indemnity and Defense Language to the Rescue

Where litigation occurs because of construction, transfer of risk (such as having a party indemnify and provide a defense) could save a company thousands, if not millions, of dollars. While a party may orally agree to come to the other party’s rescue in the event an issue arises, that may be far from reality. For example, a general contractor transitioned from commercial to residential projects. The general contractor bid out the work and acquired a new crew of subcontractors to handle it. 

The general contractor reasoned that since his crews stepped up when things went south on commercial projects, they would they do the same on the residential projects. However, one of the jobs resulted in a claim for defective construction. Without contractual language obligating the subcontractors to defend or indemnify the general contractor, there is little to no chance that they would do so

This scenario could have been avoided if the parties had a written contract which included language requiring the subcontractors to indemnify and defend the general contractor for their own actions or inactions. 

4. Payment Provisions Are Protection From Angry Subcontractors

Payment is probably one of the most contentious topics in the construction industry. It is not uncommon to have payment delayed or withheld (whether merited or not). In these instances, how can a general contractor pay its subcontractors? For many, the reality is that they cannot. In these situations, unsurprisingly, the parties that are owed money are not going to be particularly happy. While some of them will ultimately file liens on the property, others will pursue the general contractor directly. 

This scenario could have been avoided if the parties had a written contract which included “pay-when-paid” language, or language that provided that being paid by the developer or owner is a condition precedent to paying subcontractors. 

5. Choose the Law and Select the Venue

Having the ability to choose where disputes take place and what law governs is a powerful tool to have in litigation. Otherwise, contractors may run into a situation where they are out of their home state and out of their element. For example, a contractor based in Florida agreed to a joint venture project in Kansas. 

Unfortunately, the joint venture soured and the contractor faces a lawsuit in Kansas. While the contractor’s Florida attorney was ready to fight, he was unfamiliar with Kansas law and not licensed in the state. As a result, the contractor had to hire an attorney in Kansas to defend the company before jurors who might relate better to the homegrown plaintiff.

This scenario could have been avoided if the parties had a written contract that included a choice of law and choice of venue provision, which would have required that any litigation would happen in a chosen location and governed by a chosen state/federal law.

6. Insurance, Insurance, Insurance

Insurance and oral agreements do not mesh well. In another example, a developer of a luxury condominium engaged a general contractor for the work. Before obtaining the permits, the general contractor verbally explained that the developer would be named as an additional insured on the insurance policy. As an added bonus, the general contractor indicated that he required his subcontractors to do the same. 

The project was completed and certificates of occupancy were issued. A couple of years later, the developer turned over ownership of the condominium to the individual unit owners. Those unit owners hired an engineer to inspect the property. The engineer issued a scathing report about all the defects resulting from original construction.

The unit owners filed a lawsuit against the developer. In turn, the developer tendered the claim to the general contractor’s and subcontractors’ insurance carriers. To no one’s surprise, none of the parties named the developer as an additional insured on the policies. 

This scenario could have been avoided if the parties had a written contract which included language requiring the general contractor and the subcontractors to designate the developer as a named additional insured on their policies of insurance. 

7. “Time-is-of-the-Essence” Becomes More Than Just a Saying

Delays are almost inevitable on any construction project. However, when delays start to impact deadlines and cost additional sums, it is inevitable that a developer or owner will have to take action against the general contractor. 

A developer of a large commercial beachfront hotel told the contractor he needed the hotel to open before summer. It fell behind schedule, so the developer put the general contractor on notice that he was going to terminate the contractor’s services project delays. The general contractor countered that there was there was no completion date in writing and that any attempt to remove him would be a breach of the oral agreement. If the developer terminated the general contractor, he would run the risk of being in breach; if he doesn’t, the project would not be delivered in time for the summer tourist season. 

This scenario could have been avoided if the parties had a written contract which included a “Time-is-of-the Essence” provision or similar language stating when the project had to be completed. 

8. Mediate or Arbitrate Away the Issues

It is very common to see contracts mandate mediations and arbitrations in lieu of litigation with the rational that these proceedings are cost-effective tools to avoid prolonged, expensive litigation.

Without these provisions, this may occur:

A commercial project did not go as planned. Multiple subcontractors came after the general contractor for a variety of issues, mostly related to payment. The subcontractors filed liens and lawsuits, which the contractor tried to stop with informal mediation. The contractor also hoped that mediation would save attorneys’ fees and court costs. The subcontractors moved forward with litigation, and the contractor had no choice but to head to court.

This scenario could have been avoided if the parties had a written contract which included alternative dispute resolution language. 

9. Exculpatory Language Could Save the Contractor’s Business

A big verdict can completely wipe out a contractor. In some instances, the amount of the verdict can be more than the amount of the contract, where the risk outweighs the return.

For example, a subcontractor was paid a low six-figure amount for stucco installation at a condominium building. The stucco system failed. After settling with the developer, the general contractor went after the subcontractor for the damages, attorneys’ fees, expert costs and other expenses incurred as a result of the developer’s lawsuit. After going to trial, the general contractor was awarded nearly 10 times the amount that was paid to the subcontractor. 

This scenario could have been avoided if the parties had a written contract which included language which limited or waived damages against the subcontractor. 

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