7 Provisions that Should be in Every Construction Contract

Have you ever read through a contract and afterwards wondered to yourself what you just read?

Contracts are often rife with boilerplate provisions that usually have little or no significance to the average person. The common response is that this is a bunch of legal jargon—that’s why I hired a lawyer.

The lawyer is supposed to take care of those things and interpret that language to make sure the other side isn’t pulling a fast one on me. Although many of these provisions are seemingly useless, some of them might have a significant impact if there is a dispute and the parties wind up in litigation.

For those individuals looking to better understand some of those alleged boilerplate provisions, we’ve put together a list of common contractual provisions, specifically geared towards assisting parties to construction contracts.

We’ve attempted to explain these provisions, including why they might be important and what each provision ultimately attempts to accomplish.

The following is a table of contents in the event that you would like to skip to a certain provision:

Force Majeure Clause (Act of God)

Force majeure is derived from the French language, meaning “superior force.” This typically refers to an event that is not typically anticipated and is not under the control of either party.  Sometimes these events are referred to as acts of God.  Although denominated “acts of God,” these acts include natural disasters like tsunamis, floods, hurricanes, and tornados, but they also can include human intervention such as strikes, riots, fires, wars, and the like.

A force majeure clause can often absolve the parties from their contractual obligations in the event that an Act of God occurs.  Accordingly, it is often wise to include the same in your contract to prevent an inequitable outcome.

Back to top

No Third Party Beneficiaries

A third party beneficiary is a person who is not a party to the contract at issue, but the contract will benefit said person either intentionally or incidentally.  A no third party beneficiary provision precludes any third parties from coming in and asserting rights in the contract and/or enforcing provisions against the parties named in the contract.

Typically the parties do not intend to benefit a third party and if they do, the parties they will expressly include such language in the contract.  The third party beneficiary is typically referred to as an intended third party beneficiary under such circumstances.  However, in certain situations, Missouri courts will find that an incidental third party beneficiary has certain rights that flow from the contract.

In order to avoid this unwanted outcome (or if it is wanted, then you should include an express provision in the contract), the attorneys drafting the contract should include a provision prohibiting the rights of any third party beneficiary.

Back to top

Liquidated Damages Clause

“Liquidated damages are a measure of compensation which, at the time of contracting, the parties agree shall represent damages in a case of breach.” Paragon Grp., Inc. v. Ampleman,878 S.W.2d 878, 880 (Mo. App. E.D. 1994).

A liquidated damages clause is particularly important in the construction industry and thus is found quite often in construction contracts.

However, in order for the liquidated damages clause to be enforceable, there are a number of different elements that must be satisfied.

To enforce a liquidated damages provision in Missouri, the claimant must first show some harm. “In Missouri, before triggering a liquidated damages provision, our courts have ‘consistently’ held that the party requesting enforcement of the liquidated damages provision ‘must show at least some actual harm or damage caused by the breach.’” Arcese v. Daniel Schmitt & Co. (Mo. App., 2016)(citing Grand Bissell Towers, Inc., 657 S.W.2d at 379; see also Phillips v. Mo. TLC, LLC, 468 S.W.3d 398, 400 (Mo. App. S.D. 2015) (“While it is not necessary to actually prove damages in the same amount as stated in a liquidated damages provision, we have reasoned that without evidence of damages, a liquidated damages clause actually becomes a penalty and is unenforceable.”) (internal citations and quotation marks omitted).

“Although proof of a precise dollar amount is unnecessary, ‘it nevertheless must be shown that some harm or damage, in fact, occurred.” Arcese v. Daniel Schmitt & Co. (Mo. App., 2016) (quoting Valentine’s, Inc. v. Ngo, 251 S.W.3d 352, 355 (Mo. App. S.D. 2008) (quoting Goldberg, 672 S.W.2d at 179).

Back to top

What is a Penalty Clause in the Liquidated Damages Context?

“[A] penalty [clause] is not a measure of compensation for contract breach, but rather, a punishment for default or a security for actual damages sustained due to non-performance which incorporates the idea of punishment.” Arcese v. Daniel Schmitt & Co. (Mo. App., 2016)(quoting Goldberg v. Charlie’s Chevrolet, Inc., 672 S.W.2d 177, 179 (Mo. App. E.D. 1984); see also Star Dev. Corp. v. Urgent Care Assocs., Inc., 429 S.W.3d 487, 491 (Mo. App. W.D. 2014).

“Ordinarily, ‘penalty clauses’ are disguised as liquidated damages clauses. The mere branding of a provision in a contract as one of ‘liquidated damages’ does not, however, make it so. If, in fact, said provision is a penalty, the labeling of the clause is of no consequence. Accordingly, the import of construing purported liquidated damages provisions cannot be overstated, in that, generally, liquidated damages clauses are valid and enforceable, whereas “penalty clauses” are invalid and unenforceable.” Arcese v. Daniel Schmitt & Co. (Mo. App., 2016)(internal citations omitted).

“In Missouri, we have adopted the rules of the Restatement of Contracts for determining whether a liquidated damages clause is in fact a penalty. See, e.g., Corrigan Company Mechanical Contractors v. Fleischer, 423 S.W.2d 209, 213-214 (Mo.App.1967).

These rules are: ‘(1) An agreement, made in advance of breach, fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless (a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and (b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.’ Restatement of Contracts § 339 (1932).” Grand Bissell Towers, Inc. v. Joan Gagnon Enterprises, Inc., 657 S.W.2d 378, 379 (Mo. App. E.D., 1983).

If the liquidated damages provision is not drafted properly, it will be subject to attack and may not hold up in court.  Accordingly, a well-versed attorney should draft any liquidated damages clause to ensure that it will withstand scrutiny if attacked by the opposing party. To the contrary, if you are defending a claim or offset based on liquidated damages, please contact one of our attorneys to learn about your legal rights.

Back to top

Counterparts (Facsimile Signing)

A counterpart signature provision is typically used as a convenience when the parties are not in the same physical location, oftentimes a counterpart facsimile provision specifically permits and validates the signing of the contract in counterparts that are faxed to the other party to the contract.

This provision may only provide a small benefit that may never matter for all practical purposes. However, if one of the parties puts the authenticity of the contract or signatures in question, the counterparts facsimile signing provision may serve as an additional safeguard to prevent any questions regarding the validity of the signatures.

Back to top

Interpretation & Headings of Contract

This clause basically states that the headings have no bearing on the content contained thereunder, and the contract should be interpreted based on the language in the body.

From a practical standpoint, most courts will not take into consideration the headings in determining the intent of the parties, as questions of ambiguity are resolved based on the parties’ meeting of the minds (their intent).  Thus, the headings should not matter when a court interprets the same.

However, if the opposing party is arguing that the heading’s title affects the interpretation, a court could adopt such argument and agree that the headings are also language in the contract.  Because the headings also are language in the contract, said language could have a bearing on the contract’s interpretation.

Thus, instead of leaving things to chance, the simple inclusion of an interpretation and headings of contract provision could prevent an improper interpretation of the terms contained in your agreement.

Back to top

Severance Provision

The severance provision usually looks something like this:

The provisions of this Agreement are severable. If any portion, provision, or part of this Agreement is found to be, determined, held, or adjudicated to be invalid, unenforceable, or void for any reason whatsoever, any such portion, provision or part shall be severed from the remaining portions, provisions or parts of this Agreement and shall not affect the validity or enforceability of any remaining portions, provisions, or parts.

As one may infer from the foregoing provision, the purpose of the severance provision is to ensure that the contract is not rendered null and void in its entirety due to one invalid or unenforceable provision.  Judges have tremendous power to interpret and make a determination regarding the terms and conditions of a contract.  If a judge decides that one provision is not enforceable, it should not wholly invalidate the contract.

For that reason, a severance provision should be included in every contract.

Back to top

Choice of Law or Forum Selection Clause

A choice of law provision designates the jurisdiction or the substantive law that governs the contract.  Also, using a forum selection clause the parties can choose the forum where the case will be resolved.  As a caveat, this provision may be superseded by a statute in certain limited circumstances such as when a consumer transaction is involved.

Consumer statutes, like the Fair Debt Collection Practices Act (“FDCPA”), protect the consumer from selecting a venue that will frustrate their ability to defend their rights in the event a dispute arises.  Accordingly, the statute makes the proper venue the county where the contract is consummated. Any deviation from this venue could be deemed a violation of the FDCPA. However, the case law defining such FDCPA violations is mixed and very gray.  Thus, you are always advised to consult with an experienced consumer protection attorney to determine whether your contract is safe with respect to the stringent FDCPA protections.

Any companies drafting a contract should choose the jurisdiction of their state law, which is Missouri for the vast majority of the readers of this article. Choosing the substantive law of your home state (or the state of your lawyer) would allow your company to have an upper hand because your lawyer should be well-apprised as to the substantive law of that particular state.  Further, if you choose the venue in which your lawyer is located, you will have another advantage as your lawyer will be familiar with the procedural process, and hopefully the judges, in such venue.

Accordingly, it is well-advised to include a jurisdiction and forum selection clause in every construction contract.

Back to top

Alternative Dispute Resolution Clause

This can be a lifesaver provision against a consumer.  Under alternative dispute resolution (“ADR”) or arbitration, the consumer waives their right to a jury usually, and in such a case, the risk and cost of the litigation is much less.  This gives the consumer much less leverage, especially in the construction context because a claim based on violations of the Missouri Merchandising Practices Act (“MMPA”) is probably in play.

When a consumer brings an MMPA claim the ante is raised because the MMPA (statute) allows the judge to award attorney’s fees in the event that the trier of fact finds that the contractor violated the MMPA.  Because a jury could rule in either party’s favor and because of the substantial risk involved, many contractors are forced into settling the matter, instead of the possible alternative of: betting the business on winning the litigation.

If the case proceeds through alternative dispute resolution, there are much less formalities and the rules of procedure (and rules of evidence) are limited to allow an expedited disposition of the case.  For that reason, ADR is often more economical and reduces certain ploys used by plaintiffs’ attorneys to create settlement leverage by capitalizing on the slow, and sometimes over formal, judicial process.

Back to top

Time is of the Essence

In a construction contract, a time is of the essence provision makes the completion of duties and the timing of the contractual obligations material to the laboring party’s performance. In the event the laboring party does not complete the performance, the party is in breach of contract or will be subject to liquidated damages (if such a clause is contained in the contract).

Because parties will often lose money if a project is not completed timely (due to lost business opportunities, lost profits from non-use of the facilities, etc.), the contract, especially in the construction industry, should include a time is of the essence provision.  For those parties who stand to potentially lose money because of a time is of the essence provision (general contractors and subcontractors), you may wish to negotiate such clauses out of the contract.  This must be addressed prior to execution of the contract.

In any event, these provisions can be critically important and can be very costly to the parties if they are inserted or deleted from the contract, depending on the factual scenario.

Back to top

Indemnity Provision

An indemnity provision is when one party in the contract agrees to pay for or answer for liability incurred by another.  It’s basically another way of saying that the party who is to indemnify is to reimburse the other for any expenses that are incurred (based on whatever the triggering event is).

Contractual indemnity is when the parties expressly agree to the same in the contract.  Equitable or non-contractual indemnity is when Missouri courts find that one party, based on principles of equity, ought to pay for the other party’s liability.

For contractual indemnity provisions, Missouri courts have “recognize[d] that indemnity contracts are of two kinds, those against loss and those against liability. Burns & McDonnell Engineering Co., Inc. v. Torson Const. Co., Inc., 834 S.W.2d 755 (Mo. App.W.D., 1992) (citing Superintendent of Ins. v. Livestock Mkt. Ins. Agency, Inc., 709 S.W.2d 897, 903 (Mo.App.1986)).

“In either case, the cause of action accrues when the covenant is breached.” Burns & McDonnell Engineering Co., Inc. v. Torson Const. Co., Inc., 834 S.W.2d 755 (Mo. App.W.D., 1992) (citing Superintendent of Ins. v. Livestock Mkt. Ins. Agency, Inc., 709 S.W.2d 897, 903 (Mo.App.1986)).

  • Indemnity against loss accrues when the indemnitee sustains actual loss.

This contemplates actual payment by the indemnitee for the obligation which the party has been found liable. Ruysser v. Smith, 293 S.W.2d 930, 933-34 (Mo.1956); Moberly v. Leonard, 339 Mo. 79199 S.W.2d 58, 63 (1936).

  • Indemnity against liability accrues as soon as liability occurs, and no actual loss need be shown.

Indemnity against liability “cannot accrue until an indemnitee’s liability has become ‘fixed and established.’” Burns & McDonnell Engineering Co., Inc., 834 S.W.2d at 758; see Moberly, 99 S.W.2d at 63.

The mere assertion of a claim against the indemnitee does not “fix and establish” liability, but only subjects the party to potential liability to be determined with the outcome of the lawsuit. Therefore, a cause of action for indemnity against liability cannot accrue until the claim against the indemnitee is completely resolved. Only then is the party’s liability “fixed and established.” Burns & McDonnell Engineering Co., Inc. v. Torson Const. Co., Inc., 834 S.W.2d 755 (Mo. App.W.D., 1992).

According to the foregoing Missouri law, the drafter of an indemnity contract or even a simple indemnification provision within a different contract should consider the objective of the parties, and for what specific situations they would like indemnification.

Some contracts are a combination and have clauses that indemnify against loss and liability. A more specific description of a clause that is intermixed as such is described and articulated in the Burns & McDonnell case:

“[T]he contract provides that Torson will indemnify and hold Burns harmless against all “‘damages, losses and expenses, including attorney’s fees.’” Id.

“This language contemplates indemnification for ‘loss.’ The contract also agrees to indemnify and hold Burns harmless against all “claims.” The use of the word ‘claims,’ while not expressly so designating, indemnifies Burns from any liability which it might incur.” Id.

“The word ‘liability’ is a broad legal term and includes ‘almost every character of hazard or responsibility, absolute, contingent or likely’; and the “condition of being actually or potentially subject to an obligation.” Black’s Law Dictionary 823 (5th ed. 1979). The term also applies to ‘unliquidated claim[s].’ Id. As used in indemnity contracts, the term ‘claim’ has been interpreted as referring to indemnity against liability.” Id.

“A third party claim for indemnity may be filed before the [claim] accrues, in order to accommodate and facilitate the whole litigation between the parties.” Burns & McDonnell Engineering Co., Inc., 834 S.W.2d at 758; see also Bond Diamond Co. v. Wilson, 325 S.W.2d 63, 66 (Mo.App.1959); Rule 55.32(f).

Accordingly, the specific language used in the indemnity contract or provision can make a significant difference in the rights of the parties and when the lawsuit can be filed.  This could make a difference as to whether the party can even invoke the indemnification provision.  Therefore, it is well-advised that any person searching for an indemnity contract or an agreement containing such a provision, should contact an attorney experienced with drafting and litigating indemnity provisions.

Back to top

Conclusion

To sum up this article, every construction contract should have certain provisions in order to safeguard the parties and to ensure that the other provisions in the contract function as they should.

The following are the 7 clauses that should be in every contract:

  1. Force Majeure Clause (Act of God)
  2. No Third Party Beneficiaries
  3. Counterparts (Facsimile Signing)
  4. Interpretation & Headings of Contract
  5. Severance Provision
  6. Choice of Law or Forum Selection Clause
  7. Time is of the Essence

While a contract can be valid and binding without these clauses, in a case where there is a close call or the contract is under heavy scrutiny, these provisions might make the difference between protecting and losing your rights under the contract.

That’s why it is important to consult with a knowledgeable attorney and retain him/her to draft your contract to assure that your legal rights are protected.

If you know of any contractual provisions that should be in a construction contract, or in any contract for that matter, please let us know in the comments section.

Back to top

Leave a Reply

Your email address will not be published. Required fields are marked *