Many agreements contain a long definitions section or numerous defined terms scattered throughout the agreement.  This is especially true of contracts in the construction industry. 

Definitions are used to help make an agreement more readable.  Who wants to read, “all applicable federal, state, and local laws, statutes, regulations, and codes that govern the project, including, but not limited to blah, blah, blah……” over and over again when it can just be defined as “Applicable Laws.”

But definitions can also expand liability or, in some cases, limit liability unintentionally.

Look at indemnity provisions for instance.

There is usually a laundry list of parties defined as “Indemnitees.”   All of the “Indemnities” are entitled to be indemnified and defended for claims covered by the indemnity, and they usually are named as additional insureds on certain insurance policies.

One situation where this can create a problem is when the architect is included in the definition of “Indemnitees.”

A broadly drafted indemnity provision can potentially result in the contractor being required to indemnify the architect for certain claims that are prohibited by Chapter 130 of the Texas Civil Practice and Remedies Code.

Even though the statute would make that type of indemnity void and unenforceable, time and resources would have to be spent having the provision declared void and unenforceable.

Another type of agreement where definitions are often used and are very important is a settlement agreement.

Let me share a real life example with you of a case my firm got involved in after definitions in a settlement agreement caused a problem.

“Parent Company” was sued over a debt, and as the case progressed the plaintiff also sued some officers and affiliates of the Parent Company.

The case settled and the settlement terms required the Parent Company to pay a certain amount over a period of time with the plaintiff agreeing to dismiss the lawsuit against all of the defendants.

The original version of the settlement agreement included a definitions section that had a separate definition for each of the defendants along the lines of  “Parent Company,” “Affiliate 1,” “Affiliate 2,” “Officer 1,” “Officer 2,” and “Officer 3,”

The payment provision, however, only required the Parent Company to make settlement payments.

Throughout the settlement agreement each time the defendants were referenced, all of the defined names were listed, which made the agreement longer and a bit cumbersome at times.

When the settlement agreement was almost finalized, the plaintiff’s attorney redefined the Parent Company to include all of the defined terms for the officers and affiliates to shorten and simplify the agreement.  The other provisions of the settlement agreement remained unchanged.

The defendants and their attorney agreed to the revision and the settlement agreement was signed.  After approximately half of the settlement payments were made, the Parent Company experienced financial problems and stopped making the settlement payments.

The plaintiff filed suit against the individual officers and the affiliates to recover the remaining settlement payments.

Even though the officers and affiliates had never intended to be responsible for the settlement payments, they ended up being responsible because the “Parent Company” was responsible for the payments under the agreement and each of the officers and affiliates had been incorporated into the definition of the Parent Company.

The lesson:

Don’t just skim over the definitions in any of your agreements.  Read them carefully and ask yourself if each of the people or entities listed really need to be included in light of the obligations or liabilities that are associated with the defined terms.

The same is true of definitions related to applicable laws, indemnified claims, and many other issues that are sometimes grouped together and defined.

Using definitions can be convenient, but unless they are carefully reviewed, they can also lead to future unintended consequences.

Internet scams.  You’ve seen them in your inbox.

The foreign citizen who has inherited several million dollars from a relative in the United States, and they want you to help them get the money.

If you forward an email enough times you’ll get paid or get a free laptop.  No unknown person in a foreign country needs your help with an inheritance and no one is going to send you a free laptop because you forwarded an email to 20 of your friends.

When it comes to internet scams, the old adage rings true: if it looks to good to be true, it probably is.  Common sense should be enough to help people avoid these scams, but some people want this unbelievable scenario to be true so much that they convince themselves they have stumbled on King Solomon’s mine.

So what do internet scams have to do with construction?  Because if you are an owner or contractor, you would do well to remember that, “if it looks too good to be true, it probably is.”

Too many projects have been derailed by someone accepting a bid that could have potentially qualified as an internet scam.   When it comes to reviewing bids, listen to your common sense.

If you’re an owner and three contractors’ bids are within a few percent of each other and a fourth contractor’s bid is 30 % less than the others, then common sense tells you that you should ask some hard questions.

If you’re a general contractor and a subcontractor’s bid comes in 20% lower than other subcontractors bidding on that scope of work then you should wonder what makes them able to get materials and provide labor at such cheaper prices.

If a bid looks too good to be true, then it usually is.

I understand the pressure to get the best price possible for a project.  But an unusually low bid from a contractor or subcontractor should cause red flags to go up.

Did they overlook a scope of work?  Are they properly staffing the project?  Were they able to secure materials at a better price?  Maybe there is a legitimate explanation for why their bid is so much lower.

But if there is no valid explanation, do not be seduced by the voice in your head that says, “So what?  It will be their problem not mine.”

Nothing could be further from the truth.  Accepting an unusually low bid usually leads to one of two scenarios: (1) an avalanche of change order requests for time and/or money; or (2) a failure to complete the work.

Trust me, both on those situations will be your problem instead of just being the contractor’s or subcontractor’s problem.

Over the years I have had owners and contractors who find themselves cleaning up a mess explain that even though the bid was way lower than the other bids, they felt like they would be protected because there was a bond (or similar type comments).

That is a flawed logic.  Providing a bid bond or a performance bond is not a solution to mitigating the risk that comes from accepting an unusually low bid.

While a bond may compensate for damages or pay to complete work, the timing of the project will be catastrophically impacted.  There will be delays, and the delays will likely be significant.

Delays have a ripple effect that can place an entire project at risk.  If an owner or contractor has to get a surety involved it will take time for the surety to investigate and determine how it wants to respond.

In the meantime, subcontractors who were properly performing will move crews to other jobs, and then the schedule is impacted by trying to get them back to the project.  This impacts sequencing and usually compounds the delay problem.

In the end, the damages caused by accepting the unusually low bid will exceed (often significantly exceed) the savings that an owner or contractor hoped to achieve with the low bidder.

I’m not saying that unusually low bids can never be valid because there are different reasons that some bids are higher or lower than others.  The next time you see the unusually low bid, however, do your homework.  Just remember that if it sounds too good to be true, it usually is.

I once had a teacher who called the word “please” a magic word.  For instance, if you asked to go to the restroom, the response was usually, “what’s the magic word?”   Then you said “please” and got to go the restroom.

This exchange repeated itself numerous times a day as students made various requests.  The word “please” usually worked.  Of course, there were other times when even if you used the word “please,” your request was still denied, which sort of muddied the water as to what was so magic about it to start with.

As it turns out, in construction law, there are also some magic words.  In fact, the recent case of Nu-Build & Associates, Inc. v. Sooners Group, L.P. illustrates this point because in that case, failing to use the magic word “reasonable” caused $3.6 million in damages to disappear.

You read that correctly.  One minute there was an award of $3.6 million in damages, and the next minute – “poof” – the damages were gone.

Here’s what happened.  Nu-Build was the general contractor for a project owned by Sooners Group.  Sooners Group terminated Nu-Build before the project was complete and hired a replacement contractor.   As often happens, a lawsuit followed.

Following a bench trial, the Court awarded Sooners Group $3.6 million in damages for its costs to complete the project after Sooners Group terminated Nu-Build.  On appeal, however, the Court of Appeals reversed the $3.6 million damages awarded to Sooners Group, and the court’s opinion is instructive to construction lawyers.

Here are two important statements from the Court of Appeals that construction lawyers should remember related to recovering damages for the cost of completing a project:

  1. One,  when seeking damages for completion costs, whether based on a contract or a tort, you must establish that the completion costs are reasonable.
  2. Two, proof of the amounts charged and paid are not evidence that the amount is reasonable.

The Court of Appeals determined that Sooners Group had not adduced any evidence at trial that the completion costs were reasonable, therefore, the entire amount was reversed.

Point number 2 seems illogical to owners and contractors who have had to complete a terminated party’s work.   From their perspective, the amounts charged and paid to complete a project or scope of work are inherently reasonable or else they wouldn’t have paid them.  Why would someone intentionally pay unreasonable costs to complete a project?

Despite the appeal of that logic, the law takes a different view.  There has to be evidence that the completion costs were reasonable to support an award of damages.

So what does this mean for construction lawyers?  One thing it means is that careful thought should be given to selecting experts and contractors that can establish that completion costs are reasonable.

And as simple as it sounds, it means making sure your experts literally say the magic word “reasonable” several times.  There’s no way to know for sure, but if one of Sooners Group’s experts had testified that Sooners Group’s $3.6 million in completion costs were reasonable, those damages costs may not have disappeared.

 

 

 

Consider the following scenario.  In a dispute between an owner and contractor, neither party can locate a copy of the signed construction contract in their files.

Without a signed contract, can the contractor still compel arbitration?  As it turns out, in certain circumstances, yes.

In Ladymon v. Lewis, the court of appeals addressed this scenario.   Some homeowners sued their builder, but no one could locate a signed version of the construction contract.

The builder filed a motion to compel arbitration.  The first step, however, in compelling arbitration is to establish the existence of a valid arbitration agreement and show that the agreement covers the claims that have been asserted.

So how can you establish the existence of a valid arbitration agreement if you don’t have a copy of the signed contract?  Well, like most things in a lawsuit, you make the best argument you can with what you have.  So that’s what the builder did.

The builder submitted an affidavit that basically said: (i) we can’t find the signed version of the contract but here is an unsigned form contract; (ii) I remember signing this form contract when we built this home; and (iii) I remember getting a copy back from the homeowners with their signature.

Not the strongest evidence you would like supporting a motion to compel arbitration.  Not surprisingly, the homeowners did not think the evidence was sufficient and filed their own affidavit saying that they did not remember signing any documents with the builder prior to construction except for financing documents.

The trial court denied the builder’s motion to compel arbitration and the builder appealed.   On appeal, the builder argued that its affidavit established that there was a valid, enforceable arbitration agreement between the parties.

[T]he absence of a party’s signature does not necessarily destroy an otherwise valid contract. . .

And the court of appeals agreed.  The court said:

[T]he absence of a party’s signature does not necessarily destroy an otherwise valid contract and is not dispositive of the question of whether the parties intended to be bound by the terms of a contract. If a contract is not signed by a party, then other evidence may be used to establish the nonsignatory’s unconditional assent to be bound by the contract, including any arbitration provision.

The court of appeals said that the builder had sufficiently established the existence of a valid contract between the parties that contained an arbitration provision.

And what about the homeowners’ testimony that they did not recall signing the contract?  The court of appeals basically said that saying you do not recall doing something is really no evidence at all.

So if you find yourself in a situation where you cannot locate a signed copy of a contract, all hope is not lost.  Use what you have and make your best arguments.  There’s a still a chance you can enforce an unsigned contract.

 

Like most sports fans in the Dallas area, I’ve spent the last couple of weeks paying attention to the countdown for one our local sports heroes, Adrian Beltre of the Texas Rangers, to reach the magical baseball milestone of 3,000 hits.  Even at the age of 38, Beltre is still playing at a high level and all season long there was never any doubt about whether he would reach the 3,000 hit plateau, it was just a question of when.

The “when” was answered on Sunday, July 30th, when Beltre became the 31st player in the history of baseball to amass 3,000 hits.  I was fortunate enough to be at the ballpark Sunday to experience it live.

 

 

Thankfully baseball is a game that acknowledges some milestones are so rare they should be celebrated.  So after the hit, the game was stopped down for several minutes as Beltre’s family and teammates all came onto the field to congratulate him while a banner commemorating the achievement was unveiled on the outfield wall.  The opposing players that were on the field at the time also made it a point to personally congratulate him.

It was a great moment to see.  And I don’t think that the cheering and congratulations were just because a player reached the 3,000 hit milestone.  A lot of it was due to the fact that the player reaching that milestone was Adrian Beltre.

Adrian Beltre is one of those players who by all accounts, does it the right way.  He is respected by players whether they play with him or against him.

Any time I’ve heard his teammates talk about Beltre, they all say he the consummate teammate.  Everyone can see that he plays hard, but it is also obvious that he enjoys playing the game. And you also don’t accumulate 3,000 hits unless you treat every at bat with the same intensity regardless of the score or conditions.

In addition to his performance on the field, Beltre is also a good person off the field.  He gives back to his community through donations to charitable organizations and giving his time to participate in events hosted by charities.  It’s no wonder he has been a fan favorite in Texas since arriving a few years ago.

So what does any of this have to do with avoiding or minimizing construction disputes?  A lot really.  Sometimes people in the construction world focus on so many things, they overlook the importance of something very basic.  If you want to avoid or reduce construction disputes, focus on doing it right.

  • Show up on time.
  • Work hard.
  • Don’t take shortcuts.
  • Be accountable and be willing to hold those around you accountable.
  • Be honest.
  • Accept responsibility for your actions.
  • Treat every project and job with the same intensity and commitment regardless of the size or fee involved.
  • And commit to doing this day in and day out, regardless of the circumstances or conditions.

You see, a lot of the same principles that allow an athlete like Adrian Beltre to excel are the same principles that allow people to excel in any industry.  So just do it right.  It’s simple to say, but too often overlooked.