Page
 

Introduction 1
 

Contracts in the Construction Industry 2

Standard Practices 2

Standard Form Contracts 3

Construing the Contract 4
 

Scope of Work Provisions 9

Definition of Scope of Work 9

Flow-Down Provisions 10

Change Order and Notice Provisions 11

Change Orders 11

Notices 15
 

Risk-Shifting Provisions 18

Indemnity Clauses 18

Insurance Clauses 19

Exculpatory, Waiver and Disclaimer Clauses 20
 

Payment Provisions 24

Price and Payment Terms 24

Payment Affidavits and Conditions 26

Final Payment 27
 

Quality Control Provisions 28

Inspection and Punch List Provisions 28

Warranty and Call-Back Provisions 30
 

Termination and Suspension of Work Provisions 31
 

Schedule Provisions 33

Scheduling, Delays and Acceleration 33

Liquidated Damages 36
 

Dispute Resolution Provisions 39

Arbitration Clauses 40

Mediation Clauses 50

The Litigation Alternative 52
 

The construction contract forms the legal foundation of every construction project. The variation in the form such contracts can take is staggering, ranging from the proverbial "handshake deal" to a complex web of numerous lengthy and interrelated contracts between the owner, the general contractor, subcontractors, suppliers and equipment dealers. In many cases, the formation of the construction contracts is haphazard. The contracts may conflict in form and procedure. Even worse, the contracts frequently are changed as the project is conceived and built.

Conflict is almost inevitable, given the competing interests present in every project. The typical owner or developer wants the project built on time and within budget. Design professionals, whether they be architects or engineers, are concerned with implementing the owner's design intent while protecting the design integrity and safety of the completed project. The general contractor wants a clear scope of work, wants to be paid promptly, and wants to complete the project as rapidly as possible. Subcontractors want to be paid within a reasonable time, and want access to the work they have undertaken to perform without interference from other trades. Suppliers want to deliver the materials or equipment ordered by the general contractor and to receive payment for all of the materials supplied. The construction lender, building inspectors, and sureties are also often involved and have their own interests to protect. All of the parties are interested in minimizing conflict and resolving any conflict promptly and at minimum expense.

For the lawyer, construction contracts are perhaps best approached as risk allocation devices. In order for the construction contract to perform its intended purpose, the contract must both accurately define a risk and allocate that risk to one or more of the parties involved in the process. Which risks are particularly important for the construction attorney to consider? What should the contract say about the allocation of those risks? What are the critical elements in every construction project?

Contracts in the Construction Industry

Standard Practices

In order to address these questions, the standard practices of the construction industry must first be clearly understood. There are many "unwritten rules" in construction contracting. These unwritten rules may take the form of standard billing practices, staffing or manpower practices, trade customs and policies which have arisen as a result of the experience of the various participants over many years in the construction business. While these rules may be unwritten, they are very real issues on the typical construction project, and the failure to understand the "unwritten rules" is often the genesis of problems on the job.

Another highly important factor in drafting construction contracts is the often interrelated roles and responsibilities of the various parties on the project. For example, while the design professional may be responsible for the overall design of the project, designers often do not have the expertise to fully develop all of the complex components of a modern building. The design professional may indicate that stone of a certain type is to be used as the exterior cladding of the building, but may specify that the general contractor and its speciality subcontractors are to install the stone using a truss system designed by the subcontractor. Such details are often required to be submitted to the architect or engineer in the form of shop drawing which illustrate in detail how the general contractor proposes to install the stone cladding. While the architect or engineer may approve shop drawings for "design intent," the architect does not design the actual truss itself, and depends upon the expertise of the speciality stone contractor to solve problems which may arise as the various components of the building come together in the completed structure. Where such responsibilities overlap, who is ultimately responsible if the building does not come together correctly, or if unanticipated costs arise?

Standard Form Contracts

Industry trade groups such as the American Institute of Architects, the Associated General Contractors, the American Subcontractors Association, and others have long wrestled with these problems. Several standard-form construction contracts have been developed by these trade associations, most notably the AIA and the AGC, in an attempt to anticipate and avoid problems caused by the unwritten rules of the industry. These trade groups have worked for years to make these standard form contracts fair to all parties, and the result is a series of contracts which are highly complex and confusing to the general practitioner who is called upon to evaluate these contracts for a client.

In an effort to make sense out of the key provisions important in every construction contract, I will outline in this paper some of the major issues which arise on every project, and to describe how these issues might be resolved on the typical project.

Construing the Contract

Most lawyers are familiar in a general way with the rules of construction which are applied to construction contracts, and are prepared to apply these rules in the event a problem arises on the job. The more challenging job is to anticipate and avoid these problems while the contracts are still in the drafting stage.

As a starting point, courts ordinarily will enforce the meaning and intention of the parties as reflected by the contract. Parties laboring under no disabilities (illiteracy, blindness, etc.) may make contracts on their own terms, and in the absence of fraud or mistake or terms that are illegal or contrary to public policy, they must abide by that contract. The fact that the contract is unwise or disadvantageous to one of the parties is no reason for disregarding it. Yon v. City of Atlanta, 201 Ga. 800, 41 S.E.2d 516 (1947).

For example, if the parties to a contract enter into an express agreement setting out a pricing formula for extra work, then that contract will be enforced, even if it later appears that the contractor cannot properly document its direct costs as required by the contract. Gilbert v. Powell, 165 Ga. App. 504, 301 S.E.2d 683 (1983); Foster v. Waverly Hall United Development Corp., 159 Ga. App. 710, 285 S.E.2d 35 (1981)(failure to keep proper records may waive mechanic's lien).

Where a contract sets up reasonable conditions precedent to a claim or defense, the opposite party usually may assert the failure to comply with these conditions as a defense. But the courts also exist to do justice, and it has been stated that "the courts will readily seize upon circumstances arising in the subsequent conduct or transactions of the parties and imply a waiver, in order to prevent a forfeiture because of non-compliance with formal prerequisites. Biltmore Construction Co. v. Tri-State &c., Inc., 137 Ga. App. 504, 224 S.E.2d 487 (1976).

The court may intervene to prohibit the enforcement of illegal contracts, and under certain limited circumstances the court will exercise its equitable powers to prevent an injustice from occurring, but these exceptions to enforcement of the plain meaning of the contract are rare.

Where the court determines that the meaning and intention of the parties is ambiguous, the court must apply certain rules of construction in order to resolve the ambiguity. O.C.G.A. § 13-2-2.

For example, the courts will ordinarily construe the contract against the party who drafted the contract. This means that if the contract is subject to more than one reasonable interpretation, all other things being equal the courts will favor the interpretation of the party who did not draft the contract. O.C.G.A. § 13-2-2(5). Likewise, those provisions added by the parties will control over conflicting provisions in a pre-printed form. Batson-Cook v. Poteat, 147 Ga. App. 506, 249 S.E.2d 319 (1978)(applying O.C.G.A. § 13-2-2(7)).

The court has the duty to construe and enforce the meaning and intention of the parties as expressed in a written contract. If the court determines that there is an ambiguity in the contract, which the court cannot resolve after applying these rules of construction, then court must submit the issue of the meaning and intention of the parties to the jury for a factual determination. Travelers Insurance Co. v. Blakey, 180 Ga. App. 520, 349 S.E.2d 474 (1986).

Where a contract has been reduced to writing, the courts generally will not consider "parol evidence" (i.e., oral or verbal testimony) which attempts to contradict or vary the terms of a valid written agreement. O.C.G.A. § 24-6-1.

Parol evidence is admissible to explain all ambiguities in writings. O.C.G.A. § 24-6-3. Fruin-Colnon Corp. v. Air Door, Inc., 157 Ga. App. 804, 278 S.E.2d 708 (1981)(reversing trial court's exclusion of such evidence introduced to explain an ambiguity).

These general rules suggest that the careful lawyer will start by a careful review of the client's contract, as well as all documents which are to be incorporated by reference into the client's contract. These may include the general contractor's contract with the owner, plans and specifications, project manuals and addenda. These documents often contain descriptions of the client's scope of work or contractual conditions or requirements which are not otherwise spelled out in the formal contract signed by the parties. Be particularly careful (because your client may not be) that all revised documents are reviewed for conflicts. It is very common, for example, for the project specifications to undergo significant revision as the project design is refined. Compliance with the specifications as originally drafted may lead to problems if those specifications have been amended by the architect and owner during the course of design development.

Once the design is complete, the owner typically provides the general contractor with a set of plans and specifications prepared by the owner's architect or engineer. The contractor agrees to build the project in accordance with those plans and specifications and not to deviate from those plans and specifications without the permission of the owner.

Where a contractor signs a contract agreeing to construct a project in accordance with plans and specifications prepared by the owner, the contractor is not responsible for the consequences of defects in the plans and specifications. United States v. Spearin, 248 U.S. 132, 136 (1918)(cited with approval in Decatur County v. Praytor, Houston & Wood, 165 Ga. 742, 142 S.E.2d 678 (1928)). In other words, the contractor is not responsible for unsatisfactory results attributable solely to defects in the owner's plans and specifications. Batson-Cook Co. v. R.C. Pierce Roofing Co., 124 Ga. App. 835, 186 S.E.2d 358 (1971).

This principle is often stated in terms of an "implied warranty" of the plans and specifications by the owner. There are, however, many qualifications to this rule as it has developed in Georgia.

Where the contract permits changes in the discretion of the design engineer, there may be no such "implied warranty" of the plans and specifications. In Decatur County v. Praytor, Houston & Wood, 165 Ga. 742, 142 S.E.2d 678 (1928), the Georgia Supreme Court held that where a unit-price contract gives the project engineer discretion to change the stated elevation of certain piers shown on the owner's plans and specifications, then there was no implied warranty that the piers will be built at the elevations shown on the plans and specifications.

In State Highway Dept. v. Hewitt Contracting Co., 113 Ga. App. 685, 149 S.E.2d 499 (1966), the Court of Appeals found that there was no implied warranty of the plans and specifications by the owner where the express terms of a State Highway Department contract warned that there may be errors in the plans and specifications and provided for the contractor to be compensated for the actual work done upon completion of the contract, including compensation for any additional work required because of errors or changes in the plans and specifications.

Where the contractor is consulted by the owner in establishing the specifications, and the contractor knows that the owner is relying upon the contractor's expertise, the contractor may not set up as a defense the improper specifications of the owner. Talerica v. Grove Park Plumbing Service, 103 Ga. App. 591, 120 S.E.2d 36 (1961).

Scope of Work Provisions

Definition of Scope of Work

"Scope of work" provisions describe the work the contractor is undertaking to perform. Most construction contracts define the contractor's scope of work broadly, to include all work reasonably necessary to accomplish the work set out in the contract, or which is referenced in the plans and specifications.

Owners should recognize that changes are inevitable even on a well-planned project, and should allow for such contingencies in their schedules and budgets. Construction contracts usually have clauses dealing with any changes in the scope of work which may arise on a project. Contractors and owners should pay particular attention to drafting of these provisions, including the procedures set out for giving notice of changes in the scope of work.

What happens when there is a conflict between the scope of work as set out in the contract, and the scope of work described in the plans and specifications? In Eller & Heyward, Inc. v. Jackson, 117 Ga. App. 753, 162 S.E.2d 238 (1968), a subcontractor contended that the subcontract requiring installation of gutters and down spouts conflicted with the construction drawings for the project which showed that no gutters and down spouts were to be installed. The court declined to determine as a matter of law whether one or the other of the documents controlled, and found that on the facts of this case the meaning of the contract was an issue of fact which was properly submitted to the jury for a determination of the intention of the parties.

Where a contract provides unit prices for quantities called out in a contract, the Georgia courts have not been particularly receptive to claims for extra expense caused by the variation from the estimated quantities. See State Highway Department v. MacDougald Construction Co., 102 Ga. App. 254, 115 S.E.2d 863 (1960); Western Contracting Corporation v. State Highway Department, 125 Ga. App. 376, 187 S.E.2d 698 (1972); Department of Transportation v. Claussen Paving Company, 246 Ga. 807, 273 S.E.2d 161 (1980)(owner admitted estimated quantities were wrong). Accordingly, unit pricing can be a useful tool for avoiding scope of work disputes where quantity variations may be expected (excavation, fill, demolition, etc.).

Flow-Down Provisions

A flow-down clause is a contract provision which creates an obligation in a "downstream" party to comply with or be bound by some obligation of the "upstream" party, usually in the same manner or in the same degree as the upstream party is bound. For example, a flow-down clause may say that the downstream party must arbitrate if the upstream party is served with a demand for arbitration.

Flow-down clauses also commonly obligate each subcontractor to comply with all of the obligations which are assumed by the general contractor in its contract with the owner. In such cases it is extremely important for the subcontractor to ask for a copy of the general contractor's contract with the owner and to carefully review it. If this is not done, then the subcontractor may inadvertently fail to comply with some condition of the general contractor's contract with the owner, perhaps leading to an inadvertent waiver of the subcontractor's claim.

Flow down provisions usually are considered to "incorporate by reference" the provisions involved. Such clauses are effective where the provision to which reference is made has a reasonable clear and ascertainable meaning. Binswanger v. Beers, Inc., 141 Ga. App. 715, 234 S.E.2d 363 (1977); Arthur Pew Construction Co., Inc. v. Bryan Construction Co., Inc., 148 Ga. App. 114, 251 S.E.2d 105 (1978)(incorporating an indemnity clause).

Provisions incorporated by reference may not be effective to limit the rights of a subcontractor where they are in conflict with other provisions of the subcontract. Centex-Rodgers Construction Co. v. McCann Steel Co., 206 Ga. App. 827, 426 S.E.2d 596 (1992).

Change Orders and Notice Provisions

Change Orders

Most construction contracts prohibit changes without the prior written approval of the owner. Some contracts go further, and bar payment for any work performed without a written change order.

As a general rule, in the absence of facts proving waiver or estoppel by a showing of some affirmative authorization to perform the extra work, the provisions of a building contract requiring notice, prior approval, and the issuance of a written change order before the performance of extra work are valid and enforceable. State Highway Department v. Hewitt Contracting Company, 113 Ga. App. 685, 149 S.E.2d 499 (1966)(failure to give contractually-required notice bars contract claim).

For example, in Heard v. Dooly County, 101 Ga. 619, 28 S.E. 986 (1897), the court enforced a contract provision barring any payment for extra work performed without a prior estimate and written authorization. See Town of Decatur v. Jaudon, 136 Ga. 854, 72 S.E. 351 (1928); Grahn Construction Co. v. Pridgen, 49 Ga. App. 720, 176 S.E. 656. Likewise, in Cobb v. Bond, 39 Ga. App. 637, 148 S.E. 411 (1929), the contractor entered into a contract providing that the owner was entitled to make changes in the work. There was no provision for additional payment for these changes. The court held under these circumstances the contractor was not permitted to recover additional payment for the changes.

The courts in Georgia have held, however, that such a provision does not always bar a recovery by the contractor for work performed without a written change order. Provisions such as these are not intended to bar the contractor from recovering for extra work added by the owner which was not within the scope of work of the original contract. Finn v. Carden, 100 Ga. App. 270, 110 S.E.2d 693 (1959)(contract claim barred because approval received from architect, but quantum meruit recovery permitted on implied obligation to pay for extra work ordered by owner's wife).

Georgia law provides that when the parties to a contract mutually depart from its terms and pay or receive money under such departure, the contract term is suspended until reasonable notice is given to the other party stating the intention to return to the exact terms of the written agreement. O.C.G.A. § 13-4-4.

Accordingly, where the parties by a course of conduct mutually depart from the strict terms of the contract and operate without prior written change orders there may be a waiver of this contract provision or an oral variation of the provisions of the contract. Biltmore Construction Co. v. Tri-State Electric Contractors, Inc., 137 Ga. App. 504, 224 S.E.2d 487 (1976); Clark v. Belleau, Inc., 114 Ga. App. 587, 151 S.E.2d 894 (1966)(engineer's approval waived); State Highway Department v. Wright Contracting Co., 107 Ga. App. 758, 131 S.E.2d 808 (1963)(engineer's failure to act after notice of claim waives contract requirement of prior written agreement).

A mutual departure from the contract occurs when the owner, without claiming that the work is covered by the contract, orally orders extra work with notice that the contractor regards the work as extra and expects additional compensation for it. The contractor can recover for the value of the work despite the fact that there is a stipulation in the contract requiring that all changes be ordered in writing. State Highway Department v. Wright Contracting Co., 107 Ga. App. 758, 131 S.E.2d 808 (1963); State Highway Department v. Hewitt Contracting Company, 113 Ga. App. 685, 149 S.E.2d 499 (1966).

The same rule applies to prime contractors who orally order extra work from subcontractors. Mion Chemical Corp. v. Daniel Construction Co., 111 Ga. App. 369, 141 S.E.2d 839 (1965)(subcontractor's extra work occasioned by faulty work of prime contractor); Clark v. Belleau, Inc., 114 Ga. App. 587, 151 S.E.2d 894 (1966)(court allows subcontractor quantum meruit recovery where contractor-owner's superintendent agrees to pay for removal of muck as an extra); Pro Metal Building Systems, Inc. v. T.E. Driskell Grading Co., Inc., 170 Ga. App. 127, 316 S.E.2d 574 (1984)(recovery permitted for rework caused by general contractor); Excavators and Erectors, Inc. v. Bullard Engineers, Inc. 489 F.2d 318 (5th Cir. 1973)(separate oral agreement to pay subcontractor for cost of replacing unsuitable soil).

The courts reason that the owner should not be permitted to mislead the contractor into thinking that the work will be paid for, and then enjoy the fruits of the contractor's labor without paying for the contractor's services. In other words, under these circumstances, the courts will not permit a forfeiture of the rights of the contractor merely because the failure to comply with the formal prerequisites of the contract. McDaniel v. Mallary Brothers Machinery Co., 6 Ga. App. 848, 66 S.E. 146 (1909).

The extra work also may be ordered by the owner's architect. Where the architect is given authority to order extra work and acts within this authority to direct the contractor to perform extra work, then the owner is obligated to pay for the extra work ordered by the architect. Continental Casualty Company v. Wilson-Avery, Inc., 115 Ga. App. 793, 156 S.E.2d 152 (1967).

In much the same way, where a subcontractor places the general contractor on notice of a claim for extra work which is denied by the general contractor, and both parties are equally well-informed about what is required to do the work, then the subcontractor may be excused from strictly following the change order requirements of the contract. Batson-Cook Company v. Loden & Company, Inc., 129 Ga. App. 376, 199 S.E.2d 591 (1973).

In order to be valid, the subsequent oral modification must be supported by separate consideration. Willingham Sash etc. Co. v. Drew, 117 Ga. 850, 45 S.E. 237; Brookhaven Landscape & Grading Co., Inc. v. J.F. Barton Contracting Co., 676 F.2d 516 (11th Cir. 1982)(finding no consideration for that portion of the contractor's claim which included work covered by the original scope of work for the project).

Sufficient consideration to support an oral modification of a written contract is provided where the builder makes alterations which entail the outlay of additional expenses and costs pursuant to the owner's direction, and the owner subsequently accepts the building as altered and occupies it. Bailey v. Martin, 101 Ga. App. 63, 112 S.E.2d 807 (1960).

Notices

All construction contracts should contain clear notice provisions. Whether the contractor has given notice to the owner of its position is often the critical determining factor in determining whether a construction claim will succeed or fail. Absent some affirmative action creating waiver or estoppel, where the contract makes notice a condition precedent to recovery of a claim, the failure to give notice bars a contract claim. State Highway Department v. Hewitt Contracting Company, 113 Ga. App. 685, 149 S.E.2d 499 (1966).

Where the parties enter into a contract providing for liquidated damages for delay, but the contractor fails to follow the requirements of the contract and timely apply to the owner for an extension of time for delays beyond its control, and the contractor produces no other evidence of a contractual defense, then the contractor loses its right to a time extension under the contract and the owner may recover liquidated damages from the contractor as matter of law. Dan-D, Inc. v. Burnsed Enterprises, Inc., 188 Ga. App. 207, 372 S.E.2d 303 (1988).

Where a contract requires that the contractor notify the owner of any claims for extra work or extra cost by the presentation of a claim with the first estimate filed after the changed or extra work was performed, and the contractor fails to follow this requirement of the contract, the contractor was not entitled to recover for its additional work. Goodwin, Inc. v. City of Lafayette, 418 F.2d 698 (5th Cir. 1969)(finding the conduct of contractor in waiting two years after completion of project to submit claim "does not add up to open and fair dealings").

It is the better practice for the construction contract to contain a clause requiring notice of a claim of defective performance or defective materials prior to initiating any repair which may result in a backcharge. Simply notifying the opposite party of price escalations or extra handling charges without acceptance of those charges by the opposite party does not assure collection of those charges. Whether it is reasonable and customary to backcharge a supplier for the cost to repair a defective product without prior notice to the supplier is a question of fact to be submitted to the fact finder for a determination. Fruin-Colon Corp. v. Air Door, Inc., 157 Ga. App. 804, 278 S.E.2d 708 (1981).

The contract also should spell out whether a reply to a claim notice is required. The owner's silence may be considered to be an acceptance of the claim and may result in the owner being deemed to have waived contract conditions which conflict with the contractor's position, or to have accepted the contractor's work subject to the conditions set out in the contractor's notice. State Highway Department v. Wright Contracting Co., 107 Ga. App. 758, 131 S.E.2d 808 (1963).

Where the opposite party is placed on notice that work is considered to be extra, the failure to follow the requirements of the contract for pricing and advance written approval of the extra work may not be fatal to the claim. Batson-Cook Company v. Loden & Company, Inc., 129 Ga. App. 376, 199 S.E.2d 591 (1973).

Provisions as to notice must be reasonably construed. State Highway Department v. Hall Paving Co., 127 Ga. App. 625, 194 S.E.2d 493 (1972).

Where a general contractor requires a subcontractor to perform extra work outside the foreseeable scope of its contract, with actual notice of the extra expenses which are being incurred by the subcontractor, then the general contractor may be found to have taken the subcontractor's claim for this extra work outside the scope of the notice requirements of the original contract. Ballenger Corporation v. Dresco Mechanical Contractors, Inc., 156 Ga. App. 425, 274 S.E.2d 786 (1980).

Where the claim is made for a defect in a product which is regulated by the Uniform Commercial Code, notice of the defect must be given to the seller of the goods. The notice must be within a reasonable time after the buyer discovers or should have discovered the defect. The failure to give the statutorily required notice bars any remedy under the UCC. O.C.G.A. § 11-2-607(3)(a). Fruin-Colnon Corp. v, Air Door, Inc., 157 Ga. App. 804, 278 S.E.2d 708 (1981).

The UCC expressly permits the buyer to backcharge the seller for any damages sustained from the breach. The UCC requires that this is done by notifying the seller that the buyer is deducting all or any part of the damages resulting from the breach of contract from any part of the price still due under the contract, pursuant to O.C.G.A. § 11-2-717.

Risk-Shifting Provisions

Indemnity Clauses

Hold harmless and indemnity clauses are extremely common in the construction industry. They are an acceptable means of allocating the risk of loss from one party to another, provided that both parties understand the risk which has been allocated and the responsibilities attendant to that allocation of risk.

Georgia law prohibits the enforcement of an indemnity provision in a construction contract which attempts to provide indemnity for the sole negligence of the party indemnified. Such contracts are considered void as against public policy. O.C.G.A. § 13-8-2(b).

Such contract provisions have been construed as requiring the indemnifying party to provide insurance for the benefit of the indemnified party. Tuxedo Plumbing and Heating Company, Inc. v Lie-Nielsen, 245 Ga. 27, 262 S.E.2d 794 (1980).

Risk may be shifted even in the absence of a formal indemnity clause. Under Georgia law, any defendant who has been sued may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to him for all or part of the plaintiff's claim against him. O.C.G.A. § 9-11-14(a).

Parties may be brought in based upon several concepts of derivative liability, including indemnity, subrogation, express or implied warranty, or some other theory. Insurance Company of North America v. Atlas Supply Company, 121 Ga. App. 1, 172 S.E.2d 632 (1970).

Insurance Clauses

Insurance policies of several types may be required by the construction contract.

One of the most important policies is the contractor's comprehensive general liability insurance policy. The typical CGL policy provides coverage for premises and operations liability, elevator liability and independent contractor's protective liability. This policy is now frequently called a "commercial" general liability policy.

A second important category of insurance is builders risk insurance. This policy provides both property damage protection and liability coverage. Usually the contractor will have the opportunity to select various "endorsements" which can add additional protection to the builders risk policy. If the project is damaged during the course of construction, the contractor's builders risk insurance may provide coverage to reimburse the contractor for this loss.

Workers compensation insurance is required by law in Georgia. If a subcontractor does not obtain workers compensation insurance for its employees, then the general contractor may be liable under its own policy for injuries to these employees. O.C.G.A. § 34-9-8.

Exculpatory, Waiver and Disclaimer Clauses

Construction contracts frequently contain provisions which attempt to expressly define a risk, then disclaim responsibility for that risk or shift responsibility for that risk to another party.

For example, claims for differing site conditions are very common due to the inherent difficulty of determining the conditions existing underground or within the structure of a completed building. Differing site conditions often significantly increase the cost of construction, create unforeseen delays, complicate construction techniques, and disrupt the smooth operation of the project.

Ordinarily, a contractor performing work under a fixed price contract is not entitled to additional compensation merely because unforeseen difficulties are encountered in the performance of the contract. Decatur County v. Praytor, Houston & Wood, 165 Ga. 742, 142 S.E.2d 678 (1928); Anderson v. Golden, 569 F.Supp. 122 (S.D. Ga. 1982).

Where the contract places a duty on the contractor to inspect and verify site conditions, this duty will ordinarily be enforced. Jahncke Services, Inc. v. Department of Transportation, 172 Ga. App. 215, 322 S.E.2d 505 (1984)(contract placed duty on contractor to make its own investigation of borrow pits).

Construction contracts often contain a "differing site conditions" clause to address the issue how responsibility for differing site conditions will be allocated between the owner and the contractor.

If the owner elects to provide the contractor with site data which was obtained by the owner's own site investigation, the owner may accompany that site data with a disclaimer indicating that the owner and site engineer do not warrant the accuracy or correctness of the data, and that the data was gathered solely for the owner's use and is provided to the contractor with that express understanding.

The construction contract also may require the contractor to conduct its own site inspection, and may completely disclaim any owner responsibility for unforeseen site conditions. Time may be insufficient for the contractor to conduct a proper site investigation before a bid must be submitted, or cost constraints may make an independent site investigation financially impossible. Issues frequently arising in the context of differing site conditions include whether the contractor was on notice of the site conditions due to site examination, the adequacy of that site examination, whether the site conditions were reasonably foreseeable by the contractor, whether the contractor relied upon site data submitted to the contractor by the owner, whether the site conditions were materially different from those contemplated in the contract documents or site report, whether the contractor's means and methods were reasonable and prudent, causation, whether adequate notice was given, and many others, not all of which have been addressed by the cases in Georgia.

The Georgia Court of Appeals has observed that the very fact that a contract contains a provision for extra work necessitated by unforeseen conditions is evidence enough that not every condition is expected to be anticipated. State Highway Department v. Wright Contracting Co., 107 Ga. App. 758, 131 S.E.2d 808 (1963).

Where the contract in question does not contain an unforeseen conditions clause, unequivocally limits the contract to a sum certain, and contains an inspection clause, the contract imposes the risk of uncertainty of subsurface conditions on the contractor. American Demolition, Inc. v. Hapeville Hotel Limited Partnership, 202 Ga. App. 107, 413 S.E.2d 749 (1991).

Differing site conditions claims may arise either as a breach of contract claim or as a tort claim, depending upon how the claim arose. If a construction contract represents that certain conditions exist on the site, and in fact the actual conditions on the site differ from those represented in the contract, then a contract-based claim arises.

A detailed analysis of the modern view on this issue was undertaken by the court in Robert E, McKee v. City of Atlanta, 414 F.Supp. 957, 959 (N.D. Ga. 1976). In that case, the court noted that if the contract clearly places the risk of uncertainty on one of the parties, then that party must absorb the losses resulting from the unexpected condition. But where the government makes positive statements of material fact concerning the work in question an implied warranty arises which is not lost by general exculpatory clauses disclaiming any responsibility for the accuracy of the data.

The court went on to note that this implied warranty is conditioned upon a determination of whether the contractor could have discovered the true facts through a reasonable investigation, given the time available, as well as the facilities and expense required in order to conduct a suitable investigation. Other factors considered are the detailed nature of the government's data. No relief will be granted, however, for the contractor's own misjudgment based upon information which is itself accurate.

This decision is in accordance with the majority view on this issue, but the Georgia state courts seem to have been less willing to embrace this view. For example, the Georgia courts have held that conditions shown on the plans and specifications which are expressly made subject to adjustment by the project engineer do not constitute a misrepresentation of site conditions. Decatur County v. Praytor, Houston & Wood, 165 Ga. 742, 142 S.E.2d 678 (1928).

As reflected in the foregoing decisions, the contractor usually is not entitled to recover from the owner for extra expense occasioned by conditions which differ from those normally encountered. This is particularly true where the contract places the risk of such conditions on the contractor, and the owner does not mislead the contractor or misrepresent the actual job conditions.

Where the contract requires the contractor to give notice of extra expense caused by unforeseen site conditions, these provisions ordinarily are enforced. State Highway Department v. Hewitt Contracting Company, 113 Ga. App. 685, 149 S.E.2d 499 (1966).

If the site conditions actually are concealed from the contractor (in other words, active rather than passive concealment of the conditions), then the concealment of the site conditions may give rise to a tort claim for fraud and misrepresentation. Robert E. McKee, Inc. v. City of Atlanta, 414 F.Supp. 957 (N.D. Ga. 1976).

Where county officials or the project engineer are responsible for the fraud, they may be personally liable. Decatur County v. Praytor, Houston & Wood, 165 Ga. 742, 142 S.E.2d 678 (1928).

Payment Provisions

Price and Payment Terms

Price and payment terms are central features in most construction contracts. For this reason, payment terms usually are spelled out in great detail in the construction contract. The lawyers asked to review a construction contract should carefully review these provisions with the client to determine whether they are acceptable and whether the client's own payment procedures have been set up to comply with the contract procedures. For example, if the client normally bills on the first of the month, but the construction contract requires all bills to be submitted by the 20th of the month for payment by the 10th of the next month, an untimely bill may mean that payment will be delayed for over a month.

Retainage is another very important aspect of the payment process. Retainage represents funds withheld by the owner or contractor for work which has been fully performed. Retainage of ten percent is common in the industry, although often this figure is reduced to five percent when the project is nearing completion. Retainage provisions are placed in construction contracts to provide security to the owner or contractor that the downstream party from which the retainage is withheld will have an incentive to perform corrective or punch list work on the project. If such corrective work is not performed, then the upstream party can order the work done by another contractor and deduct the cost of that work from the retainage. Provisions spelling out how and under what circumstances such deductions may be taken from the retainage are highly important provisions of the contract.

Contingent payment clauses make the right to receive payment for work performed contingent upon the happening of some event, usually the receipt of full payment by the party making payment. Problems occur when the party making payment does not receive payment through no fault of the party expecting to receive payment.

For example, a subcontractor who has fully and properly performed may not receive payment from a general contractor due to the fault of the general contractor, another subcontractor or supplier who have defaulted on some aspect of their performance, thereby authorizing the owner to withhold payment from the general contractor. Thus, the innocent subcontractor suffers non-payment due to the performance problems unrelated to their own work.

The courts in some jurisdictions interpret contingent payment clauses to mean that the contractor must make payment within a reasonable time, but the Georgia courts have not followed this liberal trend. In Georgia, a pay-when-paid or pay-if-paid clause is fully enforceable. Sasser & Co. v. Griffin, 133 Ga. App. 83, 210 S.E.2d 34 (1974).

A pay-when-paid clause in a subcontractor's contract may be circumvented where the court finds that a oral agreement apart from the written contract supports the claim. Excavators and Erectors, Inc. v. Bullard Engineers, Inc., 489 F.2d 318 (5th Cir. 1973).

Payment Affidavits and Conditions

Construction contracts often contain a condition requiring the submission of a final lien waiver or an affidavit that all bills for labor and materials used on the job have been paid as a condition of payment.

Most construction contracts require billings to take the form of applications for payment. Standard forms, such AIA Form G702 are often employed. These forms usually require some form of affidavit of payment from the contractor. This may take the form of a list all subcontractors and suppliers, and an indication that previous payments have been applied to these billings.

Note that payment affidavits take various forms. Some affidavits indicate that payment of subcontractors and suppliers are to be made in the future from the funds paid by the owner or contractor. Other forms indicate that payment already has been made to subcontractors and suppliers. Some contractors object to the latter form of affidavit, which, in their opinion, requires them to "finance the job."

Another common variation is a payment affidavit which indicates that the application for payment represents all sums owed through a certain date. Contractors with pending or unpriced claims should be sure to note that such claims are excluded from the payment application and its affidavit. Otherwise, the contractor risks waiving such pending claims.

Final Payment

Receipt of final payment, including payment of contract balance and retainage, is a critical element in the construction scenario since it eliminates payment as leverage to assure performance by the contractor, subcontractors and suppliers. Final payment is also a triggering event for the execution of final lien and bond waivers. Final payment usually indicates that any punch list work remaining on the project has been completed to the satisfaction of the owner or general contractor. In some contracts, final payment is the triggering event for the start of contract warranty, and receipt of final payment is sometimes made a condition for the enforcement of any warranty provided by the contract.

A contract which requires the written acceptance of the contractor's work as a condition precedent for final payment is enforceable under Georgia law. D.I. Corbett Electric, Inc. v. Venture Construction Co., 140 Ga. App. 586, 231 S.E.2d 536 (1976); Jerome Distributors, Inc. v. B.L.I. Construction Co., 142 Ga. App. 776, 237 S.E.2d 13 (1977).

Quality Control Provisions

Inspection and Punch List Provisions

Inspection and punch list provisions provide the opportunity for the owner to specify construction quality control procedures for the project. Inspection provisions should spell out how inspections are to be performed, who is to conduct the inspections, and what is to be done with respect to work which fails inspection. Punch list procedures relate to final inspection of the work. These provisions usually spell out what corrections or repairs of the contractor's work are necessary before final payment is made. Typically, the owner is authorized to deduct from the final payment the cost of any punch list work which remains uncorrected.

The better practice is for the inspection provisions of the contract to establish accepted industry standards as a baseline for performance. Where the architect requires stricter inspection or quality standards than those set out in the specifications, and the contractor properly protests compliance with these standards, then the contractor may recover for the extra cost of complying with these stricter standards. Batson-Cook Company v. Loden & Company, Inc., 129 Ga. App. 376, 199 S.E.2d 591 (1973).

A wide variety of sources exist for establishing industry standards for performance of a construction contract, some of the more important being local building codes, industry trade groups, and standards published by the American National Standards Institute and the American Society for Testing and Materials. In the absence of a contractual standard, standards may have to be proven by way of expert testimony. Such testimony is admissible to show the custom and practice of a construction trade. Biltmore Construction Co., Inc. v. Tri-State Electrical Contractors, Inc., 137 Ga. App. 504, 224 S.E.2d 487 (1976); Puritan Mills, Inc. v. Pickering Construction Co., Inc., 152 Ga. App. 309, 262 S.E.2d 586 (1979).

Ordinarily, where the contract makes the decision of the architect or engineer binding on the contractor, such a provision will be enforced. Finn v. Carden, 100 Ga. App. 270, 110 S.E.2d 693 (1959).

Where the contract makes engineer's decision in certain matters final, in the absence of fraud or such gross mistake as would necessarily imply bad faith or a failure to exercise an honest judgment, the contractor may not recover for costs associated with the engineers decision, even if the contractor proves that decision is erroneous. State Highway Department v. Hewitt Contracting Company, 113 Ga. App. 685, 149 S.E.2d 499 (1966).

This rule does not extend to errors in calculation or other such mistakes not related to engineering judgment. State Highway Department v. Hewitt Contracting Company, 113 Ga. App. 685, 149 S.E.2d 499 (1966).

Warranty and Call-Back Provisions

Most construction contracts contain warranty provisions which state that the contractor or subcontractor warrants its work for some period of time, normally one year. These provisions should set out exactly what the contractor is required to do in order to meet the requirements of the warranty.

The general conditions in most standard form contracts state that the warranty is not an exclusive remedy. In other words, a claim for defective performance is not limited to the one-year warranty period set out in the warranty. The statute of limitations for such claims which arise under a written contract is six years. O.C.G.A. § 9-3-24. See McDevitt & Street Co. v. K-C Air Conditioning Service, Inc., 203 Ga. App. 640, 418 S.E.2d 87 (1992). In addition to any written warranty contained in the contract, there is implied in every contract for work or services a duty to perform it in a skillful, careful, diligent, and workmanlike manner. Howell v. Ayers, 129 Ga. App. 899, 202 S.E.2d 189 (1973).

Contract provisions in building or construction contracts which attempt to insulate the contractor from its sole negligence are prohibited by statute in Georgia. O.C.G.A. § 13-8-2(b). This statute has been construed as prohibiting warranty language which has this same effect. Bicknell v. Richard M. Hearn Roofing & Remodeling, Inc., 171 Ga. App. 128, 318 S.E.2d 729 (1984).

Georgia recognizes the rule that neither caveat emptor nor merger by deed is a viable defense by a builder-seller against a homeowner's tort-negligence and breach of contract claims seeking recovery for latent building construction defects about which the purchaser homeowner did not know and in the exercise of ordinary care would not have discovered, which defects were either known to the builder-seller or in the exercise of ordinary care would have been discovered by him. Worthey v. Holmes, 249 Ga. 104, 287 S.E.2d 9 (1982).

There are a variety of warranties under the Uniform Commercial Code which apply to the sale of goods. These warranties include both express and implied warranties, including warranties of merchantability and fitness for an intended purpose.

Termination and Suspension of Work Provisions

Provisions relating to the circumstances which may give rise to termination or suspension of work should be addressed in the construction contract.

Termination for default is a highly serious matter which may result in severe damages to all parties involved with the project. The grounds for a termination for default should be clearly and specifically addressed in the contract. Where a contractor is wrongfully terminated, an action will lie for the damages caused by the wrongful termination. Stowers v. Hall, 159 Ga. App. 501, 283 S.E.2d 714 (1981); Marathon Oil Company v. Hollis, 167 Ga. App. 48, 305 S.E.2d 864 (1983).

In order to avoid problems in cases of voluntary termination, the better practice is to make some provision for obtaining from the defaulting party an acknowledgment of default or some form of admission that there has been a material breach of contract. The acknowledgment of default also should include a final lien waiver in the proper statutory form acknowledging that any payments which have been previously received constitute full and final payment under the contract.

The modern trend is to include provisions in the construction contract which permit the owner to terminate its contract with the general contractor for "convenience," meaning that there is no requirement for the owner to show cause for the termination. In such clauses, the owner usually agrees to pay for the contractor's direct costs of demobilization, but not for any lost profits on the job. Such clauses do not always insulate the owner from liability to the general contractor. See Department of Transportation v. Arapaho Construction, Inc., 180 Ga. App. 341, 349 S.E.2d 196 (1986).

Suspension of the work on the project may be necessary for a variety of reasons, including adverse weather, delays in fabrication, discovery of design problems, and other reasons. The manner in which suspension of work is to be ordered, and any compensation to the contractor which is to be paid as a result of the suspension, should be spelled out in the contract. Suspension of work through no fault of the contractor may give the contractor grounds for assertion of a claim for delay or acceleration, as discussed in more detail in the following section of this paper.

Schedule Provisions

Scheduling, Delays, Acceleration

The contract schedule usually is one of the most important provisions of the contract to all parties. The owner must know when to expect completion in order to give notice of cancellation of leases, to plan a move into the new facility, to schedule production runs, to anticipate cash flow needs, to coordinate production, etc. The contractor must schedule manpower and equipment, and the projected profit on the job may depend upon completion of the work within the scheduled period of performance. For all of these reasons, scheduling is highly important to all parties in the construction process. In construction contracting, time is money.

Where a contract states that time is of the essence, and the contractor fails without excuse to timely complete its contractual obligations, then the contractor is liable for any damages caused by its delay. Heard v. Dooly County, 101 Ga. 619, 28 S.E. 986 (1897)(weather delays no excuse); Ladd Lime & Stone Co. v. MacDougald, 32 Ga. App. 709, 124 S.E. 551 (1924)(permitting recovery for cost of idle labor and equipment); State Highway Department v. Hall Paving Co., 127 Ga. App. 625, 194 S.E.2d 493 (1972).

Whether a contractor is entitled to a time extension or additional compensation for a project delay depends upon who or what is responsible for the delay, and whether the delay constitutes an excusable delay under the terms of the contract.

Non-compensable delays authorize an extension of the contract completion date, but do not authorize the collection of damages for the delay. Non-compensable delays occur when matters outside the control of the parties cause the delayed completion.

Compensable delays authorize both an extension of the contract completion date as well as collection of damages caused by the delay. Compensable delays occur when one party fails, without excuse, to timely perform a contractual duty which causes a delay in the other party's performance. Travelers Indemnity Co. v. West Georgia National Bank, 387 F. Supp 1090 (N.D. Ga. 1974)(owner delay in granting contractor's requests for time extensions bars owner from recovering liquidated damages); Rome Housing Authority v. Allied Building Materials, Inc., 182 Ga. App. 233, 355 S.E.2d 747 (1987)(owner's failure to timely issue change order to general contractor); GYMCO Construction Co., Inc. v. Architectural Glass & Windows, Inc., 884 F.2d 1362 (11th Cir. 1989)(general contractor's failure to supply template to subcontractor).

Concurrent delays occur when the actions of both parties cause or contribute to the delay. In Georgia, neither party may recover damages for a concurrent delay. J.A. Jones Construction Co. v. Greenbriar Shopping Center, 332 F.Supp. 1336 (N.D. Ga. 1971), aff'd, 461 F.2d 1269 (5th Cir. 1972); Anderson v. Golden, 569 F.Supp. 122 (S.D. Ga. 1982); Malta Construction Co. v. Henningson, Durham & Richardson, Inc., 694 F. Supp. 902 (N.D. Ga. 1988)(holding issue is for trier of fact).

Contract language may change this equation by requiring a party to assume the risk of delays which are caused by factors which are not normally considered to be within the control of the parties (for example, weather or labor trouble).

Delay and acceleration on a construction project are related concepts. Where the contractor is delayed, acceleration may be required in order to comply with the time requirements of the construction contract unless a time extension is granted.

Direct acceleration occurs where an order to accelerate performance is given. The contractor normally is entitled to compensation for any extra expense caused by an acceleration order. Constructive acceleration occurs where either compensable or non-compensable delays exist, but the contractor's request for an extension of the contract completion date is refused or deferred. If the contractor accelerates its performance and incurs additional expense in order to overcome the delay and achieve the original completion date, then the contractor's performance has been "constructively" accelerated, even though no direct acceleration order has been given. The contractor normally is entitled to compensation for constructive acceleration.

Where the contract requires the contractor to give notice of any delay as a condition precedent for recovery of the costs of delay, and the contractor fails to timely exercise its rights under that provision and apply for an extension, then the contractor waives its right to a time extension. Dan-D v. Burnsed Enterprises, Inc., 188 Ga. App. 207, 372 S.E.2d 303 (1988); State Highway Department v. Hewitt Contracting Company, 113 Ga. App. 685, 149 S.E.2d 499 (1966).

Most contracts require notice when a condition is encountered which causes a delay or acceleration of the schedule. Where the notice alerts the opposite party that the claimant has a grievance against it and reasonably complies with the notice procedure set out in the contract between the parties, the failure to strictly comply with the notice procedures is not fatal to the claim. E.C. Ernst, Inc. v. General Motors Corp., 482 F.2d 1047 (5th Cir. 1973).

Liquidated Damages

Liquidated damages are often spelled out as a remedy for delay in completion of the contract. Liquidated damages "liquidate" or set the amount of damages a party may collect for delay. Such damages usually are measured by the day. Liquidated damages are often set based upon per diem interest carry on the construction loan for the project, anticipated rentals, the cost of obtaining a replacement facility during the term of the delay, or other such factors.

By statute in Georgia, if the parties agree in their contract to assess liquidated damages, unless the agreement violates some principle of law, the parties are bound by this agreement. See O.C.G.A. § 13-6-7. Gibson v. Sheriff, 155 Ga. App. 578, 271 S.E.2d 710 (1980).

A liquidated damages provision also limits the owner's recovery to the amount stated in the liquidated damages provision, notwithstanding that larger actual damages were eventually sustained. Georgia Ports Authority v. Norair Engineering Corporation, 127 Ga. App. 864, 195 S.E.2d 199 (1973).

On a multiple prime contract, liquidated damages may be assessed against a contractor who fails to meet milestone dates which result in delays to the other prime contractors. Georgia Ports Authority v. Norair Engineering Corporation, 127 Ga. App. 864, 195 S.E.2d 199 (1973).

The fact that adverse weather was encountered does not always excuse contract performance. The contractor should anticipate and make provision in the construction schedule for normal amounts of bad weather. Heard v. Dooly County, 101 Ga. 619, 28 S.E. 986 (1897).

The conduct of the owner may waive the contractual due date, however, and where evidence of such a waiver exists, summary judgment granting the owner liquidated damages for the contractor's delay is not warranted. Dan-D v. Burnsed Enterprises, Inc., 188 Ga. App. 207, 372 S.E.2d 303 (1988).

A subcontractor's delay may be excused by failure of prime contractor to perform some action which is a constraint on the subcontractor's performance. Gymco Construction Co., Inc. v. Architectural Glass & Windows, Inc., 884 F.2d 1362 (11th Cir. 1989).

A provision inserted in a contract simply to deter a party from breaching it is a penalty and not liquidated damages. The law will enforce liquidated damages but will not enforce a penalty. To distinguish a penalty from liquidated damages, a three-part test must be employed. To enforce the provision as liquidated damages, the court must find:

(1) that the injury caused by the breach is difficult or impossible to estimate accurately;

(2) that the parties intended to provide for damages rather than a penalty;

(3) that the sum stipulated is a reasonable pre-estimate of the probable loss.

Gibson v. Sheriff, 155 Ga. App. 578, 271 S.E.2d 710 (1980).

A "no damage for delay" clause seeks to prevent the contractor from recovering for any extra cost associated with suspending or extending the scheduled or anticipated period of performance for the project. In formulating its estimate for the cost of the project, the contractor usually estimates how long the project will take and makes provision for costs accordingly.

If the anticipated completion time of the project is extended, the contractor might be in the position of having to pay for extended rentals, wage rates may increase, and project and home office overhead must be carried over a longer period of time. This obviously increases the contractor's costs.

The Georgia courts have enforced no damage for delay clauses. State Highway Department v. Wright Contracting Co., 107 Ga. App. 758, 131 S.E.2d 808 (1963). State Highway Department v. MacDougald Construction Co., 102 Ga. App. 254, 115 S.E.2d 863 (1960).

Perhaps the leading case in our region dealing with the permissible exceptions to a no damage for delay clauses is E.C. Ernst, Inc. v. Manhattan Construction Company of Texas, 551 F.2d 1026 (5th Cir. 1977). In that case, decided under Alabama law, the court noted the harsh effect of "no damage for delay" clauses and observed that while courts strictly construe such provisions, they also generally enforce them absent a delay (1) not contemplated by the parties under the provision, (2) amounting to an abandonment of the contract, (3) caused by bad faith, or (4) amounting to active interference.

Georgia courts also find that delays which were not contemplated by the parties provide an exception to enforcement of a no damage for delay clause. Department of Transportation v. Arapaho Construction Co., 257 Ga. 269, 357 S.E.2d 593 (1987).

Some courts outside the state of Georgia have held that a contract with a no damage for delay clause does not preclude the recovery of delay damages where the contract also contains a provision which requires an extension of time for completion and the time of completion is not properly extended in accordance with the requirements of the contract. The courts in these cases usually state that enforcement of the no damage for delay clause is conditioned upon compliance with the extension provisions during the course of performance under the contract.

Dispute Resolution Provisions

Numerous forms of dispute resolution clauses are found in construction contracts. As any experience advocate knows, there are pros and cons to any dispute resolution procedure. In weighing these considerations, most construction contracts lean toward alternative dispute resolution procedures such as arbitration or mediation.

Arbitration Clauses

In deciding whether to insert an arbitration clause in a construction contract, a number of advantages and disadvantages should be considered. Most construction contracts require arbitration to be initiated in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association ("AAA"). The AAA has extensive experience in the administration of construction arbitrations. If AAA or some other independent entity is not selected to administer the arbitration, then the drafter of the arbitration provision should carefully consider how the arbitration process is to be administered. Administration by the parties themselves is seldom successful.

If the arbitration is administered by the AAA, it will be conducted before a panel of experts selected by the parties from a list maintained by the AAA. These experts know the construction industry and are familiar with its special problems and challenges.

By the same token, these experts bring with them their own point of view on many matters. It may be difficult for an arbitrator to be neutral about matters with which they have great personal familiarity.

One alternative is for the parties to specify their own arbitrator, and have these arbitrators pick a third "neutral" arbitrator (the so-called "yours, mine, and ours" arbitration). In my experience, this form of arbitration is subject to considerable delays caused by disputes over selection of the "neutral," and when selected, the "neutral" ends up effectively acting as a single arbitrator who sides with one or the other of the party-selected arbitrators in deciding the case.

Although the arbitration process has its own delays, an arbitration decision usually can be obtained much faster than a court decision, usually within a matter of a few months from the selection of the arbitrators.

Fees for arbitration are based on the amount in controversy and can be quite high if the amounts in controversy are large. Fees usually must be paid in advance and may not be fully refunded even if the arbitration does not go forward.

Unless a neutral site can be agreed upon, the AAA will usually hold the arbitration hearing in its offices. A fee may be charged for use of the arbitration room, particularly if the hearing extends over several days.

The arbitrators must be paid by the parties. The arbitrators are compensated by a daily fee which can amount to thousands of dollars over a lengthy hearing. The arbitrators' expenses (hotel, food, transportation, etc.) are all billed to the parties. These fees and expenses may be allocated by the arbitrators to the losing party, or it can be split between the parties, as the arbitrators see fit.

There is no discovery in arbitration, except for that ordered by the arbitrators or agreed to by the parties. Usually, only exhibits which will be introduced in evidence at the arbitration are exchanged by the parties. While the parties may save the cost of conducting discovery, thereby reducing preparation costs, this savings may be offset by lengthening the time of the arbitration hearing.

The lack of discovery also means that neither side has much chance to learn about the other side's case prior to the hearing. This means that a party has less chance of learning the relative strengths and weaknesses of each side's case. This may reduce settlement opportunities and increase the chance of unpleasant surprises at the hearing.

Arbitration is a contractual dispute resolution process. This means that only those parties who contractually agree to arbitrate can be joined in the arbitration. Architects and engineers usually have provisions in their contracts barring them from being joined in any arbitration between the owner and the contractor.

In arbitration, the hearing can and often is broken up into segments. This can be more convenient than a court case, where the judge directs the attorneys to appear at trial and to conduct the trial through to a conclusion, usually with no adjournment. The downside of this is that evidence presented at the first arbitration hearing may be forgotten by the time the last hearing is held.

Scheduling a hearing can be a problem in arbitration. Usually, the panel is made up of professionals who have busy schedules. It often is difficult to find a block of time that is convenient for everyone. This can result in a considerable delay in holding the first hearing, and may require a month or more between hearings if the hearing is broken up into segments.

There is virtually no possibility of reversing an arbitration award on appeal. In the absence of fraud or misconduct, the decision of the arbitrators is final. This is fine if you win, but what happens if you lose?

Georgia has adopted an arbitration statute called the Georgia Arbitration Code. O.C.G.A. § 9-9-1.

The Georgia Arbitration Code applies to all disputes in which the parties have agreed in writing to arbitrate and "shall provide the exclusive means by which agreements to arbitrate disputes can be enforced" in Georgia, with certain stated exceptions. O.C.G.A. § 9-9-2.

An arbitration agreement submitting the controversy to arbitration or a contract which provides for arbitration of disputes arising under the contract is enforceable pursuant to the Georgia Arbitration Code. O.C.G.A. § 9-9-3.

Under the Georgia Arbitration Code, demand for arbitration must be served on the other parties to the arbitration by registered or certified mail, return receipt requested. This statute provides for preliminary injunctions, attachment, and other special relief upon application to a court having jurisdiction of the controversy. O.C.G.A. § 9-9-4.

If a party seeks to arbitrate a claim which would be barred by a statute of limitation had the claim been asserted in court, a party is authorized under the Georgia Arbitration Code to apply for a stay of the arbitration or vacate any award rendered by the arbitrators. A party waives the right to raise the limitation of time as a bar to arbitration in an application to stay arbitration by that party's participation in the arbitration. O.C.G.A. § 9-9-5.

An application to compel arbitration may be filed with a court having jurisdiction. A party also may apply to stay arbitration if no valid agreement to submit to arbitration was made, if the arbitration agreement was not complied with, or if the arbitration is barred by a limitation of time. O.C.G.A. § 9-9-6.

Where a party serves a demand for arbitration, the demand must specify the agreement pursuant to which the arbitration is sought, the name and address of the party serving the demand, that the party served with the demand shall be precluded from denying the validity of the agreement or compliance therewith or from asserting the limitation of time as a bar in court unless he makes application to the court within 30 days for an order to stay arbitration, and the nature of the dispute or controversy sought to be arbitrated. Amendments are permitted after the original demand is served. O.C.G.A. § 9-9-6.

After service of the demand for arbitration or any amendment thereto, the parties served must make application within 30 days to the court for a stay of arbitration or be precluded from denying the validity of the agreement to arbitrate. The right to apply for a stay of arbitration may not be waived except as set out in the Georgia Arbitration Code. O.C.G.A. § 9-9-6.

Parties may seek consolidation of separate arbitration proceedings under certain circumstances. O.C.G.A. § 9-9-6(e).

The Georgia Arbitration Code provides that if an arbitration agreement sets out a method for appointment of arbitrators, that method shall be followed. If there is no method set out in the agreement or if for some reason the method fails or is not followed then the court may appoint one or more arbitrators on application of a party. O.C.G.A. § 9-9-7.

Arbitrators shall appoint the time and place for a hearing and may overrule the designation of the place of hearing stated in the arbitration agreement. Ten days' notice is required before the hearing is held. The arbitrators may adjourn or postpone the hearing. A court may direct the arbitrators to proceed promptly with the hearing in a determination of the controversy. O.C.G.A. § 9-9-8(a).

At the arbitration, the parties are entitled to be heard and to present pleadings, documents, testimony and other matters including cross-examination of witnesses. Parties have the right to be represented by an attorney. The hearing must be conducted before all the arbitrators unless the parties agree otherwise. A majority of the arbitrators may determine any question and render or change any award. The arbitrators are required to maintain a record of all pleadings, documents, testimony and other matters introduced at the hearing, including ordering the proceedings to be transcribed by a court reporter. O.C.G.A. § 9-9-8.

The arbitrators may issue subpoenas for the attendance of witnesses and for the production of books, records, documents, and other evidence. The subpoenas may be served by the court and enforced in the same manner as service and enforcement of subpoenas in a civil action. Discovery may be ordered by the arbitrators according to procedures established by them. A party has the right to the obtain a list of witnesses in examining copied documents relevant to the arbitration. Witnesses are entitled to compensation in the same manner as witnesses in superior court. O.C.G.A. § 9-9-9.

The arbitrators must render their award in writing and sign it. The award must be delivered to each party personally or by registered or certified mail, return receipt requested. The award must be made within the time fixed by the agreement or within 30 days following the close of the hearing if no provision is made in the agreement. A court may shorten or lengthen this time. The parties may extend in writing the time before or after its expiration. A party waives any objection to the award that is not made within the time required unless he notifies the arbitrators in writing of his objection prior to the delivery of the award to him. O.C.G.A. § 9-9-10.

Arbitrators are authorized to change the award if there is a miscalculation or mistake, if they have awarded upon a manner not submitted to them, or if the award is imperfect in a matter of form not affecting the merits of the controversy. Application for a change in the award must be made within 20 days after its delivery and must be served upon the other parties. Objection to the change of the award by the arbitrators must be made within 10 days after service of the application for a change, and written notice of this objection must be served on the other parties. The arbitrators then have 30 days to rule on the objection. O.C.G.A. § 9-9-11.

The court must confirm the award within one year after its delivery. O.C.G.A. § 9-9-12.

The court is authorized to vacate an award within three months after delivery of the award for corruption, fraud, misconduct, partiality of an arbitrator appointed as a neutral, overstepping of the authority of the arbitrators, or failure to follow a procedure set out in the Georgia Arbitration Code. Other grounds for vacating the award also exist. O.C.G.A. § 9-9-13. The award also may be modified by the court. O.C.G.A. § 9-9-14. Judgment may be obtained on the award, O.C.G.A. § 9-9-15, and appeals are authorized, O.C.G.A. § 9-9-16.

Unless otherwise provided in the agreement to arbitrate, the arbitrator's fees and expenses, not including counsel fees, incurred in the conduct of the arbitration, shall be paid as provided in the award. O.C.G.A. § 9-9-17.

There is also a procedure to enforce an arbitration agreement under the Federal Arbitration Act. If a suit is brought on an issue referable to arbitration under an arbitration agreement, a stay may be entered in any court of the United States upon application of one of the parties. 9 U.S.C. § 3.

A party may compel arbitration under the Federal Arbitration Act by petitioning the United States court having jurisdiction for an order to compel arbitration. 9 U.S.C. § 4.

If the agreement makes provision for a method of naming or appointing an arbitrator or arbitrators, such method shall be followed, but if no method is provided or if one of the parties fails to use such method, or for any reason there should be a lapse in the naming of an arbitrator, then upon application the court shall designate and appoint an arbitrator or arbitrators who shall act under the agreement. 9 U.S.C. § 5.

Under the Federal Arbitration Act, the arbitrators may summon in writing any person to attend a hearing as witnesses and compel them to bring any book, record, document, or paper which is deemed material as evidence in the case. Fees for attendance shall be the same as fees for witnesses before masters of the United States courts. A summons shall issue in the name of the arbitrator or arbitrators and shall be directed to the person to be served in the same manner as subpoenas to appear and testify are used in court. A United States district court may be petitioned if to compel attendance of such person or to punish such person for contempt of the summons. 9 U.S.C. § 7.

If the parties have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration and so specify in court, at any time within one year after the award a party may apply to confirm the award and the court must grant a confirmation order unless the award is vacated, modified, or corrected as prescribed by the Federal Arbitration Act. 9 U.S.C. § 9.

An arbitration award may be vacated where an award was procured by corruption, fraud, or undue means, where there was evident partiality or corruption in the arbitrators, where the arbitrators were guilty of misconduct in handling the hearing, where the arbitrators exceeded their powers or imperfectly executed them. A court is authorized to direct the arbitrators to rehear a matter, in its discretion. 9 U.S.C. § 10.

Where a miscalculation occurs or a mistake is made in description of any person, thing, or property referred to in an award, or where the arbitrators have awarded upon a manner not submitted to them, or where the award is imperfect in matter of form not effecting the merits of the controversy, a court is authorized to modify the award to correct the mistake. 9 U.S.C. § 11.

Sureties have historically resisted being compelled to arbitrate disputes between their principal and a claimant. The bonds issued by a surety usually do not contain an express arbitration provision, but ordinarily do incorporate by reference the construction contract which their principal has signed. If that contract contains an arbitration provision, the modern trend finds that the surety bond has incorporated the subcontract by reference and that the arbitration provision in the contract also is incorporated by reference into the bonded obligation.

Accordingly, if such an incorporation clause exists, the surety is required to arbitrate. J.S. & H. Construction Company v. Richmond County Hospital, 473 F.2d 212 (5th Cir. 1973); United Fidelity & Guaranty Company v. West Point Construction Company, Inc., 837 F.2d 1507 (11th Cir. 1988); Transamerica Premier Insurance Company v. Collins & Company, General Contractors, Inc., 735 F.Supp. 1050 (N.D. Ga. 1990).

Language in the bond stating that "any suit" must be brought within two years is not inconsistent with an agreement to arbitrate. Transamerica Premier Insurance Company v. Collins & Company, General Contractors, Inc., 735 F.Supp. 1050 (N.D. Ga. 1990).

It is possible for a party to take actions which will be inconsistent with proceeding under arbitration to resolve a dispute. If a party files a complaint, pursues discovery, files motions in court, and in general takes actions which completely disregard the arbitration provision, a court may be authorized to find that the party waived its right to demand arbitration. Where a party attempts to preserve these rights, however, arbitration will not be waived. H.R.H. Prince LTC. Faisal M. Saud v. Batson-Cook Company, 161 Ga. App. 219, 291 S.E.2d 249 (1982).

As indicated earlier, an arbitration award must be confirmed within one year after it is returned by the arbitrators. A failure to confirm the award may result in waiving the award.

Mediation Clauses

Mediation is often a superior solution for the resolution of construction disputes. Mediation may be conducted under the auspices of the American Arbitration Association, which has formal rules and procedures for mediation. Other companies also offer this service and employ experienced construction professionals, former judges, and others skilled in the mediation process.

Mediation is an effort to bring the parties together to a mutually agreeable settlement. Mediation is non-binding and the parties, not the mediator, ultimately determine whether the case will settle.

Lawyers often recommend that the mediation be conducted pursuant to a confidentiality agreement in order to avoid prejudice to an arbitration or litigation of the claim subsequently.

The process works best if both parties have decision makers present and participating in the mediation. It is usually helpful to have legal counsel present to help organize the argument and effectively present each party's position.

The process usually starts by an introductory statement of the position of the parties. Then private sessions with the mediator are held in an effort to determine whether common ground can be reached. A strong mediator is often helpful. Errors in logic, faulty assumptions, and weak arguments can be pointed out by the mediator.

Mediation is often successful in settling a case because it offers the decision makers for each side the first opportunity to hear their opponent's case unfiltered through the eyes and ears of their own personnel. Assessments of the strength and weakness of each side's case can be made. Mediation should occur only after thorough preparation of the case. Under these circumstances, mediation is surprisingly effective in achieving a resolution of construction claims.

The Litigation Alternative

At the time suit is filed, a party must determine whether to demand a jury trial or have its construction case tried before a judge. There are advantages and disadvantages to both procedures.

With the judge trial, scheduling flexibility can be increased. More interaction with the judge is possible than would be the case with a jury. Accordingly, if the judge has questions, he can stop the proceedings, question the expert, or request clarification from the attorney. This usually is not possible with a jury trial.

Judges may have more familiarity with technical concepts and are, of course, usually much more educated than the members of the jury.

Certain advantages also exist with the jury trial. A jury trial usually occurs continuously until it is completed. The jury then retires and deliberates until it reaches a verdict.

It is usually much more difficult to appeal from a judicial decision than it is from the decision of a jury trial. Accordingly, an adverse decision rendered by a judge may be difficult to reverse, while there may be more possibility of reversing an adverse jury trial verdict.

The rules of evidence are strictly adhered to during a jury trial. This offers the opportunity to exclude evidence which might be reviewed by a judge "for what it's worth."

Juries are often viewed as being unsophisticated. Juries do, however, have an excellent collective ability to determine who is lying and who is telling the truth.

While court costs are charged in litigation, these costs usually are much lower than fees for arbitration. Whoever prevails in the litigation is awarded court costs virtually automatically. There is no problem in litigation with compelling the attendance of the parties and attorneys, since the judge can direct the attendance of the attorneys at the trial and subpoenas are readily available to compel the attendance of witnesses.

A trial occurs after a full discovery, including interrogatories, depositions, requests for production of documents, and requests for admissions.

Discovery provides the opportunity to learn a great deal about the opponent's case and for your opponent to learn a great deal about your case. This is intended to facilitate settlement.

Litigation also can compel parties to participate in the dispute resolution process. A summons and complaint can be issued against any one subject to the jurisdiction and venue of the court. Third parties can be added under many circumstances.

With litigation, an appeal to a higher court is possible and may result in a reversal of the trial court decision. If a case is appealed, a delay of as much as a year or more may occur before the judgment is final.
 

Mr. Chapman concentrates his practice on all phases of construction law. Mr. Chapman obtained his Juris Doctor Degree from the University of Virginia and received his Bachelor of Arts Degree, with high distinction, from the University of Kentucky, where he was elected to Phi Beta Kappa.
 

Mr. Chapman has written extensively on construction and construction liability matters and is a frequent lecturer on these topics. He is a member of numerous construction law committees of the American Bar Association, including the Forum on the Construction Industry, the Public Contracts Section, the Construction Trials Subcommittee of the Litigation Section, the Fidelity and Surety Law Committee of the Tort and Insurance Practice Section, and the Construction Law Committee of the General Practice Section. He is a member of the Construction Industry Arbitration Panel of the American Arbitration Association, and has served as an instructor for AAA's advanced arbitrator training course. Mr. Chapman is a member of the Lawyers Club of Atlanta, the Atlanta Bar Association's Construction Law Section where he has served as a director and officer, and the State Bar of Georgia.