A Word of Caution

2. A Word of Caution These materials are presented with the understanding that the information provided is not legal advice.  Due to the rapidly changing nature of the law, information contained in this presentation may become outdated.  Anyone using information contained in this presentation should always research original sources of authority and update this information to ensure accuracy when dealing with a specific matter.  No person should act or rely upon the information contained in this presentation without seeking the advice of an attorney.

3. Contract Documents… What You Don’t KnowCAN Hurt You! Presented By: Carl L. Fletcher, Jr., Esquire

4. Review of Fundamental Contract Principles

8. Two Principal Functions of Contracts • Sets the terms of the parties’ agreement: • Scope • Quantity • Time • Price • Quality • Assigns risk between the parties

9. If The Terms of A Contract Are Unambiguous, The Courts Will Simply Enforce Its Terms • A court will not concern itself with the fairness or inequity of those terms, or how their application affects the parties. • This principle is called “Freedom of Contract.” • The only limits on Freedom of Contract are where the contract violates law or contravenes public policy.

10. The W. Va. Supreme Court of Appeals Has Said, Regarding Freedom of Contract and Public Policy: [Y]ou are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred, and shall be enforced by courts of justice. Therefore, you have this paramount public policy to consider, – that you are not lightly to interfere with this freedom of contract. Wellington Power Corp. v. CNA Surety Corp., 614 S.E.2d 680, 685 (W.Va. 2005), quoting Baltimore & Ohio Southwestern Railway Co. v. Voight, 176 U.S. 498 (1900).

11. Some Arguments That Are Easy To Assert But Almost Never Work To Negate The Terms of A Commercial Agreement • Duress • Contract of Adhesion • Fraud in the Inducement • Unconscionability

12. Given that we are most likely going to be bound to our construction contracts, what are some important provisions that are often overlooked?

13. “Incorporation By Reference” Provisions

14. Examples • The Contract Document consists of this Agreement; any Drawings, Specifications, or Addenda issued prior to execution of this Agreement; Exhibit A: Scope of Work; Exhibit B: Guaranteed Maximum Price; other Exhibits attached or referred to in this Agreement; other documents listed in this Agreement; change orders or amendments issued after execution of this Agreement; all of which form the Contract and are as fully a part of the Contract as if attached to this Agreement or repeated herein, and are hereby incorporated by reference.

15. Examples

16. Examples

17. Incorporation By Reference • Can be located in various areas of the agreement. • No special language necessary. • Applies whether documents are attached or not. • Applies whether you read/review the documents or not.

18. Implied Covenants & Obligations

19. Implied Covenants & Obligations • These are duties not explicitly stated in the contract documents, but are as binding as if they were. • They arise generally out of obligation, implied in every contract, of Good Faith and Fair Dealing.

20. Examples • Implied Warranty of Plans and Specifications • Implied Duty of Good Faith and Fair Dealing • Implied Duty to Share Material Information • Implied Duty to Provide Access, Duty to Coordinate and Duty to Not Interfere • Implied Warranty of Fitness for a Particular Purpose or Habitability • Implied Warranty of Workmanship • Implied UCC Warranty of Merchantability • Implied UCC Warranty of Fitness for a Particular Purpose • Implied Standard of Care • Implied Duty to Construct According to the Plans and Specifications • Implied Duty to Construct According to Legal Requirements such as Building Codes, Ordinances, Consent Decrees and Regulations • Implied Duty to Complete the Work in a Reasonable Time and For a Reasonable Price

21. Implied Covenants & Obligations • These implied obligations can be modified by express contractual provisions. • Conceptually, express provisions are used to assign or shift risk. • Conversely, these implied obligations arise in the absence of the parties’ assignment of risk.

22. Implied Covenants • Can be imposed by law. • Where imposed by law, may require specific language to modify or negate. • Some implied covenants may override express contractual terms.

23. Pay-If-Paid Clauses

24. Pay-if-Paid Clauses • By their nature, appear in subcontracts, or contracts where owner is not a party. • Shift the risk of owner’s non-payment to subcontractor. • Require specific language to be effective: • “Condition Precedent” • “Subcontractor Accepts Risk of Non-Payment By Owner” • Different than a “Pay-When-Paid” clause. • Can affect the owner.

25. Examples If the Subcontractor is making satisfactory progress with the Work (in the Contractor’s reasonable opinion), is not in default under any provision of the Subcontract and the Contract Documents, and if the Contractor, as a condition precedent to Subcontractor’s right to receive such payment, has received payment from the Owner for such Work, the Contractor will, subject to other provisions of this Subcontract, make monthly payments to the Subcontractor as set forth above in subparagraphs b and c of this Article 2. Subcontractor agrees to look solely to such funds received by Contractor from Owner for payments to Subcontractor hereunder, and payment by the Owner to the Contractor shall be a condition precedent to payment by the Contractor to the subcontractor. As a clarification and further definition of the condition precedent for any and all payments under this Subcontract, the Subcontractor acknowledges and agrees that in the event payment is not made to Contractor for any reason, including but not limited to default by the Owner, Subcontractor shall look exclusively to Owner for payment of any and all funds due under this Subcontract, whether or not such non-payment is related to Subcontractor’s work. Subcontractor further agrees that delay in payment or non-payment by the Owner does not create any separate obligation of Contractor to pay regardless of the extent of the delay. Final payment shall be made after Subcontractor’s Work has been accepted by Owner, satisfactory proof of payment of all amounts owed by Subcontractor in connection with this Subcontract has been provided, the Subcontractor’s Work is completed, all waivers and releases required by Contractor has been provided by Subcontractor, and Contractor has been paid in full for the Subcontractor’s Work. Contractor may withhold any amounts otherwise due under this Subcontract, or any other contractual arrangement between the parties, to cover any costs or liability Contactor has incurred or may incur for which Subcontractor may be responsible hereunder.

26. Examples Contractor’s receipt of payment from Owner shall be an express condition precedent to Subcontractor’s right to payment for any Work performed. In the event the Owner’s nonpayment is due to Contractor’s failure to meet its obligations set forth in the Prime Contract, and such failure is not due to Subcontractor’s failure to meet its obligations pursuant to the Contract Documents, the Contractor accepts the risk of nonpayment by the Owner, and Subcontractor will be paid within a reasonable amount of time. In the event the Owner’s nonpayment is due to any other reason, Subcontractor accepts the risk of nonpayment. Nothing contained in this provision affects the rights of the Contractor to assert any deducts, offsets or back charges under other provisions of this Subcontract.

27. Pay-If-Paid Clauses • Valid in West Virginia, Virginia, and Maryland. • Have been declared void in some jurisdictions. • Are “classic” risk-shifting provisions. • Require specific language to be effective. • Although not included in owner’s contracts, they can affect owner’s interests.

28. Conclusion • Construction contracts are a vehicle for assigning/shifting risk among parties. • The courts will generally enforce the parties’ contracts unless they violate public policy: “Freedom of Contract.”

29. Conclusion • “Incorporation by Reference” clauses help determine what is included in the contract: • Apply whether incorporated document is attached or not. • Apply whether incorporated document is read or not.

30. Conclusion • Implied covenants arise out of implied Duty of Good Faith and Fair Dealing. • Apply in the absence of specific shifting of risk in contract. • To the extent those terms are imposed by statute, parties must take care in efforts to avoid them. • May override express contract terms.

31. Conclusion • Pay-If-Paid Clauses shift risk of owner non-payment to subcontractors. • Directly affect subcontractors and contractors, but indirectly affect owners as well. • Are enforceable in some states, but not in others.

33. Thank You!

34. For more information, contact:Carl L. Fletcher, Jr., EsquireBowles Rice McDavid Graff & Love LLPcfletcher@bowlesrice.com(304) 347-1149