Three Construction Disputes: How Better Contract Compliance Could Have Prevented Them
By Kyle Dungca and Maegan Spivey
Every construction dispute that occurs can teach contractors something about their construction contracts and operations. Let’s look at three legal cases across the U.S. in the last 18 months that had big implications for those involved and possibly could have been avoided with stronger, better executed contracts.
Construction Project: Washington Bridge Rebuild
Location: Rhode Island
Contract Issue*: The Washington Bridge was closed suddenly in December 2023 due to structural failures, and in March 2024, it was announced that the bridge would need to be demolished and rebuilt. The state plans to put the project out to bid with an estimated completion date of 2026. The problem is that maintenance of the bridge was already awarded to a GC in 2021 through a $78M contract, only half of which has been completed. The state says they plan to put the remaining funds towards the new bridge. So, what happens to the GC holding the previous contract? One construction attorney believes the GC is likely to see a Termination for Convenience clause invoked.
Read more about the project here.
What is a termination for convenience clause?
A termination for convenience clause is a provision commonly included in construction contracts that allows one or both parties to terminate the agreement without needing to prove fault or a breach of contract by the other party. While we don’t often see this clause invoked, both GCs and subcontractors need to be checking the prime and subcontracts for this clause to understand how it could affect them in unpredictable circumstances.
What is an ideal termination for convenience clause?
An ideal termination for convenience clause includes:
A clear and well-defined explanation of any event(s) that can or cannot trigger the clause.
A notice requirement so GCs get a heads up that the Owner is going to exercise their termination for convenience rights.
Language that allows the GC to recuperate the costs expended on the job so far, including labor, materials, fees, etc.
Allowances for ramping down, so that the GC can recuperate additional costs incurred by demobilization and any agreements that they may have entered into on behalf of the project.
The clause should also be mutual for both the GC and the Owner, and it should be very clear how the clause interacts and ranks with other termination clauses in the contract.
How Document Crunch Could Have Helped:
Document Crunch becomes helpful here as it allows users to quickly locate where the termination provisions are in the contract versus having to flip through the entire document page-by-page. Users are subsequently able to get right to assessing the language for both risk and deficiencies and rectify any shortcomings. Additionally, Document Crunch provides out of the box guidance around this provision, amongst several others, that would clue the user into certain things to be mindful about as they conduct their risk assessment of the contract.
Construction Project: Costco Corporate Headquarters
Location: Washington
Contract Issue*: The general contractor hired a subcontractor to perform excavation work. During the project, the GC directed several changes, including resequencing work and deeper excavation, which significantly increased the subcontractor costs. The subcontractor performed the extra work and subsequently submitted change orders seeking $1.5M in additional compensation. However, the GC argued that the subcontractor waived its right to these claims because it did not provide adequate notice or obtain approval before performing the extra work, as required by the contract. The contract specified that change orders must be approved in writing by both parties before the extra work is performed.
Read more about the case here.
how did the court rule?
Unfortunately for the subcontractor, the trial court dismissed the subcontractor's claims, and the Court of Appeals upheld this decision, emphasizing the subcontractor failed to obtain an approved change order as stipulated in the contract. The Court also noted that the subcontractor's argument that GC's directive was a "construction change directive" was unsupported by the record, which lacked any written documentation of such a directive.
Why wouldn’t a subcontractor follow notice requirements?
Complying with notice requirements is often fairly easy and straightforward. The reason it doesn’t happen often enough is either a communication failure or lack of understanding of the specific requirements as they are often inconsistent across the entire contract. It is not uncommon for subcontractors to rely on relationships and interpersonal communication to manage changes instead of following the terms of the contract.
What does an ideal construction notice clause look like?
An ideal notice clause includes the following and should be understood by the project team from Day 1 of executing the contract:
Clear, well-defined trigger events that would require a notice.
When a notice should be submitted by.
Any proof or paperwork that needs to be submitted with the notice.
How to deliver the notice (e.g. who must send it, how to send it, who must receive it, and any receipt confirmation required).
Finally, notice should never come as a surprise. Formal notice should not be the first time the other party becomes aware of a notice event. Consistent communication from contract negotiation to completion can ease any contract issues.
How Document Crunch Could Have Helped:
This situation underscores the importance of reading and adhering to what is explicitly stated in the contract verbatim. Document Crunch would have been helpful to the subcontractor here because it specifically looks for and summarizes the change order provisions, amongst several other important provisions, in a contract, all in just a matter of minutes. Document Crunch, by way of its “Project Team Cheat Sheet” provides a much easier and user-friendly way for project teams to do a look-back and reference the contract for those provisions that impact their day-to-day on the jobsite. And because Document Crunch would’ve already identified and summarized the change order requirements, the subcontractor would have had the opportunity to do a quick check on what those requirements were. They would have seen that there is a strongly worded change order provision requiring written approval from the GC prior to performing any extra work. Had they obtained this written approval prior to performing the extra excavation work, they would have been in compliance with the requirements of the contract, and would have been entitled to the extra compensation that they were seeking for it.
Construction Project: East Empire Construction
Location: New York
Contract Issue*: A general contractor terminated a steelwork subcontractor with 72-hours notice claiming that the subcontractor’s work was faulty and their safety standards subpar. The GC then withheld payment in order to remedy the costs incurred by the faulty work. The issue is that the contract signed between the two parties requires the GC to notify the subcontractor of any intent to terminate and give the subcontractor ten days to cure the issue. Because the GC didn’t do this, the court found the termination unwarranted and the subcontractor worthy of payment.
Read more about the case here.
How common are Notice to Cure provisions invoked?
We have not personally seen any construction law cases where immediate termination of a subcontractor has occurred, though we have heard of scenarios where it would have been justified. Luckily, relationships are still important in construction and they often save companies from disputes and legal repercussions. Owners and GCs often try to work out issues regarding “failure or neglect to carry out the work” amicably before turning to contract termination and notice of right to cure clauses.
What is an ideal Notice to Cure clause?
Giving notice to cure is usually a last resort, but it is still a critical part of the termination rights detailed in a construction contract. An ideal notice to cure clause should include:
Clear and well-defined examples and definitions of what constitutes a breach in contract worthy of termination.
Proper notification requirements (who sends and receives it, what is sent, when it’s sent, and how it’s sent).
An opportunity for the accused party to respond.
A cure period during which the accused party can try to remedy the issue to avoid termination.
Any causes for which the cure period may be skipped and the party terminated immediately. Examples from this case include: “the other party expressly repudiates the contract or abandons performance” or “the breach is impossible to cure”
How Document Crunch Could Have Helped:
Similar to the above anecdote regarding the Washington Bridge Rebuild, Document Crunch becomes helpful here in being able to quickly see if the contract even has a Notice to Cure provision. If it does, then the user now has an opportunity to review and address any deficiencies with how the language is written. On the other hand, if it turns out that the contract does not have such a clause in place, then now there becomes a ripe opportunity to negotiate the inclusion of one for protection against abrupt invocations of the termination clauses.
What will the next decade of construction contract disputes entail?
Software like Document Crunch is helping contractors draft and negotiate airtight clauses, like those discussed above, and empower project teams with every contract detail they need to protect profit margins. As software powered by AI makes contracts more efficient and enforceable, what will the next wave of disputes look like? We think construction lawyers will be challenged by rare issues that weren’t fully contemplated during the contract negotiation phases. The dispute won’t entail how to interpret the contract, it’ll entail what to do when the issue isn’t even covered in the contract. A prime example is the COVID-19 pandemic. Previously, pandemics were not a frequently contemplated force majeure event and contractors had no clear-cut way to recover from the lost time and money. We now see “pandemics” included in contracts regularly.
Ultimately, the cost of a construction contract dispute far outweighs the cost of a great contract management software. We’d love to show you how. Schedule a demo today.
*These details are accurate as of May 7, 2024 but may change as the court cases develop after this date.