Powerful Words in Any Contract
Disputes are common on construction sites. Every contractor knows that. And any dispute can derail a project – turn a potential money-maker into a money pit. Many disputes profiled on these pages became epic legal struggles lasting years. A few of those cases ran up legal fees more than the cost of construction.
My advice: Stick to building. Don’t get stuck in a legal quagmire.
The best way I know to stay out of court: Write contracts that require arbitration – alternative dispute resolution (ADR). Courts won’t touch a contract dispute that requires arbitration. Require ADR and there’s no right to sue. That’s a game changer when an owner or owner’s attorney threatens legal action.
Statistics show that sellers are more likely to win in arbitration. That makes arbitration a good choice for construction contractors.
If you write the contract, you decide how disputes will be settled. Your contract should:
- Make it clear, “owner and contractor will submit all disputes related to this job to binding arbitration.”
- Identify the arbitrator. AAA, CDRS and JAMS are common choices. But a Web search will turn up qualified independent arbitrators in your community. Consider a “mobile” neutral – someone willing to meet on the construction site.
- Identify the arbitration rules. The arbitrator you select will suggest rules he or she prefers.
- Make the arbitrator’s decision final. The words are, “Judgment on the award may be entered in any court having jurisdiction.”
On Residential Jobs
Eleven states (CA, IL, MD, MA, MO, NE, OR, PA, SC, TX, VT) void any residential arbitration agreement that omits disclosures required by state law. Requirements are different in each state. Sometimes specific words are required, or all upper case, or underlined, or initialed or placed above the signature line, etc. Without the precise disclosure required by state law, your agreement to arbitrate isn’t going to hold water – or worse, will require a court to decide if ADR is required.
A Louisiana case (S. LA Contractors v. Kraus Construction, May 5, 2022) illustrates what’s likely to happen with a broken ADR clause.
Kraus Construction was the general contractor on a school job in Longville, Louisiana. South LA was the site work subcontractor. When site work was finished, South LA claimed a balance due of $135,660 and filed suit to collect. Citing the ADR clause in their contract, Kraus asked the Louisiana court to delay action on the suit until arbitration was complete. South LA insisted their contract’s arbitration clause was defective. The agreement required ADR under "Arbitration Rules of Better Business Bureau". The BBB doesn’t have arbitration rules. Now what?
The trial court ruled that arbitration was required. South LA appealed. The appellate court affirmed the trail court’s decision. The ruling by Judge Perret: Louisiana law favors arbitration as a speedy way to resolve contract disputes. Any agreement to arbitrate is irrevocable and enforceable, assuming:
- The contract is valid, and,
- The dispute falls within the scope of the arbitration agreement.
OK. Kraus Construction got their arbitration hearing – after decisions by both a trial court and an appellate court. But isn’t this obvious? A few more seconds spent drafting the ADR clause would have saved hours (days?) in court.