Thoughts on construction law from Christopher G. Hill, Virginia construction lawyer, LEED AP, mediator, and member of the Virginia Legal Elite in Construction Law
Map of the United States District Courts in Virginia,(Photo credit: Wikipedia)
I have discussed how hard it is in the Commonwealth of Virginia to make out a claim for fraud when a construction contract is involved. On limited exception is where a claim for “fraud in the inducement” is involved. Essentially, such a claim states that one party was hoodwinked into entering the contract in the first place. Because of the initial fraud (for instance misrepresenting the class or existence of a contractor’s license), the courts may bypass the terms of the contract and allow a claim for fraud to go forward.
I’m back after a welcome change of offices from a Regus location to a separate and more customer-friendly local shared office space location. I thought I’d jump back into posting with a series of construction contract-related posts, the first of which relates to indemnification clauses.
An indemnification clause in a contract obligates one party (the Indemnitor) to take on liability (read pay for) any damages to another party (the Indemnitee) under certain circumstances. In a construction context, this type of arrangement can arise in a bonding context with a general indemnity obligation to the surety among other contexts outside of the four corners of any prime or subcontract. I will not be discussing those other contexts and will focus on the typical indemnity clause found in most if not all, construction contracts. These clauses most often state that the “downstream” party is to indemnify all of the upstream parties for any and all damages incurred by the indemnitees due to any action of the downstream party, its employees, subcontractors, sub-subcontractors, etc. The clauses are often not limited in scope and generally include attorney fee provisions and generally require indemnity for breaches of contract by their terms. Continue reading Construction Contract Basics: Indemnity
In this case, the Plaintiff provided therapy services to residents of nursing homes. It sued for breach of a contract that included a standard arbitration clause stating that all disputes relating to the contract are to be resolved through arbitration. Subsequently, the parties reached a settlement agreement through e-mail negotiation. The agreement, again in e-mail form, stated the amounts to be paid to the plaintiff by the defendants and on what schedule. The settlement e-mail also stated that any dispute relating to the non-solicitation provisions of the contract would be resolved in the Western District of Virginia Federal Court. However, this final e-mail did not provide for any particular jurisdictional requirements for payment disputes and explicitly left any unchanged portions of the original contract in full force.
The defendants brought a motion to compel arbitration under the original contract. The Court denied this motion relating to the non-solicitation claims and granted it as to the payment dispute. The Court reasoned that the parties specifically waived arbitration as to the non-solicitation provisions but specifically left arbitration in force regarding all other contractual claims.
While this case is not one relating to a construction contract, it provides some good lessons for construction professionals and the construction lawyers who advise them.
1. E-mails resulting in changes to a contract, even through settlement negotiations, can waive contractual provisions.
2. Choose your words in such e-mails carefully, you may end up in two different venues like the defendants in this case if you are not careful to either keep arbitration in force for all claims or for none.
3. The power in point 1 of this list, when used carefully, can assure that the parties to a contract end up in the venue that they desire when seeking to enforce a negotiated settlement.
In short, be careful when crafting a non-judicial settlement of a contractual dispute to avoid litigation over what the settlement means. It is expensive enough to litigate any breach of terms of a settlement without having a court tell you what those provisions entail.
While here in Virginia, as in most places, the courts will almost automatically send any breach of contract case with such a clause to arbitration, a question exists whether the claim against the bond held by a surety that is not a party to the contract is subject to being referred. Well, in a recent opinion the District Court for the Eastern District of Virginia in Norfolk weighed in on this question where there was no opposition or objection to a motion to stay pending arbitration.
All of us in construction have run into mandatory arbitration clauses in our contracts. These clauses are more or less desirable based upon the size of project and other factors that will provide a topic for another post here at Musings or in my class at Solo Practice University (and likely both).
In drafting and considering the usefulness of these clauses, make sure that you keep in mind that the Federal Arbitration Act applies to actions in federal court. In short, the FAA gives parties to a contract containing an arbitration clause the absolute right to a stay of a law suit pending arbitration.
While this seems obvious, a recent U. S. Supreme Court decision expanded the universe of people that can demand such a stay. In Arthur Andersen LLP v. Carlisle, et. al., the Court stated that any person who is allowed to enforce a contract under state law can obtain such a stay. In short, if a person can make an argument that they have some sort of right to enforce a contract’s terms, that person can get a stay, at least until a court says otherwise.
For contractors and other construction pros, this case only underscores the need to examine your contracts carefully. If third parties, including architects, LEED AP’s on the project and others that could get a benefit from what looks like a straight line agreement, are part of the process, you could end up arbitrating a case that you never anticipated you would be arbitrating.
Consider this latest decision by the U. S. Supreme Court a reminder that you should think carefully about every aspect of a contract before you enter into it. If necessary, have experienced legal counsel review that contract and discuss its implications prior to diving in.
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