United States: Construction Law In Kentucky - Contracts

Every construction project has its own law that is unique to that project. That law is comprised of three components: the statutory law, the common law, and the contract.

The statutory law consists of the laws, statutes, and ordinances that are passed and enacted by the U.S. Congress, the state legislature, and local governmental units. These include not only the laws themselves, but also the regulations that are adopted to implement the laws. The federal Miller Act and the state mechanics' lien statute are two examples of statutory laws. In addition, the EPA and OSHA regulations and the Kentucky Administrative Regulations (KARs) are examples of regulations adopted to implement various laws.

The second component of the law of a construction project is the common law, or the judge-made law. The common law consists of the opinions written by the courts of appeals in the various jurisdictions that set out the law that will be followed in that jurisdiction. Examples of common law are the economic loss rule (whether or not a particular state will enforce the economic loss rule), enforcement of pay-when-paid clauses, and the enforcement of indemnification clauses (if a state does not have an anti-indemnity statute).

The third component of the law of a construction project is the contract itself. The contract is as important, if not more important, than either the statutory or common law. Through the contract, the parties can modify the statutory law (if the modification is not against public policy). For example, by contract a party can waive the mechanics' lien rights that it has by statutory law. In addition, a pay-when-paid clause can be worded in the contract to ensure the clause will be enforced even in those jurisdictions that by common law restrict its enforcement. Therefore, care and attention must be paid to the contract that is signed by the parties. All of the contract must be reviewed before signing, not only the terms set out in the contract itself, but also all documents that are incorporated into the contract by reference.

The successful completion of a construction project requires the careful coordination of the labor forces of the general contractor and his subcontractors and the delivery and storage of materials to be incorporated into the project, as well as direct, clear communication between the participants in the project. For this reason, the "contract" is the focal point of virtually every relationship in a construction project. The contract assigns the rights, risks, and responsibilities to the respective parties to the contract.

Standard form contracts serve an important function in the construction industry. These forms are convenient, economical, should promote a more equitable allocation of risks and responsibilities, and should be more comprehensive in scope than forms developed specifically for individual contracts or individual segments of the construction industry. Further, court decisions interpreting the clauses included in standard form contracts permit participants in a project to know in advance how courts may view the meaning of particular clauses, and give other courts precedent to use if subsequent interpretation should become necessary.

Standard form contracts are generally developed by organizations interested in defining the contractual relationship between various groups providing services in the construction industry. Although the philosophical views and biases of the sponsoring organizations are often reflected in certain parts of standard forms, the forms generally are not unreasonable, one-sided documents protecting the membership of the sponsors.

When asked to enter into an agreement which incorporates a standard form contract, first check the edition of the standard form to determine whether there have been any changes from editions which may be more familiar.

Carefully consider each standard form contract. Although the form may appear to be primarily boiler-plate, and thus less important than the plans and specifications, the forms contain important risk-sharing and remedy-granting provisions that will affect performance costs and dictate certain contract administration practices. Be alert to possible alterations in the form, such as additions, deletions, and word changes -- either by delineation or supplementary conditions.

Finally, study the list of clauses incorporated by reference into the contract, and obtain copies of those clauses in order to assess the parties' established rights, risks, and responsibilities.

The amount of profit on a project and the scope of work are inextricably related. Accordingly, contractors must consider the exact language of the provision in their contract with the owner which delineates the scope of work.

The "scope of work" is a general phrase which means the actual and reasonably anticipated breadth of the undertaking. It is imperative that the contractor study all contract documents carefully in order to insure that he has taken into account all the work in his bid. Even if the contract documents are drafted with a great deal of clarity, the contractor must realize that the scope of work includes all work which is indispensable to the performance of the specified work. The fact that this indispensable work is not expressly stated in the specifications is no defense.

It is imperative that the contractor study all the contract documents carefully in order to insure that he has taken into account all the work in his bid. In Setzer v. Whitehurst, the Kentucky Court of Appeals held that even though the subcontractor did not see the specifications, where the evidence shows that they were made available for his inspection during the period of time the work was in progress, he cannot be heard to say that he did not know that certain work and materials were required to be performed.

Likewise, the contractor must be aware of disclaimers which are included in the contract documents. In one important Kentucky case, Codell Construction Company v. Commonwealth, a contractor claimed that soil conditions existing on a road construction project differed from the soil information published by the Kentucky Department of Highways. The Department published the results of its soil survey on the project drawings along with an express and unqualified disclaimer as to the accuracy of the soil conditions. The court disallowed the contractor's claim for additional compensation because the disclaimer put any bidder on notice as to his obligation to make his own private investigation, and the parties should have realized that the estimates might well be inaccurate.

The instructions on how to construct a project are contained in the contract documents. These documents consist of a series of interrelated provisions, specifications, drawings, details, and notices which are intended to complement each other as they guide the contractor through the project. The contract documents include boiler-plate specifications and details which are typical for all projects as well as special provisions and drawings which are developed specifically for the project at hand. The formidable task of integrating these various documents into one harmonious set could never be done without some ambiguities remaining in the contract documents.

Ambiguous language in contract documents is a common source of construction disputes. In many cases, the ambiguity can be resolved by resorting to an "Order of Precedence " clause.

Ambiguities fall into two categories, patent and latent. A patent ambiguity is one which is readily noticed, while a latent ambiguity is hidden within the contract documents. A contractor has an obligation to seek out from the owner or its architect or engineer an interpretation of patent ambiguities in the plans or specifications before he bids the job. All of these clauses require the contractor to notify the architect or engineer immediately upon discovery of a discrepancy or ambiguity in the contract documents. If a contractor fails to clear up the patent ambiguity, he will bear the risk of any loss arising from a more costly interpretation.

On the other hand, if an ambiguity is latent, the contractor has a better opportunity to make claim on the basis that the scope of work has actually been increased, because he was unable to tell, due to the latent ambiguity in the plans, that he would be required to do more than he envisioned when his bid was submitted.

Contractors are invariably subject to the proposition that "time is money". However, courts generally hold that time is not of the essence in construction contracts. Therefore, if the owner is able to assert a claim for delay against the contractor, the prime contract must expressly state that time is of the essence. Most modern construction contracts contain this language and, in fact, usually specify a date by which the project is to be completed. This proposition is typically linked with a liquidated damages provision in the construction contract.

Liquidated damages provide the owner with a method for obtaining compensation from the contractor for each day of delay caused by the contractor. These provisions are very common in public works contracts and are occasionally found in private agreements.

When the parties have agreed to a liquidated damages clause, it becomes the exclusive remedy for the owner for delay. Thus, an owner cannot obtain liquidated damages and then actual damages caused by delay as well.

In order for a liquidated damages clause to be enforceable, the amount of the liquidated damages must be a reasonable estimate of the probable loss the owner will experience by the contractor's delay. Liquidated damages must be compensatory in nature and cannot be punitive.

One of the abiding fears of construction owners is that at the end of the work, the contractor will present a long list of extras which arose during the course of the work, but which the owner had no knowledge that the contractor was considering to be extras. To alleviate this problem, most construction contracts require that the contractor notify the owner, in writing, within a specified time that a problem exists and that a claim will be made. Theoretically, this notice will insure that the owner is aware of the problem and can take appropriate technical steps to remedy the problem.

Owners frequently defend against a contract claim by alleging that the contractor failed to strictly comply with the contract notice requirements. This defense is generally unsuccessful. Rather than dismissing an otherwise valid claim because of a notice deficiency, a court will generally require an owner to demonstrate that it has been prejudiced by the lack of proper notice. Prejudice may result from the loss of material witnesses or documentation, or the inability to properly investigate the facts. Notwithstanding this general rule, several jurisdictions do not look as kindly on a failure to comply with the notice requirements in the contract and have imposed upon the contractor a duty to strictly comply with the notice requirements without looking into whether there was prejudice. This situation recently occurred in State of Indiana v. Omega Painting, Inc., and resulted in the contractor losing an otherwise valid claim.

In the Kentucky case of Smith v. Ferguson, the Court denied the contractor's claim for extras for his failure to give proper notice before proceeding with the claimed extra work. However, where the parties to the contract have ignored the contract provisions while acknowledging the extra work, the contractor will recover.

Every effort should be made during contract performance to comply as completely as possible with all notice requirements in the contract. This goal should be made clear to field supervisors and other on-site personnel who are in a position to document job-related problems.

Waiver and release is generally a defense to specific allegations or claims based on contract clauses. Waiver has been defined as:

A waiver operates to preclude a subsequent assertion of the right waived or any claim based thereon. However, it must be shown by the party claiming the waiver that the party against whom the waiver is asserted had knowledge, actual or constructive, of his rights at the time the waiver occurred. Generally, only the person for whose benefit the right or privilege was intended, or his duly authorized agent, may waive a contractual right.

A question of whether the words or actions of a party constitutes waiver frequently arises in the construction context in connection with a contractor's failure to obtain a written change order for extra work and for failure to give notice for a claim for extra compensation as required by the contract. The owner's intention to waive these contract rights must be proven and this can lead to serious evidentiary problems. Such a waiver may be found in a course of conduct. For example, where the owner issues oral directives and then pays for that extra work, he will not be permitted to suddenly impose the writing requirement on subsequent extras.

Standard form contracts contain numerous clauses by which parties waive various rights and claims. For example, Paragraph 4.3.5, "Waiver of Claims: Final Payment", of AIA Document A201 provides that:

Likewise, other contract provisions provide that the parties specifically do not waive their rights. For example, Paragraph 13.4.2, "Rights and Remedies", AIA Document A201, provides that:

Most construction contracts for projects of any significance include clauses covering delay in performance and time extensions. Projects are delayed for a wide variety of reasons and the contractor should be aware as to the responsibility for various types of delays. Some delays are the result of occurrences beyond the control of either the contractor or the owner. Yet many delays result from the failure of one or more parties to fulfill their contractual obligations.

There are generally four kinds of possible delay on a construction project:

1. Excusable;
2. Compensable;
3. Non-excusable; and,
4. Concurrent.

Not all delays result from the conduct of the contracting parties. When outside forces delay completion of the work, the delay is termed "excusable" under most contracts. Normally, excusable delays are synonymous with those things which are covered in a force majeure clause which excuses the contractor from timely performance in the event of certain circumstances such as a storm, an act of God, a fire, a strike, a war, or other governmental actions for which neither the contractor nor the owner are responsible. Courts often rule that the contractor is entitled to an extension of time for an excusable delay, but is not entitled to any additional compensation arising from the delay, and he will be relieved of any liability to the owner for damages as a result of late completion.

A compensable delay, on the other hand, arises from an act on the part of the owner and is one for which the contractor can recover compensation in addition to an extension of the contract performance period. Compensable delays often stem from work suspensions, design defects, changes, differing site conditions, and owner-caused interference’s, such as the failure of the owner to provide access to the construction site.

The third kind of delay is a non-compensable delay. This is a delay which is caused entirely by the contractor's fault in performance. If the contractor has failed to coordinate his work, failed to schedule the delivery of materials, or failed to bring enough workmen or equipment to bear on the project, then he is not entitled to any additional compensation and is not entitled to an extension of time in which to complete the contract. Furthermore, the contractor can be liable to the owner and others for delays which are attributable entirely to him.

The final kind of delay is a concurrent delay, a particular segment of time on a project when both the owner and the contractor are simultaneously causing delay to the work. The rule with regard to compensation for concurrent delays is mixed. In some states, an owner cannot recover for a concurrent delay and neither can the contractor, since an allocation between the two parties would arguably be arbitrary and without factual basis. On the other hand, there are states in which the courts now attempt to apportion concurrent delays between the owner and the contractor'

Many construction contracts contain a "No Damage For Delay" clause which seeks to prevent the contractor from recovering damages for time delays. Because delay claims have proved expensive, owners today frequently use such clauses to avoid responsibility for project delays. Unfortunately, contractors too often notice the clause for the first time when preparing their delay claims. By then it is too late. On the other hand, owners who rely too heavily on the no damage for delay clause can have a false sense of security. A poorly drafted clause can expose the owner to delay claims. Even a well-worded clause is subject to exceptions which, if applicable, leave the owner vulnerable.

Although no damage for delay clauses are valid and enforceable against the contractor, the rule is not without its limits. There are four widely recognized exceptions to the enforcement of no damage for delay clauses. They involve situations where the delay was (1) not contemplated by the parties, (2) so unreasonable as to amount to an abandonment, (3) caused by bad faith or fraud, and (4) caused by active interference of the owner. These are judicially created exceptions allowing courts to avoid the harsh effects which result from the application of the clause.

The author is aware of no Kentucky cases which directly address these exceptions.

No damage for delay clauses are generally recognized as oppressive, forcing the contractor to bear the liability for unforeseeable delay costs resulting from acts of the owner. Recently enacted legislation in Washington and California which significantly limits the enforceability of no damage for delay clauses reflect this recognition.

A typical no damage for delay clause might state:

There are many variations. The particular wording of the no damage for delay clause is of utmost importance. Given the harsh pecuniary effect of the clause, courts enforcing no damage for delay clauses construe them strictly.

Under the general rules of contract interpretation, the reference to specific terms often implies the exclusion of those terms not listed. Thus, a federal district court, faced with a no damage for delay clause that barred claims for delay due to the fault of "the contractor, the architect, the owner, or any other contractor or subcontractor performing work on the project", ruled that delays due to a supplier hired by the owner were not within the scope of the clause and allowed the contractor's claim for damages.

The AIA and EJCDC general conditions do not contain express no damage for delay clauses. Paragraph 8.3.3 of AIA Document A201 states that the recovery of damages for delay by either party under the provisions of the contract documents is not precluded.

The Federal Government's construction contracts also do not contain no damage for delay clauses. To the contrary, the policy in federal contracts is to compensate the contractor for government-caused delays. Under the U.S. Army Corps of Engineers' standard "Suspension of Work" clause, Contract Clause 8(b), FAR 52.212-12, the contractor may recover for unreasonable suspensions, delays, or interruptions which are the responsibility of the Government. A contractor is entitled to an adjustment in contract price to reflect the cost of delays, excluding profit.

Delays on Federal construction projects due to changes or defective specifications generally are compensable under the standard "Changes" clause, Contract Clause 65, FAR 52.243-4.

Furthermore, delays for physical conditions materially different from those indicated in the contract documents or otherwise anticipated, are compensable under the "Differing Site Conditions" clause, Contract Clause 49(b), FAR 52.236-2. Unlike the suspension clause, an element of profit is allowable under the changes and differing site conditions clauses.

Non-federal public agencies claim that no damage for delay clauses serve the public interest by eliminating the need to predict and provide for such costs in the public budgetary process. They defend such clauses because of a perceived need to cap expenditures, especially where funds must be appropriated in a fiscal allocation process. These owners would rather pay more for the project initially by accepting what they believe are contingencies included in the price by bidders than attempt to predict the cost of owner-caused delays. However, as one court has stated:

The Kentucky Finance and Administration Cabinet [a]n extension of time shall not be construed as cause for extra compensation under the Contract") incorporates restrictive language in its delay clause.

The Contractor agrees that, whether or not any delay shall be the basis for an extension of time, it shall have no claim against the Owner for:

1. an increase in the Contract Price.
2. a payment or allowance of any kind for damage, loss, or expense resulting from delays.
3. any damage, loss, or expense resulting from interruptions to, or suspensions of, its work to enable other contractors to perform their work.

The Kentucky Transportation Cabinet does not utilize no damage for delay clauses. Its general provisions, however, provide for only extensions of time for delays beyond the contractor's control.

In effect, the acceptance of a no damage for delay clause may forfeit the contractor's delay claim for compensable delays. At the time of bidding, therefore, the contractor must consider the financial impact which a no damage for delay clause might have. If the clause cannot be negotiated away, the contractor's bid should be structured accordingly.

An acceleration is the speeding up of the rate of performance in order to try to complete the project earlier than would otherwise naturally happen. Accelerations are accomplished by adding to manpower, crews, supervision, or overtime work, breaking sequences, expediting deliveries, and other methods. An acceleration can be ordered directly by the owner or initiated by the contractor, or it can be constructively ordered.

The elements of a constructive acceleration are (1) the contractor has encountered excusable delay entitling it to a time extension, (2) the contractor has timely requested such a time extension, (3) the owner failed or refused to grant the extension, and (4) the owner either expressly ordered the contractor to accelerate the work or acted in such a manner that the owner required the contractor to complete the work within the original contract time.

Some courts have interpreted no damage for delay clauses to preclude the recovery of acceleration costs. These courts reason that accelerations obviously result from delays and thus fall within the typical no damage for delay clause'. Other courts, however, distinguish acceleration from delays, thereby allowing the contractor to avoid the typical no damage for delay clause and recover acceleration costs". The authors are aware of no Kentucky cases which directly address the acceleration issue. Envirotech Corporation v. Tennessee Valley Authority, was decided by a Federal Court in Kentucky, but did not directly address Kentucky law.

A suspension is a form of delay resulting from the owner interrupting the course of work for a period of time. "Suspension of Work" clauses benefit both the contractor and the owner. They provide the owner with the latitude to temporarily halt construction, if, for example, the owner experiences funding or right-of-way problems, while providing that the contractor will be fairly compensated for his additional costs and performance time resulting therefrom. However, the contractor must show that the Government was the sole cause of the suspension before recovery will be allowed.

Contractors dealing with federal construction contracts are expressly allowed to recover in delay situations where no formal affirmative suspension order is issued, but where the effect of the owner's action or inaction is the same.

It is important to recognize that the reasonableness of the time taken by the government to act, or in its failure to act, depends upon the circumstances. For example, in Azerind, Inc., the Armed Services Board of Contract Appeals awarded delay damages to the contractor when the Government took two months to respond to the contractor's materials submittals. The Board held that in the absence of a contract provision to the contrary, 10-14 days are generally allowed for turning around shop drawings and submittals.

If the world were perfect, there would be owners and design professionals who know exactly what they want and contractors who understand exactly what they are supposed to do. Under these utopian conditions, there would be no need for contract clauses dealing with changes. However, because people, who are not perfect, are involved from the inception of the construction process, the "Changes" clause is essential to every construction contract. The purpose of the clause is to allow modification of the written agreement between the parties. It enables the owner to order variations in quantity, quality, or method without breaching the contract or obtaining the consent of the contractor. If the contractor signs a contract with a changes clause in it, he forfeits his right to consent to an owner's change to the Scope of the work. The key items on which a contractor based his bid may be changed, but he is to be compensated in a manner which preserves his status under the contract at the time the change is issued.

The changes clause is also a mechanism which operates as a bookkeeping system. Each party will know at any given point and time what he owes and what he is entitled to receive.

Under the AIA's new General Conditions, a change order is distinguished from a construction change directive. A change order is by definition an agreement between the owner, contractor, and architect. The construction change directive is a written order prepared by the architect and signed by the owner which directs a change in work and states a proposed basis of adjustment in either contract sum, contract time, or both.

Change orders are invariably the source of contractual disputes. Traditionally, courts have been hesitant to ignore the plain language of a contract requiring, as a condition precedent to recovery, a written change order. Accordingly, owners who have been sued for extra work by contractors often invoke the formal change order procedure as a defense to the claim. Courts in some jurisdictions have maneuvered around these seemingly strict requirements to allow recovery by the contractor under the theories of apparent authority, waiver, and quantum meriut or unjust enrichment.

Even without a formal change order, the owner may become obligated to pay for work it orders. A "constructive change" arises when the contractor is required to perform work on a construction project which is different from or in addition to the work set forth in the original agreement. Showing that the owner directed the additional work is the key.

The term "constructive change" was, at one time, almost exclusively associated with Government contracts. It was viewed as governmental conduct which was not a formal change order, but which has the effect of requiring the contractor to perform work different from that prescribed by the original contract. Although the term is used less frequently in connection with private construction contracts, the concept is well known in that context.

As the AIA document A201 "Changes" clause indicates, changes are to be within the scope of the contract. If the contractor finds himself confronted with an undertaking substantially different from that which he had originally contemplated due to the extensive changes ordered by the owner or dictated by the owner's actions, then a cardinal change exists. The term "cardinal change" basically refers to a change ranging beyond the scope of the contract, which constitutes a material breach of contract. In that situation, the contractor has the right to disregard the contract and seek compensation for the reasonable value of his services.

In most instances, whether a cardinal change has occurred depends upon the determination of a factual question. As a practical matter, cardinal changes are quite rare.

Every contractor performing under a fixed price contract determines his price based on certain basic assumptions concerning the conditions he will encounter. Unanticipated conditions, such as concealed subsurface conditions, can greatly disrupt project scheduling and otherwise increase the cost of the work.

To prevent contractors from inflating their bid prices to cover this contingency, most owners include "Changed Conditions" or "Differing Site Conditions" clauses in the contract to allow for price adjustments in case such conditions are encountered. On the other hand, in order to reduce the risk they are assuming, owners sometime include disclaimers in the contract concerning the accuracy of the information provided by the owner.

The inclusion of a "Changed Conditions" or "Differing Site Conditions" clause in the contract provides the means for dealing with differing site conditions. It should be stressed that the contractor's recovery is not automatic. Rather, the contractor must establish that his situation is one which falls within the scope of the clause.

In order to make a claim under a changed condition clause, the contractor is not required to show that the owner is at fault. Instead, the clause allows the contractor to recover his additional costs regardless of the owner's honest failure to discover or reveal the actual conditions.

In essence, the owner assumes the risk of such conditions by including the clause in his contract.

A careful reading of the AIA, Corps of Engineers, and Kentucky Finance and Administration Cabinet clauses reveal that there are two distinct types of unanticipated conditions which are compensable. Type 1 conditions are those which differ materially from the conditions indicated on the contract documents, while Type 2 conditions are those which are of such an unusual nature that they would not ordinarily be found to exist.

In order to recover for a Type 1 changed condition, the contractor must show (1) the actual conditions, (2) the conditions as indicated by the plans, specifications, and other contract documents, (3) the existence of a variation, and (4) that notice as required by the contract was given. An example of a Type I changed condition occurred when the construction procedures and design requirements set forth in the contract documents, read as a whole, indicated subsurface conditions permitting excavation "in the dry". However, the actual conditions made it impossible or impractical to excavate in this manner. Therefore, design and construction features of the contract may indicate the type of conditions reasonably expected to be encountered, and it is not necessarily required that such indications in the contract be explicit.

To establish a Type 2 condition, the contractor must show that the conditions he encountered were unusual and differed materially from those he had reason to expect, considering the nature of the work and the locale. A good example of a Type 2 changed condition is presented by the case of Layne Texas Company. In Layne, the contractor reasonably estimated that the material he would encounter would be 20 percent rock. He based his judgment on a site inspection, his performance of an earlier contract in the same area, and the general history of the terrain. However, in excess of 35 percent of the material he encountered was rock. The Board of Contract Appeals held that this additional quantity of rock constituted a changed condition compensable under this specific contractual provision.

Many private and non-federal contracts do not include a changed conditions provision and at common law, all risks of difficulty of performance remain with the contractor facing changed conditions. However, the absence of a changed conditions clause does not necessarily preclude recovery by the contractor under appropriate circumstances. In order to recover, the contractor must base his claim on legal theories such as misrepresentation , breach of warranty , or mutual mistake.

Owners frequently try to escape the risk of changed conditions by using contracts which contain broad exculpatory language disclaiming any liability for the accuracy of plans, specifications, or borings or other subsurface data. Fortunately for the contractor, many courts have held that this language does not have the sweeping effect it is intended to have, and it will not serve to relieve the owner of some of its general duties. In fact, courts normally will not allow such language to eliminate the relief provided to the contractor by the changed conditions clause. Furthermore, even where the contract lacks such a clause, but does contain extensive exculpatory language, it may still be possible for the contractor to recover if he can show, for example, that independent subsurface investigation was not feasible and that he was thus forced to rely on the information provided by the owner. Some states, however, including Kentucky, take an especially hard line in upholding such disclaimers. In Codell Construction Company v. Commonwealth, a contractor was denied extra compensation for differing subsurface conditions from those indicated on the drawings and specifications because the owner included a disclaimer on the drawings as to the accuracy of the subsurface conditions. The Court held that the disclaimer:

An indemnity clause is a common feature in most construction contracts. It is one of the most feared, and least understood clauses.

Contractual indemnification is a major tool for allocating the risks of loss among the various participants in construction projects. Most construction contracts contain an indemnification provision whereby one party agrees to be responsible for and hold harmless another party from all claims for damages arising from the performance of the work which that other party would otherwise be legally responsible.

A court's determination of , whether a particular indemnity clause will be enforced often depends upon the rules of construction employed by the court when interpreting the provision. Courts will not enforce a contract clause for indemnification unless that intention is expressed in clear and unequivocal terms, particularly when the effect of the clause is to exculpate the indemnitee for negligence. Because indemnity provisions tend to destroy the generally favorite rule that tort-feasors must accept responsibility for their own acts, courts look upon indemnity agreements with disfavor and often conclude that the language of the indemnity provision is not so sufficiently clear and unequivocal as to give rise to an indemnity obligation.

An indemnitor's liability will depend upon the scope of the damages covered by the indemnification agreement. Under the AIA form, contractors are required to defend and hold harmless owners against claims, suits, or damages, regardless of whether any loss has been suffered, or whether any liability has been shown to exist.

A contractor should secure contractual liability insurance to protect him from all of the indemnification he has assumed under the contract. If necessary, supplementary umbrella policies should be obtained. Subcontractors should be required to provide certificates of insurance and any necessary renewal certificates for the duration of the project to cover their indemnification liability.

By reason of their inherently complex nature, construction projects generate disputes. Unquestionably the best way to handle a dispute is to avoid it altogether. However, since that is not always possible, the contract documents provide a mechanism for resolving disputes.

Typical Contract Language;

All Federal Government contracts are required by law to contain a clause stating that the contract is governed by the Contracts Disputes Act of 1978, 4 U.S.C. §601, et seq. This Act replaced a maze of overlapping and confusing laws and rules governing the disputes process under Federal procurement with a comprehensive law that affects every stage of a Government contract dispute, from the first communication with the contracting officer to the final decision on appeal.

All claims by contractors against the Government must be submitted, in writing, to the contracting officer, for a decision. Except for claims involving fraud or for penalties or forfeitures which another federal agency is authorized to settle, the contracting officer may decide all claims relating to a contract subject to the Contracts Disputes Act. A contracting officer's final decision pursuant to the Contracts Disputes Act is the necessary prerequisite for an appeal to a Board of Contract Appeals or the U.S. Claims Court.

If attempts at settlement and formal negotiation of construction disputes prove fruitless, a contractor has two alternatives: arbitration or litigation. Although arbitration and arbitration agreements have been in existence for a long time, their utilization in the construction industry is rather recent. The availability of arbitration as an alternative, however, depends upon whether or not the contract contains an enforceable arbitration clause covering the dispute.

Arbitration allows disputing parties to present their positions to a quasi-judicial arbitrator or panel of arbitrators, while avoiding many of the drawbacks and technicalities of the normal judicial process. However, arbitration also has its drawbacks. The pros and cons most frequently cited are:

1. Speed of Resolution -- arbitration is often used as a means of circumventing the multi-year waiting period that is common with congested court calendars. However, arbitration can be a time- consuming process if one party drags its feet or attacks the scope of validity of the arbitration clause in a court proceeding.
2. Cost Savings -- Depending upon the parties and the complexity of the issues, arbitration can be less costly than a comparable court proceeding. This is not, however, normally the case.
3. Technical expertise of the arbitrators -- Presentation of the claim to a panel of arbitrators which have expertise in the construction industry, rather than a judge or jury with only a layman's knowledge of technical points, is generally cited as an advantage of arbitration.
4. Privacy - Arbitration does have the advantage of privacy, the results are not a matter of public record.
5. Avoidance of legal technicalities - In arbitration proceedings, strict rules of evidence do not apply and arbitrators are generally liberal in their acceptance of evidence.
6. Lack of Discovery - There is generally no discovery in arbitration, unless agreed to by the parties, specifically authorized by statute, or ordered by a court. This inability to compel discovery can be both a drawback and an advantage, depending upon the status of a party's own knowledge of the facts and documentation.
7. Limited Scope of Judicial Review -- Because the arbitrator's function in a quasi-judicial role, their award will not be overturned by a court unless there is proof of fraud, corruption, or gross negligence.

The well-drafted contract clause providing for arbitration could be the critical factor determining its enforceability. Utilizing such wording as "the parties may submit to arbitration", will not eliminate, but rather inspire litigation as to its interpretation and enforceability. A mandatory arbitration clause is enforceable in Kentucky in light of the Kodak Mining Company v. Carrs Corporation case and the Kentucky Arbitration Act, KRS Chapter 417.

The parties to a contract can include a provision stipulating the applicable law that will govern the contract. These clauses save the attorneys and the courts from difficult choice of law problems.

Perhaps not surprising, this question has not generated much litigation, as the law in the various states that regulates design and construction services is relatively uniform, except for the areas of indemnity, payment conditions, and statutes of limitation.

Paragraph 13. 1, "Governing Law", of AIA Document A201 provides that: The contract shall be governed by the law of the place where the project is located.

Federal contracts do not contain a choice of forum, or jurisdiction, clause. That choice is provided by the Contract Disputes Act of 1978. Under the Act, a contractor may appeal a decision by a contracting officer to either a Board of Contract Appeals or the United States Claims Court in Washington, D.C. The Boards of Contract Appeals serve as the principal trial courts for federal government contract disputes. Hearings before the Boards are held at places which are convenient to the parties. The key consideration is the location of the majority of the witnesses, the parties, and counsel. If both parties agree on a hearing location, the Board will ordinarily attempt to accommodate their request.

Most commercial construction contracts contain a provision giving a dissatisfied party the express right to terminate or cancel the contract for default if any of the occurrences specified in the termination provision take place, and recover damages caused by the terminated party's actions. If the contract does not contain a termination clause, there is an implied common-law right to terminate. However, since construction contracts usually cover an extended duration and require many specific and discrete aspects of performance, a party to a construction contract may not exercise his implied right to terminate for minor or trivial performance failures. In other words, a breaching party must have committed a material breach of his contract obligations before this implied right can be exercised.

Most public contracts, and some commercial contracts, also contain a termination for convenience clause which allows the owner, or in some cases, the general contractor, to cancel a contract for virtually any reason. Unlike a default termination, a termination for convenience cannot be used to cancel a commercial construction contract unless there is an express clause in the contract, that is, there is no implied right to terminate for convenience.

The majority of the contract clauses discussed so far have dealt with the contractual relationship between the contractor and the owner. The Pay-When-Paid clause is contained in agreements between contractors and subcontractors. The pay when paid clause is a device whereby the contractor shifts the risks of payment failure by the owner from the general contractor to the subcontractor.

Pay when paid clauses essentially provide that the lower-tier contractor will not be paid until the higher-tier contractor gets paid. Read literally, these clauses would appear to mean that a subcontractor must wait to be paid until the contractor is paid by the owner. However, courts do not always give literal interpretation to these clauses.

A typical pay when paid clause might state:

Whether a pay when paid clause is valid and enforceable depends upon the court's interpretation of the language of the contract provision. In interpreting the contract language, the intention of the parties is the controlling factor in each particular case. The courts in Kentucky have held that pay when paid clauses constitute an unconditional promise by the contractor to pay the subcontractor, with the payment postponed for a reasonable period of time after the work was completed, during which the contractor would be afforded the opportunity of procuring funds from the owner to pay the subcontractor. If it develops that the owner does not pay the contractor, the contractor is not relieved of his obligation to pay the subcontractor, unless the contract language clearly shows in unequivocal terms the parties' intention to shift the risk of the failure of the owner to pay from the general Contractor to the subcontractor.