Contracts

Contracts come in all shapes and sizes and are needed for daily transactions, whether it is an employment contract, sales contract or service contract, such as construction or renovation.  The basic elements of a contract are offer, acceptance and adequate consideration.  

A common contract that is often litigated are contracts involving construction.  Construction litigation typically focuses on any breaches of contracts between the owner of real estate and the builder of the home or any structure on the property.  Breaches of construction contracts can be by either party, and may involve defects in the construction, delays in payment, or in the construction itself, liens, or abandonment of the project.

Some of the more common construction contract provisions that may result in a breach are:

1. Scope of Work/Performance Duties Provision

This provision is meant to describe in clear detail what work is going to be done by the builder.  Common sections will also include how each party will handle unforeseen problems as well as who will bear the cost of certain risks and liabilities.  The landowner should also express clearly in this provision what she expects the quality and result of the work to be.  This expectation may cause the majority of problems, and does result in litigation if a landowner is not clear in her description of what the final project should be.  In order to avoid these kinds of issues, it is helpful to have independent counsel review your contract and negotiate on your behalf to ensure terms that are mutually agreeable by both parties.  The building documents should include express descriptions of all standards, risk allocation, design specifications, and any warranties.

2. Securing the Parties’ Performance Provision

This provision is meant to provide each party with assurances of either completed construction or payment for that construction.  Specifically, it details the post payment and performance bonds that you will use to ensure that the builder or contractor will continue to perform the work.  On the other end, builders will use this provision to make sure the landowner has the necessary resources to fund the build and insure against possible non-payment.  This may involve the builder listing the different ways he can secure payment of the construction from the landowner.  In the case of non-payment by a landowner, some builders and contractors may be able to insure themselves through pre-payment clauses and mechanic’s liens.  In order to avoid these types of issues it is wise to seek counsel to review the contract in order to ensure the landowner can finance the project.

Mechanic’s Liens

One common manner of ensuring payment to the builder is through a mechanic’s lien.  These liens ensure that the builder will be paid before anyone else in the event of a liquidation of the agreement because the landowner cannot or refuses to pay.  The lien stays in force until the project is finished and all construction personnel have been paid.  Further, this lien gives the builder a priority claim in the work and property in the event other creditors claim an interest in being paid from the property, either through repossession or foreclosure, after the lien is asserted.  It is important to note that a mechanic’s lien can secure both unpaid work as well as any material costs related to the construction.

In order to enforce a mechanic’s lien in New Hampshire, the lien must be filed within 120 days of the last date the builder provided labor or materials.  However, in New Hampshire, the lien is not recorded prior to the legal action to enforce it so a lien claimant must file an Ex Parte Petition to Secure Mechanics Lien with the court.  Further, New Hampshire does allow mechanic’s liens to take priority, however it does provide an exception to conventional mortgages under certain circumstances.

In Massachusetts, mechanic’s liens have two parts: (1) the Notice of Contract, and (2) The Statement of Account.  The Notice of Contract details that there was in fact a contract between the parties, and may also put the landowner on notice that the builder is planning on filing a mechanic’s lien.  The Statement of Account details the names and addresses of the parties, address of the construction, property description, and the original contract amount as well as all change orders, amounts in dispute, amounts received, and amount currently due.  The Notice of contract must be recorded on the earlier date of three: a) 60 days after filing of Notice of Completion; b) 90 days after filing notice of termination; or c) 90 days after last furnishing labor and/or materials to the project.  The statement of Account must be filed on the earlier date of these three: a) 90 days after the recording of the Notice of Substantial Completion; b) 120 days after the recording of the Notice of Termination; c) 120 days after the lien claimant last furnished labor or materials to the project.

3. Payment Provision

Similar to the Performance Provision, the Payment provision details how the landowner will pay the builder.  This usually includes a schedule of the value of the identified work and may include line items that have been fulfilled, completion percentage, and item value for that percentage of work from the builder.

4. Project Changes and Change Orders Provision

The Project Changes provision includes the method that the landowner can notify the builder of any changes to the original specifications and plans.  At its most fundamental point, this notification method is meant to allow the builder or contractor time to reassess the costs that will be incurred as a result of the changed building plan.  The Change Orders provision describes the procedures that the builder or contractor may take in order to notify the landowner of any changes to the original project, budget, and/or schedule that the builder or contractor will need to adjust as a result of the changed building plans.

5. Delays Provision

The Delays provision insures the builder against delays due to events or occurrences outside of the builder’s control.  The provision will detail the procedures through which contractors can claim time extensions and/or damages for events over which the contractor bears no responsibility. The most common types of events for which a builder or contractor may receive compensation despite the project’s delay include labor disputes, material shortages, and actions taken by government agencies that resulted in delays to the project.

Whether you are the builder or the homeowner, it is important that you have a contract and that you understand all provisions contained therein.  Having a well drafted contract will help you understand and allocate risks and diminish the likelihood of litigation.  Notwithstanding, if you are faced with litigation or simply require assistance with your contract, the attorneys at Smith-Weiss Shepard & Kanakis, P.C. are here to help you.