Construction attorneys are often retained to draft and negotiate contracts for clients and projects located in different states. Before participating in those negotiations, it is imperative they understand how jurisdictional differences influence the enforceability of construction contract provisions. This article examines how different states regulate construction contracts by highlighting the disparate impact their laws have on private construction contract provisions. The provisions discussed below illustrate why understanding those legal nuances will facilitate smoother negotiations, enhance contract enforceability, and improve project outcome.
Indemnity Rights & Duties
Anti-indemnity statutes govern the parties' indemnification rights and duties. Those statutes vary because states operationalize different policy objectives when allocating liability for project-related claims among the contracting parties. Many states, like New York, restrict the enforceability of indemnity provisions, particularly those that seek to indemnify a party for its own negligence. Tennessee and numerous other states limit their prohibitions to provisions that indemnify a party for its sole negligence. Conversely, states such as Florida enforce broad indemnity provisions, which can expose contractors to significant liabilities if they are not careful. Failing to draft conforming indemnity provisions risks voiding the entire provision. Those outcomes can be catastrophic if the indemnified project participant cannot rely upon the contractual indemnification provision.
Choice of Law
Choice of law provisions specify which state laws govern the contract. These provisions are especially important when the parties and project reside in different jurisdictions. For instance, Virginia law typically allows parties to select Virginia law even if the project is located in another jurisdiction. States such as Idaho refuse to enforce provisions that restrict a party's ability to enforce its rights under Idaho law if the project is located in Idaho. Careful consideration should be given to the choice of law provision because doing so ensures the provision will be enforceable and its application will align with the parties' interests.
Forum Selection
Forum selection provisions identify where contract-related disputes must be venued. Such provisions are generally enforceable but may be scrutinized in different ways depending on the state. In Delaware, no statute apply to forum selection provisions. Therefore, Delaware courts will uphold a provision that designates a specific jurisdiction for resolving disputes regardless which jurisdiction is specified. However, in jurisdictions like Arizona, courts invalidate a provision that requires litigation regarding a project in Arizona be venued outside of the state. These jurisdictional implications can, and often do, have significant cost and logistical impacts on a party's ability to resolve a dispute.
Attorney's Fees & Costs
The structure of attorney's fees and cost provisions often plays a significant role in a parties' analysis of whether it makes economic sense to litigate a claim. Parties in states that enforce unilateral provisions have a tactical advantage if the provision applies to them because they are better positioned to aggressively litigate claims they might not otherwise pursue. States like Georgia generally enforce unilateral attorney's fee provisions that grant such rights to one party. Conversely, in Massachusetts and California, courts require that all fee provisions be applied bilaterally which allows the prevailing party to recover its fees and costs. Such states often interpret and then apply unilateral fee provisions in a reciprocal manner.
Waiver of Mechanic's Lien Rights
Mechanic's lien waivers are a critical aspect of construction contracting because they forfeit a party's lien rights and insulate owners from such lien claims. The rules governing the enforceability of lien waivers vary widely with many requiring strict statutory compliance. California mandates that the waiver include language similar to the statutory waiver forms. Some states, such as Virginia, do not mandate the use of any particular forms; they simply require that the parties sign written waivers. It follows that owners must be careful if they want to ensure they receive enforceable lien waivers.
Waiver of Implied Warranties
Some states permit waivers of implied warranties, while others impose restrictions intended to protect consumers of construction services. For example, contractors in Oregon can waive implied warranties of habitability in residential contracts. However, New Jersey courts typically do not allow such waivers. Owners and contractors must understand whether any implied warranties apply to their project and, if they do, can they be waived. The parties can then decide how to manage which party is responsible for resolving warranty-related issues.
Pay-If-Paid & Pay-When-Paid
"Pay-if-paid" and "pay-when-paid" provisions typically regulate whether a contractors' duty to pay subcontractors and suppliers is contingent upon the contractor receiving the owner's payment. The practical impact of these payment provisions is that they dictate how project participants manage their budgeting and cash flow. Arkansas and New Jersey enforce pay-if-paid provisions under certain conditions, meaning contractors must pay their subcontractors even if the owner fails to pay them. North Dakota does not impose any restrictions on contingent payment provisions.
Prompt Payment
Many states laws ensure the timely remittance of payments by regulating when payments by owners, contractors, and subcontractors must be made. Failure to timely remit payment often results in penalties and the accrual of statutory interest on the unpaid amount. New Jersey's protective statutes require that all construction contracts include prompt payment provisions. The Texas Prompt Payment Act states that owners can avoid penalties if they pay contractors within a specified timeframe, typically 30 days after receiving a proper invoice. On the other hand, Arkansas, Colorado, and Idaho are examples of states that do not regulate when payments must be made.
Liquidated Damages
Liquidated damages provisions typically require that a contractor pay an owner predetermined amounts as compensation for the late delivery of a project. Numerous states like North Dakota enforce liquidated damages provisions if the: actual damages were difficult to estimate at contract execution; parties made a reasonable effort by to fix compensation, and amount is reasonably related to the anticipated damages. In contrast, states such as New York scrutinize these provisions in a different ways, particularly if the contractor is terminated and the provision does not explicitly apply to terminations. These variations require that liquidated damages provisions be carefully drafted to ensure they comply with the relevant state laws.
Retainage
Retainage is the portion of a payment that an owner withholds until project completion to ensure that contractors and subcontractors fulfill all of their contractual obligations. Texas law requires that an owner retain 10% of the contract price. Illinois caps retainage at 10% until the project is 50% complete at which time the retention must be reduced to no more than 5% of the remaining payments. In contrast, Alaska does not limit or regulate retainage. Therefore, in order to proactively implement alternative ways to mitigate completion risks, it is important for project participants to understand how laws impact the structure of progress payments on a project.
Residential Construction Contracts
State laws often require that residential construction contracts include unique consumer protections. In Florida, residential construction contracts must expressly define lien rights, explain how homeowners can access state recovery funds, and who is responsible for remediating defective work. Similarly, California requires that all residential construction contracts include, amount other provisions, lien notice requirements, an agreed upon contract sum, definitions of substantial and final completion, how change orders must be processed, limitations on downpayments, and explanations regarding homeowners' rights to cancel the contracts. Those requirements underscore why residential construction contracts must be carefully drafted to include all of the provisions that protect homeowners' interests while ensuring they are well-informed and protected against potential fraud.
Conclusion
The complex network of multi-jurisdictional construction laws governing construction contracting render it impractical to address all of the provisions potentially implicated by those disparate state laws. Other additional contract provisions that vary state-to-state include: no damages for delay; waiver of subrogation; change orders; dispute resolution; insurance requirements; warranty and guarantee requirements; workers' compensation laws; differing site conditions; handling of hazardous materials and waste; record-keeping; and contractual limitations of liability. Ultimately, construction attorneys will be better equipped to protect and advance their clients' interests if they understand how each of those provisions must be drafted to conform with the relevant multi-jurisdictional construction laws. Drafting enforceable contracts ensures project risks will be allocated among the parties in a manner that reduces the likelihood disputes will adversely impact the timely completion of projects and the costs to do so.
Originally published by American Bar Association's Spring issue of 'Under Construction', 26 February 2025
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
