THE NEED FOR A COMPREHENSIVE LEGAL COURSE IN CONSTRUCTION EDUCATION

INTRODUCTION

The contract is the focal point of virtually every relationship in the construction in­dustry. Contractors must understand con­tract terms to avoid assuming great risks without clearly realizing the potentially harmful consequences. As litigation increases, persons entering the construction field must become competent in the area of construction law. Consequently, the spe­cific subject of construction law should be taught to students of construction. Courses in business law are necessarily theoretical and generally cover too broad an area to satisfy the particular needs of the constructor. General theories must be un­derstood, but their practical application to specific situations typically encount­ered in the construction business is essential.

All to often, the parties of a construction contract believe that their duties and li­abilities are limited to what is written in the contract. In fact, however, the words in the contract are ultimately binding only if some unknown hearer of the facts decides that they are. A contract is not the law; it is a set of promises which may or may not be enforced under the law. A great body of precedent in construction law is available that impacts the resolution of contractual disputes. Likewise, statutes bearing on the construction process abound. A knowledge of how case law and statutes interact with contract law is an important part of the construction student's education.

MINIMIZING DISPUTES

Most construction projects commence on a relatively high note. The attitudes of the parties toward each other rarely improve and often deteriorate as the project progresses. In the beginning, it is not unusual for the parties to deal rather in­formally with one another, relying more on custom and practice than on the contract. This practice in and of itself can lead to problems if the minimum formalities, such as written notices, are ignored. When areas of dispute arise, the parties typically take a more formal stance and focus more heavily on the wording of the written contract. A contractor's knowledge of construction law can help him to avoid many potential legal pitfalls and entanglements.

Many contracts are of such form that they actually contribute to the problem through ambiguities and contradictions. A person educated as to the possible impact of a poorly worded contract can avoid many of the problems that might arise from their use during the precontractual phase.

A person learns from his experiences; sometimes the lessons are costly. A con­tractor who has studied the disputes of others can often avoid the expense of going through a similar experience himself. On the job training can provide relevant expe­riences, but there are better ways to learn the law.

CONTRACT NEGOTIATION

Many contracts for construction projects for the private sector are negotiated. While much of the negotiation is dedicated to the technical and financial aspects of the project,_{_} the contractor with some knowledge of construction laws can avoid possible legal pitfalls and help to allocate the risks in an equitable manner.

It is not always practical to have an attorney present during the contract negotiations. As a matter of practice, legal counsel is used only in complicated or unusual situations. Therefore, it most often falls upon the laymen to determine the rules by which they will play.

A knowledge of implied duties established primarily through case law can help the contractor in structuring the agreement so that roles, responsibilities, and liabil­ities are clearly defined. Take, for exam­ple, the case of a cost plus contract with no guaranteed maximum price. The contractor has the implied duty to keep the owner ap­praised of all cost overruns in a timely manner in the absence of contractual lan­guage to the contrary. In Jones v. J. H. Hieser Construction Co., Inc., the court held that the contractor was responsible for paying the cost in excess of the estimate because he did not inform the owner of overruns, thereby depriving him of the op­portunity to make changes [1].

CONTRACT ANALYSIS

A veritable cornucopia of standard form contracts is available. The list includes those prepared by the AIA, the NSPE, the ASCE, the AGC, as well as those used by various levels of government. Standard form contracts are the product of much study by representatives of the various groups along with their attorneys and others. Much of the effort to update these form contracts goes into trying to correct the failure of earlier editions to protect adequately the particular group responsible for its dis­tribution. The contractor must be able to understand and judge the risks and benefits of using a certain form contract for a given project. Exceptions to particularly harsh language can be taken in the bid or clarifications of ambiguities noted. All too often, the parties to a contract choose a standard form contract with language that is completely opposite to the intention of all the parties. The indiscriminate use of such contracts without recognizing their inherent dangers is less likely if the contractor is knowledgeable in the area of construction law. An important part of the construction student's training is to demonstrate that form contracts are to be used only as guides and may not serve the needs of the parties adequately. A conglomeration of various clauses from unrelated contracts put together by the cut and paste method can result in an unworkable nightmare if com­piled by one whose understanding is superficial.

CONTRACT ADMINISTRATION

It is during the actual construction period that the contractor can best derive the benefits of his training in legal issues. In the first place, a knowledge of legal issues often instills a respect for compliance with formalities, thereby overcoming many potential problems before their inception.

The parties have any number of implied du­ties which do not appear in any written contract. A knowledge of these duties will help to forestall many costly disputes. An attorney's first rule of construction claims presentation or defense is "know your contract."[2] In like manner, the first rule of effective contract administration for the contractor is the same.

The required paperwork for construction projects is greater today than ever before, and the efficient organization of paperwork is essential to a successful operation from a managerial standpoint. One of the reasons for the compilation of records is to assist in the resolution of possible claims and disputes. An understanding of the project's contract and an awareness of possible legal stumbling blocks can assist the manager in properly establishing his paperwork procedures.

SUBCONTRACT ADMINISTRATION

The use of subcontractors to perform a sub­stantial portion of the work has become more prevalent in recent years. As this trend increases, the role of the general contractor becomes less of a technical one and more of a subcontract administrative one.[3] His viability in the business thus depends to a greater degree upon his abilities to deal effectively with subcontractors than it might have earlier. While his ability to understand and judge the technical aspects of workmanship and quality is still re­quired, his abilities with regard to the subcontracting process will need to in­crease as the trend toward using more sub­contractors increases. A knowledge of the law will prove invaluable in this regard. For example, consider the situation where the agreement between the general contrac­tor and the subcontractor calls for the subcontractor to be paid only after the owner pays the general contractor. In Thomas J. Dyer Co. v. Bishop International Engineering Co., the court held that the general contractor had to pay the subcon­tractor even though he had not been paid by the owner, who had bankrupted [4].

CONCLUSION

The study of construction law is not meant to be a substitute for seeking and receiving advice from a qualified attorney. However, there is a wide range of situations where consultation with an attorney is impractical. A contractor who has had formal education in construction law is in a position to recognize those instances where such consultation is advisable.

A person in the construction industry who regularly enters into contractual relationships should learn all he can about contracts and the law. There are many customs and practices within the construction industry whose origin is based upon compliance with legal principles.

The study of construction law should not be left as a graduate school subject. In schools offering graduate studies in construction, a large majority (87.5%) offer courses in construction law [5]. Perhaps this situation reflects the general perception at these schools that graduates must be trained for mid-management and upper-management levels which would make them more likely to be involved in contractual matters.

An old cliche says, "Ignorance of the law is no excuse." Perhaps for those in decision-making capacities in the construction industry, the saying should be, "There is no excuse for ignorance of the law."

COURSE DEVELOPMENT

To cover the material usually covered in a comprehensive course on construction law requires 30 to 40 one-hour lectures. Assuming two to three meetings per term lost to introduction and tests, schools on the quarter system would have about 27 lectures and schools on the semester system would have about 43 meetings for a three credit hour course. The following suggested course outline is based on 43 meetings. The 16 topics underlined are those which may be omitted when using the 27 meeting schedule.

TOPIC DESCRIPTIONS

Sources of Law

The shared system of law (federal, state, and local) is explained. Statutory law, case law, and common law are discussed. Contract law is contrasted with tort law.

Agency Relationships

The basic relationships between the princi­pal, the agent and a third party is out­lined. Arms-length relationships are compared to agency relationships.

Bidding

Standard bidding procedures are reviewed. The contractor's duty to seek clarification is explained. The law with regard to bid mistakes is outlined.

Construction Contracts

The contract is a means to manage or allo­cate risk. The various types of contractual relationships (lump sum, cost plus, etc.) are discussed.

Contract Interpretation

The legal rules for determining what the contract says in the event of a disagreement are given.

Changes and Extras

The rules of contract law regarding modifi­cation of agreements are studied. The var­ious methods by which change orders may be authorized are discussed.

Termination

Recission is distinguished from termi­nation. Termination prior to performance, termination pursuant to contract pro­visions, and termination due to material breach are discussed.

Duties of the Parties

The express and implied duties of the owner, the contractor, and the designer are re­viewed. The authority and responsibility of the designer as contract administrator and judge of performance are outlined.

Subcontracting Process

The subcontractor selection process is dis­cussed relative to potential legal prob­lems. The rights and obligations of the general contractor and subcontractor are discussed.

Subcontract Administration

The impact of the inclusion of various clauses in the subcontract are discussed. Cases are studied that have set important precedents in the contractor-subcontractor relationship.

Defects and Warranties

Claims against the designer are contrasted with claims against the contractor. The means of determining the acceptability of materials and workmanship is set forth. Standard warranty provisions and latent de­fects are discussed.

Differing or Changed Conditions

Means of protecting oneself against differ­ing site conditions are outlined. Notice requirements are given. Recovery proce­dures are reviewed. Cases regarding exculpatory clauses are listed and re­viewed.

Standard Payment Procedures

Standard payment procedures are reviewed with respect to legal pitfalls and remedies. Remedies for nonpayment are discussed.

Completion and Final Payment

The doctrine of substantial performance is detailed, emphasizing the legal and finan­cial importance of the date of substantial performance. Cases wherein substantial performance was either affirmed or denied are contrasted.

Methods of Scheduling

CPM diagrams are presented in order to show the concepts of excusable, compensible and noncompensible delays as they relate to critical and noncritical activities. The topic of who owns float time is addressed.

Obtaining Time Extensions

Standard contractual provisions regarding time extensions are studied. The merits of various reasons for time extension are re­viewed using actual cases.

Rights of the Parties with Respect to Time

The owner's and contractor's rights includ­ing the right to timely performance are discussed. The contractor's right to finish early is studied.

Acceleration, Delay, and Disruption

Voluntary acceleration, acceleration at the insistance of the owner, and costs of ac­celeration are. outlined. Cases showing methods of establishing delays are re­viewed. Voluntary disruption or suspen­sion, disruption or suspension by the owner, and costs of disruption or suspension are outlined.

Delay Damages

The owner's damages--lost use, financing costs, and special damages are shown. Liq­uidated damages--are discussed. The con­tractor's damages--escalation, extended duration, finance costs, and overhead--are reviewed.

No Damage for Delay Clauses

Typical contractual language for no damage for delay clauses is recapped. Cases wherein these clauses were not enforced are studied. Alternative contract language setting forth two-way liquidated damages is presented.

Basic Damage Principles

The compensatory nature of damages is ex­plained. The law of contract damages is studied. Damages in tort are discussed. Direct and consequential damage rules are covered.

The Contractor's Damages

The various ways in which a contractor may be damaged--changes, extras, wrongful ter­mination, disruption, etc.--are reviewed by case studies.

The Owner's Damages

The various ways in which a contractor may be damaged--abandonment, failure to com­plete on time, deviation from the plans, etc.--are reviewed by case studies.

Calculation of Damages

Demonstrative evidence and order of proof are discussed. Cases which serve as bench marks in damage calculation are used as ex­amples.

Interest, Mitigation, and Betterment

Provisions for the recovery of interest and attorney's fees are studied. The obligation of reasonable diligence and ordinary care to mitigate damages is discussed. The con­cept that a party cannot expect compensation for more than the loss is explained.

Negotiation Disputes

The "art" of negotiation is discussed. Procedure, documentation, goals, and final limits are discussed in order to instill within the student a systematic approach to negotiation.

Arbitration

The pros and cons of arbitration are con­trasted. The contractual requirements and enforcement procedures are outlined. Con­solidated or multi-party arbitration is discussed.

Litigation

The profile of a construction trial is given. Special procedural rules relative to the proceedings are discussed. Documen­tary evidence and demonstrative evidence are studied.

Contrast Record Administration

The management of construction project pa­perwork relative to proving or defending claims is reviewed. An outline of standard procedures, logs, charts, etc. is given.

Construction Related Accidents

Workmen's Compensation laws are reviewed.. The role of privity and duty are outlined. Negligence, strict liability, and proximate cause are discussed.

Lien Laws

The definition and purpose of a lien are given. The mechanics of who may file, how they may file, and the time elements in­volved are discussed.

Surety Bonds

Provisions of the Miller Act are discussed. The various surety bonds in construction contracts--bid bonds, performance bonds, payment bonds, and subcontractor bonds--are studied. The surety's responsibilities are reviewed.

Surety Bonds

The basic nature of regulation and functions of regulatory agencies are discussed. Antitrust, EEO, and OSHA compliances are investigated.

Federal Contract Disputes

Federal procurement contract clauses relat­ing to the resolution of contract disputes are reviewed. The relevance of the Contract Disputes Act are discussed. The appeal process is outlined.

Risk Management and Indemnity

Various aspects of risk management are dis­cussed, including contractual risk control, risk shifting through indemnification, and insurance.

Bankruptcy

The basic rules of the Bankruptcy Act are reviewed. Problems pertaining to surety companies and fraudulent conveyances are discussed. Creditor's remedies are out­lined. Transfers, fraudulent and otherwise, are also examined.

Labor Relations

The administration of labor contracts is considered. The relevance of Taft-Hartley and Davis-Bacon are studied. The legal aspects of dual-shop operation are investigated.

Applicability of the Uniform Commercial Code

Application of the UCC to construction contracts is discussed. Its application to equipment contracts, subcontracts, and supply contracts is also discussed.

Claims Presentations

Methods of analysis are outlined. The use of legal assistance and claims consultants is discussed. Strategies for defenses are given.

Contractual Provision for Controlling Quality

Various contractual provisions relating to inspection and supervision are reviewed and case law relative to each is explained. Risk sharing provisions are reviewed in respect to the control of workmanship and materials.

The Contractor's Liability to Third Parties

The principles of strict liability, vicarious liability, and statutory liability are discussed. The contractor's potential liability to third parties for personal and non-personal injury damages is reviewed.

The Contractor's Rights against the Design Professional

Trends in recent cases regarding the defense of privity are recapped. The principle of negligence as the basis for the design pro­fessional's liability is discussed. Areas considered include defective design, negligent supervision or inspection, and interference in contract administration.

REFERENCES