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Real Estate Law

Do We Really Want Courts Deciding if Our Construction Contracts are Fair?

As I posted recently, the Virginia General Assembly has passed, and I can see no reason why the governor won’t sign, [enhanced version available to subscribers], a bill that would essentially invalidate preemptive contractual waivers of lien rights as they relate to subcontractors and material suppliers. It does not apply to General Contractors, but it is a step in what many (including those attorneys that represent subcontractors and suppliers) believe is the right direction.

Of course, as soon as I posted last week, my friend and colleague Scott Wolfe (@scottwolfejr) commented on that post and then gave his two cents worth at his Zlien blog. The gist of the comments here at Musings and the post over at his blog was essentially that these contractual provisions were inherently unfair and therefore should be abolished because of both a relative disparity in leverage between the Owner or GC and the Subcontractor when it comes to negotiations and the fact that subcontractors often don’t read their contracts or discuss them with a construction attorney prior to signing them. I hear this first of his arguments often when I am reviewing a contract after the fact and a client or potential client acts surprised that a provision will be enforced and the courts of the Commonwealth of Virginia will actually enforce them. As to Scott’s second reason, I have always warned here at Musings that you should read your contracts carefully because they will be the law of your business relationship in the future.

The first of his two points is more interesting and in some ways more easily supported. However, where we are speaking of contracts between businesses where both sides are bound by the terms of the contract, it begs the question of whether in seeking to make contracts more “fair” we could add a layer of uncertainty that could cause more problems than it solves. Do we really want courts stepping in after the fact to renegotiate the terms of a deal that was struck months or possibly years before because one judge believes that the deal was too one sided? Do we really need such “Monday morning quarterbacking?” Is one person’s idea of “fair” better than another’s when both parties to the contract had the full ability to read, negotiate and possibly reject the deal long ago? Personally, I think that the answer to these questions is, in all but the most egregious cases or where the legislatures have stepped in adding certainty (whether to the good or bad), “No.”

A question that must be asked is are all subcontractors or suppliers so lacking in negotiating leverage that they would essentially sign anything to get the work? It is my experience that this is only partially true. While the leverage seems to flow downhill from the Owner to General Contractor to Subcontractor, the tide often turns at the supplier level. Suppliers often have credit agreements with personal guarantees that give them more leverage from a purely monetary standpoint than do the subcontractors.

Furthermore, those that would look to renegotiate a deal after the fact will often forget that GCs depend on good subcontractors to keep them afloat. Without good subcontractors doing the work for general contractors that do not self perform much work, these general contractors will not do quality and timely work and will lose business. In short, subcontractors likely have more leverage than they think, particularly where they carefully read the contracts and negotiate certain particularly onerous terms. If a construction professional does not take the time to read and understand a contract, should it be the job of the courts to protect that company from itself?

Of course both sides of a contract negotiation will try and tilt the contract in their favor. This can often lead to provisions that are clearly slanted one way or the other if those provisions are not hammered “flat” prior to the project’s beginning. These provisions can look “unfair” to the party that may not be able to collect right away because of a “pay if paid” clause or, at least until later this year, may have waived its lien rights. Such provisions, if allowed to stand during negotiations, do make collection difficult, particularly in a tough economy.

However, at least in Virginia, both sides can make their own rules for the construction project by contract and those rules will be applied. This fact can be a great thing because construction professionals in Virginia (particularly those that get an experienced construction attorney involved early in the process) know that the rules will be applied as written and that their deal will be honored. I would hate to sacrifice this certainty of dealing on the alter of after the fact renegotiation of the contract in the name of “fairness.”

I expect that many readers (this means you Scott) will have opinions on this matter and I fully encourage any responses as this debate has at least two sides and the opinions on all sides are not without some logic, so have at it!

As always, I welcome your comments. Please subscribe to keep up with this and other Construction Law Musings.

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