Translating Legal Jargon in Construction Contracts, Part 1
By D. Jeffrey Craven
This is part 1 of a two part article originally published in the August/September 2013 edition of Hardwood Floors Magazine.
Since the Nixon era, the plain-language movement has gained momentum, attempting to remove legalese from the law and from “legal” writing. “Legalese” is both the use of old (archaic) terminology or foreign-language words (typically Latin) and the use of cumbersome sentence structure. Plain English legal writing has been emphasized and taught in law schools for decades. Despite this movement, construction contracts continue to use many of these old terms. Defined below are some of these terms that are still commonly used in construction contracts. The definitions provided are the usual and typical definitions and are intended for general guidance only, as terms can be and are sometimes redefined in contracts. Because so many of these term are still in use, this article has been split into two parts, with the second half set to appear in the October/November 2013 issue.
Additional Insured: An “insured” is any person who is protected by an insurance contract. “Additional insured” is used to refer to all people who are protected, or should be protected, by an insurance policy. When you buy an automobile liability policy, it typically provides money to repair your vehicle in an accident, but, more importantly, provides money to pay for medical care for other people injured in the accident. In construction, an additional insured could be a GC who did not buy your policy of insurance but who is named and protected by it.
Allowance: An “allowance” in a contract is a set value given to a particular portion of the contract, where the specific materials to be used may not be identified. Common to custom or semi-custom home contracts, it provides a set amount in the contract price for materials but allows the homeowner the opportunity to select the material of choice. So, an allowance for flooring might set aside $5,000, and if the owner upgrades, the owner pays the difference between the $5,000 allowance and the total cost of the upgrade.
Claims, Demands, Causes of Action, Liabilities: Usually this phrase is in an insurance or indemnity (see “Indemnification,” on page 28) section of a contract. “Claim” is a broad term that generally means any type of problem or issue that one person could assert against another (though often it may be specifically defined in an insurance agreement). “Demand” is when a person who has a claim seeks money from another. “Cause of action” means a legal theory by which one person who has a claim makes a demand against another in a lawsuit. Someone can have a cause of action against another even when no lawsuit has yet been filed. Think of a cause of action as being one of any number of methods to assert a claim against another in a court or arbitration case. “Liabilities” means any exposure that one person may have to claims by another. In its broadest sense, a liability is anything that might negatively impact a job or negatively impact the projected profit in a job. Liabilities can be direct, like when you accidentally knock over an antique vase while moving materials into a job site, or they can also be indirect, like when a subcontractor makes a claim against your bond and the bonding company looks to you to repay it. Altogether, these terms form a phrase that roughly means “anything that can negatively impact the bottom line.”
Condition Precedent: A “condition precedent” in a contract is something that must occur first before one of the parties to the contract is obligated to do what he or she has promised to do. As an example, a condition precedent might be that the homeowner needs to have the old flooring removed and mold remediation performed before the flooring contractor is obligated to start installation. Often on larger jobs, a condition precedent to the GC’s obligation to pay the subcontractor is the subcontractor providing lien waivers from its subcontractors and material suppliers.
Consequential Damages: “Consequential damages” are costs and expenses that arise as a result of some act. To illustrate, say a supplier provides wood flooring that is defective, and the contractor installs it. The homeowner discovers the defect. The homeowner’s direct damages are those that come directly from its contract with the contractor, and in this case are the bad materials. But the homeowner might have consequential damages as well, like the extra cost to store furniture at a storage facility while the flooring is being removed and new flooring installed. In other words, the extra cost to the homeowner arises as a consequence of the installation (and removal and replacement) of the defective flooring.
Force Majeure: This is actually a French term that means “a superior force.” Force majeure clauses in contracts are also referred to as “acts of God.” These clauses generally provide an excuse from performance or from damages caused by a delay in performance of a contract. So, for example, a flooring contractor in the Midwest is contracted to install a floor in a home, but the day before, the home is demolished by a tornado. In such a circumstance, the force majeure clause would protect both the homeowner from having to pay and the contractor from having to install. Effectively, the contract was cancelled by Mother Nature.
General Conditions: “General conditions” is really more “construction-ese” than legalese. Typical of larger commercial contracts, there will be industry-wide common provisions that generally do not vary from project to project. By contrast, the “main” contract between the parties usually contains those terms that are specific to the particular job (e.g., price, start date, time to finish, payment schedule, and the plans and specifications). Rather than include the general conditions in the main contract, often these common provisions are in a separate document that is then included as part of the overall contract.
Guaranty v. Warranty: A “guaranty” is a promise by one person to do an act that is supposed to be done by another. For example, the homeowner has doubts about the subcontractor but knows a mutual friend who is also a contractor. The friend promises that if the subcontractor does not finish the job, the friend will. In that scenario, the friend is called the “guarantor” and the owner is the “beneficiary.” A guaranty is a secondary obligation, which means the guarantor is only obligated to perform if the subcontractor fails to perform.
A warranty in a construction scenario is usually a promise that the work meets certain minimum standards, and a corresponding promise to fix or replace defective work or materials (for a specified time). While guaranty and warranty are often used as synonyms, you can see they actually have different legal meanings.
Heirs, Executors, Administrators, Successors, Trustees, and Assigns: This phrase commonly is used in either release or indemnity language in a contract to extend the particular contract obligation to include not only the people signing, but other people who are in some fashion related to them. “Heirs” in a contract are people who, on the death of one of the signers to a contract, receive the contract benefit of that person. An “Executor” is a person who is responsible to manage property, debts, and rights of a person who has died. “Administrators” refers to a person who has been given the authority to handle contract rights for one of the signers to the contract. It is used to apply where executor or “trustee” might not apply. Likewise, “successor” is a broad term that means any person who receives the right to enforce the contract after its signing. While an heir is a successor, a successor might not be an heir. Typically administrator and successor are used where one of the signers to the contract is a company instead of an individual. A trustee is a person assigned to administer a trust. A trust is a document that is created during the life of a person through which that person holds property, and is intended to act in lieu of a will for the maintenance and distribution of the person’s property (estate) after death. So if a person with a trust enters into a contract and then dies, and the contract is for construction on land owned in the trust, the trustee will act in place of the dead signer to oversee the contract and pay the contractor. “Assigns” are persons who receive the right to benefits from a contract but who may not necessarily be responsible for the obligations. A contractor may owe money to a supplier, and will assign his right to the payments due from the owner on a contract to the supplier. The supplier is then an assign.
Incorporation by Reference: Construction contracts frequently have a list of documents that are included in the contract, like plans, specification sheets, shop drawings and the like. Sometimes the contract will state that particular terms or portions of these other documents are specifically “incorporated by reference” or “incorporated by reference as if fully set forth herein.” Simply put, it means that the drafter of the contract wants to use the language in the other document and to include it in the contract without actually retyping it into the contract. Where you see such language, you want to make sure (a) that you have the referred-to document, and (b) that you read and understand the incorporated language along with the contract portion that refers to it.
Indemnification (or indemnify, defend, protect and hold harmless): This language is typically in the insurance clauses of the contract. “Indemnification” is a term that means to shift certain liabilities from one person to another (see “Claims, Demands, Causes of Action, Liabilities” on page 28). A typical construction contract indemnity clause will require the contractor to protect the owner from any claims that might be asserted by other persons for things like damage by one contractor to another contractor’s work or for injuries to other people on the job site. Most often the indemnity obligation is handled by the responsible person purchasing insurance that covers the person to be protected. However, the obligation to provide the indemnity protection may require the responsible party to hire and pay for a lawyer to “defend” the protected person in a lawsuit, and also to pay any monies for damages that are not covered by insurance (“hold harmless”).
But Wait, There’s More
Still with us after all this legalese? Look for the second half of this article in the October/November 2013 issue of Hardwood Floors.