As long as they are reasonable and fair, contractors can set claims periods within which their customer or subcontractor must raise an issue that it believes may lead to damages, back charges, or other credits.
A claim period is exactly what is says it is: a period of time to make a claim. The theory is simple, if you learn (or should have learned) of an issue which leads to a claim of damages, you must raise it within a certain amount of time. If the claim is not raised timely, it is barred by agreement.
In order to have an effective clause, you must solve these problems:
(1) What is a claim? How do we define a claim?
(2) When does the claimant learn of the claim, or when should it learn of a claim?
(3) What is a reasonable amount of time to make notice of the claim?
(4) What is the most efficient means of making notice of the claim?
A notice clause is extremely helpful with regard to claims for additional compensation, changes in the work and delays on the project.
One of the most important items to resolve in a contract is the methodology you will use to calculate damages. Eliminating speculative calculation methods is vital to streamlining dispute resolution.
In the case of delays and overruns - liquid damages (LDs) is a very useful tool. LDs are used to stipulate to a specific amount of damages per time unit. Both parties will agree to this damage as fair and reasonable prior to beginning work on the project.
An example would be a daily LD for project overruns. This is not only useful for the project owner, but also for the contractor, as it can now predict amounts that will be back charged against it.
A useful LD clause will be coupled with an effective change order provision which allows the contractor to extend the time for completion, in order to avoid LDs. But the clause is effective for all parties involved and reduces the need for speculation and protracted dispute resolution.
Often the largest challenge in resolving a dispute is locating documentation and then shuffling through papers. We would advise that you reduce this burden by requiring an affirmative duty to maintain and routinely produce documentation.
A clause which, obligates your customer or subcontractor to provide weekly or monthly production of logs, time sheets, applications for payment, change orders, invoices, receipts, etc. - will drastically reduce the length and costs of your dispute resolution.
Furthermore, the obligation should be affirmative, thus limiting your customer's or subcontractor's ability to raise a claim or defense based upon an unknown fact which is not documented (i.e. change order or alternative agreement).
Dispute Resolution Methods
Mediation, Arbitration and Litigation are all possibilities which might be attractive to you and your business. There are various outfits that can provide the alternative dispute resolution that you might want.
The American Arbitration Association is not the only ADR body on the market. In fact, due to their high costs, slow dockets and excess administration, they might not be the right choice for you. Alternatives provide more streamlined, expedited and cost-effective options.
Mediation, Arbitration, and Litigation can be used singularly or in conjunction with one another. A contractor might wish to utilize non-binding mediation for pre-termination disputes while the work is on-going, but elect for arbitration for post-termination disputes. You might want to select your forum after a dispute arises. In some cases, a contractor's cleverly drafted contract might obligate a party to bring an action before a court of law, but reserve the contractor's right to remove that action to ADR.
Stipulations for Alternative Proceedings
When a party utilizes litigation, the rules are set by the courts. ADR methods such as mediation and arbitration have some simple rules, but much is left to the determination of the parties or the arbitrator/mediator. Think about your litigious needs beforehand and stipulate to some safeguards in your contract.
One of vital importance is the level of discovery you want to allow. In most cases, you will not be provided with the right to proceed with advanced discovery in ADR. If you foresee the need to obtain admissions, interrogatories (questions with written answers) or production of documents - stipulate to the same in your contract. If you think that you will need to obtain the deposition of persons - elect to permit that examination in your contract.
The costs, fees and methods of paying should also be a concern. Generally, the claimant is required to front fees & costs. You want to obtain an agreement that both parties will split costs, pay up front and be entitled to recoup.
Fee and Costs
By now this should be a staple in your contract - recovery of fees and costs. But how much?
Every contract should have a clause which provides you with recovery of your fees and costs in the event that you are successful in your claim. But, contracts often do not define the extent of those fees and costs.
You may want to stipulate to a liquidated damage of a certain percentage of the recovery (say 25% of the damages awarded) or, if you want to cover all bases, you might want to define the time period and types of fees and costs that are recoverable. For instance, a contractor can elect to recover all fees incurred since the date notice of the claim was made, including in house attorney time, collection agency costs, and attorney fees and expenses.
However you seek to recoup these losses - this clause is vital.
Review and Appeal
One of the major reasons that people and entities are detracted from ADR is because of the binding nature of arbitration awards - without the benefit of appeal or review.
One way to fix this problem is to provide for a direct and immediate appeal of any arbitration award to the applicable court of appeals. A clause should limit appeals to matters of law, which is a permissible and appealable issue.
How to Do All of This?
Contracts are vital to the success of a contractor. It is important to think ahead and limit your exposure to difficult, costly and lengthly proceedings.
Contact your attorney, have a meeting and discuss your needs. Iron out your contracts and implement a protocol.