Translating Legal Jargon in Construction Contracts, Part 2

In the last issue we started defining some of the common "legalese" terms that show up in contracts despite the growing "plain English" movement in the legal profession. Legalese is the use of old (archaic) terms, foreign-language words (typically Latin) and cumbersome sentence structure. The definitions provided below are the usual and typical definitions and are intended for general guidance only, as terms are sometimes redefined in contracts.

Independent Contractor: An "independent contractor" is a person hired to do work for one person but is not permanently employed by that person. Independent contractors are responsible for making their own decisions about how to accomplish the task given to them by the person hiring them (the "means and methods"), are also responsible for providing their own workers' compensation and other insurance, must pay their own taxes, and generally are considered to operate a business separate from the party hiring them.

Integration: The legal term "integration" is a bit of a misnomer, as a typical integration clause in a contract seeks to exclude all other communications between the parties about the subject of the contract. Essentially, when a contract is referred to as "fully integrated" it means that all of the terms have been fully stated in the contract or in the specific documents that the contract says are included (incorporated by reference) and a part of the contract. Therefore, any outside document or verbal discussion concerning the contract that has not been included and referred to in the contract is excluded. The idea behind this type of language is to make it clear that the only terms that the parties are relying upon are those set forth in the contract.

Joinder: "Joinder" is typically used when discussing how the parties will handle their disputes. In that context, an owner and contractor might have a dispute that covers work that was performed by a subcontractor. The contract language in both the owner-general and general-subcontractor contracts may permit the subcontractor to be brought into the arbitration or court case between the owner and the GC.

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Liquidated Damages: This term is used to set the value of damages that one (or both) parties anticipate will be suffered in the event that the contract is not completed on its terms. Often it is expressed in terms of dollars per day and used to set the amount of damages arising from a delay in the time to complete. A liquidated damages clause allows the parties to set a specific dollar amount for damages at the outset of the contract, when it is often difficult to predict actual damages that a person would suffer if the contract is not fully and timely performed. The parties make a reasonable estimate of what such damages might be and agree to a set liquidated damage amount. "Liquidated" means that the damages are already finalized, known or capable of being calculated.

Non-Assignability: This means that (a) the contract or (b) the thing that one party to the contract is supposed to do or (c) the benefit that one party to the contract is supposed to receive cannot be given to another person. In some contracts there are limits placed upon the ability to assign work to others or the ability to assign the right to payment to another.

Order of Precedence: Contracts that refer to outside documents will usually have an "order of precedence." This means the level of priority given to each of the documents, particularly if the language of one conflicts with the language in another. So, for example, a subcontract will often incorporate at least some terms of the general contract. If a subcontract term conflicts with the same term in the general contract, the parties have to decide which term to follow. An "order of precedence" might say that the terms of the general contract come first, followed by the subcontract, then the plans, specifications, etc.

Pay When Paid and Pay If Paid: "Pay when paid" and "pay if paid" are used to describe a limitation on the timing or obligation to make payment. A GC might use a pay when paid clause in its contract with the subcontractor so that the GC has to pay the subcontractor for the completed work only after the GC is paid by the owner for that work. Pay if paid might be used where payment is based upon meeting some objective that is not within the control of the parties, like approval of a project by a government agency that is providing grant money for the project. Pay if paid clauses are rarely used and generally not looked upon favorably by the courts, while pay when paid clauses are common and permitted so long as there is a reasonable timeframe by which to expect payment.

Rights and Remedies: "Rights" are what one party to a contract receives as part of the contract. A contractor has a right under the contract to payment once the contractor has performed. A contractor also may have other rights, such as the right to general conditions for owner-caused delay. "Remedies" are a different set of rights that generally arise when one party has failed to do what it contracted to the other party to do. If a contractor has not been paid for work, the contractor's remedies typically include suing for damages. "Damages" might include both the money owed to the contractor under the contract and other money as well, like interest, attorney's fees and costs.

Severability: This generally means that, if necessary to meet the overall objectives of a contract, the contract may be broken into parts. This is used to protect the parties from having the contract completely undone where a part of the contract may be legally unenforceable.

Statutory Limitation Period: A "statute of limitation" is a written law that sets the time period by which a lawsuit must be brought. There are different statutes depending upon the nature of the claim, so that the limitation period for filing a lawsuit to enforce a contract might be different than one for damages arising from an automobile accident. The limitations periods of these statutes also can vary from state to state. To protect against this uncertainty, a contract may have an express "statutory limitation period" by which the parties agree to the amount of time that either may have to sue to enforce the contract. These clauses may also specify how to determine when that time period begins to run, known as the "accrual date."

Subrogation: This is an insurance term that means when the insurance company makes a payment, it then has a right to recover that payment from any other responsible party. In effect, subrogation means that the insurance company "stands in the shoes" of the party on whose behalf it made the payment. So, if an owner's insurance company pays for damage caused by a contractor, and the owner sues the contractor to recover for those damages, the insurance company is typically subrogated up to the amount it paid to the owner. In some instances, the insurance company may actually take over the lawsuit, but in most it simply asserts a right to recover any amount it paid from the payment made by the responsible party.

Substantial Completion: Broadly speaking, this term means that the work is sufficiently complete that the property may be occupied and used for its intended purpose, but that the work may not be final. "Substantial completion" typically means all but punch list work has been completed. However, be careful, as this term is frequently redefined in contracts, and where it is not defined by the contract, the term may be defined by reference to local laws or municipal ordinances.

Termination for Convenience (v. for Cause): A "termination for cause" is a termination due to the fault of the non-terminating party. A "termination for convenience" is a termination for any reason other than the fault of the non-terminating party. Construction contracts often have different clauses detailing the rights and obligations depending upon the type of termination. For example, a termination for the owner's convenience might include a clause that the contractor is entitled to actual costs incurred through the date of the termination plus expected profits from the contract. A termination for cause, by contrast, would entitle the contractor to payment, if at all, only after the project is completed and the owner has deducted from the contract the additional costs to complete.

Time is of the Essence: This term is meant to simply make clear that one or more of the parties expects the contract to be started by a specific date, completed by a specific date or both. It is important primarily to provide notice of the expectation of timeliness, so that a party may seek damages for untimely performance (see "Liquidated Damages," on page 28).

Work for Hire: This is often used in a section dealing with copyright or patent issues associated with a contract. For example, a flooring contractor may be hired to both design and install parquet in an entryway. The owner may want a unique parquet, not a design copied and used in any other home. In that case, the owner may assert the copyright over the design, even though the contractor actually designed the work. In such instances the contract will state the design is a "work for hire," which means the contractor is being hired to design the parquet specifically for this homeowner, who will retain ownership of the design upon completion.