In any construction contract, it is important to have a provision for termination of the contract. An experienced Morgan Utah real estate lawyer can draft a customized construction contract for you incorporating the termination provision.

Contract Termination Provision

While the purpose of a contract is to obligate people and firms to perform in certain ways, the tightness of the bonds of mutual obligation can be set by the parties themselves–even to the point of nearly eliminating the obligation itself. Both contract suspension and contract termination provisions act in this way to allow one or both parties to breach the contract without substantial penalty. Termination clauses are typically written so as to allow the buyer to get out of the contract on certain terms, but they will occasionally be written so as to allow the seller to escape from their contractual duties as well. Contract termination clauses are sometimes open-ended to allow termination at the whim of one or more of the parties. However, such termination provisions can result in the contractor requiring a premium on the normal contract price to cover the risk of termination. More complex termination provisions are usually written in such a way as to balance the need for protection against the cost of this protection. Such provisions will often outline

• The conditions under which termination is an option (e.g., bankruptcy, failure to reach certain scheduled milestones or progress levels, behavior indicating incapacity or inability to complete the work as ordered in the contract, etc.).

• The time frame in which the termination will be initiated and completed. For example, the contract may call for the parties to be given notice of termination within two months prior to the new fiscal year, with the termination itself to be completed three months following notice.

• The payments to be made as part of the termination for startup costs, rental costs, loss of value of assets that are specific to a job, settlement expenses, subcontractor claims, inventory and warehousing costs, final audit costs, and so on. For large contracts, it may be prudent to specify what costs will be allowed as part of a settlement and what costs will be disallowed. For example, while a contractor may want to receive payment for materials still in inventory that have been purchased for a job, a more reasonable basis for payment would be reimbursement for items that could not be resold or be used on other jobs within a reasonable time period.

• The party or parties who are authorized to invoke a termination or a decision-making mechanism through which the termination provision is to be invoked.

Conflict Resolution Provisions

Conflict resolution provisions can be divided into two basic types: prevention provisions and resolution processes. Prevention provision take many forms depending on the kind of conflict that one can anticipate. A common prevention provision is one that specifies which documents will take precedence over others.

There are basically three methods for resolving conflicts: negotiation, mediation, and arbitration.

Negotiation essentially involve the parties in dispute discussing the conflict with each other with an eye toward trying to find a mutually satisfactory resolution to the conflict. As a conflict resolution strategy, negotiation is most effective when all the parties in conflict have good communication skills, good intentions, and a general willingness to compromise.

Mediation is like negotiation in that the outcome is one that is voluntary. What mediation adds is the expertise of a skilled mediator who helps the parties to identify their interests, generate multiple solutions, and discover the solution(s) that provides the best chance of mutual satisfaction and of avoiding further conflict, and insures that the parties’ rights are respected and that the agreement is fair and “tight” in all respects. Mediation is typically successful with all the persons who could negotiate a solution on their own, but is additionally successful with a large proportion of people who could not come to a satisfactory resolution without some assistance. If all else is equal, mediation could be described as being a bit more expensive than negotiation because the services of a mediator must be purchased. Studies of the effectiveness of mediation suggest, however, that the expertise of a skilled mediator can often mean the difference between a “band-aid” resolution that quickly falls apart and a resolution that is effective for the long term. This is the case because mediators are trained to (1) probe for and address hidden issues, including issues related to respect and psychological satisfaction, that if not addressed tend to generate additional conflict; and (2) identify and test for potential weaknesses in mediated agreements. That is, mediators work to insure that parties in conflict do not simply paper over the conflict or reach unrealistic or ineffective resolutions.

Arbitration is the third conflict resolution method. This method essentially involves the parties presenting their case to a neutral third party and having this third party, the arbitrator, judge the merits of each side’s case. In binding arbitration, the parties agree to submit to the judgment and remedies specified by the arbitrator. Arbitration can resemble, and even mimic, the legal processes (e.g., rules of evidence for civil suits, etc.) that would be engaged if the conflict cannot be resolved, or it can be customized to meet the needs and styles of the parties. If arbitration is to be used as a conflict resolution mechanism, however, it is probably best that the form and procedures to be used in the arbitration are specified in the initial contract or at some time before a conflict actually occurs. Otherwise, it is quite possible that the parties will waste resources strategizing and arguing over the rules to be used in arbitratng the conflict. In developing the rules to guide arbitration, contract negotiators can consider some of the following options:

Either–or judgments. Either–or judgments require the arbitrator to choose either the solution suggested by Party A or the solution suggested by Party B. It does not allow the arbitrator to fashion a compromise solution. The idea behind either–or judgments is to get the conflicting parties to develop options that include a high degree of compromise. The party choosing not to develop a compromise option will tend to lose out under this condition.

Unrestricted/restricted rules of evidence. Restricting evidence to that which would be allowed in court has the advantage of making the arbitration outcome more closely approximate the outcome that would be achieved if the parties went to court. Keeping the rules of evidence unrestricted, however, is more likely to allow issues to surface that, if left unaddressed, would lead to further conflict in the future.

Formal/informal method of argumentation. Again, whereas formal presentations of arguments will result in a better approximation of legal-system outcomes, informal presentations, appropriately referred, might do more to further interparty communications in the long term.

Restrictions on levels of judgment and types of remedies. The contract negotiators may want to restrict the value of the judgment that an arbitrator can assess (e.g., assessments under $200,000) or restrict the remedies to a particular type (e.g., remedies that involve repair of defective workmanship by the contractor but not remedies that involve hiring a different contractor to replace the work).

Typically, in contracts where there is some expectation of conflict, contract negotiators will attempt to structure a range of conflict resolution mechanisms and to require the parties in conflict to attempt to resolve their conflict using one method (e.g., negotiation or mediation) before going on to use another method (e.g., mediation or arbitration).

Building the trust relationship

Contracts of various types are entered into for different reasons. Some contracts are let out simply because it appears that costs can be saved, others are let out because the property owner does not have time to gear up to provide the service in-house, and still others are entered into because of the lack of in- house expertise.

Building trust or positive interdependence in contract relationships must begin with trust-enhancing measures on both sides. However, the government’s contract manager must take the lead in making this effort a meaningful one, as it is the usually the inactivity on the part of the government that allows a contractor to wander into a state of non- or poor performance. Key behaviors and steps that contract managers can initiate so as to increase the chances that a trust relationship will be established include

Developing key one-on-one personal relationships between the property owner’s and the contractor’s staff. These relations should involve a mix of formal and informal settings and conditions. Special efforts should be made to establish a relationship between individuals on each side who are designated as the single point of contact for their respective organizations

Establishing benchmarks and coordination and communication standards for such things as response time to queries and payment due communications; use of particular software, network protocols, and procurement processes; and clear expectations regarding shipping schedules, warehousing processes, inventory tracking, lead times, and so forth. When the property owner and the contractor attend to developing such standards, they prevent unnecessary deterioration of the relationship. Common procedures for fostering such communications include periodic report cards, regular meetings, and joint planning sessions.

When is a contractor’s relationship

The contractor’s relationship with the government must not have the attributes of an employer-employee relationship. Hence, even if a government enters into a contract for services, if the services are effectively rendered in a manner that suggests an employer-employee relationship, the Internal Revenue Service will require the government to pay the taxes it was attempting to avoid through the contract. A number of factors go into determining whether such an employer- employee relationship exists, including the nature of the work. If there is an employee who provides a similar service or type of work to the government, or if the person is responsible for a function of government or can exercise judgment on behalf of the government, this suggests that an employer-employee relationship exists. Also, an employer employee relationship exists if the government has control (or even the right to exert such control) over a person. Such control can relate to

• When, where, and how the work is done.

• The expectation that a person attend or receive training.

• The expectation that a person’s work be integrated with the operations and administrative routines of the government.

• The expectation that work be performed personally.

• Situations where the government hires, supervises, and pays other workers on the same job.

• The length of the relationship (e.g., steady long-term activity suggests an employer employee relationship).

• The expectation that a person work certain hours.

• The expectation that a person work full time on the government’s project or refrain from work on other projects.

• The expectation that the work be performed in the government’s facilities, especially when it could logically be done elsewhere.

• The expectation that work be performed in a preset order when it could potentially be performed in a different order.

• The requirement of frequent oral or written reports of activities.

• Payment that is by the hour, week, month, or other set interval rather than based on the job or on a straight commission.

• Payment of business expenses (which indicates an employer employee relationship).

• Furnishing tools and materials.

• The contractor’s investment in facilities, tools, and equipment (which indicates contractor independence).

• Realization of a profit or loss (which indicates contractor independence).

• Working for a number of people (which indicates contractor independence).

• Availability of services to the public (which indicates contractor independence).

• Right to discharge (if the government can threaten dismissal that is not based on nonperformance of contractual obligations, an employer employee relationship is suggested).

• Right to quit (if a person can quit without incurring a liability, this indicates an employer employee relationship, as a contractor who quits will typically be liable for nonperformance).

There should be a statement in the contract that indicates the contractor is independent. Unfortunately, while it is appropriate to include such language in the contract, the determining factor from the perspective of the Internal Revenue Service is the nature of the actual relationship. An experienced Morgan Utah real estate lawyer can draft a construction contract with appropriate language to ensure that the contractor is treated as an independent contractor.

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