This article revisits the topic from a different perspective – that of the courts. For example, how will a court determine which state’s law governs a payment dispute? How will a court decide whether a contractor can assign its contractual obligations to another contractor? This article will look at a series of court cases from around the country to answer these questions.

Governing Law

Imagine this scenario: a construction project in Ohio requires certain materials manufactured in Indiana. The contractor that orders the materials is a Kentucky corporation licensed to do business in Ohio. After the materials are delivered, the owner pays the Kentucky contractor for the materials, which are then stored off-site in Kentucky.

When the Kentucky contractor gets into financial trouble and disappears, the owner is left with materials for which the manufacturer in Indiana is demanding payment. Which law governs the dispute?

The answer is simpler than you might think. Section 13.1 of the A201-2007 and Section 17.05 of the EJCDC C-700 explain that the contract shall be governed by the law of the place where the project is located. For the scenario above, the construction project took place in Ohio, so Ohio law governs. This is a logical choice, and probably the most convenient for the parties involved.

Around the country, courts generally follow this analysis. For example, in 2001, the United States Supreme Court in C & L Enterprises, Inc. v. Potawatomi Indian Tribe of Okla., 532 U.S. 411, was asked to interpret the standard A201-1997 under which a contractor had agreed to install a new roof on a building located in Oklahoma. After the contract was signed, but before the start of performance, the owner changed the specified roofing material and rebid the project.

The contractor responded by filing an arbitration claim, as required under the contract, and was awarded damages. When the owner refused to pay, the contractor filed suit in Oklahoma state court (the place where the project was located) to enforce the arbitration award.

By the time the case went to the United States Supreme Court, one of the issues was whether Oklahoma state court was a proper forum to enforce the arbitration award. The Supreme Court said yes. The reason: the A201 document clearly stated that the “law of the place where the Project is located” governed (i.e., Oklahoma law). In addition, because Oklahoma law allowed arbitration awards to be enforced by state courts, the contractor’s state court lawsuit was proper.

Now for the caveat applicable only to the current A201-2007: Section 13.1 contains new language relating to arbitration proceedings. When arbitration is selected as the binding method of dispute resolution, the Federal Arbitration Act, rather than state law, serves as the governing law.

Had this change been in effect when the U.S. Supreme Court decided the case above, the result might have been the same, but the governing law definitely would not. Instead of Oklahoma law governing the dispute, the Federal Arbitration Act would have replaced Oklahoma state law. The lesson: if state law should govern the construction contract, work with construction counsel to modify the A201-2007 document.

Successors and Assigns

An assignment is a transfer of rights under a contract from one entity to another. Although a common feature of many contracts, both the A201-2007 and EJCDC C-700 make it clear that assignments generally are disfavored.

In private transactions, parties typically choose to contract with each other through voluntary negotiations. In some ways, these contracts are more personal than publicly bid contracts. For example, the contractor may be known as a particularly skilled craftsman, uniquely capable of producing the owner’s desired result. If the contract could be freely assigned, the non-assigning party very likely could find itself doing business with a complete stranger with whom it never negotiated (i.e., a contractor incapable of pounding nails straight.)

To discourage this outcome, A201-2007 Section 13.2.1 provides that “if either party attempts to make such an assignment without such consent, that party shall nevertheless remain legally responsible for all obligations under the Contract.” Requiring written consent for the assignment helps the owner maintain a measure of control over who will complete its project.

The problematic nature of assignments is even more drastic in the context of public contracting. If a publicly bid contract could freely be assigned, the owner could end up with a contractor that was not evaluated under the statutory bidding standards, thereby violating the very competitive bidding laws that Ohio requires. It is likely for that reason that the OSFC’s 2008 General Conditions document does not mention, or provide for, the assignment of construction contracts.

It should also be noted that there are two exceptions to the general assignability rules noted above. First, the A201 permits the owner to assign its rights under the contract to an institutional lender that is providing the construction financing for the project. In such an event, the lender must assume all of the obligations of the owner, and the contractor must execute all consents reasonably necessary to facilitate the assignment.

The second, and more common, exception involves the subrogation rights of sureties. Recently, a Massachusetts state court addressed the very issue of whether the A201’s general prohibition on contractual assignments was intended to apply to a surety’s subrogation rights in Reliance Ins. Co. v. City of Boston, 71 Mass App. Ct. 550.

Subrogation is a fancy way of identifying a type of legal substitution. When Party A subrogates to Party B, Party A is said to “step into the shoes” of Party B. In doing so, Party A receives all of Party B’s rights. In light of this natural sequence of events, the Massachusetts court concluded that it was only normal for a surety (i.e. Party A) to make payment on behalf of its principal (i.e. Party B) and step into the principal’s shoes against third parties. This meant that that the A201 “did not intend the anti-assignment provisions to interfere with normal subrogation rights.”

The key to successfully dealing with adversity on a construction project is to identify risk before the project begins and to deal with the risk in the contract documents. This ties in directly with Rule 1 and Rule 13 of Bricker & Eckler’s 20 Rules for Public Owners’ Contracting Success. These rules, however, can be applied not only to owners, but also to design professionals and contractors. The key is to identify the risk early and to allocate the risk in the contract documents.