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Negotiating and drafting municipal construction contracts can be a stressful process for Board or Council members, even when ignoring the legal hurdles and risks that lie in wait. That anxiousness increases when elected officials aim for a level of transparency that allows the public to easily understand the municipality’s project and goals. In the midst of this stressful process, the intent of a contract or particular provision can be lost.

To avoid issues, the importance of creating clear and concise construction contracts should not be overlooked. In addition to providing a better public understanding of government, contracts that use clear and precise language, if drafted correctly, can help avoid long legal battles and litigation and costly change orders, mitigate specific risks, and prevent mid-project renegotiation.

Clearly State the Intent of the Parties

Before diving into construction contracts specifically, it is important to have some background on contracts generally. At their basic level, contracts establish the rights and duties of a municipality and its vendor. Fundamentally, a contract explains the circumstances under which a municipality will pay a vendor for a completed project. The obligation to pay a vendor is legally referred to as a “duty” and the receipt of payment from the municipality is a “right.” It is typical that each party will have both rights and duties under a contract, and they are typically reciprocal (for example, a right to receive payment exists only in the presence of a duty to pay).

Contracts have a way of making that straightforward relationship complex. In addition to occasionally referring to “parties of the first and second part,” contracts often also reference concepts such as consideration, conditions precedent or subsequent, the mutuality of obligation, and other phrases that distract from the purpose of the contract. At best, these phrases speak to a legal audience (such as a judge) that neither party wants to resolve their dispute. At worst, these phrases force parties to resolve their disputes in a courtroom.

While the substance of a contract may vary depending on what the parties are seeking to accomplish, every contract should utilize similar general principles to ensure the language of the contract means what the parties intend for it to. At first this comes across as obvious, but caselaw is full of disputes due to ambiguities arising in contracts. Municipalities can avoid, or at least limit, the risk of ambiguity by entering into carefully drafted contracts that clearly state the parties’ intentions.

When a dispute over the meaning and/or scope of a contractual provision comes before the court, the first thing the court will do is analyze the plain language of the contract. If the court determines the language is unambiguous, the court will enforce the contract as written. However, if the language is found to be ambiguous, meaning the language is either inconsistent on its face or can be reasonably interpreted to mean more than one thing, the court will interpret the language by examining outside evidence, such as, what the parties previously said or did, recognized industry practices, etc. While a court will conduct its interpretation with a goal of enforcing the intent of the parties, one or both parties’ actual intent at the time of drafting may still be lost.

Thus, one way to protect a municipality’s interest when drafting a contract is to carefully examine its terms for clarity. The following are some general principles to keep in mind:

• Use plain language (avoid legalese)
  • For example, if the parties agree on something that may vary from another thing previously agreed to, the parties may include the phrase “notwithstanding anything to the contrary herein.” This phrase needs to be used carefully as the parties may have different thoughts on the intent of this phrase (Does herein apply to a specific section or the contract as a whole?). Instead, the contract could include language that addresses what a specific provision will supersede (This provision applies, except to the indemnification obligation discussed in Section 6.).
• Remove unnecessary words
  • While in most writing, drafters like to use many different words to describe the same thing to avoid being repetitive, this is not the case in contract drafting. Being repetitive with descriptions can limit ambiguity.
• Define important terms
  • For example, a provision describing the scope of the work to be performed under the contract should be carefully drafted to accurately and completely describe all the required work. Once defined, the scope of work may be referred to as “the Work.”
• Review for consistency
  • For example, if the parties are referred to as “Municipality” and “Vendor” in the contract, this should remain the same throughout, rather than interchanging the full name of the municipality or vendor.

While these, among other things, are important principles to keep in mind when considering any contractual obligation, this is especially true for construction contracts, as they tend to contain provisions more susceptible to ambiguous language.

If you feel that you would like some more background on contracts generally before reading further, feel free to read over our May 2024 newsletter, “Best Practices for Entering Into Township Contracts,” which can be found here, before coming back to read on.

Carefully Revise and Finalize

The goal of drafting a contract is to ensure that all provisions are clear, understandable, and unambiguous. However, construction contracts contain provisions that are susceptible to common attacks, meaning that those provisions should receive closer scrutiny. While all provisions should be written with intent and care, the following are the areas that are most often litigated, lending to them the need for additional scrutiny.

SCOPE OF WORK

Construction and capital improvements are often the most stressful times for a municipality because the work is public and timelines are difficult to manage. This is often true because construction projects can take on a life of their own, morphing from one thing into something entirely different. At times, it can feel impossible to reign in these types of projects. But all is not lost. One of the best methods available for any municipality to control construction work is to ensure that the scope of work is clearly articulated in the contract, including any contingencies that may arise.

Clearly articulating the scope of work can mean different things in different contexts. For example, it may mean that reliance on construction plans may be insufficient to properly articulate the scope of the project. To fix this, consider including a clear statement of intent as to what the plans are meant to accomplish should questions later arise. Alternatively, it may require the assistance of an owner’s representative to aid in the drafting of the contract terms in a manner that will be understood by the public, parties, and the Court should litigation arise.

INSURANCE

One of the most important aspects of construction contracts is risk mitigation. As a municipality, the Board or Council often does not have the expertise, workforce, or funding to oversee all aspects of a project. This leaves the municipality vulnerable because it cannot observe and fix safety violations or construction defects when they occur, and unfortunately these are the real-world problems that are most litigated.

One way to mitigate this risk that is often used is the inclusion of an insurance clause within a construction contract. An insurance clause simply requires that a vendor have a minimum amount of insurance to cover problems with the construction or injuries that occur while work is being performed. Unfortunately, these clauses (as is standard within the insurance industry) can be made more confusing than necessary as they often rely on insurance jargon for their clarity.

But, as is indicated above, construction contracts often have multiple audiences (including the public) and should be clear in what they are requesting. Therefore, while it is typically appropriate to include policy names, types, and endorsements/additional insured requirements, it would also be appropriate to explain the purpose of the provision and what it is expected to guard against. Thus, explaining in plain language that the municipality is seeking to mitigate risk through the vendor’s procurement of insurance that names it as an additional insured and protects against personal injury, worker’s compensation claims, and damage/injury that arises out of the vendor’s work is equally appropriate.

INDEMNITY

Indemnity provisions are another important risk mitigation tool that is typically included in a construction contract. Generally, an indemnity provision requires a vendor to “hold harmless” the municipal government from any damages that arise out of the construction contract, including those that are covered by insurance. Essentially, indemnity is an additional layer of protection that more broadly protects against future damages.

However, there is an important limitation that a municipality should know before including an indemnity provision within its next construction contract. Historically, indemnity provisions have been as broad as possible and have required vendors to pay for any and all damages, including damages caused by others or damages caused solely by the municipality. However, that has changed with the adoption of MCL 691.991(2), which protects vendors that engage in construction contracts with municipalities, and specifically limits their duty to indemnify (i.e., pay for municipal damages) to only those damages that they cause. Therefore, historically broad indemnity agreements are no longer valid, and their language should recognize what is legally allowed under MCL 691.991(2). Consequently, this is an additional area where clear and precise language is required to ensure compliance with the law, but also includes a hold harmless requirement that protects the municipality from injury or damages that were caused by a vendor.

Conclusion

Construction projects are one of the most important contracts in which municipal governments enter, and the time and attention spent on drafting them should be commensurate with their importance. Instead of using form agreements “that everyone uses,” municipalities should consider using plain language, especially within the most important provisions of construction agreements, to ensure that they are getting what they expect. Doing so will not only help avoid problems in the future, but will also serve the public good by making it clear to the people what their elected officials are doing to improve their community.

By Claire Moore and Eric Conn

This publication is intended for educational purposes only. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.