An Ounce of Prevention is Worth A Pound of Cure: Residential Construction Contracts

On average, we represent approximately 10 clients who are having disputes related to their signed residential construction contracts for every one who contacts us to review such contracts before they are signed. Many such disputes are unnecessarily complicated by poorly drafted or unbalanced contracts which could have easily been prevented at a fraction of the cost necessary to decipher their intended meaning after the fact. Anyone contemplating entering into a residential construction contract should have it reviewed by an experienced construction lawyer before signing it.

We have seen examples of builders employing the full gamut, from very well-drafted residential construction contracts that obviously were obsessed over by experienced attorneys before their first use, to forms that builders apparently downloaded from the Internet and hardly modified at all. As an example of the latter, we once were asked to advise parties in southeastern North Carolina who were locked in a dispute with a local builder over a home constructed in this region, but the signed contract between the two inexplicably required any disputes to be governed by California law and to be decided by an alternative dispute resolution company we had never heard of and which appeared to have ceased conducting business long before the contract was signed! Obviously, that was a bad situation for both parties, and could have been avoided by proper contract drafting, review and negotiation.

There are forms easily available that at least provide a useful starting point for residential construction contracts. As a service to residential construction participants, the North Carolina Bar Association’s Construction Law Section (in which two of our firm’s attorneys are members) published a residential construction contract form in 2005. This form can be used on both “lump sum” and “cost plus” construction projects. These forms were designed to be easy for both homebuilders and their customers to use when contracting for a construction project. In many cases, the parties can simply fill in the details such as insurance, payments and warranties for a specific project, and make any other agreed-upon changes.

In some cases, this can be achieved without the need for specific legal advice, although every situation is different and should be considered carefully. Other industry participants, such as the American Institute of Architects and ConsensusDocs, also publish construction contract forms that have been carefully reviewed and approved by a host of construction industry participants. Unfortunately, we have found very few experiences where residential builders and owners have employed such standardized forms as their starting point. Unfortunately, we are often informed by owners after the fact that they accepted whatever proposed contract document their builder proposed without question because the owner did not want to upset their “relationship” with the builder at the outset.

North Carolina courts generally consider parties to residential construction contracts as willing participants operating on an equal footing. The courts are unlikely to allow either party to avoid the terms of such contracts on the grounds that they constitute “contracts of adhesion,” the terms of which were non-negotiable prior to formation. The courts also will generally look to the contract entered into by the parties for available remedies, often to the exclusion of other possible common law remedies otherwise available to the courts. So the terms of these contracts are incredibly important, and are better reviewed and negotiated carefully before formation, rather than fought over once the parties have reached the point of a dispute. Especially when involving “homegrown” contracts not of a standard variety, such disputes can end up being very time-consuming and expensive. In the context of residential contract disputes, an ounce of prevention is truly worth a pound of cure.