The Dotted Line: 6 ways a construction contract can become unenforceableJanuary 26, 2021AUTHOR Kim Slowey @kimslowey
PUBLISHED Jan. 26, 2021
Certain situations like illegality or coercion can invalidate a contract in whole or in part.
This feature is a part of "The Dotted Line" series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
Most contractors are well aware that they must abide by the performance standards and scope-of-work requirements in their contracts or potentially face legal action. What they might not realize is that there are situations that could render their contracts or a portion of those contracts unenforceable.
In the legal world, there are affirmative defenses available to someone being sued for breach of contract, said attorney Quinn Murphy with Sandberg Phoenix in St. Louis. If those affirmative defenses are established, he said, it could mean that the parties no longer have an enforceable agreement.
Contractors must keep in mind, though, that the issue of whether a contract is unenforceable is a nuanced one and dependent on the facts specific to each contract, according to attorney Brian Wolf of Smith, Currie & Hancock LLP in Ft. Lauderdale, Florida. This is why it’s important to seek legal counsel when faced with a potential contract issue.
Here are some situations where a contract could be rendered unenforceable:
Prior breach of contract
A prior breach, said Murphy, is the most common way contracts or a portion thereof are determined to be unenforceable.
“If there has been a prior breach of the contract, the party who breached that contract doesn't then get to enforce the contract,” he said.
Nonpayment is a frequent example of a prior breach, Murphy said. Take, for instance, a general contractor that has not paid one of its subcontractors according to the terms of its contract. If that general contractor terminates the subcontractor and then takes the sub to court because it did not add manpower to accelerate the schedule when requested, the sub can use the fact that the general contractor has not made the required payment as a defense.
“So it’s just based around the general principle that a party that breaches the contract [first] is not entitled to enforce that contract,” he said.
This approach can be very effective, Murphy said, because judges and juries typically don’t have a great deal of knowledge about the construction business and, when finding fault, will often fall back on blaming “who did the first bad thing.”
A contract can be declared unenforceable if it does not comply with applicable laws, Wolf said. For example, states like California and Florida have extensive and strict licensing laws, and if a contractor takes on a project without being properly licensed, the contract is likely illegal and therefore unenforceable.
“Illegality is almost universally recognized as a defense to enforcement of a contract,” Wolf said.
For example, Oceanwide China Holdings recently accused international developer and general contractor Lendlease of not having a valid California license during its performance on the $1 billion Oceanwide Plaza mixed-use project in downtown Los Angeles and asked a court to void a $38.4 million payment awarded by an arbitrator.
Work shut down on the project in early 2019 amid claims of a lack of funding on Oceanwide’s part and failure to pay contractors. Lendlease told Construction Dive it had fully complied with all California state licensing requirements.
The court has not yet ruled on Oceanwide’s motion.
Sometimes tied to the issue of legality, Murphy said, are mistakes. If a contractor, for example, is hired to build a $16 million building and discovers oil underground after starting construction, and the environmental authorities prevent the project from moving forward at that location, the contractor cannot try to enforce the contract and sue the owner for the $16 million, he said.
“The owner of that property could say, ‘No, the whole project was based upon the mistake that this was a legal endeavor. And because it's not a legal endeavor, I'm excused from non-performance by mistake,’” Murphy said.
Other mistakes that could result in a contract or a portion of a contract being deemed unenforceable occasionally involve materials that are declared illegal.
For example, Brazilian rosewood has been banned from import into the U.S. since 1992. If a construction company had been hired to provide cabinetry, desks or anything else made of that material, Murphy said, the owner could not sue the contractor for not providing the product specified in the contract.
“You were both mistaken as to the legality of importing it,” he said.
A contract can end up being unenforceable if one of the parties made a misrepresentation in the securing of that contract, said attorney Barry MacNaughton with Ervin Cohen & Jessup in Los Angeles.
If an electrician, for example, operating in California or Florida, which require electricians be licensed, turns out not to be licensed going into a project, then it’s a clear misrepresentation on the part of the contractor. Even if the electrician is licensed, however, and does not have the requisite experience to perform the work in the contract, he said, that is a misrepresentation as well, but is very difficult to prove in court.
Someone who signs a construction contract or any other agreement must have the capacity to do so or else the contract could become unenforceable, MacNaughton said. It has long been recognized that minors do not have the legal capacity to enter into contractual agreements, but other individuals could fall into that category as well, such as those who are psychologically incapacitated, he said.
A more likely scenario in the construction industry, though, would involve someone who did not speak English, MacNaughton said, who perhaps is being made to sign a change order or other document.
“If you have a Spanish-speaking worker at the jobsite, and the owner knows he doesn’t speak English or have the ability to understand what is being put in front of him, and the owner says, ‘Sign this,’” MacNaughton said, “then you do have a lack of capacity defense.”
Coercion can occur when a party asks that a contractor perform work in a situation where the contractor has no choice but to agree, Murphy said. If a general contractor, for example, knows that a subcontractor has all of its resources tied up in a project and does not have any other liquidity to help fund its operations, he said, it could be coercion if the general contractor tells the subcontractor it will not be paid for work already performed unless it agrees to commit to extra work as well.
Another example of coercion involves liquidated damages. If a subcontractor is providing a vital service or material, knows that the general contractor is subject to liquidated damages if the project falls behind and uses that as leverage to force the general contractor to approve a change for additional money, the general contractor could argue that it was forced to sign the change order.
“Symbolically, it is the contractor putting a gun to your head and saying, ‘Sign this or else,’” Murphy said.
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