Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

Choosing The Governing Law - Choice of Law Clauses

Like most other contracts, construction contracts and architects agreements usually have a section on governing law - the choice of law clause. Choice of law clauses are usually good things. Contracting parties choose what law will govern the contractual relationship between them before they enter into the contract - while they're still on good terms, before they're polarized by confrontation and the posturing of their lawyers.

You can spend years and many thousands of dollars fighting not over the actual merits of who did what, whether they did it right, or paid enough when they were supposed to, but instead fighting over the law of which state should govern the dispute. If you don't choose governing law in advance, odds are good that you'll get to experience that fight. If you choose governing law in your contract, and choose it well, odds are you can save your powder for something more important.

A choice of law clause first needs to choose which jurisdiction's law will govern. In the U.S., this is going to be state law because the law governing contracts and most other private relationships in the construction context is state law (e.g., contract law, tort law, agency law).

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In the last post we talked about what retainage is, why owners and contractors withhold it, and how much they customarily withhold. As promised, in this post we'll talk about releasing and reducing retainage before work is completely finished.

Early Release of Retainage

Contracts often provide for an early payment - referred to in trade vernacular as "release" - of retainage. Under prime contracts, the owner usually releases retainage that's allocated to subcontractor work that has been completed. This usually applies to retainage withheld on subcontractor work that starts and ends early in the project (e.g., demolition, excavation).

In most cases these subcontractors complete their work long before the owner must release retainage to the prime contractor (usually once the prime contractor substantially completes the entire work). Waiting until the prime contractor substantially completes the entire work is a long time for an early finishing subcontractor to wait, especially when they're waiting for up to ten percent of their money.

So subcontracts often require the prime contractor to release retainage to the early finishing subcontractors soon after the subcontractor completes their part of the work, regardless of when the prime contractor gets their own retainage from the owner. So the prime contractor usually wants to ensure their prime contract allows for early release of that retainage money from the owner too. That way the money due to the early finishing subcontractor comes from the owner, not from the prime contractor's operating cash or the prime contractor's lenders.

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What's Retainage?

"Retainage" is law talk for money that an owner, or a contractor, withholds from an interim payment to pay at a later time. Construction contracts - and here I mean both prime contracts and subcontracts - usually provide for retainage. The owner often withholds retainage money from the prime contractor until the prime contractor

If you'd like to see what the retainage provisions in a contract look like, try

Why Have Retainage?

Why do owners and contractors withhold retainage?

• It's security for performance. If full payment is deferred until completion, the contractor has a good incentive to complete it. They have "skin in the game" until the game ends.
• It's also a reserve of money that an owner can draw on if the original prime contractor doesn't perform and the owner has to replace the original contractor with a substitute contractor at a higher price. A substitute contractor usually costs more. And the owner may use money they withheld as retainage to pay the extra cost. Prime contractors do the same in case they have to replace a subcontractor.

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Introduction To Floating Interest Rates

In the last post we talked about pros and cons of fixed interest rates. When a fixed interest rate doesn't fit the bill, the alternative is a floating rate. As promised, today we'll talk about floating interest rates, some problems with them, and some suggestions for making them work better in your contracts.

Keeping in mind from the last post on fixed interest rates, the longer the amount of time between setting the rate and when interest actually gets charged, the greater the chances that interest rates at large will change.

Problems With Bank Rates and Publication Rates

Contracts usually set floating interest rates by reference to some widely available rate or index and then add percentage points to it. If you want to sound work on Wall Street, you can add basis points instead. I frequently see something like "the Prime Rate, plus 4%." This works OK, until you ask questions like:

• Which Prime Rate? The Wall Street Journal's Prime Rate? Bank of America's Prime Rate? Chase's Prime Rate?
• What happens if the Prime Rate source is no longer available?

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