Defining Claims in Construction Contracts and Architects Agreements
Why Define Claims?
Designers, contractors, owner, lenders, and the like often get into disputes involving the design or building of a construction project. When this happens, we usually say "they're making a claim" or something like that. Other times, we say "they're waiving their claims." But what do we really mean when we refer to claims. Especially when we refer to claims in the abstract - when we're referring to claims generally at large, not a specific set of identified claims?
When referring to claims, it's usually a good idea to ensure that everyone involved and affected agrees on what qualifies as a "claim". Especially when someone is waiving claims, as they often do in a Change Order, a settlement agreement, or a prior work clause. Few things in business are as annoying as years of depositions, document review, motions, and counter-motions, all over whether "it was the intent of the parties" to waive this or that claim. Of course defining what qualifies as a claim won't guarantee you'll avoid this; but your odds will be better.
So when I write a contract I usually define the term "claim". There's several options for doing this.
- Use the definition in Section 15.1.1 of the American Institute of Architects' A201 General Conditions of the Contract For Construction (2007 edition). This is the definition I see most often. But I usually find it's not broad enough and leaves things out that should be in the definition of claim.
- Write your own custom definition. Like all custom work, this takes a lot of thought, time, and care. Plus there's a good chance of overlooking something.
- Use the definition in Section 101(5) of the United States Bankruptcy Code . This is the definition I usually use. Why??
Virtues of the Bankruptcy Code Definition
Why use the Bankruptcy Code definition of "claim"?
- The definition is broad. It usually sweeps in everything I can think of that I'll want included in the term "claim".
- The bankruptcy process is focused on claims.
- So claims are defined carefully, as well as broadly. Ultimately, it's a claim that each creditor has against the debtor who goes into bankruptcy. Just about every right a creditor could have against the debtor gets categorized as a claim. A lot of the the bankruptcy court proceedings focus on how to categorize claims, what to do with claims, and how much the holder of each claim gets paid on their claim. So if a creditor's right doesn't fit within the definition of "claim", there's going to be big trouble. The breadth and care of the Bankruptcy Code definition works to avoid that
- The judiciary committees of both houses of Congress, the American Bar Association, and many other interested groups with a lot of really smart men and women, spent a lot of time writing the Bankruptcy Code. They focused at least some of that time on defining "claim". Call me lazy, but after reading it the definition they wrote, and concluding that all those really smart people did a pretty good job, only in the exceptional case will I spend too much of my own time re-inventing that wheel.
- It saves work. You can complain about a lot of things Congress does and doesn't do. But they did a pretty good job of defining a "claim" in the Bankruptcy Code. So I'll use it. Borrowing the government's definition without charge makes me fell like I'm getting more for paying my taxes.
- It saves space. You can say in an agreement that "'claim' has the meaning defined in the United States Bankruptcy Code." Then you don't need to take up space in the document with the rest of the definition. Maybe this would be inconvenient in the days when you had to go to a library to look the definition up in a book. But this is the 21st Century; if you're reading this you can probably google it on the Internet. Or you could just embed a hyperlink into the definition right in your contract.
Conclusion
The Bankruptcy Code definition doesn't work all the time. You have to think about the parties to your contract, what they are exchanging between each other, and how the courts have interpreted and applied the definition. If it after doing all of that the Bankruptcy Code definition works, or it's at least better than anything else, then the odds favor using it. If not, you need to add language changing the definition in your contract, or use another definition altogether.
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
