Chapter 8: North American Construction Law

8.3 The laws of the United States are enacted by the US Congress. Many such laws are very general, and the details are filled in by regulations which are consistent with the basic law. For the most part, the laws affecting all contracts deal with labour and other socio-economic fields instead of the commercial rights and liabilities of the parties to the contract. Some examples are the Davis-Bacon Act of 1931 (which sets forth the policy of the minimum wage rates that can be paid), safety and health legislation, and non-discrimination. 2 Many of these requirements apply to all contracts while others only apply to contracts where the US Government has provided some of the funding.

8.4 The US Government is a major procurer of construction services. Its procurement system is governed by a few basic statutes, for example, the Armed Services Procurement Act, 3 the Federal Property and Administrative Services Act, 4 the Competition in Contracting Act, 5 and the Contract Disputes Act, 6 but expanded and supplemented by a system of regulations known as the Federal Acquisition Regulations (FARs). The FARs deal with virtually all aspects of contracting including changes (variations), delay, dispute resolution, etc. These are addressed in more detail in Section C below.

8.5 All disputes between the US Government and its contractors are resolved by either specialized administrative courts known as the Civilian Board of Contract Appeals (CBCA) for contracts with civilian agencies, 7 and the Armed Services Board of Contract Appeals (ASBCA) for contracts with military agencies, 8 or a specialized court known as the US Court of Federal Claims. 9 Appeals from both the two administrative courts and the Court of Federal Claims are appealable only to another specialized court, the Court of Appeals for the Federal Circuit. 10

8.6 A practical effect of having these specialized courts is the development of a large body of construction jurisprudence. While strictly applicable only to direct Federal government contracts, it has been relied upon by other courts and often by arbitrators, even international arbitrators. 11 It is certainly the largest body of construction law in the US and perhaps the world.

8.7 The US Federal Arbitration Act (FAA), 9 U.S.C.§1 governs all arbitrations which involve more than one state, in effect, virtually all commercial contracts. Of particular importance to the construction community is that the FAA enforces arbitration provisions as agreed to by the parties, including choice-of-law and the site of the arbitration provisions even if a state law purports to limit arbitration to its laws and requires arbitration to be held in that state. 12 In addition, arbitration awards can only be challenged on very limited grounds which would be readily familiar to those who know the UNCITRAL Model Law on Commercial Arbitration and the 1958 New York Convention. 13

8.8 The starting point of state law is that 49 of the 50 states, the exception being Louisiana, and all the Canadian provinces except Quebec are common law jurisdictions. This means that the law has developed through the application of prior decisions on the same subject modified when necessary to fit new, but still analogous circumstances; however, the basic principle is that prior decisions are binding; this is known as “stare decisis”.

8.9 The law in each state has separately developed. For many the common law of England was the starting point and older English case law like the foreseeability of damages as set forth in Hadley v Baxendale 9 Exch. 341, 156 Eng.Rep. 145. (Court of Exchequer, 1854) is still applicable. This, of course, includes construction law.

8.10 For the most part, the parties to a construction contract are free to contract as they choose. In some states, there are statutes which directly affect construction contracts. An example is statutes requiring owners (employers) to pay prime (main) contractors or main contractors to pay their subcontractors within stated periods; these are called “prompt payment” requirements. 14 Some such statutes affect all contracts; others only contracts entered into by the state or other public entities.

8.11 Each state and political sub-division, of each state, for example, cities, highway authorities, etc., has requirements for their direct procurements. This accounts for a vast amount of construction activity; for example, roads, bridges, water treatment and distribution systems, sewage treatment systems, etc. The laws and regulations applicable to these procurements have to be individually ascertained.

8.15 A contract is at its simplest “a promise or set of promises for the breach of which the law gives a recovery or the performance of which the law in some way recognizes as a duty”. 15 The three classic elements for contract formation are an offer, acceptance and consideration. In modern construction contracts, particularly those made by public entities, there are generally two forms of offer and acceptance: Invitation to bid or request for proposals.

8.16 The invitation to bid process typically begins with an owner's issuance of a formal invitation to bid or on a specific project, which includes detailed plans and specifications and the contract terms and conditions under which the owner seeks to procure the project. Contractors then submit sealed bids to the owner. The owner evaluates the bids and selects the lowest priced responsive (strict adherence to the instructions in the invitation to bid) and responsible (a determination of the bidder's ability to perform the work) bid for award of the contract.

8.17 Sealed bidding has long been the generally accepted method by which government (at the Federal, state, and local levels) construction contracts are made and are governed by the Federal Acquisition Regulations and state and local procurement laws and regulations.

8.18 In the past several decades, government entities have increasingly embraced negotiated procurement of construction projects. Under this method, the government issues a request for proposals and allows the contracting officer to select a proposal that offers the “best value” to the government by allowing tradeoffs between price and technical factors related to the procurement. The request for proposals must include a detailed listing of all factors that will be taken account of in making the award. The contracting authority (often known as the contracting officer) evaluates the proposals received, enters into negotiations with one or more contractors to clarify technical and pricing matters, and then awards the contract to the contractor that offers the best value to the government.

8.19 In private construction contracts, an owner is much freer to utilize the method it desires to retain a contractor, and often will solicit proposals or bids from only contractors it is familiar with or knows can perform the work. Regardless, the methods are largely the same as in the government realm but typically without the attendant formality.

8.20 In commercial settings, it is presumed that the contracting parties have...