Best Practices Construction Law : Construction Lawyer & Attorney : Matthew DeVries : Stites & Harbison Law Firm : Green Building & LEED Litigation

What does a little game of tag have to do with construction contracts?  If you ever come by my house on a Saturday afternoon, you will find about 10-15 kids running through my backyard playing the "You're it!" sensation.  Oftentimes, when I am sitting on the back deck with a cool glass of iced tea, one of these runts will run right towards me in hopes of finding assylum in my presence.  Reaching out to touch my arm, the kid yells: "HOME BASE!!!"

"How did I become home base?" I ask myself.  If you don't know what I am talking about, home base in this childhood game is a safe haven ... a resting area ... a zone of protection.  I delight in the idea of being a "home base" to any one of these kids. Fun times.

The little game of tag came to mind last week when I was reviewing a construction contract, which included a new clause that I had never seen before.  It read something like this:

Subcontractor hereby waives the protection of the automatic stay provisions under federal bankruptcy laws, 11 U.S.C. section 362, or any other similar stay provisions under any present or future state or federal law relating to bankruptcy or insolvency.

Wow!  That cannot be enforceable, can it?  What's the point of home base ... the automatic stay of litigation that is guaranteed by filing for bankrupty protection ... if you can waive it?  Certainly, the bankruptcy courts do not appreciate their jurisdiction and powers being waived.  Right?

Wrong. The issue is not so simple.  Courts have treated pre-petition waivers differently and inconsistently throughout the country.  The courts generally fall into the following categories:

1. Those jurisdictions where pre-petition waivers are enforceable, whether on public policy grounds or freedom of contract grounds.
2. Those jurisdictions where pre-petition waivers are unenforceable, as against a statutory policy or to protect other creditors.
3. Those jurisdiction where pre-petition waivers are viewed on a case-by-case basis.

If you understand the purpose of the automatic stay, then you understand why there might be divergent views from the courts.  The waiver of automatic stay provision should not be confused with a blanket prohibition against filing for bankruptcy, which would not be enforceable.  In other words, the automatic stay is not to provide an absolution of liability, but rather to "stay" the litigation of claims that exist outstide the bankruptcy court.  The "stay" ... or home base ... gives the debtor, the creditors, the trustee and the court a resting area to begin, assess, and analyze the restructuring process.  

<8/26/09> Update: I have received a number of inquiries about the case law supporting the various approaches above.  For an good review of the law, see Michael L. Bernstein's article for the American Bankruptcy Insitute entitled, "Enforceability of Prepetition Waivers of the Automatic Stay."

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You don’t always say what you mean. And you don’t always mean what you say. 

In construction contracts, parties attempt to use plain and ordinary words to describe their respective obligations. For example, when the parties use the word “shall” in their agreement, they generally understand that the obligation specified is mandatory. Or when parties use the word “may” in their contract, performance is permissive or optional given the plain meaning of the word. Consider the following construction contract provisions:

“If the Owner fails to make payment for a period of 30 days, the Contractor may, after seven days written notice, terminate the Contract and recover from the Owner payment for Work performed.”

“The Work may be suspended by the Owner as provided in Article 14 of the General Conditions.”

“Payments may be withheld on account of (1) defective Work not remedied, (2) claims filed by third parties, or (3) failure to carry out the Work in accordance with the Contract Documents.”

In all of theses examples, it seems clear that the parties agreed to allow—but not require—the specified performance. The word “may” was permissive in nature.

According to some courts, however, this traditional line of reasoning is no longer the trend in the context of arbitration provision in construction contracts. For example, in TM Delmarva Power v. NCP of Virginia, the Supreme Court of Virginia held that the parties’ use of the word “may” in the dispute resolution provisions of their construction contract required mandatory participation in arbitration at the election of one of the parties. The arbitration agreement provided:

“If any material dispute, disagreement or controversy concerning this Agreement is not settled in accordance with the procedures set for in [previous section] . . . then either Party may commence arbitration hereunder by delivering to the other Party a notice of arbitration.”

The court held that the above provision was mandatory at the election of one of the parties: “The word ‘may’ . . . means that either party may invoke the dispute resolution procedures, but neither party is compelled to invoke the procedures. . . . [But] once a party invokes the arbitration provision, the other party is bound to arbitrate.”  The Delmarva court reasoned that the disputes provision would be “rendered meaningless” if the word "may" was interpreted as permissive because parties to a commercial contract can always choose to submit their disputes to arbitration.  The Fourth Circuit reached the same dcision in United States v. Bankers Ins. Co.

Given the trend that the courts have interpreted the term “may” as “shall” in the context of arbitration agreements, parties to a construction contract must be careful in understanding both the plain, ordinary meaning and the legal meaning of the particular words used. In the above examples, if the parties wanted arbitration of disputes to be permissive and non-mandatory, they could have clarified their contract by including more explicit language (i.e., "any and all disputes, upon mutual agreement, may be arbitrated" or "with the consent of the other party, either party may commence arbitration").  It is important in contract drafting that you say what you mean and you mean what you say.

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