Jonathan A. Cass, Nicholas F. Morello and John A. Greenhall | Construction Executive
Many contractors repeatedly make the same mistakes in negotiating contracts. Here are the most common mistakes contractors make—and how they can be avoided.
1. NOT BEING CAREFUL WITH FORCE MAJEURE CLAUSES
To protect themselves from liability in the event of unforeseen circumstances like fires, floods, wars, unusual delays in deliveries, strikes, pandemics or acts of God, contractors should ensure their contracts contain robust force majeure provisions. These provisions state that in the event of any extenuating circumstances outside of its control, the contractor is not liable for any damages that result from a delay to the project completion date and is entitled to a time extension. This clause has been critical in addressing COVID-19-related disruptions and the current material shortages. Contractors should be wary, however, of “no damage-for-delay” language, which often appears in conjunction with these clauses.
2. NOT HAVING AN ENFORCEABLE INDEMNIFICATION PROVISION
The three types of indemnification provisions used to pass the risks of losses arising out of personal injury or property damage are:
- broad, which requires the indemnitor to cover the indemnitee’s entire liability regardless of fault;
- intermediate, which fully compensates the indemnitee for any loss so long as the indemnitor is found to be only partially negligent; and
- limited, which only requires the indemnitor to pay for the portion of the loss that is attributable to the indemnitor.
While it may seem obvious that it is beneficial for a party to have broad indemnity in their downstream contracts and limited indemnity in their upstream contracts, it isn’t always that simple. Many states have laws that ban certain indemnification provisions, so it is important to understand which state laws apply to each contract and revise the contract so the indemnification provision is actually enforceable. These provisions should also be discussed with an insurance professional.
3. NOT PROPERLY NEGOTIATING ‘PAY-IF-PAID’ AND ‘PAY-WHEN-PAID’ PROVISIONS
A “pay-if-paid” provision allows a contractor to withhold payments to its subcontractors until the owner has paid for those services. This clause passes the risk of an owner’s non-payment down to the subcontractor, making payment a “condition precedent” to the downstream payment. Contractors should include them in subcontracts, subject to state-specific laws governing the enforceability of these provisions.
Subcontractors, however, should negotiate a pay-if-paid provision out of the subcontract and replace it with a “pay-when-paid” clause, which simply says that the contractor will pay within a certain number of days from receipt of payment. If the owner does not pay the contractor within a reasonable time of the due date, the contractor must still pay the subcontractor all amounts owed.
4. NOT INCLUDING SPECIFIC ‘EXCEPTION’ LANGUAGE ON PARTIAL WAIVER/RELEASE FORMS REGARDING CLAIMS
Owners and contractors usually require partial waivers of liens or claims to accompany requisitions for payment. This is an important tool for narrowing the scope of liability. A subcontractor may waive its rights to any claims for any portion of the project performed prior to payment. If one is the signer, it is important to make these waivers as limited as possible. A contractor signing such a waiver should “except out” all particular claims that it wants to reserve (even ones they don’t know at of the time of signing).
For example, if a contractor wants to claim damages from a 10-month shutdown, it should modify the waiver to say “the contractor does not waive its claims for additional compensation and time arising from the 10-month shutdown of the project.” In the event that the upstream entity refuses to pay without a total release, contractors would be prudent to show that the claim is not being released by sending a separate and contemporaneous notice that documents the exception to the waiver.
The contractor must be diligent in bringing claims promptly and in accordance with the contract for them to survive the waiver, but even that is not foolproof depending on the court and jurisdiction.
5. NOT ASKING TO SEE ALL INCORPORATED DOCUMENTS
Before signing a contract, a contractor must review the entire contract, including incorporated documents. Most contracts incorporate plans, drawings, specifications, general conditions, supplemental conditions, addenda and amendments to the contract documents. Subcontract agreements also often bind the subcontractor to duties and obligations contained in the prime agreement between the contractor and owner. A contractor can be held to many terms it never knew it agreed to if the contractor failed to read all of the contract documents. For example, with the 10-month shut down of the project claim above, if the subcontract is silent on whether a subcontractor can get its damages for the delay, but the incorporated prime contract has an enforceable no-damage-for-delay clause, the subcontractor cannot recover its monetary losses.
CONCLUSION
Construction is a difficult enough industry without being tied to a one-sided contract. A contractor should not assume risks that outweigh potential profits, and a bad contract can turn a good project into a project with a lawyer on speed-dial. Best practices start prior to signing the contract, not after.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.