By John R. Hawkins of Porter Hedges
Published January 26, 2023
It’s 3:00 p.m. on a Friday and you’ve been tasked with reviewing a construction contract by close of business. It’s long, and you only have time to review the most important terms. Which ones do you choose?
Divide and Conquer
Contract terms can be divided into three general categories of terms. There are commercial terms like scope of work, price and schedule deadlines. There are procedural terms such as payments, change order requirements and notices for events like substantial completion. Presumably, the project team is addressing the commercial and procedural terms. This leaves the third category sometimes euphemistically called “boilerplate.” These are important too, of course, and this article gives a list of the top 5 most critical to review when time is short.
A Top 5 List
- Dispute Resolution
These terms set the forum where a dispute will be decided, generally in litigation at the courthouse with a jury or arbitration decided by construction lawyers. Contractors usually prefer the latter because they want their case decided by arbitrators who understand what they do. If arbitration is chosen, make sure it allows for “joinder” and “consolidation,” which allows getting all the project stakeholders into one proceeding to avoid having one dispute in litigation and the other(s) in arbitration. Owners may want to join the designers, and contractors may want to join subs, so careful coordination of dispute resolution terms among the different stakeholder contracts is important with arbitration. Nothing is required in the contract for joinder in litigation. Arbitration used to be quicker and cheaper, but this isn’t necessarily true today.
Whole books have been written on indemnity, but there are a couple of key concepts to consider. Most parties want to strike the obligation to “defend.” The party you are defending and indemnifying will say this means providing a defense for them upfront like insurance. Some insurance policies won’t pay for this. Also consider the scope of what you’re indemnifying. Does the trigger for the indemnity obligation limit liability for losses “to the extent caused by” your alleged negligence, allowing lien claims, providing faulty owner information, etc.? Most states have statutes that limit the scope of some “broad form” indemnities, those triggered by the acts or omissions of the party you’re supposed to defend or indemnify, but it’s better to address these issues in the contract.
- Consequences for Schedule Delays
Contracts often have “no damages for delay” provisions. These generally say that the contractor can only get a schedule extension if it is delayed for reasons not its fault, but it cannot get extra money. These provisions are common and could saddle the contractor with, or help the owner avoid, large losses for a delay.
Potential losses to the owner from delay are often hard to estimate when the parties sign the contract. The owner and contractor will sometimes agree on “liquidated damages” for contractor delay that’s the contractor’s fault. These are usually stated in dollars per day of delay in meeting critical deadlines such as substantial completion. The estimated, or “liquidated,” amount must be by its nature difficult to quantify and the parties’ reasonable estimate of the loss at the time the contract is signed. The owner will need to have some rational basis for the liquidated amount, or it may be unenforceable as a penalty.
- Force Majeure
A force majeure is another important concept, especially related to delays. It is an event that the parties could not have reasonably anticipated or controlled such as a major hurricane or “an Act of God.” The concept is that the parties won’t be held responsible for contract performance to the extent of the effect of the force majeure. Care should be taken in listing what constitutes a force majeure. Common new force majeure events sometimes listed are delay and disruption from supply chain issues and pandemics. Who will bear the risk of a delay from these and other force majeure events?
- Limitations on Damages
A waiver of “consequential” damages is a common term with far-reaching implications. If something is built wrong, the costs to fix the problem are “actual” or “direct” damages. These are the costs directly and necessarily resulting from failing to meet contract requirements. This might be the cost to replace or repair a defective pump system. Consequential damages are caused by, but do not necessarily flow from, breaching the contract. These might include lost revenue and loss of use of the project. The cost to the owner for not being able to use the project because of faulty construction can be catastrophically high. Given the potential loss, owners usually don’t want to waive consequential damages, and contractors usually do.
Another increasingly common provision if a general limitation of the contractor’s liability if it makes a mistake. The idea is that the contractor will limit its potential loss given the potential gain from the project. This is often stated as a dollar amount or percentage of the total contract price. The parties will have to weigh the risks of project problems that generate high-dollar damages.
The “boilerplate” terms are important and need to be carefully reviewed as time and circumstances allow. This list of five provides a guide to some of the most important ones to review when time is short. These deserve special attention because of the potential loss – or protection – they can bring.