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By Duane Craig
July 10, 2016
Many small construction businesses forgo legal counsel to save on expenses, but end up paying for it in the long run. Contractors of all kinds are at a disadvantage long before moving the first shovelful of earth merely because some contract clauses are stacked against them.
Here are four construction contract clauses that pose special challenges for contractors.
When a clause doesn’t allow the contractor to get paid for delays, it is a “no damages for delays” clause.
These clauses often also limit the contractor’s ability to extend the time to completion. Since construction is a very risky business, and success often depends on completing the project within a specified time, these clauses limit the claims contractors can submit when things beyond their control affect the schedule.
An enforceable contract that allocates risk accurately should allow contractors to get paid for all delays they don’t cause. That should include delays for acceleration, changed conditions, and disruption. Clauses that affect claims, like this one does, also specify the timeframe allowed to submit claims. The contract should allow ample time to provide delay notices, and to submit claims. If you can’t avoid “no damages for delays” clauses, then have the contract list the delays for which you will not get paid, and insist that listed delays include only those which you have no control over.
Throughout contract law you often see clauses requiring parties to contracts to “indemnify, defend, and hold harmless.” Sometimes the clause includes only one or two of the actions. When you’re assessing risk, you need to know what each of these words means from a legal perspective. If you agree to indemnify, it means you will reimburse the other party in the contract when there is loss or damage. Ideally, you would only indemnify risks that you have control over. That way, you’re not offering to pay for losses and damages that someone else caused.
When you agree to defend another party, you are agreeing to pay what it costs to defend them against a suit brought by a third party. Unlike when you agree to indemnify, when you agree to defend, there doesn’t need to be a loss that’s proved. You are immediately on the hook for a potential liability when a third party files a claim. When you agree to hold harmless, you are saying that you will both defend as well as cover losses, no matter who’s at fault.
The most important thing about “indemnify, defend, and hold harmless” clauses is that when they are used properly they place the risk with the party who is responsible. Unfortunately, they are often not used properly by assigning all risk to the project participant who has the least amount of leverage in negotiations. Subcontractors are prime targets for this type of misuse of the clause. Allocating risk using this clause improperly also places everyone at an increased risk because when a project participant can’t afford to cover the costs arising from losses or damages, everyone loses. One way to avoid risk from this clause is to only agree to indemnify, defend, or hold harmless where you have control over the potential losses and damages.
The owner’s “right to withhold payment” for work is there to protect the owner. These clauses usually refer to withholding payment for delays, potential liability claims, work that doesn’t meet contract specifications, and other risks. However, owners usually have some protection in the form of retainage, so the right to withhold payment should be limited to very specific situations. Contractors should also make sure that contract language doesn’t allow withholding payment for “anticipatory breach of the contract.”
There's a practice in construction contract law to use the term “reasonably inferable” in the general conditions portions of contracts. This relates to the design documents and appears in contracts to acknowledge that design documents are never perfect. It is up to the people doing the building to construct a project that substantially matches design intent. So, the drawings show a door and it’s up to the contractor to include a frame with the door, even though a frame might not be shown on the drawings. The contractor can reasonably infer that the door should have a frame.
Problems come up when the design documents are so incomplete that the contractor has to begin drawing too many inferences. The result is the contractor starting to construct on-the-fly with materials and methods that might not match the intent of the design. Or, the contractor begins relying on change orders to cover mounting unforeseen costs.
The best defense against becoming prey to the “reasonably inferable” clause is to do a thorough review of the design documents looking for completeness and constructibility. If the design doesn’t pass muster then not getting involved in the project could save you a lot of sleepless nights. Another option is to try to work out the design concerns before the final bid.
This is not a complete list of contract clauses that could cause problems for construction businesses, and is not legal advice. But being aware of these clauses and their potential setbacks could save you a pretty penny. To put yourself in the best position, always consult legal counsel when you are considering signing a contract.
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