Here are seven steps to prevent common mistakes in contracts.
By Julia M.I. Holden-Davis
Construction contracts come in many shapes and sizes: from a handshake to several hundred-page agreements with numerous attachments. No matter the size, many of the same concerns exist and must be addressed. Here are seven questions to ask yourself to avoid some of the most common mistakes:
1) Is this the right kind of agreement/project structure for me? Avoid an all-too-common mistake of presuming that some particular form of project delivery, as reflected in a contract, will “fix” everything. For example, as design/build became prevalent, many project owners used it after hearing someone tout benefits like “no claims” or “faster/less costly.”
However, these benefits are only achieved in certain circumstances. Sure, design/build can proceed in a faster, less costly way. But that is achieved in part by giving the contractor greater flexibility. The more flexibility is taken away, the less of a benefit may accrue. For an owner that has precise ideas about what it wants built – whether aesthetically or functionally – design/build may be incredibly frustrating and may not have the desired end result. Match the selected method with the expectations of both parties and ensure that is what is described in the contract.
2) Does this accurately identify the work that either (a) my company is doing or (b) my company is hiring another company to do? Work scope is one of the critical components to a contract and needs to be clearly defined to avoid problems later on. Scope has an intrinsic relationship with both time and money; failures to adequately define what is in – or outside – scope puts both at risk.
3) Does the contract share risk in ways that are consistent with my expectations? Key risk provisions include indemnity provisions, insurance provisions, changes and claims provisions, and limitation of liability clauses. These need to be carefully drafted to appropriately allocate risk. Failing to do so can create significant exposure or leave a company without recourse. In addition, these provisions must be carefully evaluated under applicable law. Many states have statutes specifically limiting or defining the scope of indemnity; violating those requirements can void the indemnity provision.
4) If the other party is responsible for certain risks, does the agreement provide me certainty of their ability to fulfill them if needed? Ongoing ability to pay is important and should be thoughtfully considered. For example, the strongest indemnity provision is worthless if the indemnifying entity cannot pay; consider managing this risk by pairing indemnity provisions with insurance. Consider whether a provision allowing a contractor to request proof of funding is needed. As an owner or upper tier contractor, consider the use of payment, performance, and warranty bonds. Parent guarantees and letters of credit may provide other ways of securing commitments. The time to manage this risk is when the contract is being negotiated – after a problem arises it may be too late.
5) Hopefully we won’t have any disputes, but if we do, is there a mechanism that works for me to resolve them? There is no one-size fits all dispute resolution clause. Instead, ask yourself a number of questions: Who will decide the dispute? Where will it be decided? How will it be decided – i.e., arbitration, litigation or some other process? When will it be decided – and when do you need it decided to manage further losses? What will be decided? What information will I need? What else am I worried about? Is confidentiality paramount? Do I need immediate relief? Do I want to be able to appeal? Do I need someone to keep working during the dispute? Do I need to manage any risk related to for disparate results? All these questions need to be thought through before one finds oneself in a dispute process in another country, in a foreign language, governed by unfamiliar law and a never-ending process.
6) Is this agreement consistent with any other agreements I’ve signed on the project (or intentionally inconsistent)?For example, if I am making promises as the prime contractor, am I requiring my subcontractor to do the same thing? If I am a project owner and my contract with the prime contractor says the architect is going to do a number of things (like reviewing/approve pay applications, inspect the work, certify the project as complete), does my agreement with my architect require the same things? If not, problems can ensue.
7) Do I know what all the requirements really are? Does the agreement incorporate a number of other documents by reference? If so, be sure you know what are in those requirements. Is there a section of “miscellaneous provisions”? If so, make sure to read them. Even if not reviewed, those items can become binding. Any issues need to be raised before signing on the proverbial “dotted line.”
Julia M.I. Holden-Davis is a trial lawyer focused on the construction and transportation sectors. Having served as the chief operating officer of a large regional firm, she is dedicated to bringing a practical understanding of the realities facing businesses. She advises clients regarding federal, state and local government issues, including evaluating requests for proposal/invitations to bid to establish risk profiles, as well as in complying with a broad variety of regulations such as subcontracting plans, wage requirements, joint venture limitations, licensing issues and ethics related matters. Holden-Davis also provides counsel on industry-specific due diligence in support of merger and acquisition transactions within the construction, transportation and government contracting sectors.