Construction Contract Clauses Part 2- Flow-Through Provisions

Posted by: Hilger Hammond On: 15th November 2016 | no responses.


By: Mark A. Rysberg

Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

Flow-through provisions are common in construction contract documents. In essence, when a general contractor enters into a construction contract with an owner, the general contractor obligates itself to perform certain functions and services for the owner. The general contractor then subcontracts some of those functions to sub-contractors. A flow-through provision is language in a contract that makes one party obligated to fulfill the obligations of another party. In essence, by way of example, if properly drafted, it could prevent a subcontractor from arguing that the obligations it owed a general contractor were different from the obligations the general contractor owed the owner. However, the language of these provisions needs to be carefully read and construed to determine precisely the specific obligations of the parties.

Further, flow-through provisions can work two ways: A subcontractor can owe a responsibility to the owner, and likewise, a general contractor can owe a subcontractor the same obligations that an owner owes the general contractor. The form and extent of flow-through provisions depends specifically upon the language of each contract document. Consider the following example:

The Subcontractor shall be bound to the Contractor by the terms of this Agreement and, to the extent that provisions of the Contract Documents between the Owner and Contractor apply to the Work of the Subcontractor as defined in this Agreement, the Subcontractor shall assume toward the Contractor all the obligations and responsibilities which the Contractor, by those Documents assumes toward the Owner and the Architect/Engineer, and shall have the benefits of all rights, remedies and redress against the Contractor which the Contractor, by Those Documents, has against the Owner, insofar as applicable to this Subcontract, provided that where any provision of the Contract Documents between the Owner and Contractor is inconsistent with any provision of this Agreement, this Agreement shall govern.

These clauses are important for several reasons. However, at its core, these provisions are intended to transfer risk from one party to another. Risk transfer is important in construction contracting because it is important to put the risk on the party that is in the best position to prevent the risk or insure around it. In that sense, flow-through provisions can be thought of as serving the purpose of aligning the parties’ performance obligations with regard to insurance and risk transfer.

Construction contracts have many different clauses that are intended to work together to accomplish risk transfer and to define performance obligations. When the parties to a contract have a different understanding about what terms are in a contract, problems can result. Therefore, it is important to understand and include thoughtfully planned and precise contract clauses in your construction contracts.

Attorneys who practice in construction law can be a valuable resource for contract review and in-house training that is intended to avoid costly mistakes later.

If you enjoyed this article, you might also like “Construction Contract Clauses Part 1: Integration Clause.”

Construction Contract Clauses Part 1: Inegration Clause

Posted by: Hilger Hammond On: 8th November 2016 | no responses.

2016-11-08_13-01-55By: Mark A. Rysberg

Construction contracts are intended to define and memorialize the parties’ expectations regarding how they will perform during the course of a construction project. This series will examine clauses that are routinely found in construction contracts and provide a brief explanation of what they are and why they are important.

The first clause to be considered is the integration clause. An integration clause is language in a contract that prohibits telling a court or an arbitration panel that prior oral arguments, or even prior written agreements, are part of the contract documents. For example, suppose an owner and a general contractor enter into an agreement. The agreement has ten elements, and the parties were discussing orally the eleventh element. If this oral eleventh element is not reduced to writing and included in the written document, chances are that that oral provision will not be enforced due to the fact that the contract is “fully integrated” because it contains an integration clause. A “fully integrated” contract means that all of the prior dealings between the parties have culminated into the written contract and a court or arbitration panel will not look beyond the written contract to determine the obligations of the parties. The following is a common example of an integration clause.

The Contract Documents enumerated in this Agreement form the contract for construction, represent the entire and integrated agreement between the parties hereto and supersede all prior negotiations, representations or agreements, either oral or written.

Notice that the language above makes it clear that the only contract terms are those embodied in the contract documents that are specifically identified in the contract. In other words, prior oral and written agreements are not part of the contract if an integration clause is included. Now, consider why this is important.

First, a written contract is intended to specify all of the terms of the agreement. If an integration clause is not included, there can be significant questions about the terms of the agreement.

Second, enforcing oral or piecemeal contracts is costly and difficult. Imagine having to piece together a contract at the end of a project based on notes, emails, and memory. That can be a difficult, if not impossible, task.

Third, basing decisions on a contract that is not fully integrated can be risky. As you may imagine, decisions to default or terminate are usually made based on the language of the contract. The precursor to those decisions is usually performance requirements set out in other sections of the contract, such as payment timing and scheduling. If one party’s expectations are based on the belief that one of those terms was agreed upon orally before the contract was signed and the other believes those terms are defined by the signed contract, there can be a serious problem because the parties will likely operate on different understandings of their respective obligations. As a result, the party issuing a default may actually be the party in default.

Construction contracts have many different clauses that are intended to work together to accomplish risk transfer and to define performance obligations. When the parties to a contract have a different understanding about what terms are in a contract, problems can result. Therefore, it is important to understand and include planned and precise contract clauses in your construction contracts.

Attorneys who practice in construction law can be a valuable resource for contract review and in-house training that is intended to avoid costly mistakes later.

If you enjoyed this article, you might also like “Construction Contract Clauses Part 2: Flow-Through Provisions.”

 

Crossing a Finish Line Can Be Tough

Posted by: Hilger Hammond On: 16th September 2015 | no responses.

The following article was originally published in Builder’s Exchange Quarterly. Summer 2015 edition.

track-finish-1442273By Aileen Leipprandt

It was reported that elite runner, Hyvon Ngetich, literally crawled the last two tenths of a mile to cross the finish line in the Austin Marathon on February 15, 2015. After leading most of the race, her body simply gave out. Instead of calling it quits, she crawled on her hands and knees to the end, taking third place with a time of 3:04:02.

Closing out a construction project is not that dramatic, nor should it be. As legal advisors to the construction industry, however, we often see relationships disintegrate at the final stages of the Project. What can you do to finish strong?

First, start well to finish well. Even before groundbreaking, prepare for close out by clearly defining responsibilities and deliverables in your contract. It’s easier to negotiate terms at the beginning of a project when relations are cordial, rather than the end when parties get sidetracked by unresolved claims. Clearly define Substantial and Final Completion and the relationship of those dates to warranty obligations, insurance requirements, liquidated damages and the statute of limitations. Specify when the Owner’s obligation for operation, maintenance, security, insurance and utilities begins to avoid gaps in insurance coverage. Evaluate whether warranty and as-built requirements are commercially reasonable. Confirm the punch list procedure has sufficient controls so that the process does not get bogged down by endless additions. And, to minimize subcontractor claims, negotiate a reduction in
retention as milestones are met.

Second, timely address claims to the extent you can. Deferred claims merely fester, derail close out and ultimately spawn calls to the legal team. Strive to neutralize claim language to avoid igniting emotion during the project.

Third, establish clear and efficient financial controls. You don’t want to chase missing lien waivers nor do you want to absorb trailing invoices that are too stale to present to upstream parties.

Fourth, don’t overlook the importance of comprehensive owner training on capital equipment. Proper handover of sophisticated systems can reduce callback and prevent damage to systems, thereby reducing warranty claims or contractor/design professional blame for operational challenges.

Fifth, carefully document all policies of insurance that apply to the project while the policy numbers, carriers, coverage limits and additional insureds are easily identifiable.

Finally, think creatively about solutions to end a difficult project on a high note. Diminish arm wrestling over whether work is truly defective by providing a warranty bond or extending the warranty. Do not overlook the reputational value gained through a smooth close out process. It’s not just first impressions that matter. Especially on construction projects, last impressions have a bigger and lingering impact. Just as Hyvon Ngetich’s heroic effort to cross the finish line in Austin, Texas left a lasting image of courage and perseverance, much can be gained when construction stakeholders focus not only on “when” a project should be completed, but also on “how.”

 

 

General Contractor Not Entitled to Indemnity From Subcontractors Where General Contractor Liable Under Common Work Doctrine

Posted by: Hilger Hammond On: 2nd January 2014 | no responses.

bluepaintBy Aileen Leipprandt

In the recent case, National Fire, et al. v Kosters & DeVries, Inc., (Nov. 2013), the Court of Appeals rejected a general contractor’s request for indemnity from its subcontractor for a construction injury accident that occurred in a common work area. In National Fire, Pioneer (the general contractor), subcontracted with Kosters & DeVries (K&D) for K&D to provide painting services on a condominium project called Union Square. One of K&D’s employees was injured during the work. The employee sued Pioneer and others claiming that Pioneer was negligent for failing to guard against a “readily observable” and “avoidable” danger in a common work area, often called the “Common Work Area Doctrine.”

While that personal injury suit was pending, Pioneer’s general liability carrier, National Fire, separately sued K&D in a “declaratory judgment action” seeking a court order that K&D must indemnify Pioneer under the indemnity provision in the parties’ subcontract. The trial court agreed with National Fire and entered an Order, stipulated to by National Fire, requiring K&D to indemnify Pioneer for any liability imposed on Pioneer arising from acts or omissions of K&D or its employees.

Meanwhile, in the personal injury lawsuit, the jury entered a verdict in favor of the injured worker, assigning 70% of the fault for the injuries to the injured employee and 30% of the fault to Pioneer. Thus, the injured worker’s total recovery was reduced by 70%. National Fire paid the plaintiff that portion of the jury verdict (30%) related to Pioneer’s assessed liability. National Fire then sought to garnish K&D for this payment claiming that K&D was required to indemnify Pioneer pursuant to the Declaratory Judgment Order. The trial court agreed. The Court of Appeals, however, reversed, finding that Pioneer’s liability arose because of Pioneer’s own negligence in failing to maintain a safe common work area. The appellate court reasoned that to the extent that K&D’s employee was negligent, the jury had already reduced the verdict by 70% to reflect that employee’s negligence. Therefore, the remainder of the jury verdict, 30%, related only to Pioneer’s negligence for which Pioneer was not entitled to indemnity from K&D per the language of the Declaratory Judgment Order.

Consider, however, if Pioneer’s subcontract (and the ensuing Declaratory Order) had required K&D to indemnify Pioneer, even for Pioneer’s own fault (except where Pioneer was solely negligent), Pioneer (and therefore National Fire) could have sustained the indemnity claim. Instead, K&D’s indemnity obligation was limited to those circumstances as described in the Declaratory Order. Lesson learned – the language of any indemnity provision (and Court Order based on such provision) must be carefully drafted.