Construction Contract Clauses, Part 7 – Indemnification and Insured Contract Coverage

Posted by: Hilger Hammond On: 10th October 2017 | no responses.

By: Mark A. Rysberg

Indemnification provisions frequently appear in construction and commercial contracts. They operate to shift risk from the party being provided indemnification to the party providing indemnification. The principle behind such risk shifting is to shift potential risks onto the party or parties that are best able to prevent, mitigate, or insure those risks. In that respect, indemnity provisions do not necessarily need to be a source of disagreement during contract negotiation.

Consider, for example, indemnification provisions that require one party to indemnify and defend other parties from the risks relating to personal injury and property damage. At first blush, the party who is to provide such indemnity may feel that they should not assume those risks. However, agreeing to a well-drafted provision requiring indemnification for personal injury or property damage can be a benefit to all of the parties—including the party providing the indemnity. Here is how that can occur.

Most general liability policies include insured contract coverage. What that does is provide coverage for certain losses arising from the contractual agreement to indemnify a third-party. In the example above, if a claim for personal injury or property damage was asserted against an indemnified party, the indemnified party could in turn assert an indemnity claim which may trigger coverage under the indemnifying party’s general liability policy. In that scenario, the transfer of risk has ultimately allowed the contracting parties to shift the risk onto an insurer. The end result is the possibility of insurance coverage coupled with the probability being reduced that the contracting parties find themselves litigating their respective liability so they may instead focus on completing the construction project.

Properly negotiated and drafted, indemnification provisions are tools which can shift risk potential to an insurer and reduce the chances of liability litigation, benefiting all of the parties.

Mark Rysberg practices in the areas of construction law and commercial litigation having represented clients involved in the construction industry with complex matters before numerous state courts, state appellate courts, federal trial courts, federal bankruptcy courts, and federal appellate courts.

If you enjoyed this article, you might also like “Waiver of Claims for Insured Losses.”

 

Changes to the 2017 AIA A201 General Conditions: Section 1.1.8 on Initial Decision Maker

Posted by: Hilger Hammond On: 9th October 2017 | no responses.

By Steve Hilger

This is part 1 of a 15-part series on the changes to the AIA A201 General Conditions. This part deals with section 1.1.8.

In the 2017 changes, particularly section 1.1.8, there are some fairly significant changes to the Initial Decision Maker clause. The changes are as follows:

 

 

 

 

 

First, in my humble opinion, the whole Initial Decision Maker process is a bad idea. It usually ends up, by default, being the Architect under section 15.2.1 because people generally do not change the language and select a third-party. So, you basically have the fox guarding the chicken coop. The Architect, as the Initial Decision Maker, has a lot of control over the outcome of the dispute.

This scenario was attempted to be worked out by the language that “the Initial Decision Maker shall not show partiality to the Owner or Contractor…” but that does not fix the problem. How do you deal with a breach of this provision?

In addition, the second clause of the change provides that the Initial Decision Maker shall not be liable for the results or for the interpretations or decisions rendered in good faith. Here again, this is a demonstration of how the AIA documents protect Architects. There is no reason why the Architect should be shielded from responsibility regarding a contractual decision made as an Initial Decision Maker. There is also a question as to whether the second clause is even enforceable. You cannot release yourself from liability for negligence in advance. Nevertheless, without a crystal ball, this clause is probably going to be enforced.

My general recommendation is to strike everything in the AIA A201 General Conditions that has anything to do with the Initial Decision Maker process.

Steve Hilger is an attorney and partner at Hilger Hammond, PC.   In Steve’s practice, he is routinely involved in extensive contract preparation and review including contracts in the construction industry, material purchase orders, vendor agreements, documents involving the Uniform Commercial Code, licensing agreements, and multiple other commercial contracts and related documents. You can reach Steve at sahilger@hilgerhammond.com.

 

Construction Contract Clauses, Part 6 – Waiver of Claims for Insured Losses

Posted by: Hilger Hammond On: 29th June 2017 | no responses.

By: Mark A. Rysberg

Many insurance sections of construction contracts contain language whereby the parties involved in the construction project waive all claims against all other parties involved in the project for insurable losses such as property damage and personal injuries.

Owner and Contractor waive all rights against each other and their respective officers, directors, members, partners, employees, agents, consultants and subcontractors of each and any of them for all losses and damages caused by, arising out of or resulting from any of the perils or causes of loss covered by such policies and any other property insurance applicable to the Work; and, in addition, waive all such rights against Subcontractors and Engineer, and all other individuals or entities identified in the Supplementary Conditions as loss payees (and the officers, directors, members, partners, employees, agents, consultants, and subcontractors of each and any of them) under such policies for losses and damages so caused.

These clauses are good for all of the parties involved as they eliminate disputes and shift the risk of loss onto the parties’ respective insurance carriers. Contractors and subcontractors should work with their insurance agents and attorneys to understand these provisions, as well as, to properly shift insurable risks onto third-parties through the acquisition of appropriate insurance coverages.

If you enjoyed this article, you may also like Construction Contract Clauses, Part 5 – Conversion Clauses.”

Construction Contract Clauses, Part 5 – Conversion Clauses

Posted by: Hilger Hammond On: 29th June 2017 | no responses.

By: Mark A. Rysberg

A conversion clause arises in the context of contract termination. There are generally two types of termination; termination for cause and for convenience. Each type of termination differs with respect to the basis for termination, as well as the limitations on payment rights the terminated party retains post-termination. A conversion clause operates to convert a wrongful termination into a termination for convenience. The following is an example of a conversion clause.

If it is determined, by litigation, arbitration or otherwise, that termination for default was unjustified for any reason, the termination shall be deemed a termination of convenience and Subcontractor’s remedies shall be limited to those provided for as a termination of convenience.

In a practical sense, these clauses protect a party that terminates a contract for cause by nullifying the effect of a possible wrongful termination. The exposure for damages is, in turn, limited to the amount that is required to be paid as if the contract had been terminated for convenience.

Typically, the amount owed for a termination for convenience will be much less than the damages for a wrongful termination as the termination provisions in a contract will typically limit the amount owed in a termination for convenience situation to the amount of the work properly performed at the time of termination. In contrast, damages for a wrongful termination could include lost profits on the entire contract irrespective of whether the work was performed.

Contractors and subcontractors that have both upstream and downstream relationships should be on the lookout for these types of clauses. When they are encountered in an upstream contract, they should be included in any downstream contracts covering portions of that scope of work. The reason being is to eliminate the possibility of being faced with a wrongful termination claim by a lower-tier contractor while simultaneously having recovery limited in a claim against an upstream contractor. A best practice would be to review each contract you are presented with and coordinate the terms therein with the terms of any contract you in turn issue downstream.

If you enjoyed this article, you may also like “Construction Contract Clauses, Part 4 – Express Trust Clauses.”

 

Construction Contract Clauses, Part 4 – Express Trust Clauses

Posted by: Hilger Hammond On: 29th June 2017 | no responses.

By: Mark A. Rysberg

An express trust clause can be used in a construction contract to create a trust over payments received by a contractor or subcontractor. The effect of establishing a trust is that it creates property rights in construction project payments and obligates the contractor receiving such payments to fulfill the fiduciary duty of using the trust funds to pay the named beneficiaries. The following is an example of an express trust clause:

All payments made by Contractor to Subcontractor shall be held in trust for the benefit of the Contractor and those persons having contracted with Subcontractor to provide materials or labor to the project.

 

These clauses can act as a sword or shield depending on the situation. In scenarios involving non-payment downstream, an express trust clause can provide the named beneficiaries (owners, contractors, subcontractors, and suppliers) with additional claims that can be asserted against a trustee that has received payment but failed to in turn issue payment downstream. These clauses can also protect all of the parties from claims asserted by unrelated creditors and bankruptcy trustees that may attempt to take the funds.

In short, if you run across an express trust clause you need to have a clear understanding of what your obligations may be. To that end, having contracts reviewed before execution and discussing these issues with legal counsel is an important step in protecting yourself.

If you enjoyed this article, you might also like “Construction Contract Clauses, Part 3 – Site Investigation Clauses.”

AIA 2017 – What’s New About The Old?

Posted by: Hilger Hammond On: 21st June 2017 | no responses.

By Aileen Leipprandt

In April 2017, the American Institute of Architects (AIA) released the 2017 editions of its flagship agreements, including the Owner-Contractor Agreement (A101), Owner-Contractor Agreement, Cost Plus a GMP (A-102), the General Conditions of Contract (A201) and the Contractor-Subcontractor Agreement (A401).  Significantly, AIA also created a new comprehensive insurance and bonds Exhibit (Exhibit A) to be used with these agreements.

Some interesting changes to note:

  • Liquidated Damages. Liquidated Damages are now expressly identified with a new provision.  In prior revisions, LDs were merely suggested in a “prompt” as an insertion. Furthermore, the Owner is not required to file a Claim to impose liquidated damages.  Prior AIA versions were silent on whether Owner was required to file a formal claim; courts addressing the question reached differing results.
  • Captive Insurance Costs.  Contractor must obtain Owner’s prior approval of Contractor’s costs for insurance provided through a captive insurer owned or controlled by Contractor.
  • Allocation of GMP.  Adopting a revision commonly made by the parties, if a GMP is given, allocation of the GMP does not constitute a separate GMP for each individual line item on the Schedule of Values.
  • Termination Fee.  Where the Owner terminates the agreement for convenience, Contractor may be entitled to a termination fee.  Prior AIA versions were silent as to such fee.
  • BIM Reliance. Use or reliance upon a BIM model without establishing protocols for such use is not at the relying party’s sole risk, without liability to others.
  • Communication Protocol.  Communication protocol is loosened so that the Owner and Contractor can communicate directly, so long as the Architect is included in communications that relate to the Architect’s services.  In prior revisions, Owner and Contractor were forced to communicate only through the Architect.
  • Weather Delays.  Delays caused by weather, so long as properly documented, are now expressly included in the “force majeure” provision as a basis for extension of Contract Time.
  • Overhaul of Insurance.  The bulk of insurance provisions have been stripped from A201 General Conditions and now appear in the new 2017 Exhibit A – Insurance and Bonds. And, the insurance requirements are much more detailed, specifying particular coverages that are required (e.g., professional and pollution liability and UAV liability) and expressly forbidding certain common restrictions on contractor’s coverages.

What didn’t change?  Indemnification, warranty and waiver of consequential damages provisions remain largely intact.

Want to learn more about the new AIA-2017 documents?  Attend the West Michigan Construction Industry Forum on October 19, 2017.

Construction Contract Clauses, Part 3 – Site Investigation Clauses

Posted by: Hilger Hammond On: 13th June 2017 | no responses.

By: Mark A. Rysberg

A site investigation clause is a provision in a construction contract that indicates that one of the parties has made an inspection of the property, project, or location where certain services, labor, or material will be provided, and that the party making the inspection is satisfied that performance will be possible given the circumstances. The following is an example of a site investigation clause:

Each contractor shall examine the construction site and area and compare its findings with the Drawing and Specification and shall inform and satisfy itself as to all matters necessary for carrying out the work; including but not limited to, general working conditions, labor and equipment requirements, accessibility, condition of the premises, obstructions, drainage conditions, actual levels, excavating, filling, etc. The Contractor shall investigate all conditions as to character of the site and character of existing structures at or adjacent to the site, and the character and extent of the Owner’s and other Contractors’ operations in the area, and in connection with the project, and shall take all such matters into account in submitting its bid. No allowance or extra payment will be subsequently made because of any such items or conditions occasioned by the Contractor’s failure to make such comparison and examination or on account of interferences from the Owner’s, Construction Manager’s and other Contractors’ activities, or by reason of any error or oversight on the Contractor’s part.

The purpose of a site investigation clause is to prevent claims for unforeseen site conditions. However, there are many limitations on site investigation clauses.

However, issues may arise when conditions that were not, or could not have been, revealed based on the information available. For example, there are circumstances where an owner would be contracting with a general contractor for performance of various services which would include excavation to build a foundation of a structure. Typically, an owner would provide some sub-surface soil data, but either the data or the contract would carry with it a disclaimer that the general contractor, then as a bidder, would be obligated to make its own investigation as to what the underground site conditions were. But, the extent that a bidder can make such investigations is limited to a review of the subsurface data provided by the owner as a bidder will typically not be permitted to perform additional subsurface testing. In that and similar situations, a bidder’s risk based on a site conditions clause will likely be limited to the physical observations available at the site and the data contained in any documents provided by the owner.

In other words, these clauses do not require a bidder to perform an exhaustive investigation into the site conditions. Rather, bidders should consider visiting the site, review all site condition data provided in the bidding documents, and consult with their counsel to evaluate whether a site conditions clause may be negotiated to more fairly define the scope of the representations contained therein.

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

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.”

 

Court’s Tough Stance on Contract Terms Means Big Loss for Wisconsin Subcontractor

Posted by: Hilger Hammond On: 12th September 2016 | no responses.

By Suzanne Sutherland

Following and understanding contract terms can have a major impact if a project goes south. A Wisconsin subcontractor learned this lesson the hard way after losing its claim against the general contractor for damages from unpaid change orders and scheduling problems. North American Mechanical, Inc. v. Walsh Constr. Co. General contractor Walsh hired North American Mechanical, Inc. (“NAMI”) to install HVAC systems for a hospital renovation and expansion.

The perfect storm of project delays, tough contract clauses, and inadequate record-keeping combined to defeat all but $8,000 of the subcontractor’s $2 million claim. Three key lessons from the court’s decision could both mitigate a subcontractor’s losses and improve likelihood of recovery.

NAMI’s first roadblock was its breach of the subcontract by failing to use the proper lien waiver forms. The court found that lien waivers with different release language and reservations of rights from the contractually required forms were entirely void. NAMI’s use of improper lien waiver language caused NAMI to forfeit this claim.

The second obstacle involved NAMI’s inability to prove change order costs. NAMI maintained that its required use of building information modeling (BIM) revealed numerous architectural problems with the plans. The court rejected NAMI’s argument that changes due to BIM-revealed conditions were beyond the scope of NAMI’s original bid. Because NAMI had insufficient documentation to back up its position that the additional costs incurred were valid change orders, the court denied the majority of this claim.

Finally, NAMI’s claim was thwarted by a no damage for delay clause in the subcontract. NAMI blamed Walsh’s mismanagement and poor scheduling for over $1.7 million in additional labor costs. The court enforced the no damage for delay clause and barred NAMI’s recovery for labor inefficiencies.

Three lessons can be learned from NAMI’s big loss. First, understand the contract requirements and follow them. Second, maintain good records for changes and know what the contract requires for payment of changed work. Third, courts can and do enforce no damage for delay clauses. Be aware of the potential risks that this clause presents and that a court may deny delay-related damages.

If you enjoyed this article, you might also like “Crossing a Finish Line Can Be Tough”.