- Manage Risk by Looking at These Three Common Construction Contract Issues
- May 13, 2015 | Authors: David E. Leavenworth; Kelley G. Shirk
- Law Firm: Hall & Evans, LLC - Denver Office
- While many construction contracts are based on AIA forms and other boiler plate documents, negotiating contract provisions to shift and limit risks is still an art form. From a litigator’s perspective, there are a number of standard contract provisions that give rise to the most commonly litigated construction contract issues. Too often, the disputes arise out of provisions that do not accurately reflect the intent of both parties - or at least what the parties believed at the time. In the construction industry, well-defined agreements are a necessity. This task should be tackled by the contracting parties during the review phase of a contract to avoid subsequent interpretation by the litigators and judges who were not involved during that negotiation. This article reviews three of those standard contract provisions and some strategies for focusing your contract review on limiting the risks associated with those provisions.
First, what is the scope of work? It seems like an obvious question, but many contract disputes arise out of parties later disagreeing about the contracted scope of work. This occurs because the parties typically think they understand what the scope of work is, so each party will interpret an inadequate description of the work based on their own assumptions. The subsequent dispute then revolves around competing perceptions of that inadequate description of services.
It is important to review all scope of work descriptions before signing the agreement. Often, the scope of work is a separate addendum to the contract incorporated by reference. If you are the attorney or professional reviewing the contract, you should ask to see all addenda especially any that include the scope of work. Whether the scope is explained on a separate attachment or inside the contract, make sure it is complete and well-defined. The scope should incorporate each phase of construction you will be involved with, and it should be limited to only the work described in the contract or incorporated by reference. A common problem is a contract that requires a party to perform all work within certain divisions or on specialized drawing sheets. The contractor’s proposal is then attached with express exclusions, which the contractor assumes outlines his scope, not knowing that the contract resolves ambiguities or discrepancies with an order of precedence clause, putting the contract in control over exhibits.
Including a provision that requires the parties to first request clarification from each other where a service is not sufficiently explained or described is one strategy to limit risks associated with the scope of work. This provides an opportunity to resolve any disputes before they escalate.
Second, who are you agreeing to indemnify and for what? You want to limit your liability as much as you can, or attempt to insure the risk where you cannot. Therefore, it is imperative that a risk manager and/or insurance counsel review the indemnification clause together with the insurance requirements. This is the only way to know how risks can be allocated.
When reviewing the indemnification language as a construction professional or attorney, look for broad language that triggers indemnity for “any and all losses that arise in whole or in part” from the services. Where possible, define that broad language - what does “arising out of” services mean? Also consider requesting that any indemnification provision be mutually applicable to both parties to share the risks.
Under Colorado law (C.R.S. § 13-21-111.5), you cannot indemnify, insure, or defend another person or entity against liability for damage arising out of death, bodily injury, or property damage caused by the negligence or fault of another person or entity - these provisions should be triggered only by your own negligence or fault. This language is often found in out-of-state contracts, so review those more carefully and provide the out-of-state party with the applicable Colorado law. Regardless, those provisions will not be enforceable in Colorado. The tougher question is whether unenforceable language contained within an indemnity provision is saved by the preamble “to-the-extent-permitted-by-law.”
Third, what happens if there is a dispute arising out of the contract? Most contracts have dispute resolution provisions that provide, and possibly limit, the options for resolving any dispute specific to the contract. In the construction industry, it is becoming increasingly popular to limit dispute resolution to binding arbitration, waiving the right to a jury trial and an appeal. Most construction professionals generally favor arbitration because it provides the ability to hire someone with industry experience to determine a binding outcome. This also reduces the fees, costs, and uncertainties that come with a jury trial.
Regardless of the forum, disputes may be further restricted by venue - choosing a specific state for either arbitration or litigation to occur. This same clause could also require that the contract be interpreted according to a specific state’s laws. Be particularly aware of this when contracting with out-of-state parties. This could affect those indemnification clauses that might otherwise be unenforceable under Colorado law. Note also that a specified venue outside of the State can complicate the enforcement of mechanic’s lien rights, which must be enforced in Colorado.
Finally, if there is an attorney fee clause with regard to disputes, review it for one-sided or one-way language, which is enforceable in Colorado. One-way clauses are often hidden in language providing a right to collect. If there is going to be an attorney fee clause, it should be a prevailing party clause. The term “prevailing party” and determining whether fees are “reasonable” can spur arguments post-trial, which are additional terms that can be defined in the contract to avoid subsequent disputes. Further, if your contract provides for a different venue and does not contain an attorney fee clause, find out whether that jurisdiction generally follows the “American Rule” in litigation or whether there are statutes awarding attorney fees in certain causes of action - most importantly, breach of contract.
Addressing these issues during review of a construction contract better prepares you to negotiate around the common pitfalls of construction agreements. You will never completely eliminate your risks, but knowing where they come from before you commence the work is the best way to limit your exposure to subsequent disputes and costly litigation.