- Drafting Contracts to Minimize or Avoid Claims
- October 13, 2014 | Author: Jason Ebe
- Law Firm: Snell & Wilmer L.L.P. - Phoenix Office
Many claims that arise in design and construction may be mitigated or avoided as a result of prudent contract drafting at the outset of the project. This article provides practical tips for drafting contracts to minimize or avoid claims. These tips are applicable to design and construction contracts at both the prime and subconsultant/subcontract tiers.
Tip #1: Seek Assistance from Knowledgeable Construction Counsel.
Unless you are a pro at drafting and negotiating design and construction contracts, knowledgeable construction counsel can provide significant value to the effort. If possible, seek out counsel who has experience representing both sides of the transaction: owner - contractor, contractor - subcontractor or supplier, owner - design professional, design professional - subconsultant. This experience provides a helpful and healthy perspective on the needs, desires, risk tolerance and negotiating strategies of the other side of the transaction and can streamline the process by detecting early the points that likely can and cannot be effectively negotiated. Similarly, seek out counsel who has experience both on the transactional side, i.e., preparing the contracts, as well as the dispute resolution side, i.e., arbitrating or litigating the contract disputes, as the dispute resolution experience provides valuable insights regarding the evaluation and drafting of effective and cost-efficient processes for minimizing or avoiding disputes during the project and for time-effective and cost-effective resolution of disputes during or after the project.
Tip #2: Recognize That One Contract Form Does Not Fit All Parties and Projects.
Too often, we see that out of comfort, habit, ignorance or fear, parties simply grab a form from a past project, change the project information and proceed without evaluation of whether that contract is right for the project and the participants. If the project is truly a clone of a past project, and assuming that project went smoothly, that decision may be fine. But most projects are unique, and consideration should be given to how that particular project should be delivered, and the relative roles and risk allocation among the project participants. If you followed Tip #1, your knowledgeable construction counsel will be able to guide you through the evaluation for selecting a contract, including whether to use an existing form or create a manuscript contract, and the individual tailoring necessary for that project.
Tip #3: Participants Perform Best In Their Comfort Zone.
This is another way of saying that the contract should document, rather than dictate, the parties’ prior agreement as to their roles and risk allocation. The parties should already have a meeting of the minds as to how to deliver their best performance regarding the project, and the contract should document how the parties will deliver that performance. Parties that are comfortable with their roles and the risks allocated to them will likely perform better than parties who are forced to accept roles and risks with which they are unfamiliar. So, while it might be nice at the time of contract execution to have a contract that shifts all or most risk to another party, if that party is thereby forced to perform out of its comfort zone, the likelihood for poor performance and resulting disputes increases significantly. In that same context, the parties are best served by being realistic as to what they each bring to the table and the performance they can deliver. Inserting unreasonably aggressive or unobtainable performance criteria regarding scope, time, cost or similar requirements likely isn’t going to lead to a successful project and instead will likely increase the number and severity of claims.
Tip #4: Clearly Define What Benefits the Contract Provides and the Proper Procedure for Obtaining Those Benefits.
Taking the time to specify what benefits are available to the contracting parties and how the parties may obtain those benefits adds significant value because the parties will know what they are entitled to (and consequently what they are not entitled to) and how to obtain relief. As an example, change order clauses should be sufficiently defined so that the parties know what time and cost relief may or may not be available for a change in the scope of work or services. In addition and more specifically, the parties should, if possible, quantify the relief available to avoid disputes as to the quantification of relief. For example, liquidated damages clauses, although unfavored by many parties as encouraging claims for liquidated damages, usually minimize or avoid disputes over the quantification of a delay or other impact. Continuing on the delay example, consideration is often given to liquidating an owner’s cost of delay, but the same consideration is usually not given to liquidating the contractor’s cost of delay, resulting in disputes over the contractor’s costs or damages resulting from an owner delay. Considering contractors estimate their time-driven costs at the time of bid or contract, including a liquidated amount for the contractor’s delay costs minimizes or avoids the need to fight later over the relief allowed by the contract. Similarly, contract clauses stating the time and manner in which claims may be made minimizes or avoids the undesirable surprise at the end of the project when all of a sudden a big claim is made as to items that could have been more easily addressed and resolved had they been raised in a contemporaneous manner during the project.
Tip #5: Tailor the Dispute Resolution Clause.
As part of the meeting of the minds of the contracting parties with respect to the project, the parties should evaluate and discuss how they want to resolve disputes that arise. A clause requiring direct negotiations among senior leadership can be effective to resolve claims before parties “lawyer up.” Thereafter, mediation is an effective and highly recommended process for resolving claims to minimize or avoid arbitration or litigation. With respect to arbitration or litigation, the parties should consider their past experience as to whether the process was satisfactory. The parties should also consider whether the proposed process makes sense for the particular process. In other words, the advice of not simply adopting language from a form contract applies even more so with respect to the dispute resolution clause. We have seen many times contracts in which it was evident that the parties took great care to describe the process for design and construction of the projects, but then included boilerplate dispute resolution clauses that were a terrible fit for the projects, and made the claims resolution process more time and cost consuming. Taking the time to evaluate and then carefully tailor the dispute resolution clause of the contract will add significant value to the project when the parties utilize, and more importantly, are satisfied with, the contract dispute resolution procedures. For more discussion on this topic, see my article “Tips for Effective Contract Dispute Resolution Clauses” in our June 2014 issue.
Tips #6: Once Your Have a Good Contract, Use It.
Of course, the strategy for minimizing or avoiding claims does not end upon the execution of the contract. The parties must then follow the contract terms and conditions and promptly implement the procedures stated in the contract for allocating risk and for avoiding and resolving disputes in order for the drafting effort to pay off. In other words, don’t negotiate the contract, sign the contract and then shove the contract in a drawer, never to be seen again. Use the contract as the tool it is intended to be to guide the parties through the design, construction, and dispute avoidance and resolution process. Conduct a workshop so that the personnel who may not have been involved in negotiating the contract but who will be responsible for administering the contract has a solid understanding on how the contract is going to be enforced. Finally, if issues do arise, involve knowledgeable construction counsel early in the process to keep the parties on the best course to an early and economical resolution of disputes and hopefully a successful project.