Volume 41, Issue 6 June 2006
Preserving Rights and Minimizing Risk
Claims Mitigation and Killer Contract Clauses
by Rick Greenleaf and Julie Earnest
This article is the second of a three-part series that discusses contractual and practical concerns glazing subcontractors should carefully consider in order to minimize financial risk. Our last article (see the April 2006 USGlass, page 8) focused on the importance of developing a contracting policy in order to establish your company’s list of “deal breakers”—those clauses that you either absolutely require in a contract or absolutely reject. Although this article does not attempt to address all of the potentially deadly clauses that may cause significant financial harm (the “killer contract clauses”), we will attempt to hit some of those clauses you should incorporate into your deal breaker list.
Waiver of Consequential Damages/Limitation of Liability
Your company should require the owner to waive consequential damages because the magnitude of a consequential damages claim can sometimes impose tremendous financial risk. Consequential damages are economic losses caused indirectly by a breach of contract as opposed to the losses flowing directly from the breach. Examples of consequential damages that an owner might claim based on a delayed project completion date include lost use, rent or business income and increased financing costs.
Consider, for example, a glass supplier contracted to supply glass to an exclusive 2,000-room hotel located in the immediate vicinity of the next Super Bowl game. For whatever reason, the glass is delivered and installed late, and the hotel is unable to open until well after the Super Bowl. As a result, the hotel loses revenue on several hundred rooms for the peak time period and damages (including the loss of business to the hotel’s restaurants) total well into seven figures. This type of loss is of such significance that the contractor is well advised to refuse to accept this risk.
A waiver of consequential damages can minimize this risk and is, arguably, somewhat standard in the industry (the 1997 AIA A201 General Conditions, Article 4.3.10 provides for a “mutual waiver” of consequential damages). Another possibility to minimize risk is to adopt a limitation of liability clause that caps the dollar amount of damages you can be assessed. Limitation of liability clauses simply state that the liability of the contractor arising out of its acts or omissions shall not exceed either the contract total sum or an agreed upon amount.
Beware of overly broad indemnification clauses. Contracts often require the general contractor to indemnify the owner and the subcontractor to indemnify the general contractor for any loss caused as a result of the indemnifying party’s negligent acts or omissions. Beware of clauses that include additional indemnification obligations.
Do not accept an indemnification clause that requires the subcontractor to indemnify the general contractor regardless of fault. Narrow the breadth of the indemnification to cover only your negligent or willful acts, and the indemnity should be limited to bodily injury or property damage and not include the contractor’s performance obligations under the contract. Due to the common flow-down provision requiring subcontractors to be bound by the provisions of the general contract, subcontractors should review not only their subcontracts, but also the general contract terms that have likely been incorporated into their subcontract terms.
No Damages for Delay
Beware of the “no damages for delay” provision. This type of clause may limit the contractor’s recovery for damages due to delays caused by others to only time extension, thus prohibiting recovery for monetary compensation attributable to delay beyond the contractor’s control. The financial risk includes those costs the company must absorb resulting from a delayed completion date such as additional job site and home officeoverhead as well as the lost revenue caused by the inability to take on other projects.
When you see this type of killer contract clause, delete it. If you are forced to accept such a clause it would be wise to seek legal advice in your jurisdiction to gain an understanding of the exceptions to the enforceability of such a clause so that any future claim can be postured properly.
Termination Upon Nonpayment
Although a glazing contractor’s remedies for nonpayment may include filing a lawsuit or an arbitration demand and preserving payment bond and mechanic’s lien rights, the most expedient and least expensive remedy is the contractual right to stop work in the event that you are not being paid. We recommend negotiating a provision that allows you to terminate a contract after written notice and after waiting a reasonable number of days for payment.
Certainly, payment disputes arise that involve only a portion of a payment application or a portion of the work. Avoid contract clauses that give the contractor/owner the right to hold the entire amount of payment. Commonsense dictates that no amounts should be withheld other than the specific amount in dispute. If change order work is performed prior to the issuance of a formal change order, and before an agreement on price is reached (always a bad idea), and the price for such work is questioned, the glazing subcontractor should be compensated for the work allowing only the disputed amounts to be withheld and negotiated or litigated later.
Minimizing your company’s financial risk in the construction industry requires that you avoid killer contract clauses. Increasing your familiarity with the legal issues and the financial ramifications of killer contract clauses will aid you in negotiating a reasonable allocation of the risk between you, the owner and the general contractor.
© Copyright 2006 Key Communications Inc. All rights reserved. No reproduction of any type without expressed written permission.