In 1979, virtually all projects were completed under form contracts. As I started practicing construction law, it seemed that most form contracts were generally fair. They were negotiated by industry groups, and over the next 10 to 20 years they appeared to become fairer. We could and did compare provisions in the AIA documents, the federal contract forms, and the EJCDC agreements. When we did, we found subtle differences, but broad similarities in their approach to contract risk allocation.
Today many private projects are done with “manuscript” contracts — instruments tailored to the owner’s interests. Many public entities have developed their own contracts, and not all of those clauses seem so fair.
In this month’s column, I focus on contract clauses that I consider unfair. And while unfairness — like beauty — may be in the eye of the beholder, I think that the clauses described below aptly fit that descriptor.
These clauses acknowledge possible owner delays, but limit relief. A typical clause might allow time extensions for owner delays, but forbid reimbursement for the superintendent’s added salary or other extended general conditions. At least in Texas, where courts give wide latitude to “freedom of contract,” these clauses may be enforceable.
There are limits, of course. Courts across the country have limited enforceability of such clauses in certain cases, finding five exceptions that would prevent enforcing such a one-sided clause. In 2013, the Texas Supreme Court applied two of those exceptions to void a Port of Houston “No Damages” clause. The court refused to enforce the clause to bar a contractor’s delay damages when it found that the port acted in bad faith and actively interfered with the contractor’s work.
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But such rulings are rare. Don’t assume that you will be able to avoid the limitations in an owner’s No Damages clause. Negotiate to find a fair revision to that language.
Some clauses propose that the contractor accept all risks associated with the site, including underground differing site conditions. Be careful about accepting responsibility for things you can’t see. Lawyers often say that contract risks are best left with those who can best control or assess them. Remind the owner that its designers are relying on owner-commissioned geotechnical information. Why not let all bidders start from that same common understanding of underground conditions? A differing site conditions clause can then adjust time or price (upwards or downwards) based on actual conditions.
Who should be responsible if the design documents have errors or conflicts? 107 years ago, the United States Supreme Court ruled that the U.S. Government impliedly warranted its plans and specifications when it issued them as the basis for requested construction bids. 49 state appellate courts follow this precedent, with the Texas Supreme Court being the only holdout. We have written before about its Lonergan decision — that unique Texas precedent denies any implied warranty of plans and specifications and suggests that contractors might be responsible for the owner’s plans and specifications despite a short bid window and a lack of licensed professional designers.
Contracts often double-down on Lonergan by declaring that the owner doesn’t warrant the adequacy of the plans and specifications. Some clauses require the contractor to agree that the plans are adequate; or that the design will provide a facility that will satisfy the owner’s intended use, and/or that the contractor will bring no claims for errors or conflicts in plans. The risk of design problems appears to be another example of a risk that is best handled by the owner, who is in the best position to assure that its documents — prepared by licensed professionals — are adequate for the owner’s needs.
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All current contracts have some provision for resolving disputes concerning the project or plan requirements. Commercial contracts may refer these issues to an initial decision maker (IDM), who is often the designer of record. But these clauses allow the contractor to seek redress if that IDM rules that the plans are fine.
In the heavy-highway world, it is common for some owner contracts to refer disputes to an employee (or contractor) of the owner for at least an initial determination. Some of these clauses provide that the employee’s determination will be final and binding on the parties. Texas courts have upheld such clauses, on the theory that the parties have consented to have the representative provide a final and binding decision. If your contract contains such a delegation, look for an appeals procedure or some other limitation on finality of the employee’s decision.
It’s common for construction contracts to require contractors to perform work in a “good and workmanlike manner” and/or that the work will be “free from defects.” Ideally, these should be backup assurances. The primary work requirements should come from objective descriptions of work requirements in plans and specifications.
But it has become common for owners to request stronger warranties. We have seen language requiring the contractor to warrant “world-class construction,” “watertight enclosures,” or work that meets “the owner’s satisfaction.” Be on the lookout for these turbo-charged warranty provisions, and remind the owner that subjective requirements may lead to substantial disagreements.
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Should you be liable for the negligence of your contracting partner? When I started practicing law, you could accept such liability. Broad form indemnity clauses were enforceable in Texas. Now the legislature has ruled them unenforceable, with certain exceptions. This results in fairer contracts, but those clauses still bear scrutiny.
We’ve begun to see contracts expanding the contractor’s indemnities. Some are understandable, such as indemnity for patent infringement or failure to distribute payments to subcontractors or suppliers. But indemnities for the contractor’s breach of contract? We have written before about such clauses. They aren’t necessary, as the owner has a contractual remedy for contract breach. And that remedy includes procedural steps and limitations on damages (typically including a waiver of consequential damages). Adding an indemnity for contract breach invites an end-run around those procedural and contractual limitations.
Notice provisions seem to be getting shorter. Not too long ago, a contractor client missed a seven-day notice window when it fell between Christmas Eve and New Years. We worked that out with the owner (who wasn’t working either) but it’s a reminder to be practical when outlining deadlines.
Many contracts allow the owner to terminate for default or convenience. There are practical benefits to these options. A convenience termination allows the parties to cease obligations without disputes. The contractor stops work and can bill for completed work and demobilization costs. And the parties don’t have arguments (in most cases) about wrongful termination.
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But owners sometimes include “conversion” clauses in their default termination provisions. These provide that if an owner defaults for cause, and that default is later found to be wrongful, the termination is automatically converted to a termination for convenience, including that clause’s limitation on damages for future performance. We believe that an owner who wrongfully terminates a contractor should be responsible for resulting common-law damages.
In my view — and in a perfect world — contracts should be about partnership. They would fairly apportion risk to the party best able to bear, understand, and control it.
The industry has come a long way since 1979, and I don’t propose going back. But it might be worth taking another look at the form contracts that were so prevalent there. They still exist, and in fact have been regularly updated to cover new risks. They offer time-tested risk-sharing models that might serve construction parties as more balanced contract clauses.
