As a construction and design attorney who both negotiates contracts and litigates disputes, I’ve evaluated many a project gone wrong because of the rights, obligations, and remedies allowed by contract terms. Too often as developers, designers, and contractors are understandably pushing forward to start a project, the parties devote insufficient time identifying and allocating risk in their contracts. Projects that end up with the most unintended consequences are those where parties defer to and use an “industry standard” contract form as opposed to one specifically tailored to the project’s needs and risks. While contract forms developed by industry organizations can provide a good starting point for most projects, prudent parties will carefully navigate and negotiate the standard terms to avoid the following tricks and traps that are inherent with use of an unaltered industry contract form. The bottom line? Nothing is “standard.”
- “Standard” form contracts tend to favor the industries that drafted them. If another party proposes an “industry standard” form contract for use on a project, start your analysis by questioning the origins of the form. If the form is from an architect’s association, ask whether developers or owners have ever been in the drafting room. If the form is from a contractor’s association, subcontractors should ask whether the form was drafted in favor of the general contractor versus the sub trades. Just because an “industry standard” form has been around and refined for 40 years by a particular industry segment does not make its standard terms suitable for your project.
- Mutual waivers of consequential damages are not truly mutual. Many industry form contracts contain a mutual waiver of consequential damages. Such clauses appear fair by claiming to be mutual. Yet, the fact is that an unaltered CD waiver poses significantly greater risk to an owner’s rights than that of the other party. This is so because the owner is not only at risk for consequential damages due to late project delivery (often addressed by liquidated damages clauses), but also because the owner faces risk for several years after completion if latent defects or errors require repairs (e.g., rent concessions to tenants or renting alternate space for office workers). Parties should always consider deleting or modifying the standard CD waiver terms to account for, at a minimum, insurance-covered claims and claims that arise after completion.
- Limitation of liability clauses are more limiting than intended. More commonly found in design professional contracts, LOL clauses should be avoided because they often conflict with other contract terms, especially insurance. A party’s liability should never contractually be limited to less than at least its insurance limits, and even then, best practices dictate ensuring that in case of a defect or error, all parties have some vested interest or “skin in the game” in resolution.
- Default insurance terms are insufficient. Speaking of insurance, “standard” industry contract forms typically provide less than standard insurance coverage for a project. Most problematic are terms that vaguely require a party to provide the types and limits of insurance otherwise described in the contract documents (which then is not done) or as typically carried in the industry (what’s typical?). Best practices dictate creating an exhibit that carefully—and with specific analysis of project risks—spells out the parties’ insurance obligations, including products-completed operations coverage and tail coverage for professional liability policies to cover post-completion risks. Contractually specifying insurance limits and scrutinizing policy endorsements (aka exclusions) are absolutely essential to hedge against risk in commercial development.
- Force majeure and delays are not addressed. One of the many things we’ve learned since early 2020 is to carefully consider the potential impacts of causes beyond all parties’ control. Yet, many form contracts either haven’t been updated since that year or simply fail to specify a remedy, leaving the parties to fight it out should a dispute arise. Best practices dictate contractually specifying the critical path delay events that warrant a time extension versus those that might be attributable to a party with other remedies available. While nobody plans to fail, failing to plan for project impacts can result in similar consequences.
- Indemnity language is considered legal jargon. Few topics in the development world generate more yawns than an indemnity clause. Despite being one of the most important contract terms when a dispute arises, parties defer to industry standard indemnity clauses at their own risk. A handful of key terms in an indemnity clause are too often dismissed as legal jargon, such as what damages give rise to indemnity and/or who is making the claims. The parties should carefully consider any “industry standard” indemnity clause and revise it appropriately to fit the needs of the project.
Complex construction projects carry risks that require contract analysis and negotiation from the outset. Regardless of your position in the contract hierarchy, plan before your next project to set aside ample time to analyze and address the risks inherent with use of an unaltered industry contract form. Know that while standard contract terms may provide a starting point for contract negotiation, nothing is truly “standard.”
Originally published by the Daily Journal of Commerce on September 14, 2023.