1. Indemnity
An indemnification provision is a contractual provision under which one party (the indemnitor) agrees to assume liability for the losses incurred by another party (the indemnitee). Most commonly, the indemnitor agrees to defend, reimburse, and hold the indemnitee harmless from certain specified liabilities, often those arising from the indemnitor's work or negligence. For example, a general contractor might require that its subcontractors indemnify the general contractor for any claim made against the general contractor that arises from wrongdoing relating to that subcontractor’s scope of work. However, parties should consult with an attorney to make sure that their indemnity language complies with applicable state laws. Most state statutes have provisions that set forth certain requirements for an indemnification provision to be enforceable and upheld in court.
2. Force Majeure
Force majeure provisions in construction contracts, also known as “Act of God” provisions, excuse parties from liability for delays or failures to perform due to certain unforeseen events beyond their control. To qualify as a covered force majeure event, the event must have such a profound impact on the company or project that it could not have been avoided and forces a change in the conditions of the project that the company cannot avoid or control. These provisions commonly apply when there is a natural disaster (i.e. hurricane, tornado, flood, earthquake), but these provisions also gained attention during the COVID-19 pandemic. Force majeure events can have massive impacts on a project by significantly increasing project costs or substantially delaying projects. Contractors should consult with an attorney to ensure that their construction contracts include, at a minimum, the force majeure events most likely to occur in the project’s location.
3. Termination Provisions
Parties to a construction contract should carefully consider situations where termination of the contract may be appropriate. A construction contract should have clear termination rights when any party fails to perform. One common termination provision often included in construction contracts is a termination for convenience provision. A termination for convenience provision provides that a party may terminate a contractor or subcontractor at its convenience for no reason at all. These clauses should contain detailed information about what damages and fees a contractor would be entitled to receive if they are terminated at the owner’s convenience. Parties should consult with their lawyer to determine whether to include, or insist on excluding, such a provision in their contract.
4. Pay-If-Paid Clauses
A pay-if-paid clause makes payment to a downstream contractor or supplier expressly contingent on receipt of payment by the higher tier entity. For example, a subcontractor subject to a pay-if-paid clause is not entitled to payment whatsoever from the prime contractor unless and until that prime contractor receives payment from the project owner. In contrast, a pay-when-paid clause merely fixes a time for payment rather than establishes entitlement to payment. Thus, to ensure a pay-if-paid provision is enforceable, it should be carefully drafted and include magic words such as “contingent upon and subject to” or “condition precedent” to clearly indicate that the payee is not entitled to payment unless and until the payor receives the funds itself.
5. Liquidated Damages
It is critical that construction projects are completed on time. Project delays can have enormous financial impacts. A liquidated damages provision attempts to account for the risk of delay by specifying a predetermined amount of compensation that a contractor must pay the owner for certain delays or failure to meet project milestones. Most commonly, liquidated damages provisions contain a set dollar amount for every day of delay. If an owner insists on a liquidated damages provision, the contractor should ensure that the liquidated damages provision equally accounts for any delays by the owner. Parties should consult with their lawyer to ensure that the liquidated damages provision in their contract complies with state specific authorities, as courts frequently refuse to uphold improperly drafted liquidated damages provisions for various reasons.
Conclusion
It
is important to discuss these common risk shifting provisions with your
attorney when negotiating a contract for a new project, drafting a new contract
for your business you just started, or simply updating your existing contract. Whether you are an owner, general contractor,
subcontractor, or supplier, early consideration and analysis of these
provisions and concepts are likely to put you in a stronger position when the
inevitable dispute arises.
Author Troy Mainzer is an attorney in Carlton Fields, P.A.’s construction group in Tampa, Florida. Troy represents owners, developers, general contractors, and subcontractors in connection with an array of construction disputes, including but not limited to commercial projects, infrastructure, residential home construction, site development, and other areas. Troy can be reached at tmainzer@carltonfields.com or (813) 229-4239.
