Understanding Key Contract Provisions Jenifer L. Kraemer - - PowerPoint PPT Presentation

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Understanding Key Contract Provisions

Jenifer L. Kraemer

Key Contract Provisions

Schedule Change Orders Deadlines Indemnification Insurance Payment Deficiencies Termination Dispute Resolution Prohibited Terms in Wisconsin

Schedule

Delays and extensions of time

Circumstances justifying extensions of time are

usually quite limited

Owner-caused delays (such as failure to make decisions

promptly, delays by Owner’s own forces, etc.)

Unexpected or hidden conditions (e.g., soil, hazardous

materials, etc.)

Unusual weather conditions Delays in release of plan/bid packages Force majeure events (e.g., acts of God, fire, war, etc.)

Schedule

Subcontracts usually consistent with, or

incorporate, contract between General Contractor and Owner

Subcontractors should be aware of how/when

General Contractor can change subcontractor’s schedule

Subcontractors should be aware of what happens

when subcontractor is delayed by General Contractor or by other subcontractors

Pay attention to deadlines for claims

(discussed in following section)

Schedule

Remedies if behind schedule

Owner’s right to require General Contractor

(or General Contractor to require subcontractor) to work overtime, add labor, expedite deliveries or take other actions to catch up, at General Contractor’s (or subcontractor’s) cost.

Owner’s (or General Contractor’s) right to

take over all or part of the work.

Termination?

Schedule

Liquidated vs. consequential damages

Liquidated = a fixed amount for each day the project is

delayed beyond the completion date.

Consequential = an open ended amount of delays which

could be sought to recover damages that indirectly flowed from a breach of contract that caused a delay.

Standard AIA and ConsensusDocs contracts contain mutual

waiver of consequential damages.

Some contractors/sureties prefer liquidated because known $

• f risk.

Owners often want consequential damages in order to

potentially recover for losses due to delay in project completion.

Likely get passed along to subs if General Contractor agrees

to contract term.

Change Orders

Changed conditions

Site conditions Hazardous materials

Changes in plans or specifications Additional work added to scope Delays

Change Orders

Usually must be in writing, signed by both

parties, prior to work being performed

Risk in proceeding without signature

Try to minimize risk by documenting in some way:

E-mail confirming direction, notice of extra Meeting minutes, project log

General Contract and/or Subcontract may

have deadline for submission of change order requests

Deadlines

Need to carefully review contract

Shop drawings/submittals Requests for payment

Date for submittal/payment

Change order requests

Most often there is a deadline for when change

• rder must be requested after event occurs.

Be aware of any documentation requirements

that must be met.

Deadlines

Claims

Contract should specify deadline for claims for additional

time/money.

A201 Section 15.1.2 requires that general contractors’ claims

be initiated within 21 days after occurrence of the event giving rise to the claim or after the claimant first recognizes the condition giving rise to the claim, unless different deadline is specified.

A401 Section 5.3 requires that subcontractors’ claims be

made by the time specified by the contract, but no later than two (2) working days before the time the claim is due from the general contractor under the general contract (see above).

Statutes of limitations. May be waived if not raised in writing prior to submitting final

pay request.

Indemnification

What is it?

Requiring a party to reimburse the other

party under certain circumstances. Used to allocate risk to party most able to control it.

Often indemnity provisions hidden in

several places:

Broad indemnity Indemnity from liens, etc. Indemnity from hazardous materials

Indemnification

Look at:

When the indemnity obligation is triggered

Loss Claim by a third party Because of:

Anything related to the work Failure to perform in accordance with contract Specific limited circumstances (discovery of hazardous

materials, etc.)

Who is being indemnified

Often includes persons or entities other than the contracting

party.

Architect, general contractor, owner, other contractors/

subcontractors, etc.

Indemnification

Look at extent of obligations

Try to limit to own actions/omissions (or those of a

person or entity who you are responsible for)

“to the extent” – usually indicates a proportional

responsibility

Exceptions referring to the other party’s “sole

negligence” would seem to require you to cover even when the other party was partly at fault

Some states dictate whether/how much liability can

be shifted to another party

Insurance

Coverage

Review with agent to confirm you have

coverage for required events and amounts:

Contractual liability (i.e., indemnity terms) Additional insured provisions Mold

Proof of Insurance

Insurance

Waiver of subrogation

Subrogation is the ability to step into the insured’s

shoes and make a claim against a third party

Waiving it means an insurer who pays out a claim

may not have the right to seek reimbursement from the third party allegedly liable for the loss

Some insurers will refuse to waive

Consistency

Make sure contracts on one project are consistent

Payment

Timing of Payment

Contracts typically take one of two approaches:

Payment due within X days of General’s receipt of payment from

Owner

Provided pay application received by X date of a given month,

then payment due by end of following month

“Pay when paid” is a lawful provision

Retainage

Percentage of retainage varies, but 10% is typical on private

projects

Retainage typically not released until final payment and

acceptance of project by Owner

Subcontracts may require warranty information, O&M manuals,

• etc. to be submitted before retainage due to subs

Payment

Subcontractor typically has contract

• bligation to timely pay its

subcontractors and suppliers, even without payment from General

Could result in liens filed against project Subcontractors should consider flowing-

down payment provisions

Payment

General’s remedies:

Contract typically allows General to withhold

payment if subcontractor not paying its subs and suppliers

Declare subcontractor in default of contract Joint or direct payment agreement

Payment

Liens can have a critical impact on the project:

Owner/Lender will likely withhold payment on draw

request until lien is cleared up

Added costs to resolve

Statute requires general contractor to defend Owner in any

lien action that is not the result of Owner’s failure to pay

Subcontract will, in turn, typically require sub to indemnify

and defend general

Both general contracts and subcontracts also typically

require that liens be bonded-over (statutory procedure to follow)

Payment

Price Escalation Clauses

Allow adjustments to a contract price based on

certain specified events (e.g., labor or material costs rising beyond a specified amount)

Should clearly define the labor or materials in

question, specify when price adjustments are to be made, and clearly describe the process (including baseline, triggering threshold, method of adjustment, any upper cap, and notice and documentation requirements).

Deficiencies

Failure to perform as required

May include:

Deficiencies in the work or defects in materials

provided

Typically General and Architect/Owner have authority

to reject work

Failure to comply with the project schedule Refusal to timely complete punchlist work

Deficiencies

Contractual Notice and Cure

Requirements

Contracts/Subcontracts often require

advance written notice and right to cure

Make sure notice/cure timelines are realistic Make sure to follow required manner of

delivering notices (e.g., certified mail, etc.)

Timely respond, in writing, to any deficiency

notices

Deficiencies

Defects in the work of other contractors

Subcontracts often require inspection of other

contractor’s work where the subcontractor’s work depends on it

Report defects to General prior to performing work Failure to inspect and report defects may be deemed

acceptance of other contractor’s work

How broad is inspection obligation?

In part, depends on subcontract language Certainly applies to obvious defects

Termination

Typical rights granted to Owner/General

Contractor

Right to terminate for breach of contract,

acts of default

Right to terminate for convenience (though

typically requires payment for work already performed, plus contractor’s/subcontractor’s

• ther costs of termination)

Right to assume contracts, if crucial to

project

Termination

Notice

As discussed regarding deficiencies, the

contract/subcontract will usually require written notice of deficiency or intent to terminate, and a cure period

Abide by any requirements for notice recipients,

method of delivery, etc.

Promptly respond to any notices and/or cure

deficiencies

Remedies

If termination is for breach or act of default,

• wner/general contractor typically can correct

deficiencies and deduct the costs from the payments due the general/subcontractor

Termination

Typical rights granted to

general/subcontractor

Right to terminate for same reasons and

circumstances as owner (or in case of subcontractor, same as general contractor’s rights with owner)

General/Subcontractor typically may recover

payment for work performed and related costs, provided termination is for reasons not the fault

• f the contractor or its subs

Dispute Resolution

Arbitration vs. Litigation

Standard AIA documents used to require

arbitration under the Construction Industry Arbitration Rules of the American Arbitration Association

Beginning with the 2007 version of the AIA

documents, litigation is now the default method of dispute resolution, with the option to choose arbitration instead

Dispute Resolution

Arbitration vs. Litigation Considerations

Risk of multiple proceedings

Unless all parties to the dispute are bound to

arbitrate, you could end-up with multiple proceedings

Limits on discovery in arbitration

May be good; may be bad

In arbitration, filing fees can be significant

and you pay the “judge”

Dispute Resolution

Arbitration vs. Litigation Considerations

(continued)

Limited scope of review from unfavorable

arbitration award, but automatic right to appeal unfavorable court judgment

On the other hand, construction arbitrators

may have more experience dealing with construction issues than a judge may have

Dispute Resolution

Attorney’s Fees

Unless the contract provides for recovery of

attorney’s fees, each party pays their own

Contracts may start with a one-way

attorney’s fees recovery provision

Consider the risks of having to pay your own

and/or the other party’s attorney’s fees

Make attorney’s fees recovery reciprocal, if

possible

Prohibited Terms in Wisconsin

Prohibited Terms in Wisconsin (Sec.

779.135)

Lien waiver before payment

Cannot require a potential lien holder to waive its

lien rights or claim against a payment bond, unless the party has been fully paid

BUT, if you do so willingly, your lien rights are waived

Incorporating other state law

Cannot make the contract subject to the laws of

another state or require that dispute resolution

• ccur in another state

Prohibited Terms in Wisconsin

Contingent payment by general contractor to

subs/suppliers

Cannot make a general contractor’s contractual

• bligation to pay its subs/suppliers contingent on

the general contractor first receiving payment from a party with whom the subs/suppliers do not have a contract (“pay if paid”)

However, general contractors may have a provision

entitling them to delay payments to subs/suppliers until they have been paid (“pay when paid”)

! "#$%$ &'(&")

Understanding Key Contract Provisions

Jenifer L. Kraemer