Mechanical Contractors Association of Northwest Ohio Risk Management: Killer Contract Clauses David W. Zoll
Introduction Overview: Risk Can & Should Be Managed Develop Risk Management Practices by: 1. Risk Identification 2. Risk Assessment 3. Risk Treatment 4. Risk Control Analyzing Killer Contract Terms
Risk Identification What is Risk: The presently unknown possibility that a positive or negative event could occur which could impact an asset, value, or objective. Examples: Adverse weather Non-payment Accidents Extra work, etc. Failure of things beyond your control
Risk Identification cont. How to Identify Risk Consider prior experience Consider those events or contingencies that could have a major, moderate, or minor impact on loss or profit Biggest risk of all may be the risk of not identifying the risk.
Risk Assessment Once risks are identified, assess them Analyze their: Frequency Severity Manageability Establish acceptable tolerances for risk You need to know how much risk is too much risk to risk.
Risk Treatment Risk Treatment involves: Eliminating, mitigating, transferring, sharing, or accepting identified risks It may also mean taking necessary steps to insulate yourself from certain risks.
Control Risk Monitor and Control Risks at Each Stage of Project. Develop risk monitoring procedures Communicate risk with field staff Encourage employees to identify and report risks Re-evaluate risks at each stage of project
Identifying Killer Contract Clauses Incorporation by Reference (aka Conduit or Flow-Down Clauses) Owner/Contractor: Here is the two page subcontract you need to sign. It details all the terms and conditions. Of course, it also references a list of documents that will bind you, even though they may conflict with the terms of this subcontract and even though we haven t given you a copy of any of the incorporated documents.
Incorporation by Reference See ARTICLE 1
Incorporation by Reference Response: Consider modifying the subcontract by adding a Stuller clause: Subcontractor shall not be bound by, and specifically objects to, any document incorporated by reference in this contract unless and until, a copy of each and every document so incorporated by reference is delivered to Subcontractor for its review and Subcontractor has certified its acceptance of the terms of such documents in writing. Carefully examine each document and fully understand its impact.
Identifying Killer Contract Clauses Indemnification Overly broad Owner/Contractor: You have to fully indemnify me, even if an accident is completely my fault.
Indemnification - Broad See ARTICLE 2
Indemnification Response Make an effort to dilute the scope of such provisions. Consider modifying the subcontract to limit indemnity: Subcontractor shall indemnify and hold harmless the Owner and Contractor and all their agents and employees from and against all claims, damages, losses and expenses pertaining to the performance of the subcontract and involving personal injury, sickness, disease, death or property damage, but only to the extent caused in whole or in party by the negligent acts or omissions of the Subcontractor.
Identifying Killer Contract Clauses Additional Insured Owner/Contractor: By the way, you don t mind adding me, my cousin, and my uncle as additional insureds under your insurance policy do you?
Additional Insured See ARTICLE 3
Additional Insured Adding general contractor as insured can increase premiums. Response Revise clause to insure there will be no claim on your policy for claims that are not due to your fault. Make sure that your policy does not provide contractor with primary coverage and that contractor s own insurance is not non-contributory. Review with your agent to insure no increase in premium.
Identifying Killer Contract Clauses Contingent Payment Clauses Contractor: I promise to pay you if and only if I get paid.
Contingent Payment Clauses See ARTICLE 4
Contingent Payment Clause Consider Owner s ability to pay. Situation where Owner s refusal to pay is attributable to Contractor s actions. Whether you have waived lien rights. Response. Consider incorporating: Subcontractor shall be paid within seven (7) days after the Contractor receives payment from the Owner; provided, however, if the Contractor does not receive payment from the Owner for any reason other than the fault of the Subcontractor, Contractor shall not be relieved of its obligation to pay the Subcontractor for all work already performed by Subcontractor.
Identifying Killer Contract Clauses No Lien Provisions Contractor: If you want this job, you have to waive all your lien rights upfront, but don t worry, you ll get paid so it s no big deal.
Lien Waivers See ARTICLE 5
Lien Waivers Ohio Revised Code 4113.62(E), provides that: No construction contract, agreement, or understanding that makes payment from a contractor to a subcontractor contingent or conditioned upon receipt of payment from any other person, shall prohibit a person from filing a claim to protect rights under 1311.26 of the Revised Code from expiring during the pendency of receipt of payment.
Lien Waiver Response: Modify the clause to include following language: In the event of Owner s nonpayment, nothing contained in this Agreement shall be construed as a waiver or impairment of Subcontractor s lien rights. NOTE: Where a no lien provision exists in addition to a pay-if paid clause, Subcontractor has little payment enforcement mechanisms. In such cases, it is suggested that Subcontractor request Contractor to acquire a payment bond.
Identifying Killer Contract Clauses Change Orders Owner/Contractor: Do it my way right now, and we ll figure out your extra costs when you re finished.
Identifying Killer Contract Clauses Change Orders See ARTICLE 6
Change Orders Responses. Avoid contract language that: Imposes obligations on the contractor to perform without reasonable contemporaneous compensation; Unreasonably limits mark-ups for overhead and profit on change orders; Expressly bars adjustment of extra work if not done pursuant to a written, advance change order signed by all parties. Always document a request for extra work and request written consent and approval from the general. Make sure there is a meeting of the minds on the basis of payment for extra work. If the contract requires that change orders be in writing, do not do the extra work until you have one, or appreciate the risk that you may not get paid. Completely understand the notification procedure for requesting additional payment and making disputes. Understand contractual time limits on filing claims for change orders. Communicate contract provisions to the field work force and follow up to insure compliance.
Identifying Killer Contract Clauses No Damages for Delay Owner/Contractor: You must bear the costs of any delays in performance even if I have caused them.
No Damages for Delay See ARTICLE 7
No Damages for Delay Responses: Avoid No Damage for Delay clauses as unreasonable and contrary to other legal principles; Qualify or limit application of such clauses so that they do not apply where Contractor/Owner intentionally or negligently contributes to the delay ( excusable delay ).
Identifying Killer Contract Clauses Liquidated Damages Owner: I promise its not a penalty, it is simply a reasonable figure calculated as an estimate of my damages caused by your delay.
Liquidated Damages See ARTICLE 8
Liquidated Damages Responses Ensure that the damage amount is not disproportionate to the magnitude of the harm caused by late completion. Ensure that the Contractor is not stacking liquidated damages for interim completion dates and final completion. Negotiate terms that spare you the risk of incurring liquidated damages caused by the delays of others.
Liquidated Damages Typical and reasonable liquidated damages clause: If the prime contract requires the assessment of liquidated damages, and such damages are actually assessed against the Contractor, Subcontractor shall be responsible to pay only the allocable share of the assessed liquidated damages caused solely by the Subcontractor. Liquidated damages shall not be assessed against the Subcontractor for delays caused by the Owner, Contractor, or other subcontractors, or as a result of acts beyond Subcontractor s control. Liquidated damages shall not be assessed against Subcontractor after Subcontractor has substantially completed its work.
Identifying Killer Contract Clauses Dispute Resolution Provisions Owner/Contractor: I am from Ohio, you are from Ohio, the project is in Ohio, so I think it makes prefect sense that if we have to litigate, we agree to do so in North Carolina.
Dispute Resolution See ARTICLE 9
Dispute Resolution Pay attention to this clause; it is frequently overlooked. Note: Watch out for notice clauses that require you to notify the Contractor/Owner of any claim, within 48 hours (e.g.) of that claim arising, or forever be barred of your right to bring it and recover damages. Different alternative dispute resolution procedures each has its own strengths and weaknesses. Arbitration: Private and supposed to be fast and inexpensive. Arbitrator(s) know construction law. However, little to no discovery, no appeal, and frequently compromised decisions. If you go through AAA it will be long and expensive. Mediation: Very fast and inexpensive. However, mediators do not often engage in weighing the merits, but rather seek resolution via concessions from both sides.
Dispute Resolution Recommended language: Any claim arising out of or related to this Subcontract shall be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party, unless mutually agreed otherwise. The parties shall share the mediator s fees and any filing fees equally. Mediation shall be held in the place where the project is located, unless another location is mutually agreed upon Claims not resolved by mediation shall be decided by arbitration. If the parties cannot agree on the identity of the Arbitrator within 10 days of a request for arbitration, then each party shall designate an arbitrator within 20 days. The two designated arbitrators shall choose a third arbitrator, who shall serve as Chairman. If they cannot agree within 30 days on such arbitrator, then the arbitrator shall be appointed by a Judge of the Court of Common Pleas of the County in which this Contract is to be substantially performed, upon suit filed for such purpose. The Parties hereby consent to the continued jurisdiction of such Court, solely for the purposes of enforcing the provisions of this Arbitration Clause. The Parties specifically reject arbitration pursuant to the American Arbitration Association. The Costs of the arbitration shall be divided equally by the Parties, and each party shall bear the cost of the arbitrator appointed by such party. Time shall be of the essence in any arbitration hereunder.
Identifying Killer Contract Clauses Miscellaneous Provisions: Termination of Contract Attorney Fee Clauses
Identifying Killer Contract Clauses Termination of Work for Convenience: See ARTICLE 10(a) Response: Include language entitling Subcontractor to receive reasonable overhead and profit on the work not executed.
Identifying Killer Contract Clauses Attorney Fee Clauses: See Article 10(b) Response: Attorney fee clauses should be evaluated in every contract. The lack of such a clause may inhibit the ability to recover on small claims. In turn, however, the prospect of attorney fees can also deter a party from pursuing a dispute.
Questions? A copy of this presentation will be posted at David W. Zoll 6620 West Central Ave Toledo, Ohio 43617 (419) 841-9623 (419) 841-9719 (facsimile) david@toledolaw.com