Catching Killer Clauses in Contract Negotiations
Risk-management personnel who are in the business of reviewing and negotiating construction contracts have some simple tools at their disposal to make sure their edits are addressing all of the killer risk-shifting clauses in those contracts. One of those is the index to that document. But not all authors of construction contract documents are kind enough to include an exhaustive index in their form agreements.
One of the most popular sets of general conditions, the A201 General Conditions published by the American Institute of Architects, includes one that is fairly comprehensive. It identifies the six terms that include a reference to indemnification, for example. On the other end of the spectrum are the innumerable custom forms created by public and private project owners, and these rarely have an index.
Even more powerful than an index is the search or find functions that are available in word processing applications and now in Adobe, the publisher of documents in portable document format, more commonly known as PDF. But with PDF documents, one must be careful to make sure the document under review is in fact searchable. Because every letter counts, it is important to have full confidence in the integrity of the search.
What, then, should contract negotiators be looking for? Here are the top examples:
SEARCH FOR ‘INDEMN’
An indemnification clause is the most powerful risk-shifting device in all of contracting. While that is indeed this author’s opinion, that clause gains its power because it may be the least understood. And part of the reason it is not precisely understood is that it is typically used in extremely long and complicated sentences. Further, the term is often used throughout a document, not just in the article or section that bears the word “Indemnification” in its heading. The A201 General Conditions contain two additional indemnity obligations for the contractor outside of that heading and one for the owner. And, yes, it is best to search the word fragment because catching “indemnify” is as important as catching the word “indemnification.” Of course, finding the term is just the first step, but at least it allows the reviewer to catch every instance where the other party is looking to shift risk in this fashion. The reviewer can then turn to available resources for understanding which risk is being shifted, to whom, to what extent, and for whose benefit.
SEARCH FOR ‘REPRESENT,’ ‘WARRANT’ AND ‘GUARANT’
A search of these words and fragments will identify the locations where one party is being asked to make a certain representation, typically regarding its capacity to handle certain work, or a “warranty” or “guaranty” regarding its work product. Outside of the index, “warrant” appears 19 other times in the A201; “guarant” appears only twice because the AIA favors warranties over guarantees.
SEARCH FOR ‘WAIVE’
This will catch “waive” and “waiver” and identify where the contract is asking one party to voluntarily relinquish one right or another. The A201 uses the term thirty-seven times in the context of lien waivers, claims waivers, and subrogation waivers. The index does not identify all uses of the word. Perhaps the most well-known waiver within that document is the mutual waiver of consequential damages that, while mutual, benefits the contractor much more than the owner. But, project owners will use that word to coax contractors into surrendering a wide variety of schedule and cost impact rights or even mechanic’s lien rights.
SEARCH FOR ‘PRECEDENT’
This search is designed to catch pay-if-paid provisions in subcontract forms by looking for the phrase “condition precedent.” Pay-if-paid terms can be worded in a variety of ways. While void in some states, other states require the use of certain “magic words” to craft an enforceable term. For other states, the door is wide open, and the term may be harder to identify. Also searching for “insolven” may help, since it is the risk of owner insolvency that is shifted with a pay-if-paid provision. Note that the term only appears three times in the A201—twice with regard to dispute resolution and once with regard to conditions to payment. But it is not mentioned at all in the index.
SEARCH FOR ‘ATTORNEY’ OR ‘LEGAL’
The point of this search is to find all of the instances where the contract may be imposing an obligation to pay attorney’s fees on one party or the other. The A201 places this burden on the contractor three times and the owner once.
SEARCH FOR ‘INCORP’
Terms of other documents and contents of other documents are often “incorporated by reference” into another agreement. This will catch both “incorporate” and “incorporated” and help identify, particularly in subcontracts, where certain rights and obligations in the prime contract flow down to the subcontractor. The term appears four times in the A201, though it is not in the index. It is used to refer to the incorporation of materials into the work and not to the incorporation of other contract documents.
SEARCH FOR ‘NOTICE’ OR ‘NOTIFY’
Contractual notice provisions are a very important project control device, and in many states a contractor will lose a claim for time or money if it has not provided notice of a claim at the right time, to the right person, in the right form, and with the right information and documentation. A search for these two words pulls up nearly 100 references in the A201.
SEARCH FOR ‘TERMINAT’
This search allows you to identify all of the termination rights available to the parties. A search for “suspen” allows you to identify related suspension rights.
Contract documents are lengthy. There are also numerous component parts—some of them assembled in the same form, some of them incorporated by reference. Searching for key words is a simple way to identify the primary risk-management terms with a high degree of certainty. While the list of search terms above is not exhaustive, it identifies the main risk shifting clauses that can kill a project’s profitability and, in worst-case scenario situations, kill a company.