Free CLE: Top 10 Killer Contract Clauses
Note for Attorneys: This course is eligible for 1.0 hour CLE credit in Florida (approval valid until 11/30/2022) and Texas. Send an email to email@example.com to obtain the course number. All other states – check your local state Bar requirements for eligibility to receive credit in your state.
How to Avoid Unfair and Unmanageable Risk in Construction Contracts
In this free CLE course, construction attorneys Adam Handfinger and Angela Connor of Peckar & Abramson will cover the top ten risk provisions they look for when reviewing construction contracts and provide helpful tips for negotiating and managing risk.
Construction contracts are long, complicated and contain many provisions that shift risk among the parties involved, oftentimes in unfair and unmanageable ways. Risk mistakenly assumed via contract can cause significant fee erosion and destroy a company.
This course will address the pitfalls to look out for in contracts as well as advice on managing risk when it does arise.
What we’ll cover:
- How to identify and address the contract provisions that matter most so you do not inadvertently assume unnecessary risk
- How to manage and navigate risk you cannot avoid
- Followed by a live Q&A!
This course is eligible for 1.0 hour CLE credit in Florida and Texas. Check your local state Bar requirements for eligibility to receive credit in your state.
Kathryn Barona (00:01):
Good afternoon. Thanks for joining us. I’m Kathryn Barona with Levelset and we’ll get started on today’s CLE in just a moment. We’ll let people, um, start coming into the room now. Thanks for joining us. We’ll get started in just a few more seconds. Okay. I’ll kick it off here. We have Adam Handfinger with Packar and Abramson’s Miami office and Angela Connor of Paccar and Abramson’s Houston office today to present the top 10 killer contract provisions, and I will let them get started with introducing themselves. And at the very end, we’ll tell you how to obtain CLE credits for this course. And if you have any questions, we’ll address those at the end. Great, thanks. Y’all go ahead.
Adam Handfinger (01:25):
Great. Thank you, Kathryn. Appreciate Levelset and helping to, uh, get this webinar established and promoted. Um, really great turnout. I think there was over 200 people that registered so really happy that there’s so much interest in the topic. Um, my name’s Adam Handfinger, I co-manage PECARN Abramson’s Miami office. Uh, Angela Conner is senior counsel in our Houston office. Uh, and I work together pretty closely on a bunch of different, um, matters and clients where we’ve got different folks working throughout the country. Um, one of the things that we spend a lot of time in doing for our contractor clients is advising them on different contract provisions that they should be thinking of when negotiating contracts and then working with their project teams to train them so that the project teams can properly administer the contracts and ensure a successful project. So the Genesis of this program in the, and the top 10 provisions, we’re going to talk about today, come from, um, Angela and my combined experience of representing contractors as construction lawyers really throughout the entire United States.
Adam Handfinger (02:41):
So, um, the 10 provisions that we’re going to be speaking about are listed here. I thought this cartoon was particularly interesting and Angela founded and I really loved it because one of the things that I’m seeing in my practice is that contracts are getting longer. They’re getting more complicated and the risks contained those contracts are frequently being shifted more and more towards the contractor and the folks performing construction while at the same time that this is happening fee and profit margins are being squeezed and reduced dramatically, such that many contractors are looking for ways to control costs and reduce costs. And one of those places where I see folks doing that is by reducing the amount of time that they spend with contract negotiation, contract administration on risk management. So it’s a concern for the industry as a whole. Um, and one of the things that we thought was, um, a good way to help resolve some of those issues is folks the tools to properly negotiate contracts. So we thought what better way to do that than identify our top 10 provisions that we most frequently look for? Interestingly, Angela and I both send that to each other separate lists, um, of our individual top 10 and with very limited exception, uh, we had the exact same list. So, uh, feel pretty good that these are the ones you all should be looking at. Um, and with that, I will flip this over to Angela to talk about design or responsibility.
Angela Conner (04:12):
Thanks, Adam. Good afternoon. Everybody excited to be here with y’all. We’re going to start off talking about design responsibility. Um, if this is not real clear, I’m going to start with, and it’s not real clear in the contract, who’s going to be responsible. Um, you know, logically if this is a design of the traditional design bid, build the, you know, the design would be on the owner and in turn the architect, however, um, there’s a, there’s a majority view and a minority view on this. I’m going to talk a little bit about the Spearin doctrine, which is, has been adopted by almost every state except for Texas. And I believe in Ohio. So as Texans always have to be a little bit different. Um, but for the spring doctrine, if spirit doctrine, excuse me, if the, um, the contract is not clear on who warrants the design, um, it will be on the owner in a traditional design bid build situation.
Angela Conner (05:14):
So, um, if the contract’s not clear and you’re in one of these mega majority states your projects in that state, it will be on the owner. Um, you will have, you will need to build it for the plans and specifications, but if there’s a defect in those that falls on the owner, well in Texas, it’s the exact opposite. If the, um, if it’s not clear in the contract, then it will fall on the contractor. Um, Texas has been, uh, this has been in legislation over the past few sessions. Um, it was, uh, the spirit doctrines been adopted for TechStop type projects in the last session. And then this year, um, we need to look out for Senate bill two 19 because it is, um, it’s a true contender this year to, um, adopt the Spearin doctrine, uh, through, through legislation. And there are a few exceptions to it.
Angela Conner (06:14):
They’re mainly oil and gas type projects or a water treatment projects, but, um, it’ll hit a majority of the, um, a majority of the construction industry, which is a great move in the right direction. Um, it’s in the Senate right now because the, uh, housemates and amendments to it. But, um, it’s looking good that, um, if the Senate approves it could go to the governor’s desk, uh, in the next few days, uh, last time I checked was yesterday. So, um, just something to keep in mind if you’re, um, in Texas, but I want to show you a couple of examples. We have the AI a two oh one and, um, I’ve highlighted the important section here. Uh, the important sentence here, I believe if you’re in Texas or in a majority state that this is enough to push that design responsibility on to the owner.
Angela Conner (07:10):
Um, we also have the consensus docs that last sentence in the first paragraph that also, we think that’s a, that’s a shift, uh, for the owner to take responsibility with those, um, design with design. But, um, you should always look at other spots though, because there’s, um, there’s times where the contractor is still responsible for the shop drawings of the submittals. You know, most of the times the middles are not contract documents. If you’re making alterations, that’s gotta be clearly expressed. And also I have found that they’ll have provisions like this, where the, it shifts to the owner, but then another section of the contract will stay the, um, the contractor must, um, must abide by the contract, must construct the project by the contract documents and by any applicable codes, laws, which she, which also gets into a real gray area, because if the design professionals did not, did not design it per code, um, you could, you could find yourself in a situation where you won’t be liable.
Angela Conner (08:16):
So I always like to, um, uh, you’re just designing, you’re just constructing per the contract documents and that’s on the architect engineer, if it’s not for code, but I mean to hit middle of the ground, you can always put in there that if the contractor knows that it’s not going to be meet code, you notify, you notify the owner of that, but you’re not responsible for it. Um, and I think that’s all about I’ll have on that one. I’m going to switch it over to Adam. He’s going to talk about hazardous materials and emphasizing conditions.
Adam Handfinger (08:50):
Yeah. Thanks Angela. One thing, um, I should have said up front for these, we’re going to use examples from the two most popular construction contract template programs. It’s the, uh, Institute of architects, AIA forum and the consensus doc forums. The reason we’re giving these examples is so that when you’re negotiating contracts, if you’re not using one of these forms, you can utilize a language from these provisions to modify. So if you have a situation where you’re negotiating a construction contract and there isn’t a clear shift of design responsibility to the owner, you can use the language that we’ve placed in providing the earlier slides to try to do that. Um, typically you’ll find, um, um, I’m speaking in a very high level, um, terms, the consensus docs will typically be more contractor friendly. And quite frankly, in my opinion, a much more reasonable contract form from the contractor’s perspective, um, having risks shift the way they ordinarily should be.
Adam Handfinger (09:51):
Um, the AIA tends to be, um, not as contractor friendly and tends to favor the architect a bit more, which makes sense since it’s created by the American Institute of architects. So that’s why we’re giving both. And as we go through some of these, um, provisions, I will point out and Angela will point out some differences between the consensus doc in the eye before, um, with hazardous materials and, um, unforeseen conditions as with design responsibility, as a contractor, you want to make sure that it’s clear that you’re not going to be responsible for things that are already out there on the site, unless you’ve been notified of them before entering into the contract. So what both the AI provision does and the consensus doc provisions do with respect to hazardous materials and unforeseen conditions is to say, if there’s a condition that’s different from what’s in the contract documents and, or is materially different than what you would have, or should have reasonably expected to have there in the, um, out there at the project site, you will be entitled to a change order, um, for either time or money in order to accommodate for, um, those unforeseen conditions or hazardous materials.
Adam Handfinger (11:01):
There are particularly I’m showing here the, um, AIA provision, there is an obligation here to notify the owner of the hazardous condition or substances, not to proceed until such time as the owner’s been put on notice. Um, and should you fail to do so? Uh, you will then be responsible. So as we talk about educating and empowering project teams and how to administer a contract, these are provisions that are very important for them to understand that if they see something, they need to immediately say something, um, if you find hazardous materials there, um, if there are conditions, particularly subsurface conditions that were not foreseen, the hand needs to immediately be raised and you need to let the owner know I’m Angela, if you could flip to the next slide. Um, again, so here’s the, um, consensus document language for waiting to hazardous materials. And if you look at, um, three point 13.2 second main paragraph, it says if after commencing the work hazardous materials discovered the worksite constructor shall be entitled to meet you only stop work in the effected area, prompting report to condition to the owner.
Adam Handfinger (12:15):
Um, and that’s what the requirement is. If you fail to do that under all these contracts, you’d then run the risk of not getting thing time or money relief as a result. Um, Angela, can you flip now to a fiduciary duties? So again, you know, the, the different requirements and the different contract forms all differ, but the main thing as a contractor that you want to make sure is that you are not responsible for these unforeseen or hazardous conditions on this. Of course you bring them to the site or something that was in the contract documents or something that you should have otherwise been made aware of were one place that I do see this happen. And this concern come up quite a bit is when contractors go to neutral, um, to perform work, um, in 40, we call them carpet baggers. Um, if you’re, if you’re used to performing work, um, in Alaska and you come down to south Florida, the conditions, um, subsurface in particular are much different.
Adam Handfinger (13:09):
So you need to be aware of those conditions because just because something isn’t on the contract documents, um, there may be implied knowledge if it’s a condition typically seen in this location. So a lot of times dispute these occur. And most often they’re with either contractors or subcontractors that don’t have experience in a particular area or region. So be aware of that. Another big issue that we always look for in contracts is fiduciary duties, and they exist in a bunch of different places. The main thing that a contractor wants to make sure is that they are not determined by contract to be a fiduciary of the owner in very simple terms, what that would mean if the contractor was the do Sherry for the owner, that’s a contractor would be required to put the interests of the owner before the interests of the contractor. That is very problematic for many reasons on the slide, here are some examples provisions where the contractor can be deemed to be a fiduciary for the owner.
Adam Handfinger (14:09):
This is most often seen in payment provisions. So the examples here are those in which the contractor is required to hold the money received from the owner in trust to only be used for the subcontractors and vendors and suppliers on a particular project. We typically try to not have these types of obligations, heightened obligations, even, yeah, for payment contained within the contracts, certain states, um, York and Texas, as examples have trust fund payment statutes that if you’re working in those states, you need to be aware of such as even if these contract provisions or not in the contract, as a contractor, you may still have fiduciary obligation patients to treat payments received by the, or in a particular way. And to failure to comply with those statutes have some pretty significant penalties on that can be imposed, but you want to still avoid having the contract impose a fiduciary obligation on behalf of the owner, the contractor to the owner.
Adam Handfinger (15:09):
I’ve also seen this where the contracts will say, and, and it’s not in the AIA or consensus docs because quite frankly, it’s not fair. Um, and it’s not a industry standard where it will say the contractor shall operate and perform their work to do Sherry to the owner. Um, again, that would require in simple terms for the contractor to build the project and operate during the course of the project, in a way that’s for the benefit of the owner rather than for themselves. Um, we typically will try to change that to say they will build a project in the best interest of the project itself. And, um, in compliance with the contract documents, there is however one place where there should, in fact, the fiduciary obligation imposed and where you will see it oftentimes, um, impose in the contract that is with respect to builder’s risk insurance.
Adam Handfinger (15:57):
Typically, um, the owner will purchase the builder’s risk policy for the project. If there is in fact, a claim made during the course of the project on the builder’s risk policy, the owner is the loss payee, typically on the policy and the carrier will pay the owner for, um, the damages that are covered under the policy. In that case, the owner has a fiduciary obligation to properly disperse. Those funds received from the carrier. The same would hold true. If in fact the contractor purchased the builder’s risk policy, and it wasn’t a loss payee. If you are not the loss payee on a builder’s risk policy, yet you are intended to be covered under a builder’s risk policy. You need to make sure that the loss payee on that policy has the fiduciary obligation to just properly disperse those funds to cover the losses that were incurred. But other than that, as a contractor, you need to be very, very careful to be sure that there are no circumstances under which you can be deemed to be a fiduciary operating for the benefit of me or Angela. You wanna move on to indemnification?
Angela Conner (17:01):
Sure. Um, I would like to talk a little bit about just what is indemnification. This is a big, um, risk shifting provision, um, you know, for example, uh, best way to do it. A thing is thrown an example, um, say I’m owner Adam’s contractor, Adam hired a window, a window sub installs the windows incorrectly. It causes leaks and damage to Jamie, to the building. Well, as owner, I will look to Adam as contractor to indemnify indemnify me for all those damages that I incurred for the defective windows. Um, and then in turn, Adam, as contractor is going to want to shift that risk down to their subcontractors, that actual window installer is going to be responsible for that damage that it caused to the owner. Um, I want to talk a little bit about the types of indemnity. Um, there’s three different types, broad form indemnity would cover, um, would cover the other party sole negligence.
Angela Conner (18:08):
So if it was a broad form and its owner contractor, uh, owner contractor contract, um, even if I was solely negligent, Adam would still have to, uh, indemnify me. And if it said defendant indemnify, he’s going to defend me to, um, well, this is really on the sub on the sub issue on the defense defense intermediate covers a party’s partial negligence. So if, um, the indemnity is partially negligent, um, the other party would have to usually defend and indemnify regardless of the percentage of fault. So that could become really unfair. And then a limited, which is ideal, especially in an owner contractor situation, uh, for the contractor, it only covers a contractor’s own negligence. Um, I’m going to show you these, um, I’m going to show you an example here. This is the AIA two oh one. Um, indemnification gets really state specific. Uh, most states have, uh, limitations on indemnification and Adam and I are going to talk about the Texas Ford examples.
Angela Conner (19:20):
Um, but this AIA, if you read here, um, but this is a limited form, Adam and I had a discussion chatted about this. You know, this to us is a limited form because it says, but only to the extent caused by the negligent acts or admissions of contractor or its subs of any tier. Um, so that would be a more limited form and form. Um, also, uh, this says other than work itself, which is, uh, something that we really liked because this will, you always want insurance involved. You want to, you don’t want to agree to indemnification. That’s not going to be covered by insurance. And so having this other than work itself, you know, um, usually insurance will only cover the property damage caused by the defective work, uh, in Texas, there’s some rip and tear, uh, costs that can be recovered. I’m not going to get into all of that, but, um, in Texas, um, you, um, if it’s not, you have to, it has to be a limited form for it to be enforceable unless it’s an employee claim.
Angela Conner (20:34):
So unless it’s in an, um, the, one of the subcontractors, uh, employees were injured or death, those, um, the GC would have to indemnify regardless of who’s at fault, even if owner’s at fault. Um, something to keep in mind though, uh, Texas also has an express negligence role. So if it’s past that limited form indemnity, it has to be conspicuous and you have to express Slee state in the identification that you are indemnifying the indemnities, even for their indemnities sole negligence, um, that, uh, you’re expressly doing that. Um, so that’s something to keep in mind, uh, for, for Texas. We also have the consensus example, which again, this is a limited form. And like Adam said, these are really a more, um, more contractor friendly in this indemnity that owner’s gonna gonna defend and indemnify indemnify the contractor first for their, for their negligence and fault, which is a pretty, pretty great.
Angela Conner (21:45):
Um, um, so I, I think, um, if you, this is really important when you’re forming your subcontracts, you know, you really need to look to the prime and make sure you’re getting it, you’re pushing those shifts that are shifting those risks, at least, uh, in the amount that you’re having to indemnify the owner. And, um, also if you can’t get a, um, limited form indemnity, I would at least add on the ability to be reimbursed if a, um, arbitrator tribunal or court finds that the indemnity is, is at fault that you get reimbursed, your proportionate share of defense costs. And, um, well, if it’s just the owner, you’re really, it’s really indemnity that you’re getting your, um, that the indemnity is going to, uh, reimburse you for their percent liable liability. You have anything to add? I think Adam said a little bit about Florida.
Adam Handfinger (22:47):
Yeah. So one thing that’s interesting about indemnity and it, and it’s almost every state has some kind of a regulation that, that impacts us. So as we work with contractors all around the country, moving from state to state, there’s always changes to their subcontract agreements and nickname, um, in order to make sure that they’re getting not only the most amount of indemnity that they can get, but also to make sure that their indemnity provisions comply with the laws of their particular states. So, as an example in Florida, um, if you take, um, Angela’s example, the window installer, if in fact a window installer was only 50% at fault, but the design professional for the owner was another 50% at fault, the way the AIA and consensus doc identity provisions work, the window installer would only have to indemnify for 50% of the damages. Um, and typically if you, if you haven’t done the fiction, that applies only to the extent of the intended tourist negligence.
Adam Handfinger (23:50):
In most states, you will be in compliance with the statute. Now in states like Florida, you could have a provision that would require the window installer to identify the owner for a hundred percent of the damages, even though they’re only restored for 50%, that avoids a dispute during and after the project with respect to who’s responsible for what percentage, but in order to have that broad form identification, you need to comply with certain provisions of the statute and even the most minor and seemingly innocuous changes to the language and an indemnity provision, um, may render it unenforceable. If in fact it does not match almost exactly to the language of the statute. So in all states, um, you need to be very careful, both with respect to the indemnity obligations that you provide upstream to the owner, um, or to the contract and, and the ones you obtain downstream to make sure that they match.
Adam Handfinger (24:48):
Um, there was a really good question asked in the chat. Um, and I, um, I think the question I’m going to restate it a little bit differently, but the question was with respect to design responsibility, and it asked whether or not the phrase reasonably inferable from the contract documents is, is, uh, is a deal breaker. And how does that work? So to break, to break that down, um, a lot of times what you’ll see in, in contracts is language that says Mr or Mrs contractor, you’re going to build a project in compliance with the plans and specifications and perform all work reasonably inferable there from which puts you into the realm of thing. Not everything that you may be required to do is going to be shown on the contract documents. Now I know that oftentimes not every bit of work and every piece of equipment or material to go in is shown on the contract.
Adam Handfinger (25:40):
And there are some things that are standard and typically not illustrated. Um, but the question then becomes, and the argument becomes reasonably and reasonably inferable by whom, because, um, work that is reasonably inferable to a structural engineer and P engineer, or some other design professional may not be the same as what is a reasonably inferable to the contractor. So what I typically advise my contractor clients to do, of course, every situation is different, but one of the solutions that we, um, use to work around that is to say reasonably inferable to a licensed general contractor in this jurisdiction, I will also typically recommend spring language. It says specifically in that same paragraph that not withstanding the foregoing it’s acknowledged and agreed general contractor is not a licensed design professional and is not guaranteeing or certifying the accuracy or completeness of the contract documents. Um, quite frankly, that probably a good phrase for contractors to input into every contract that they enter into.
Adam Handfinger (26:48):
But, um, particularly with respect to, um, particularly with respect to, um, the paragraph locations where there is some language that, um, suggests that their work may be required, that’s reasonably inferable. So be careful of that, um, um, uh, schedule, you wanna go down to insurance of financing. So, um, one of the things that is very important, um, is you want to make sure that your owner of the project has the money to build the project. Um, and Angela put, show me the money here, which is funny because it’s oftentimes the phrase we use when we’re negotiating with the owner. We say, you know, show us the money, um, because it’s critically important. And oftentimes, um, you know, it’s, it’s, and it’s one of those things at the beginning of the project, it’s a little more obvious that it should be asked who’s the construction, let me see the proof of financing, um, where, where is the money.
Adam Handfinger (27:50):
But oftentimes what contractors don’t think to do is to ask for that at other points in time during the project, um, typically, um, there is an entitlement to request assurance of financing, not only at the beginning of the project, um, but also during the course of the project when certain things occur, but you have to, um, you have to ask for, um, and oftentimes different projects are financed in different ways. Um, we recently, you know, what we most often see is projects that are financed by large financial institutions and reads the names that we’re all familiar with. Um, what happens if a project is financed by cash, the developer’s paying out of pocket, how does that out? Does that impact? If you’re going to be required as a contractor to bond a job, will the sureties be interested in furnishing a bond where the owner’s paying cash?
Adam Handfinger (28:43):
And there is no traditional instructional lender. In my experience, Sherry’s are not interested in funding projects where the developer is cash financing it without some money being put in escrow to secure the payment. We recently did a project where the owner was financing the job by the [inaudible] program, which is where foreign investors can invest in qualified businesses and projects. And in exchange for an investment in a day obtain, um, citizenship status for their, for their family. Um, the, the problem there is that, um, the money is in trust. And I remember the contract negotiations where the owner started by saying all the money to build a project isn’t trust. Um, and we then had to say, well, what are the conditions by which the money is released from trust? The answer was the, um, you know, the, the United States office of immigration and naturalization has to approve each investor on a one-on-one basis.
Adam Handfinger (29:42):
And as the families are approved, the money gets released. Well, now we’re dependent on the federal government approving, um, you know, foreign families for, um, citizenship as a condition for funds being released. That’s obviously a problem. Um, so all of those different nuances all come into play, but if we don’t ask the questions upfront and you don’t ask the owner to show you the money, you won’t be entitled to know that. Um, and unless you’ve got a bonding or surety company digging into the project financials, it is something surprisingly, um, that I often see contractors not request. Um, Angela, if you go to the next slide, and if you look at the, um, the AIA contract, uh, document, it does allow you and identify the situations by which you are entitled to ask for assurance of owner financing after the project, um, starts. And the, if you look at the second full paragraph, it’s when the owner fails to make a payment, which would be obvious.
Adam Handfinger (30:51):
Um, if the contractor identifies in writing a reasonable concern regarding the owner’s ability to make paint at window, um, or when there’s a change in the work that a material we change as the contract song. So realistically there is, um, ample opportunity after you commence a project to request, um, adequate assurance of financing. Um, but you need to again know when to ask for it. Um, so it’s something that I typically advise clients and help them implement as part of their standard operating procedure at the beginning of every project after the contract is signed. But before the work convinces, you ask for adequate assurance of financing, if you’re bonded on the job, typically that’s a conversation that’s happening upfront anyway. Um, but on many smaller to mid-size projects where in fact, um, um, funding and sufficiency of funding tends to be a bigger problem or more frequent problem.
Adam Handfinger (31:49):
Um, it’s not being requested as often and many times when we come in, post-mortem, there’s now a problem with payment. Um, you realize it had, we asked upfront the contractor would have realized that this is a risk that they needed to be aware of. Um, so make sure that whatever contract, you sign, grant you, the ability to ask an owner about the availability of financing and both the AIA and the consensus doc language that we’ve provided here, um, would be great as to any contract document, um, so that you can make sure that the owner’s got the money to actually pay for the work you’re performing. Angela, you can go to the next slide.
Angela Conner (32:26):
Yeah. I’m going to talk a, we’re still sticking with payment here, and I’m going to talk a little bit about the contingent payment clause. Um, so this would be applicable to, uh, your subcontracts to any general contractors, sub contracts. Um, this is another, um, risk shifting provision shifting the risk of nonpayment, um, to get a contingent payment clause. You really, it usually needs to be clearly expressed. And, um, there are multiple states that like you, New York and California that do not allow these contingent payment closes. Um, I want to show you an example of a, um, a contingent payment clause is a pay if paid and then, but I wanted to show you also a pay when paid, um, show you the difference in these two we’ll first look at the pay when paid. So it is contractors shall pay sub within seven days of contractors, receipt of payment from owner.
Angela Conner (33:23):
So this really is a time-based payment clause. The contractor cannot wait forever for the owner to pay contractor, to pay its subs, um, many, uh, in Texas anyway, and I think other jurisdictions it’s really a reasonable time, uh, to make payment. And you could even, um, specify that in the, in the contract, you know, what really is a reasonable time to make those payments. Um, and then we’ll shift over to the pay if paid. So this is the, um, what’s called the contingent payment clause and it expressly states that is the owner’s payment to contractor is a condition proceeded to subcontractor receiving payments. And, um, I’ve added another sentence here that the sub is acknowledging. It is assuming the risk of non-payment by the owner, which, um, th this, these can be pretty harsh, uh, for a subcontractor, but, um, you’re really a as general contractor shifting that risk of payment here in Texas, we have a statute chapter 56 of the business and commerce code, where there are some situations, uh, and ability to, uh, render these contingent payment clause is unenforceable.
Angela Conner (34:45):
So that’s always something to keep in mind when you’re, when you’re drafting these provisions also, um, there’s a number of different ways. For example, if the general contractor is in breach of the prime, you are not going to be able to rely on the contingent payment clause to pay your, um, to pay your subs. And there’s, uh, there’s a number of other, uh, exceptions there. One is, um, it cannot be unconscionable. Well, the statute does not tell you, uh, what that is, but they said they stated is, um, not unconscionable if you, um, do certain items. And some of that is, uh, getting financial information. So what Adam just talked about getting assurance of financing, uh, might be a good idea to look at that statute in, uh, request the items listed in there, your, your, um, your good, you’re putting yourself in a better position to make that contingent payment clause enforceable.
Adam Handfinger (35:45):
Well, one thing to point out about the contingent payment clauses, um, Elise in many states, if a contractor has posted a payment bond, um, that’s intended to stand in the shoes of the owner, um, and avoid, uh, claims of lien or protect from claims of lien. The payment bond surety is sometimes not entitled to rely on the pay if paper them. So that just because the owner hasn’t paid the contractor doesn’t mean the subcontractor is not entitled to make a payment bond claim. Similarly, on, in most jurisdictions, if the owner has not paid the contractor, um, a subcontractor is not precluded from recording its claims of lien, just because contractually the pay, if pay provision may not require the contractor to make payment, we want to avoid an owner from being able to not pay for materials and improvements at their property by simply not paying the contractor, um, and relying on, um, a pay of paid defense in the subcontract agreement.
Adam Handfinger (36:50):
That just doesn’t, that wouldn’t be fair. Um, and also too, as with indemnification provisions, those jurisdictions that do enforce pay if paid and, and, and some do not such as ever we’ve in New York, um, the courts require very specific language in order to enforce these provisions and any real deviation from what’s been permitted will render the provisions on enforceable. I’m been finding that courts typically bend over backwards in order to avoid not paying or penalizing an entity like a subcontractor that’s performing work over issues such as this, because they feel that, um, the financial burden for the project should not fall on the subcontractor. So if there is an opportunity to make sure that a subcontractor or vendor or supplier get paid, um, courts typically will look for ways to do that. So if you’re going from jurisdiction to jurisdiction, just as with the identification revision, please make sure that a construction lawyer who knows that particular your area takes a hard look at your contingent payment provisions to make sure that they’re enforceable, uh, before we go onto the next provision type, there was another good question in the chat, um, talking about intentional negligence as a potential loophole to identity.
Adam Handfinger (38:07):
So I thought it would be worthwhile to address that for, for a moment. Um, so intentional negligence is the way the question was phrased, which is, um, a little bit of a misnomer. Although I hear it frequently, um, negligence is when things happen and it’s not intentional, um, something that has done purposefully, if you purposely harm someone that would be an intentional act or torque, um, typically outside the realm of negligence, um, gross negligence is where the conduct is, is, is terrible. Almost rises to the level of intentional, but not so much intentional. Typically you will see that. Um, and again, as an example, um, it may be the best way if I’m an owner and I take some intentional conduct that is intended to harm someone, I can not bend demand that I’m identified for that conduct. Um, in fact, the statute in Florida, um, exempts gross negligence and intentional misconduct from indemnity provision.
Adam Handfinger (39:05):
So I cannot, as an owner require that Angela as a contractor and identify me for my own intentional misconduct or gross negligence, it is that is not conduct that I am permitted, um, that I’m allowed to be identified for. You can imagine that, um, I always say it’s the golden rule, um, should you, as the gold makes the rules. So what was happening was owners and contractors were pushing these absurd and unreasonable indemnity provisions and obligations downstream to subcontractors and saying, we have this project for you. You have the opportunity to make a lot of money, but you have to indemnify us for everything under the sun, even our own intentional misconduct or gross negligence. Um, and over con the legislature we send for to have stepped in. And I said, no, um, that is not something that you are entitled to ask for. Um, if the provisions permitted, we are not going to enforce that it is void, um, as being against the statute.
Adam Handfinger (40:00):
So you will not, you will see, you will not see, um, people being identified for their own intentional misconduct or gross negligence. You will also find that when you’re dealing with insurance policies, typically there is exclusions for that type of egregious conduct. So it was as lawyers, um, when we are making allegations against another party for some sort of wrongdoing, he’s very careful, um, not too much intentional misconduct, if we can avoid it. Sometimes fraud is excluded from insurance coverage as is oftentimes gross negligence. So you need to be very careful about, um, the things that you allege in writing in particular as it may impact identity insurance. Um, um, and the like, so that was a great question. I don’t know who asked it, but Jake that, um, uh, Angela, if you want to move on to delay enforcement. Sure.
Adam Handfinger (40:54):
So sure as a, is a, is a Latin phrase that, um, people often misuse or, or, or ask or ask what it means or how to pronounce it. Um, and it’s become very popular in, in over the past year for sure. And force matures intended to, um, describe an event that causes a delay that is beyond someone’s control. And when you have a fourth major event, whether it’s bad weather, um, terrorism, um, adverse government actions, um, unavoidable accidents or circumstances, the will typically be entitled to an extension of time from the completion, um, obligation. Now my, in my LinkedIn post promoting the webinar, like I started off by snark and we say, we would not be discussing COVID during this presentation, as quite frankly, I’ve heard it, I’ve had enough, um, COVID webinars to last more than a lifetime last year, but with respect to this provision, it is, it is interesting to point out now in the consensus doc language that we’re shown, if you will, could Subpart J epidemic is actually called out as an example of a force majeure provision.
Adam Handfinger (42:05):
Um, I think as we move forward, you’re going to see, um, epidemics and pandemics and things of that nature, probably even a specific reference to COVID being included, not only as a force majeure event, but also, um, exclude likely excluded from insurance policy. But if I know the insurance industry, the likely added as a rider that you can then purchase, if that hasn’t already happened, because it’s now something that is on everybody’s radar screen. But the issue with force Missouri is you want to make sure that you identify the types of provisions that may in fact, entitled the contractor to an extension of time. The more examples you can give, um, the better the consensus doc sec, uh, language that we’re showing here in section 6.3 does a very good job of identifying, um, many different things that can be a, um, course measure event, including the very first one acts or emissions of the owner.
Adam Handfinger (43:01):
Now force measure events will typically entitle a contractor to additional time, but will not necessarily entitle the contractor to additional money for extended GCs and things like that. Um, and if you look at section 6.3 0.2, um, it identifies exactly which of, um, these, um, which of these sections above, um, entitled the contractor to, uh, money in addition to time. And I will correct myself. Thank you to Mr. Ian Schwartz force measure is a French term, not a law. I think I said a Latin, so Ian has always, um, he has always, uh, on top of me there. So I appreciate that Mr. Schwartz. Um, one thing, one thing to note, um, is adverse weather and depending upon where you are in the country, um, you may have different types of adverse weather. So, um, if you’re in south Florida, um, it’s hurricanes, um, if you’re in California, it’s it’s know maybe, um, uh, maybe an earthquake or something like that, you want to be very specific about what constitutes adverse weather, um, in, in, in contracts in south Florida, we will say that, uh, named storms, tropical or hurricane, or always adverse weather, right.
Adam Handfinger (44:17):
Um, but what do you do about rain? So we will typically set a standard, you know, anything more than the 10 year national average, according to know is standard or something of that nature. You want to be pretty specific. Um, Angela, if you go to the next slide, which I think is the AIA a force majeure provision, then so here you’ll see the AIA document. Doesn’t identify as many specific provisions weaving a bit or, or events weaving a bit more for, um, discussion later on, but it does have, um, number five, but other causes that the contractor asserts and the architect determines justify delay. So it does have, um, sort of this catch-all it also says in Subpart three other causes beyond the contractor’s control. So where there are things that have come up that are beyond the contractor’s control, the contractor will argue that they are entitled to, um, a delay, um, an extension of time.
Adam Handfinger (45:11):
Now you’ll note in the AIA version, it specifically says that 8.3 does not preclude the recovery of damages for delay by either party, um, pursuant to other provisions of the contract. So again, forced measure, um, the French phrase forced measure, um, does not necessarily entitle the contractor to, um, additional money, but does entitle them to additional time. And you need to look at other sections of the contract to determine what the, uh, monetary entitlement is as a result. Um, Angela can go to the next slide. So be very aware, um, if you’re entering into a contract with a no damage for delay provision, this would be a provision that would say, um, there is no instance by which you are entitled to additional money as a result of a delay. Now, every jurisdiction, again, like I said, with, um, the contingent payment provisions courts, look for reasons to not enforce these types of provisions.
Adam Handfinger (46:12):
So if you had these types of provisions in your contracts that you’re going to be trying to enforce, you wanna be very careful to make sure that the particular jurisdiction and location that you’re performing work, that it complies with the requirements of that court. And one thing I can tell you is as we take our contractor clients into different jurisdictions, this is another one of those provisions that likely requires and typically requires some modification. Um, there are always a lot of different exceptions to the enforceability of a no damage for delay provision. Um, enter the question, fraud act an act of interference and misrepresentation in bad faith, just like intentional conduct or intentional misconduct is typically an exception to a no damage for delay provision. As an owner, you can’t enforce the no damage for delay provision on a contractor that you were actively interfering with.
Adam Handfinger (47:05):
Um, you cannot enforce these types of revisions as an owner, if you’ve, um, if you’re guilty of fraud or some other bad faith conduct, um, but as a contractor, you would prefer to not have to make these arguments later in time. So the best thing is to avoid to the extent that you can provisions that do not give you a settlement to damages for delay. And, um, certainly something you want to be very careful. The other thing to point out, um, in all of these contract forms and, and even in non template forms, there are almost always deadlines to assert a claim for additional time and a claim for additional money. And oftentimes the failure to meet those deadlines can be prejudicial to your ability to pursue those claims. So these provisions, um, particularly force measure and claims provisions, article 15 of the AIA document, make sure your project teams are aware of the timing requirements, what events constitute the requirement and trigger the obligation to make notice so that they can spot in real time as things happen.
Adam Handfinger (48:14):
Um, when notices need to be need to be, uh, sent, you may even want to consider pre drafting some standard letters to either the owner or the contractor or whomever you are required to make notice to. Oftentimes the lender requires certain notices when different events occur so that you don’t have to in the moment and under the gun of time, pressure, start from scratch, drafting a letter. Um, oftentimes we help clients draft these letters in advance. So they have them at the ready in the event that, um, there’s adverse weather, there’s a hurricane and the, like you want to be able to get those letters out quickly and not have to scramble to try to figure out exactly what they should say, um, or where they are, where they should go. Um, Angela, with that, do you want to, I’ll flip over to you to talk about liquidated damages.
Angela Conner (49:01):
So we’ll switch little switch gears. If the contractor is at fault for a delay, what kind of damages are we looking at? And so, um, whenever, whenever everybody sees a liquidated damage provision, everybody, um, most of the time, uh, gets very alarmed, but, but it really usually is, you know, it’s not all bad because, uh, in Texas, for instance, if you have the LD provision, you’re not going to be liable for any other type of, uh, delay damages. So, so you’ll know those dollar amounts up front and you can, um, you can price that risk. So it might not always be bad. Um, if there is no LD clause, you are, um, you, the contractor is usually, um, responsible for the owner’s actual damages. Um, unless there’s some type of an express waiver, like a consequential damage waiver, which we’ll talk about in a, in a minute.
Angela Conner (49:54):
Um, here’s an example from the consensus docs of a liquidated damage damages provision. Um, I think, um, this is, this is a good one because it makes you think about when is it going to trigger? Is it going to trigger on substantial completion or final completion? Um, if, uh, you know, as a contractor, you would be pushing for that substantial completion because it’s, it’s, uh, it’s able to, um, that building, uh, that project is, uh, being able to, uh, be used for its intended purpose. That should be enough for, um, that LD provision, uh, to stop. Uh, but also, you know, here you could talk about, um, maybe it’s something where it needs to be in finally complete if it’s some events center and it cannot just be substantially completed and needed it to be final. Um, so to be, um, to be very, I want to be very mindful of when it triggers also, um, you know, a liquidated damage provision to actually be enforceable.
Angela Conner (50:54):
Again, this is pretty jurisdictional, uh, specific, but it usually, uh, cannot be a penalty. And really what is that, uh, you know, there are some factors to look at that at the time of contract. Was it, um, was it a reasonable forecast of those expected damages and, um, are those damages unlikely to, uh, be known at the time of contracts? So that’s the purpose of these LDS? Uh, Texas has a recent case actually that went into, um, went into detail stating that those look into liquidated damages to be enforceable can not be significantly more than the owner’s actual damages. And if you have a, um, if you have a big developer that puts up apartments all over the country, they probably have some pretty good historical data and know what their actual damages would be. So that’s something that you could rely on as a contractor to, to really evaluate are these LDS significantly more, and we should just be paying actual damages, not LD. So, um, you know, that last, uh, that recent case is I think very helpful for, for contractors. Um, I have some
Adam Handfinger (52:09):
Go ahead, Adam. I was going to add one, one, one quick note. Um, some jurisdictions, um, have statutes that say if there’s liquidated damages, that is the owner sole and exclusive remedy in the event of a delay. Other states do not have that. So one thing you want to make sure any event, even if there is a statute that your liquidated damage provision is clear that in the event of a delay, the liquidated damages will be the owner sole and exclusive remedy for delay. Sorry,
Angela Conner (52:38):
Angela. No, no, no. That’s, that’s perfect. Yeah, that’s good. And really goes to my first point here, you know, to be specific in what actually is included in that LD provision, um, make it clear when it starts and stops. And if you’re, if you’re a contractor you’re pushing to get this job done, and you’re looking at LDS, you know, attempt to negotiate a bonus, if you actually complete early. Um, and then I’m going to talk a little bit about consequential damages. So, um, actual damages can be direct or consequential, and it’s a little confusing. It can get real gray about what is an actual damage and what is it, a consequential damage? Um, the AIA in consensus dogs have a mutual labor, which I think is a, um, is a great, uh, a great ad. I can give you just an example of, uh, some possible consequential damages.
Angela Conner (53:34):
Uh, for example, for the owner of consequential damage might be, um, on, in, on a, uh, office building they’re lost rent for, um, you deliver for the contractor delivering the project 60 days late. Um, it could get real gray if the owner has some type of service and they had to, uh, an event center and they had staff on for 60 extra days that they didn’t need to, is that really is that consequential or direct? Um, so really moral of the story here is to be very specific in your consequential damages waiver so that it will cover, um, what you will, what we believe or you believe is a consequential damage for that specific project. I think the AI does a really good job of this. Um, it includes, you know, loss of income, profit. It even talks about employment. I don’t think this is real clear about if you had to pay staff longer.
Angela Conner (54:35):
So you might can make that a little bit more clear, but in then on the contractor side, I know in Texas, I think it’s there’s enough case law there to say your lost profits on the job you’re on is a direct, is a direct damage. It’s not consequential, but, um, this, but the CIA does a great job because it it’s it’s specifically accepts the anticipated profit, um, arising out of the work on that particular job, which I think is really important. And then, but, uh, this one also the only exception here too, is, uh, the LD provision is carved out a consensus docs. Um, same the car’s out LDS, but this is also a pretty good detailed, um, consequential damages waiver. And I will turn it over to Adam to talk about our last topic.
Adam Handfinger (55:28):
Yep. So, um, I’ll cover quickly in the few minutes we have left, um, termination, hopefully something that you don’t typically have to deal with, although from time to time, it does occur. Uh, there’s generally two types termination for convenience is when the project is terminated and there is no reason other than the convenience of the parties. Um, as a contractor, you want to make sure that the owner does not have the ability to do this. Um, we’ll we know plea, um, and whenever they prefer, if you look at the, uh, consensus doc termination for convenience, you will see that in addition to, um, um, all the costs that, um, the contractors incurred, um, they’re entitled to overhead and profit on the work, not performed. That presents a, um, an incentive for the owner, not to terminate the project for convenience, because they’ll have to pay the contractor on the profit of work, not performed.
Adam Handfinger (56:22):
If you look at the provision, Angela, the next slide on the termination for, um, convenience does not necessarily include, um, the lost profit. Um, and typically we, um, as a contractor, you’d want to try to include that in owners typically do not agree to include it. And quite frankly, I, um, I don’t see all that many projects entered into, um, where this isn’t a battle during the negotiation of the contract. Um, termination for convenience. Angela, if you go to the, if you go to the next slide, that’s where, um, either the owner or the contractor has done something that constitutes a default, we’re showing you here, the owner’s right to terminate on the consensus box in any event. And in any contract, you need to make sure that the owner’s required to provide ample notice and an opportunity for the contractor to cure before it can terminate the contractor.
Adam Handfinger (57:15):
Um, the, a, the consensus docs, I believe, uh, does a better job of outlining the specific notice requirements and must be made prior to, uh, the owner being able to terminate the contractor for default, the AIA documents does have a notice and right to cure opportunity, but it’s not as robust as the consensus docs in any event. Um, even when you’re dealing with an AIA form or consensus doc form, you can modify the language. And I think you want to make sure that, um, in any event you have an opportunity to cure. Um, and if it’s an, if it’s an event that, or an event of default that cannot be cured within, within the time period, that you have an opportunity to diligently pursue and prosecute the rectum, you know, rectifying that default event before you’re terminated in the event, you are in fact terminated, um, terminated for cause, um, and, and are in default or the owners.
Adam Handfinger (58:09):
In fact, in default, the damages will be the difference between, um, what do you owner spends if someone’s perform the work and what your contract balance was as well as some other penalties. So, um, most jurisdictions have case law that says termination is only for the most dramatic breaches of contract should and should not be used, um, on a day-to-day basis for every type of default. Um, so be aware of that. Um, if in fact, you find yourself on the verge of a termination issue under project, you need to look for a carefully at the castle. Um, I see we’re right about an hour. So I want to be respectful of everybody’s time. I know that they plan to circulate the, um, PowerPoint presentation, feel free to use portions of the provisions that we’ve cited. Um, both of our contacts and contact information is on the last slide, happy to answer questions by email or otherwise. So feel free to reach out. Um, and again, thank you so much for your time and thank you to Kathryn and Tara and everybody at the Levelset team for the work that they didn’t help me put this together. And I hope you all found it valuable.
Angela Conner (59:13):
Thank you all. Thank you both. And I just put in the chat to email me at my email address. Um, if you have any questions about getting CLE credit and we do have this accredited by the state bar, Florida and Texas. So, um, please email Catherine dot Berona Levelset dot com. And, um, thanks again. Yeah. Thanks Angela and Adam, we’ll also in the email that everyone will receive by early next week. Okay, great. Catherine, I send you the PowerPoint. Um, would that be helpful? Yeah, I have it already. Oh, you do? Oh, that’s right. You okay? Good. All right. Thanks.