Utilizing Contract Negotiation and Formation

This article represents part three of a continuing series of articles identifying and explaining important risk shifting contractual clauses.  In previous articles we’ve explored the importance of identifying and assessing risk shifting clauses, including “no damage for delay” and “exculpatory Contractor review of documents” clauses. Here are a few more clauses that deserve attention and review during the negotiation process.

INDEMNITY CLAUSE: Often contracts contain clauses reading something to the effect of: “Each party shall indemnify, defend, and hold the other party harmless from and against any and all claims, actions, suits, demands, or judgments asserted, and any and all losses, liabilities, damages, costs, and expenses, including, attorneys’ fees alleged or incurred arising out of or relating to any operations, acts, or omissions of the indemnifying party.”  Indemnify means to protect against future damage, loss, or injury.  This provision means that the indemnifying party will pay the damages, claims, expenses and other types of payments listed in this provision if the indemnified party, incurs damages as a result of something the indemnifying party does related to the agreement. The  indemnifying parties actions or omissions which could result in liability to the indemnified party are listed at the end of the provision. This provision requires that the indemnified party promptly notify the indemnifying party of a claim and allow that party to control the defense or settlement of the claim. An indemnification provision addresses the risk that your company might be liable for damages resulting from something the other party does related to the contract.  Indemnity clauses can also address the actions or omissions of third parties, so review these provisions with great care.

OBLIGATION TO CONTINUE WORK: One of the biggest risk shifting clauses in any construction contract relates to the obligation of the supplier, subcontractor, or general contractor (in an owner/contractor dispute) when a dispute arises during the progress of a project.  A situation where a contracting party is forced to work and complete a project when there is a known dispute can quickly lead to a soured relationship fraught with additional disputes or financial ruin. From an owner’s perspective, the owner will want to have a clause obligating the contractor to continue working notwithstanding the existence of disputes. From the owner’s point of view these disputed generally center around workmanship, scheduling or other performance type issues. From a contractor’s point of view, they will want a clause granting them a right to stop work in the event of untimely or non-payment.  If no clause exists, either the contractor or owner may have the right to terminate for default, or cause, which equates to a material breach of the underlying contract.  Without clarification within the terms of the contract, whether a default constitutes a material breach is often a question for the jury to decide after-the-fact. Unfortunately, all parties can become losers when litigation comes into play.

– Paul A. Sheridan