Killer Contract Clauses
Successful projects, especially in construction, can be made or broken in the details of your contract. Disputes are inevitable in business, no matter your industry, but having a set of standard contract clauses that you use can help reduce your risk of going to court. The following contract clauses are great to have in your back pocket during any contract negotiation.
(Be sure to consult with your attorney for assistance drafting contract clauses and when deciding which, if any, to include in a contract.)
1. Pay if Paid Clause
A pay if paid clause is a powerful risk mitigation tool. The clause generally serves as notice to subcontractors that they will only be paid, regardless of their costs for materials and labor, once the general contractor is paid (usually by the property owner).
Though it seems unfair on its surface, the clause offers protection for subcontractors as well. The clause states that the subcontractor should get paid, although it is contingent on payment from the owner of the contract.
2. Indemnity Clause
An indemnity clause protects the indemnified parties from third-party lawsuits. The clause can serve to "indemnify and hold harmless" numerous parties. It is a way to transfer risk between parties, prevent loss, or compensate for loss if a specified event occurs.
The scope of an indemnity clause can’t be overly broad and is usually prefaced with legal terminology that states "to the extent allowed by law" as one party cannot indemnify another party from all risks. Risk-shifting in indemnity clauses is common, but subcontractors may wish to resist overly broad language that pushes indemnification beyond personal injury and property damage.
3. Change Orders Notice and in Writing
Change orders are often the most litigious issue between parties on a construction project. Subcontractors should pay special attention to the notice and approval provisions for change orders in each contract.
If the contractual provisions allow the general contractor to approve changes or direct changed work without giving prior notice, the subcontractor may want to oppose the provision. A mutually acceptable price for each change should be negotiated before the change is implemented, and a provision for such negotiations should be included in the contract.
4. Final Payment as a Waiver
The acceptance of final payment acting as a waiver clause can negate unresolved subcontract claims. If this clause is included, the acceptance of the final payment waives the subcontractor's right to seek compensation for claims or change order requests upon acceptance of the original contract sum. If the subcontractor agrees to this clause, the subcontractor should be careful to avoid acceptance of final payment until all such claims are resolved.
5. No Damage for Delay
Extension of time clauses are common in all construction contracts, but some "No Damage for Delay" clauses attempt to stop any contractor from reasonable compensation for delays caused by others. A contractor or subcontractor is entitled to reasonable compensation for delays caused by other parties, so this clause should always be given careful review.
6. Arbitration Clauses/Attorney's Fees
A smart way to avoid costly court battles is to include an arbitration clause in your contracts. The language in the contract should include a specification for payment of attorney fees if the matter proceeds to trial. However, beware that it is a double-edged sword, meaning the parties subject to the contract all agree to payment of attorney fees for the other parties if they do not prevail.
Identify the specific venue of dispute, if possible. Doing so helps make the arbitration process binding. Though arbitration is usually a cost-saving option, there are benefits to a civil court hearing the matter. Discuss the arbitration and attorney's fees clauses with your legal counsel to make sure you understand and are willing to abide by the terms set forth in the contract.
Are You Using These Killer Contract Clauses?
If you haven’t already spent time working on a set of standard contract clauses with your attorney, you should. Clear, detailed contracts are one of the best risk management strategies you can use. If you’d like to begin creating your own killer contract clauses, get in touch with Daffern Law Firm today.
