Global supply-chain delays and shortages have had an impact on construction contracts in terms of enforceability and risk, and have increased the likelihood of litigation to settle differences between parties, as well as the need to negotiate contracts that anticipate and minimize potential disputes.
āThe allocation of risk is paramount to [achieving] the best possible outcome,āĀ stated David Vanderhider, a Partner in the San Antonio office of Dykema Gossett, a Detroit-based national law firm with a substantial construction litigation practice.
During an October 26 webinar that explored the legal considerations of supply-chain impacts on contracts, Vanderhider was joined by two Partners from Dykema Gossettās Chicago office: Steven Mroczkowski, who is Co-leader of the firmās Construction Group; and Melanie Chico, Asset Practice Group Leader.
Chico predicted that supply-chain problems, including those related to costs and labor, are likely to spill into 2023. To which Vanderhider followed that earlier attention to planning will be needed to prepare for delays and cost overruns. Mroczkowksi added that collaboration is the key to allocating risk fairly, and heās been seeing fewer take-it-or-leave-it clauses on contracts. But he also noted that āthereās no one-size-fits-allā solution.
Contractual risk and reward
The bulk of the webinar was taken up with the partners discussing different contract clauses. For example, Mroczkowski has seen an uptick in litigation over the applicability of force majeure, which is intended to excuse nonperformance following a particular event. (This is commonly known as the āAct of Godā provision.) Such clauses are enforceable when the event is beyond the reasonable control of the party. And what is often being litigated, he said, is whether the affected party took sufficient steps to reduce its risk.
Mroczkowski cautioned that force majeure can vary by jurisdiction and how a projectās financing is structured, which is why he advises clients to customize the language of their contracts to the realities of the given project. āSometimes, risk allocation boils down to an amendment in a contract,ā observed Chico.
Another growing area of dispute, the partners said, is a contractās Notice requirement, which spells out when a party is entitled to additional compensation or time. Chico said that too many notice clauses are loosely drawn up, and lack specificity when it comes to who, what, when, and why.
Indeed, the partners agreed that the precision of a particular clauseās language usually determines each partyās level of protection in a contract, especially at a time when outside forces that affect contractual agreements are in flux.
Litigate or arbitrate
![Contracts are still being written too loosely](/sites/default/files/inline-images/construction_contract_agreement_template1_1.jpg)
Ā
During the webinar, the partners touched on suspension and termination provisions, limitation of liability clauses, waivers for consequential damages (which owners are generally interested in), safety requirements, and insurance requirements. (Vanderhider said that insurance policies covering errors and omissions/professional liability āare trending,ā and revolve around notice provisions.)
He said heās been seeing contracts with more provisions that allow owners to withhold payments, with a notorious change in emphasis from āpay when paidā to āpay if paid,ā which shifts more risk onto subcontractors. Chico added there are options āto be creative here,ā such as payment clauses that kick in or are capped at certain thresholds, are limited to certain building materials, are tied to index pricing, or offer early payment for supply and storage actions.
The partners also took some time to debate how best to resolve disputes in general.
Vanderhider typically favors litigation, claiming that arbitration doesnāt always save time or money, and can place limits on the presentation of evidence and witnesses. āMany of the more common contract forms donāt reflect the reality of todayās economic climate,āĀ he asserted. But Vanderhider also conceded that arbitration makes it easier for parties to keep evidence private
Chico, on the other hand, prefers arbitration, āmostly because itās fasterā than letting a lawsuit play out. She and Vanderhider agreed that dispute clauses in contracts are most effective when they are consistent throughout the construction chain. Mroczkowski recommended, too, that contracts include a provision mandating some level of arbitration so as not to halt the project while the parties try to resolve differences.
In conclusion, Mroczkowski cited four takeaways for contractual risk mitigation:
ā¢Focus on your priorities
ā¢Be proactive anticipating supply-chain impacts
ā¢Ensure consistency in certain key contract terms
ā¢Ensure compliance with local laws.
Related Stories
Building Team | Apr 4, 2017
Dispelling five myths about post-occupancy evaluations
Many assume that post-occupancy (POE) is a clearly-defined term and concept,Ā but theĀ meaning of POE in practice remains wildly inconsistent.
Structural Materials | Apr 3, 2017
Best of structural steel construction: 4WTC, Fulton Center, Pterodactyl win AISC IDEAS2 Awards
The annual awards program, sponsored by the American Institute of Steel Construction, honors the best in structural steel design and construction.
Reconstruction & Renovation | Mar 16, 2017
Pols are ready to spend $1T on rebuilding Americaās infrastructure. But who will pick which projects benefit?
The accounting and consulting firm PwC offers the industrial sector a five-step approach to getting more involved in this process.
Contractors | Mar 15, 2017
Dan Ulbricht joins Skender Construction as Vice President
Ulbricht will be working with Skenderās executive leadership team to augment partnerships and expand new markets.
Contractors | Mar 9, 2017
5 reasons why Millennials are great for the construction industry
Millennials often are unfairly saddled with the dubious reputation for being entitled, disloyal, and self-centered, but it turns out that they are actually not that different from their older work colleagues, according to an FMI study.Ā
Industry Research | Mar 7, 2017
These are the 10 most expensive cities in the world to build in
Paris, Frankfurt, and Macau are all on the list, but none of them are more expensive than the city in the number one spot.
Architects | Jan 4, 2017
The making of visible experts: A path for seller-doers in the AEC industry
Exceptional seller-doers have the ability to ask the right questions, and more importantly, listen.
Building Team | Jan 3, 2017
How does your firmās hit rate stack up to the AEC competition?
If your firm is not converting at least a third of project proposals when competing for new work, it may be time to reassess your marketing tactics and processes.
Contractors | Dec 22, 2016
New commercial building energy code released
The update includes a new compliance path and significant technical changes affecting building envelope, and mechanical and lighting systems.Ā
Contractors | Oct 13, 2016
Contractorsā financial performance improved in 2015
The Construction Financial Management Associationās latest survey found gains across the board, but notable variances by the size of the companies.