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.
“The allocation of risk is paramount to [achieving] the best possible outcome,” 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 Gossett’s Chicago office: Steven Mroczkowski, who is Co-leader of the firm’s 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 he’s been seeing fewer take-it-or-leave-it clauses on contracts. But he also noted that “there’s no one-size-fits-all” 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 “Act of God” 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 project’s financing is structured, which is why he advises clients to customize the language of their contracts to the realities of the given project. “Sometimes, risk allocation boils down to an amendment in a contract,” observed Chico.
Another growing area of dispute, the partners said, is a contract’s 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 clause’s language usually determines each party’s 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)
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 “are trending,” and revolve around notice provisions.)
He said he’s been seeing contracts with more provisions that allow owners to withhold payments, with a notorious change in emphasis from “pay when paid” to “pay if paid,” which shifts more risk onto subcontractors. Chico added there are options “to be creative here,” 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 doesn’t always save time or money, and can place limits on the presentation of evidence and witnesses. “Many of the more common contract forms don’t reflect the reality of today’s economic climate,” he asserted. But Vanderhider also conceded that arbitration makes it easier for parties to keep evidence private
Chico, on the other hand, prefers arbitration, “mostly because it’s faster” 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:
•Focus on your priorities
•Be proactive anticipating supply-chain impacts
•Ensure consistency in certain key contract terms
•Ensure compliance with local laws.
Related Stories
| Jan 5, 2015
Beyond training: How locker rooms are becoming more like living rooms
Despite having common elements—lockers for personal gear and high-quality sound systems—the real challenge when designing locker rooms is creating a space that reflects the attitude of the team, writes SRG Partnership's Aaron Pleskac.
| Jan 2, 2015
Construction put in place enjoyed healthy gains in 2014
Construction consultant FMI foresees—with some caveats—continuing growth in the office, lodging, and manufacturing sectors. But funding uncertainties raise red flags in education and healthcare.
| Dec 30, 2014
A simplified arena concept for NBA’s Warriors creates interest
The Golden State Warriors, currently the team with the best record in the National Basketball Association, looks like it could finally get a new arena.
| Dec 30, 2014
The future of healthcare facilities: new products, changing delivery models, and strategic relationships
Healthcare continues to shift toward Madison Avenue and Silicon Valley as it revamps business practices to focus on consumerism and efficiency, writes CBRE Healthcare's Patrick Duke.
| Dec 29, 2014
High-strength aluminum footbridge designed to withstand deep-ocean movement, high wind speeds [BD+C's 2014 Great Solutions Report]
The metal’s flexibility makes the difference in an oil rig footbridge connecting platforms in the West Philippine Sea. The design solution was named a 2014 Great Solution by the editors of Building Design+Construction.
| Dec 29, 2014
HDR and Hill International to turn three floors of a jail into a modern, secure healthcare center [BD+C's 2014 Great Solutions Report]
By bringing healthcare services in house, Dallas County Jail will greatly minimize the security risk and added cost of transferring ill or injured prisoners to a nearby hospital. The project was named a 2014 Great Solution by the editors of Building Design+Construction.
| Dec 29, 2014
New mobile unit takes the worry out of equipment sterilization during healthcare construction [BD+C's 2014 Great Solutions Report]
Infection control, a constant worry for hospital administrators and clinical staffs, is heightened when the hospital is undergoing a major construction project. Mobile Sterilization Solutions, a mobile sterile-processing department, is designed to simplify the task. The technology was named a 2014 Great Solution by the editors of Building Design+Construction.
| Dec 29, 2014
Startup Solarbox London turns phone booths into quick-charge stations [BD+C's 2014 Great Solutions Report]
About 8,000 of London’s famous red telephone boxes sit unused in warehouses, orphans of the digital age. Two entrepreneurs plan to convert them into charging stations for mobile devices. Their invention was named a 2014 Great Solution by the editors of Building Design+Construction.
| Dec 29, 2014
Spherical reflectors help spread daylight throughout a college library in Portland, Ore. [BD+C's 2014 Great Solutions Report]
The 40,000-sf library is equipped with four “cones of light,” spherical reflectors made from extruded aluminum that distribute daylight from the library’s third floor to illuminate the second. The innovation was named a 2014 Great Solution by the editors of Building Design+Construction.
| Dec 29, 2014
Hard hat equipped with smartglass technology could enhance job site management [BD+C's 2014 Great Solutions Report]
Smart Helmet is equipped with an array of cameras that provides 360-degree vision through its glass visor, even in low light. It was named a 2014 Great Solution by the editors of Building Design+Construction.