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
| Jul 16, 2014
ASHRAE, IAQA team up to improve resources on indoor air quality
Indoor Air Quality Association will become part of the ASHRAE organization while maintaining its own brand and board; HQ will relocate to Atlanta.
| Jul 15, 2014
Michael Graves talks with Washington Post about new design eye from life in a wheelchair
Celebrated American architect Michael Graves sits with the Washington Post to talk about how being on a wheelchair changed the way he focuses on design.
| Jul 15, 2014
A look into the history of modular construction
Modular construction is more than a century old, and throughout its lifespan, the methods have been readapted to meet specific needs of different eras.
| Jul 15, 2014
AECOM to buy URS Corporation in $6 billion deal
Together, the firms will form a massive global giant with more than $19 billion in revenue and 95,000 employees in 150 countries.
| Jul 15, 2014
Trade groups form task force to further transparency and optimization of building product ingredients
The Harmonization Task Group will offer marketplace benefits including consistent messaging, simplification, elimination of redundancies, and creation of more accurate, faster and less costly assessments.
| Jul 14, 2014
Meet the bamboo-tent hotel that can grow
Beijing-based design cooperative Penda designed a bamboo hotel that can easily expand vertically or horizontally.
| Jul 11, 2014
First look: Jeanne Gang reinterprets San Francisco Bay windows in new skyscraper scheme
Chicago architect Jeanne Gang has designed a 40-story residential building in San Francisco that is inspired by the city's omnipresent bay windows.
| Jul 11, 2014
Are these LEGO-like blocks the future of construction?
Kite Bricks proposes a more efficient way of building with its newly developed Smart Bricks system.
| Jul 10, 2014
Unique design of Toronto's townhome The Tree House
Plans for a new Toronto townhome brings cutting-edge design.
| Jul 10, 2014
Berkeley Lab opens 'world's most comprehensive building efficiency simulator'
DOE’s new FLEXLAB is a first-of-its-kind simulator that lets users test energy-efficient building systems individually or as an integrated system, under real-world conditions.