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 25, 2011
Top 10 rules of green project finance
Since the bottom fell out of the economy, finding investors and financial institutions willing to fund building projects—sustainable or otherwise—has been close to impossible. Real estate finance prognosticators, however, indicate that 2011 will be a year to buy back into the real estate market.
| Jan 25, 2011
Construction firms planning to hire, not fire in 2011, reports AGC
More construction firms are planning to hire workers this year than are planning to make layoffs, according to the results of an industry-wide survey by the Associated General Contractors of America and Navigant. The survey, conducted as part of the Construction Industry Hiring and Business Outlook, shows the industry may finally be emerging from a severe downturn that has left millions of skilled workers unemployed.
| Jan 25, 2011
AIA reports: Hotels, retail to lead U.S. construction recovery
U.S. nonresidential construction activity will decline this year but recover in 2012, led by hotel and retail sectors, according to a twice-yearly forecast by the American Institute of Architects. Overall nonresidential construction spending is expected to fall by 2% this year before rising by 5% in 2012, adjusted for inflation. The projected decline marks a deteriorating outlook compared to the prior survey in July 2010, when a 2011 recovery was expected.
| Jan 21, 2011
Combination credit union and USO center earns LEED Silver
After the Army announced plans to expand Fort Bliss, in Texas, by up to 30,000 troops, FirstLight Federal Credit Union contracted NewGround (as CM) to build a new 16,000-sf facility, allocating 6,000 sf for a USO center with an Internet café, gaming stations, and theater.
| Jan 21, 2011
Manufacturing plant transformed into LEED Platinum Clif Bar headquarters
Clif Bar & Co.’s new 115,000-sf headquarters in Emeryville, Calif., is one of the first buildings in the state to meet the 2008 California Building Energy Efficiency Standards. The structure has the largest smart solar array in North America, which will provide nearly all of its electrical energy needs.
| Jan 21, 2011
Primate research facility at Duke improves life for lemurs
Dozens of lemurs have new homes in two new facilities at the Duke Lemur Center in Raleigh, N.C. The Releasable Building connects to a 69-acre fenced forest for free-ranging lemurs, while the Semi-Releasable Building is for lemurs with limited-range privileges.
| Jan 21, 2011
Harlem facility combines social services with retail, office space
Harlem is one of the first neighborhoods in New York City to combine retail with assisted living. The six-story, 50,000-sf building provides assisted living for residents with disabilities and a nonprofit group offering services to minority groups, plus retail and office space.
| Jan 21, 2011
Nothing dinky about these residences for Golden Gophers
The Sydney Hall Student Apartments combines 125 student residences with 15,000 sf of retail space in the University of Minnesota’s historic Dinkytown neighborhood, in Minneapolis.
| Jan 21, 2011
Revamped hotel-turned-condominium building holds on to historic style
The historic 89,000-sf Hotel Stowell in Los Angeles was reincarnated as the El Dorado, a 65-unit loft condominium building with retail and restaurant space. Rockefeller Partners Architects, El Segundo, Calif., aimed to preserve the building’s Gothic-Art Nouveau combination style while updating it for modern living.
| Jan 21, 2011
Sustainable history center exhibits Fort Ticonderoga’s storied past
Fort Ticonderoga, in Ticonderoga, N.Y., along Lake Champlain, dates to 1755 and was the site of battles in the French and Indian War and the American Revolution. The new $20.8 million, 15,000-sf Deborah Clarke Mars Education Center pays homage to the French magasin du Roi (the King’s warehouse) at the fort.