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Reviewing Contracts – 10 Key Clauses to Look Out For
September 17, 2012 | Construction Contracts
As the challenging economic conditions continue to cause problems for the construction industry, construction contracts are becoming increasingly complex and onerous. In this article, we identify 10 of the most important clauses to look out for when reviewing a prospective contract.
1. Conditions Precedent
It is extremely important to look out for conditions precedent when reviewing a contract. A condition precedent can seriously restrict your contractual rights if you fail to comply with it, leaving you with no remedy for what might otherwise be a perfectly good claim. Common conditions precedent include:
- A requirement to provide specific documentation (e.g. collateral warranties) as a condition precedent to payment.
- A requirement to give notice within a specified time limit as a condition precedent to an extension of time.
- A requirement to carry out particular tasks (such as providing O&M manuals) as a condition precedent to practical completion being certified.
Conditions precedent can be difficult to spot because it is not necessary to actually use the words “condition precedent”. Look out for clauses that contain wording like “provided that”, “on condition that” and “subject always to”.
If you come across a condition precedent, consider (a) whether you can comply with it and (b) what will happen if you don’t. If you are unlikely to be able to comply, try to negotiate to make the clause less onerous, say, by increasing the time limit. If you accept the condition, ensure you have adequate procedures in place to allow you to satisfy the condition.
2. Design Responsibility
If you have design responsibility, it is crucial to determine exactly how much responsibility you are being expected to take on. For example, contractors with design responsibility often have to accept responsibility for designs produced on behalf of the employer at tender stage. If you are unwilling to take responsibility for someone else’s design, the contract must reflect this.
Another common provision to be wary of is a “fitness for purpose” clause, which effectively requires you to guarantee that the design will satisfy its intended purpose. Professional indemnity insurers will often refuse to provide cover for such absolute guarantees. A less onerous alternative to a fitness for purpose obligation is a clause which requires the contractor to exercise reasonable care and skill in carrying out their design. In the event there is a defect, the contractor will not be liable if he can show he exercised reasonable care and skill (this will involve obtaining expert evidence).
3. Limitations on Liability
If a claim is made against you, a limitation of liability clause will give you valuable certainty about your total financial exposure. It is therefore very important to seek to include a provision in the contract which limits your liability for losses suffered by your employer in the event you breach the contract or cause loss or damage. Ideally, you should aim for an overall limit on your financial liability for any loss connected with the contract. However, if this is not achievable, a less comprehensive limit, such as a total cap on liability for consequential loss, is nevertheless extremely useful.
4. Acceleration and Omission
Clauses allowing the employer to accelerate the works and/or omit work are becoming more prevalent, as they give the employer flexibility to alter the scope of the contract to suit their needs. Whether this type of clause is acceptable depends on the remedies available to you in the event that acceleration or an omission is instructed. For example, a clause which compensates you for the additional costs you incur in accelerating your works may well be acceptable (provided it is possible/practical to accelerate in the first place), but a clause which requires acceleration without any additional payment is probably unfair. A clause which permits aspects of your works to be omitted could be acceptable if it provides you with a right to compensation for loss of profit, but may need to be resisted if it does not.
5. Payment Provisions
Payment terms should always comply with the relevant provisions of the Construction Act (if it applies). A clause which simply states “payment terms 30 days net”, for example, is far from satisfactory; it will lead to confusion about when the due dates and final dates for payment are and when notices should be given. Vague clauses like “retention to be released following completion” should also be questioned – it must be clear when you will receive payment. If payment terms are vague, it is more likely that payment disputes will arise. It may also be harder to bring a claim because it is difficult to determine exactly what rights to payment you have.
A set-off clause allows the paying party to make deductions from monies owed to the payee in cases where the payee also owes money to the paying party. Set-off clauses are fairly common and can be accepted, but it is important to consider how much power they give the paying party. A set-off clause which allows the paying party to deduct sums which are proven to be due from the payee under the terms of the contract is quite reasonable. However, a set-off clause which allows the paying party to deduct sums which they estimate will become due from the payee in the future could be open to abuse and should be treated with caution. Clauses which allow set-off across different contracts may also cause cashflow problems for the payee.
Indemnities are a common feature of construction contracts. An indemnity is basically an agreement to reimburse the other party for loss or damage they suffer. Indemnities introduce risk because they can require you to assume liability for any loss suffered as a consequence of your breach, even if you had no idea at the time of entering into the contract that the employer might be at risk of suffering that sort of loss. This is an extension of the normal legal principle that a party in breach of contract will only be liable for losses that were foreseeable at the time the contract was entered into. An indemnity can even make you liable for the actions of a third party, depending on how it is drafted.
You must thoroughly assess the potential risk of accepting an indemnity. What is the risk that an event might occur which allows your employer to call on the indemnity? What sort of losses could you potentially be responsible for? Often, an indemnity will only be acceptable if appropriate limitations on liability can be agreed.
8. Final and Conclusive Provisions
Contracts often include clauses which state that certificates or decisions become final and binding after a specified period of time. There is no real problem with this, as it provides a degree of finality and certainty for both parties. However, consideration should be given to provisions which give you a very short period of time to challenge, say, an adjudicator’s decision or a final payment certificate. You could seriously prejudice your rights if it transpires that the timescale you agreed to is simply not long enough to allow you to put a claim together.
9. Exclusive Remedies Clauses
Some contracts contain clauses which state that the only remedies available to the parties are those expressly set out in the contract. The effect of these clauses (if properly drafted) is to exclude all non-contractual claims the parties might be able to bring, such as claims in negligence or for damages at common law. Clauses like this should be considered very carefully, as it is almost impossible to know at the start of a contract what sort of claims you might need to bring later on. Generally speaking, a clause which limits your remedies to those expressly set out in the contract should be avoided unless the terms of the contract are so comprehensive that it contains sufficient remedies for any potential claim which may arise.
10. Termination Provisions
Almost all contracts have termination provisions, but you should look out for clauses which allow your employer to terminate for unusual or trivial reasons. This effectively gives the employer discretion to terminate simply because they no longer want you working on the project, rather than because you have done something seriously wrong. Clauses giving the employer the express right to terminate for convenience should also be reviewed carefully to check whether they offer compensation for lost profit and other costs arising from termination.This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.