ic equitable risk allocation legal perspective

Construction Industry Institute

3MAbbottAir Products and ChemicalsAlcoaAmgen Inc.Anheuser-Busch CompaniesAramco Services CompanyBP AmericaBiogen IdecCITGO Petroleum CorporationCargillChevronCodelco-ChileConocoPhillipsThe Dow Chemical CompanyDuPontEastman Chemical CompanyExxonMobil CorporationGenentechGeneral Motors CorporationGlaxoSmithKlineIntel CorporationInternational PaperKraft FoodsEli Lilly and CompanyMarathon Oil CorporationMerckNASANOVA Chemicals CorporationNaval Facilities Engineering CommandOntario Power GenerationPetroleo Brasileiro S/A - PetrobrasPraxairThe Procter & Gamble CompanyProgress EnergyRohm and Haas CompanySasol TechnologyShell Oil CompanySmithsonian InstitutionSolutiaSouthern CompanySunocoTennessee Valley AuthorityU.S. Architect of the CapitolU.S. Army Corps of EngineersU.S. Bureau of ReclamationU.S. Department of Commerce/NIST/

Building and Fire Research LaboratoryU.S. Department of EnergyU.S. Department of Health & Human ServicesU.S. Department of StateU.S. General Services AdministrationU.S. SteelWeyerhaeuser Company

ABB Lummus GlobalALSTOM PowerAMECAZCOAker KværnerAutodesk, Inc.BE&KBaker Concrete ConstructionBechtel GroupBlack & VeatchBurns & McDonnellCB&ICCC GroupCDI Engineering SolutionsCH2M HILLCSA GroupDay & Zimmermann InternationalDick CorporationDresser-Rand CompanyEmerson Process ManagementFluor CorporationFru-Con Construction CorporationGrinaker-LTAGS Engineering & Construction CorporationHarper IndustriesHatchHilti CorporationHyundai Engineering & ConstructionJMJ AssociatesJacobsKBRKiewit Construction GroupJ. Ray McDermottM. A. Mortenson CompanyMustang Engineering, L.P.R. J. MyckaThe Nielsen-Wurster GroupParsonsPathfinder LLCPerot Systems CorporationPrimavera SystemsS&B Engineers and ConstructorsSNC-Lavalin Inc.The Shaw GroupTechnipVictaulic CompanyWalbridge Aldinger CompanyWashington Group InternationalWorleyParsons LimitedYates ConstructionZachry Construction CorporationZurich

Equitable Risk Allocation:

A Legal Perspective

Construction Industry InstituteContracting to Appropriately Allocate Risk Research Team

Implementation Resource 210-3

February 2007

© 2007 Construction Industry Institute™.

The University of Texas at Austin.

CII members may reproduce and distribute this work internally in any medium at no cost to internal recipients. CII members are permitted to revise and adapt this work for their internal use provided an informational copy is furnished to CII.

Available to non-members by purchase; however, no copies may be made or distributed and no modifications made without prior written permission from CII. Contact CII at http://construction-institute.org/catalog.htm to purchase copies. Volume discounts may be available.

All CII members, current students, and faculty at a college or university are eligible to purchase CII products at member prices. Faculty and students at a college or university may reproduce and distribute this work without modification for educational use.

Printed in the United States of America.

iii

Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Contract Language Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3. Legal Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

4. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

v

Executive Summary

When allocating construction risks, appropriate allocation is often not achieved due to the

inferior bargaining position held by lower-tier parties. Beyond this dilemma, the most appropriate

and equitable allocation of a particular risk can vary from project to project depending on factors

such as the type of risk, work, and contract. As a result, no single, appropriate allocation exists for

a given construction risk for all projects. Unfortunately, arriving at a conclusive agreement between

contracting parties as to the most appropriate allocation of a given construction risk for a specific

project can be a cumbersome, albeit crucial, task.

Due to the problems associated with determining appropriate risk allocation between contracting

parties, the Construction Industry Institute (CII) formed the Contracting to Appropriately Allocate

Risk Research Team in an effort to encourage risk assessment and allocation in a compromising and

educated manner, recognizing the unique circumstances of each specific project. By involving both

the owner and the contractor in the risk allocation process, which should begin early in the project

life cycle, both parties can avoid the increased costs associated with inappropriate risk allocation.

To aid in this process, the research team developed the Two-Party Risk Assessment and Allocation

Model, which encourages contracting parties to compromise during the risk allocation process.

This publication is meant to accompany the Two-Party Risk Assessment and Allocation Model by

providing useful legal perspective references regarding both contract language and legal research.

This book looks at the top 14 risks, identified as the “hot-button” risks, which are listed below in order

of the most to the least frequently allocated in an inappropriate manner:

1. No Damages for Delay

2. Consequential Damages

3. Indemnity

4. Ambiguous Acceptance Criteria

5. New or Unfamiliar Technology

6. Force Majeure

7. Schedule Acceleration

8. Cumulative Impact of Change Orders

9. Owner-Mandated Subcontractors

10. Insurance Allocation

11. Differing Site Conditions

12. Design Responsibility

13. Waiver of Claims

14. Standard of Care

A contract language table was generated for each of the 14 “hot-button” risks. Various examples

and/or concepts of contract language were analyzed and categorized according to perceived biases

and compromises to help contracting parties consider the most pertinent risk issues and potentially

identify “appropriate” compromising clauses.

The research team also developed legal perspective references that provide educational

assistance to contracting parties. Those references are contained in this book. The highlight of

the legal research for each risk is a legal issues and considerations flow chart. These charts help

minimize much of the confusion and ambiguities surrounding the allocation of each risk, as well as

denote which party may actually be carrying the associated risk in the eyes of the court.

Industry participants are encouraged to use this publication in conjunction with the Two-Party

Risk Assessment and Allocation Model (Implementation Resource 210-2) or as an independent

educational resource regarding risk allocation from a legal perspective.

1

Chapter 1: Introduction

The Purpose of this Implementation Resource

This publication is a result of CII research into risk allocation. It covers contract language and

legal research for the 14 risks that are most often cited as “allocated inappropriately.” Accordingly,

these risks can be thought of as possessing the most potential for spawning disputes during

contract negotiations. It is intended as a guide for contracting parties so that they can become more

aware of the associated risk issues from a legal perspective. It also will give contracting parties a

better understanding of which party is really carrying a given risk and how the parties may reach

a compromising position. Accordingly, the parties will be in a better position to draft appropriate

contract language and compromising terms and conditions. This is not a legal book, nor does it

purport to be a comprehensive digest of existing statutory or case law. What is ubiquitous is the

common nature of the problems and it is in identifying the nature and implications of the problems

that this study seeks to give the industry a basis for coming to common terms.

“Hot-Button” Risks

CII formed the Contracting to Appropriately Allocate Risk Research Team to develop a risk

assessment and allocation model that will aid contracting parties in cooperatively identifying,

assessing, and ultimately allocating risk on any specific project. The data collected by the research

team yielded a list of 14 “hot-button” risks that are frequently allocated in an inappropriate manner.

Table 1 displays the top 14 risks most frequently allocated in an inappropriate manner in ascending

order from the most frequently to the least frequently as determined by various research inputs.

Table 1. Top 14 Risks Most Frequently Allocated in an Inappropriate Manner

Top 14 Risks

1. No Damages for Delay 8. Cumulative Impact of Change Orders

2. Consequential Damages 9. Owner-Mandated Subcontractors

3. Indemnity 10. Insurance Allocation

4. Ambiguous Acceptance Criteria 11. Differing Site Conditions

5. New or Unfamiliar Technology 12. Design Responsibility

6. Force Majeure 13. Waiver of Claims

7. Schedule Acceleration 14. Standard of Care

Risk Allocation Tools

The research team noted the general lack of education surrounding the topic of risk allocation. As

a result, a primary focus of the research was to develop a model that could be used as a learning tool

to educate the industry on the legal issues surrounding risks commonly allocated in an inappropriate

manner. Accordingly, the research team developed the two legal perspective references contained

2

here along with a database of risk allocation principles. These three risk allocation tools are to be

used during and after the contracting parties have completed the risk assessment process developed

by the team (see CII Research Summary 210-1 and CII Implementation Resource 210-2).

Risk Allocation Principles: A Risk Allocation Tool

The research team developed a list of risk allocation principles that will help negotiating parties

decide which party is the appropriate party to assume each particular risk. These principles will get

both contracting parties to consider the most important risk allocation concepts and ideas that have

the most potential to be overlooked or disregarded. The principles are divided into two separate

categories: (1) general risk allocation principles and (2) legal risk allocation principles.

General Risk Allocation Principles

• Many risks cannot be entirely eliminated, but can be controlled.

Example: Contracting parties will never be able to eliminate the possibility that a war will break out and halt the progress of a project in a particular geographical area. However, the possibility can be lessened by carefully selecting the geographical location of the project, while the potential financial impacts can be accounted for by drafting force majeure language that addresses the risk of war.

• Eliminating one risk may cause new risks to materialize.

Example: Suppose an owner wishes to completely avoid any and all liability for differing site conditions. Accordingly, the owner provides no representations of said site conditions, and contractually requires the prospective contractors to investigate the conditions for themselves and bid accordingly. Although the owner will have successfully shifted the risk of differing site conditions to the contractors, the owner will now have to hope that the bidding contractors do not severely overestimate or underestimate their increased contingencies. Both extremes could result in disaster to the project’s success.

• Many risks are interdependent so it is important to evaluate risk dependencies to be able to predict the cumulative impact or “domino effect” that may materialize with the realization of one individual risk.

Example: If a project has a difficult time attracting skilled crafts to perform the work, a multitude of risks could materialize: delays, rework, increased project management costs, increased absenteeism rates and many other secondary risks will have an increased likelihood of occurring if unskilled craftsmen make of the majority of a project’s work force.

• “Lessons learned” from inappropriate risk allocation should be meticulously documented.

Example: If a new, altered version of a contract clause is utilized for a project, litigation ensues and the resultant proceedings end with a court rendering an unfavorable, completely unforeseen verdict pertaining to the altered clause, the clause alterations and project circumstances that led to the ruling should be exhaustively recorded.

3

• The optimum allocation of many risks may involve shared responsibility.

Example: Similar to the trend of many courts to provide common law indemnification rights on a comparative fault basis, it is simply more efficient and equitable to share risks rather than to load a weaker, single party with the majority of risks.

• Ignoring a risk will not eliminate its potential costs. If a risk is not contractually allocated, it will be assumed, knowingly or unknowingly, by one or both of the contracting parties.

Example: If a risk is not allocated in a contract, parties often end up in arbitration or litigation to argue over the implied allocation. The U.S. legal system is based on a common law system that will assign the implied allocation according to the precedence established by previous case rulings. Depending on numerous project-specific circumstances, common law rulings may yield a sharing of liability or a complete shift.

• The optimum allocation of any particular risk may change from project to project depending on the unique circumstances of the project.

Example: A very clear example would pertain to limits of liability. Optimum limits of liability will vary from project to project depending on the available insurance policies and the financial capacities of the client and contractors involved.

• Any particular party ought to be able to assume a risk if that party: (1) understands the risk, and (2) an adequate reward exists for the assumption.

– Adequate reward may come in the form of a risk/reward contractual arrangement or as a high probability for increased profit from the assumption of the risk.

Example: A severely schedule driven project, such as a semiconductor manufacturing plant project, will most likely have very high liquidated damages associated with late completion. Accordingly, a sophisticated contractor will recognize that its client has a large amount of earnings at stake, thus justifying the risk of large sums of liquidated damages being assessed. However, the client should also recognize that it has a lot to gain by on time or early completion, thus a contractual provision establishing a monetary reward for on time or early completion should be established to make it reasonable for the contractor to accept the risk.

• If the damages of a risk allocated to the contractor are foreseeable, the contractor has the responsibility to account for the risk in the bid price.

Example: If a contract holds a contractor liable for an owner’s consequential damages, the contractor should account for the possibility of the damages materializing within its bid.

• Consideration should be given to the fact that in some cases it may be fiscally efficient for some owners to reallocate common risks between the parties upfront in exchange for a higher bid price or a contractual reward scheme.

Example: A casino project will typically carry very high liquidated damages for late completion. If a reward scheme is not implicitly established, an owner may still prefer to pay “extra” through an extremely padded contractor contingency rather than lower the liquidated damages sum and lessen the incentive for early or on time completion.

4

• Both parties should always consider the ability of the risk-bearing party (including insurance companies) to survive the materialization of the risk.

Example: Merely successfully shifting a risk to a party does not eliminate the risk that the assuming party may not be able to remain solvent if the risk should occur. This is precisely the reason why the private insurance sector refuses to insure flood damages and instead yields this role to the government. The widespread damage associated with a flood could easily force a private insurance company out of business.

• Owners should realize that shifting risk will often increase the contractor’s price, and should determine whether such risks could be more cost-effectively accounted for with owner retention.

Example: Sophisticated contractors will typically recognize onerous contract terms and if negotiations are unsuccessful or not attempted, bid prices may significantly increase. Examples of such contract terms include no damages for delay clauses, non-waivers of consequential damages, and high liquidated damages provisions.

• The maximum possible loss for each risk should not be overlooked or confused with the maximum probable loss.

Example: The maximum possible loss for a risk is the worst case scenario. The maximum probable loss can be interchangeably defined with the “expected value” of a risk. Specifically, none of the associated project personnel accounted for the maximum possible loss associated with the collapse of the World Trade Center towers. Instead, the towers were designed and constructed according to the maximum probable loss.

• Parties should determine the potential for profit that each risk may or may not possess.

Example: Risk/reward schemes encourage amiable contracting relationships while providing clear incentives and disincentives pertaining to performance. Therefore, whenever possible parties should identify and utilize opportunities where an increase in risk assumption is directly correlated to an increase in potential monetary compensation. When potential for profit is considered for every single risk, the optimum allocation may not always be the most efficient (lowest bearing cost) or equitable (most control over risk) allocation, but may instead create the highest likelihood for project success (on time, on budget completion).

• To facilitate a non-controversial contractual relationship, contracting parties should strive for harmony among all contract clauses.

Example: An owner should not attempt to include a no damages for delay clause in conjunction with a liquidated damages clause. Essentially, this demonstrates to the contractor that it will be responsible for its delays to the project, while the owner will not take responsibility for delays it causes. This breeds a controversial relationship from the outset.

5

Legal Risk Allocation Principles

• Courts will construe provisions exactly as they are written (unless they are against public policy or statute). – Stricticti Juris

Example: Unless illegal or ambiguous, courts will look at the plain and ordinary meaning of contract language in order to ascertain the intentions of the parties.

• Courts will only construe a contract provision in a manner that will do substantial justice to the parties. – Strictisimus Juris

Example: Courts will not interpret contract language to indicate an intention that clearly differs from extrinsic evidence speaking to an alternated agreed upon interpretation between the parties. In other words, a court will not construe ambiguous terms in their most unfavorable light.

• Specific contract language will be construed over general language.

Example: A broad clause that states that the contractor is responsible for providing all materials and labor for a project will not overrule a specific clause that states that the owner will provide certain enumerated materials for construction.

• General disclaimers are not usually enforceable.

Example: General disclaimers of the accuracy or sufficiency of site conditions provided by the owner will typically not be enforced by a court.

• By signing the contract, you have accepted what is in it. – Caveat Emptor – “Let the buyer beware.”

Example: A recent legal case reviewed by the author dealt with a design/build contractor’s complaint that unbeknownst to the design/build contractor, its contract with the owner contained both performance and prescriptive specifications. When the design/build contractor attempted to install the prescriptive work as performance-based work, the owner disputed the work. The court ruled in favor of the owner citing the fact that the contractor had not read the specifications closely enough to realize that they contained performance and prescriptive specifications.

• No contractual arrangement can reallocate intentional wrongdoings or illegal activities.

Example: No state will allow an indemnification clause to provide indemnification for willful acts that will knowingly cause harm to other parties.

• Contractual ambiguities will be construed against the drafting party. – Contra Proferentem

Example: If a clause in an owner-contractor contract ambiguously specifies the acceptance criteria for a project, the contractor will be allowed to rely on its own reasonable interpretation and the owner will assume all resultant increased expenses.

6

• If the contract is silent regarding damages, the offending party will be held responsible for the damages “reasonably foreseeable” as a result of their conduct.

Example: The most well-known example would pertain to consequential damages. If a contract does not address consequential damages, all contracting parties will be held responsible for damages that should have reasonably been foreseen as a result of actions or inactions of the parties. For example, if a vendor delays in delivering a piece of equipment to a manufacturing facility, the vendor will be held responsible for the lost profits that would have been averted if the machine would have been fixed on time. The vendor should have reasonably anticipated that its delay would have resulted in a loss in production and ultimately a loss in profits.

Legal Perspective References: Risk Allocation Tools

The first of the two legal perspective references developed is a set of contract language tables

that give samples and concepts of contract language for all 14 of the “hot-button” risks. The contract

language tables will assist contracting parties in drafting and negotiating compromising clauses by

making them aware of the major contract language concepts and issues as perceived by the widely

represented research team consisting of owners (public and private), contractors, subcontractors,

attorneys, insurance/risk management representatives, and A/Es. Parties will also be able to

reference the contract language tables for each of the 14 risks to receive guidance as to where an

existing clause may fall on the continuum of appropriate or optimum allocation.

The second legal perspective reference is legal research on the U.S. judicial system’s attitudes

surrounding 10 of the 14 “hot-button” risks. The main purpose of the legal research is to identify the

major legal issues and considerations pertaining to each of the 10 risks researched. The secondary

purposes of the legal research are to determine (1) how the U.S. judicial system will allocate a

particular risk in the case that it is not allocated in the contract documents and (2) the exceptions to

enforceability established by the courts when the risk is included in the contract documents. Due to

the availability of massive amounts of data, the research team conducted legal research for only 10

of the top 14 “hot-button” risks, exclusively. The highlight of each risk discussion is the flow chart that

summarizes the legal concepts that contracting parties should be most aware of.

Common Law Definition

Essentially, common law is case law or rules and standards determined by previous decisions in

specific cases. Common law can be defined as the precedence established by court decisions over

many centuries based not on statutory law, but on the decisions of judges. In this sense, the research

team hopes to invoke Oliver Wendell Holmes as he asserted:

“The life of the law has not been logic: it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed or unconscious, even the prejudices which judges share with their fellow-men, have a good deal more to do than the syllogism in determining the rules by which men should be governed.” (Holmes, 1881)

7

Legal Perspectives Disclaimer

CII and Research Team 210 make no representations, warranties, or covenants as to the legal

information contained in or the legal opinions expressed in this implementation resource including,

without limitation, the accuracy or completeness of such information or opinions. The recipient

acknowledges that CII shall have no liability to recipient resulting from the provision or use of these

contract language or legal research materials to or by recipient. The contract language and the legal

research information were compiled by CII from sources believed to be reliable. We trust that you will

customize these samples to reflect your own operations and believe that these samples may serve

as a helpful platform for this endeavor. Any and all information contained herein is not intended to

constitute legal advice and accordingly, you should consult with your own attorneys when developing

programs and policies. We do not guarantee the accuracy of this information or any results and further

assume no liability in connection with these sample materials and sample policies and procedures,

including any information, methods or suggestions contained herein. Moreover, CII reminds you

that these materials cannot be assumed to contain every acceptable compliance procedure or that

additional procedures might not be appropriate under the circumstances.

As stated above, this study does not purport to constitute legal advice. Additionally, the

complexities of the facts underlying each particular construction dispute are such that even cases

interpreting longstanding contract clauses may seem like a matter of first impression to the court. This

study is intended to only educate the reader as to the general concepts discussed. It is not intended

as a substitute for competent legal advice. Further, the suggested resolution of risk allocation set forth

herein cannot be said to be the last word on the subject, but rather should represent a significant

first step in approaching a reasonable allocation of risk that ultimately will set standards within the

construction industry rather than allow the “law of the jungle” to prevail.

9

Chapter 2: Contract Language Tables

Introduction

The contract language tables are a critical tool when analyzing or drafting a construction contract

clause involving any of the 14 “hot-button” risks. The research team investigated contract language

clauses associated with each of the top 14 “hot-button” risks to identify clauses that seemed to

contain a bias and clauses that seemed to provide compromising language. Accordingly, the contract

language tables give examples and/or concepts of contract language for each of the top 14 risks that

may 1) favor the buyer, 2) favor the seller, or 3) compromise. Typically, the buyer language favors the

owner in an owner-general contractor contract or the general contractor in a general contractor-

subcontractor contract. Conversely, the seller language typically favors the general contractor in

an owner-general contractor contract or the subcontractor in a general contractor-subcontractor

contract.

Research and Findings

The contract language tables were developed by reviewing existing standardized and privatized

contracts and conducting phone interviews with four industry personnel thoroughly experienced

with drafting and negotiating contract language for their respective organizations. These industry

experts were all employees of CII member companies, with two interviews conducted with major

owner organizations and two conducted with major contractor organizations. When applicable, the

legal issues and considerations revealed through the extensive legal research were used to provide

guidance for clause construction. Lastly, the wide representation of the CII research team was utilized

to scrub the tables and ensure that all contracting parties’ interests were adequately expressed.

Application of Findings

The contract language tables can be used as a contract language negotiating point between

buyer and seller parties who have identified one of the top 14 risks as a high concern that needs

mutual attention to ensure appropriate allocation. The compromise language is suggested only and

obviously provides no guarantee of success absent such factors as the good faith and ability to

perform of the parties. Internally, an industry participant may find it useful to compare its company’s

existing standardized clauses pertaining to each of the 14 “hot-button” risks to the contract language

found in the contract language tables developed by the widely represented CII research team to

determine where there are commonalities or disagreements.

The Contract Language Tables

The following pages contain the contract language tables developed for each of the top 14

“hot-button” risks. The contract language tables are organized from the most to the least frequently

allocated in an inappropriate manner, beginning with the “No Damages for Delay” contract language

table. At the top of each table, a list of “issues” has been compiled. These “issues” should be

considered when negotiating clauses while referencing the 14 contract language tables.

10


• ISSUES: Time only v. time and money, notice provisions, fixed schedule of compensation, foreseeability, owner cooperation, active owner interference (“inexcusable incompetence”), contractor contingencies, subcontractor contingencies, length of delay before compensation (or) as an exception to the clause, owner-financing considerations (price-certainty), excusable v. non-excusable delays…

Favors Buyer Compromises Favors Seller

• Language that provides time relief only to a contractor from owner-induced delays. All other damages indirectly or directly related to the delays are non-recoverable.

“No interruption, interference, inefficiency, suspension or delay in the commencement or progress of the Work under this Contract, from any clause whatsoever, including those for which Owner may be responsible in whole or in part, shall relieve Contractor of its duty to perform this Contract in accordance with the terms of the Contract Documents, or give rise to any right to damages of any kind or nature from Owner. Contractor expressly acknowledges and agrees that it shall receive no damages for delay. Contractor’s sole remedy against Owner for delay shall be the right to seek an extension in the Contract Schedule. Granting of any such time extension shall not be a condition precedent to this no damages-for-delay provision. This no-damages-for-delay provision shall apply to claims for early completion, as well as claims based on late completion. It is expressly acknowledged and agreed to by Contractor that a material inducement to Owner to enter into this Contract is this no-damage-for-delay provision.”

• Language that contains limits/ exceptions of recovery for delay damages ($ and time). Language may also include a requirement governing the level of proof necessary to demonstrate delay (or) it may define how monetary recovery is to be calculated to exclude items such as profit, or certain overhead cost elements. If a time extension is part of the agreed upon remedy for owner-induced delays, the contract should specify a reasonable timeframe in which the extension must be granted.

• Language that provides “equitable adjustment” for owner-induced delays.

“Contractor shall be entitled to equitable adjustments in Contract Price and Contract Schedule in the event Contractor is delayed or impacted due to acts by Agent, Owner, or third parties under Agent or Owner’s control at the work site or by changes in laws or regulations that are made following the execution of this Contract.”

• Language that establishes a fixed schedule of compensation for owner-induced delays.

“For each day that the Contractor is delayed by the Owner or Owner’s agents, the Owner will pay the Contractor a fixed sum of $XX,XXX per day of delay.”

11


• ISSUES: Owners have more to lose/owners have more to gain, reasonable foreseeability, reasonable certainty, liquidated damages, home office overhead, limits of liability, specific events v. “catch-all” phrases, insurance…


• If there is no language addressing consequential damages, the contractor is put at a high disadvantage. In some projects (i.e., casino, power, semiconductor) an owner’s consequential damages can reach millions of dollars a day.

• Language that specifically states that the owner will be allowed to collect consequential damages (regardless of if the contractor is also allowed to collect its consequential damages).

• Language that contains a mutual waiver with the contractor responsible to the owner for performance and delay liquidated damages. These liquidated damages may cover loss of profit and loss of product and should capture reasonably estimated damages. Regarding the magnitude of liquidated damages, consideration should be given to ensuring incentive for performance while making allowance for the contractor to remain solvent if the liquidated damages are assessed. Also, insurance should be sought to provide limited liability protection to the contractor. The language below also does not disallow the contractor to collect extended home office overhead costs.

“Except to the extent that liquidated damages provided for in the Contract, Owner and the Contractor waive all claims against each other for consequential damages. By way of illustration, but not limitation, consequential damages includes: (1) Owner’s loss of profit, economic loss, loss of reputation, loss of goodwill, loss of revenue, business interruption, arising out of or related to the Contract Documents, and (2) Contractor’s loss of profit, economic loss, loss of reputation, loss of goodwill, loss of revenue, loss of financing, increased financing costs, business interruption, and/or loss of management or employee productivity or of the increased cost of the services of such management or employee productivity arising out of or related to all of the Contract Documents. Nothing herein shall be construed to limit Contractor’s liability for damages for third party claims that may be asserted against the Contractor or Owner, including bodily injury or damage to tangible property arising out of, results from, or related to the negligence, errors or omissions or services provided by Contractor.”

• Language that waives the owner’s right to consequential damages, but allows the contractor to collect its consequential damages.

• AIA mutual waiver language that allows the owner to collect liquidated direct damages only. However, by nature liquidated damages are used to estimate indirect or special damages (consequential damages) not known at the time the contract is executed. Therefore, this ambiguous language may be construed to eliminate liquidation of consequential damages for the owner.

“The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes: (1) damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and (2) damages incurred by the Contractor for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work. This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Subparagraph 4.3.10 shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents.”

(AIA: A201-1997,¶4.3.10 – With the phrase “for principal office expenses including the compensation of personnel stationed there” deleted)

12

3. Indemnity

• ISSUES: Worker’s compensation, broad-form clauses, intermediate clauses, comparative clauses, active and passive negligence, statutes (Illinois’ Scaffold Act), public policies, insurance, Owner-Controlled Insurance Programs, Contractor-Controlled Insurance Programs…


• “Broad-form” language that requires indemnification for the owner even if the owner is solely negligent and the contractor has “zero” negligence. In other words, the event could be caused in whole or in part by the owner’s negligence, but the owner would still be indemnified.

“The Contractor agrees to indemnify and hold harmless the Owner, its officers and agents, against any claim for injury or damage to persons, corporations or property arising out of the performance of the work on the Project, regardless of whether the injury or damage is caused in whole or in part by the act or negligence of the Owner, its officers or agents.”

• “Intermediate” language that requires the contractor to indemnify the owner unless the injuring event is caused by the sole negligence of owner. Therefore, if the owner is 99% at fault, the contractor must still indemnify the owner completely.

“To the fullest extent permitted by law, Contractor shall protect, defend, indemnify, and hold harmless Owner, its agents, employees, subsidiaries, consultants (including the AE), representatives, shareholders, directors, officers and each of them (collectively “Owner Indemnitees”), from and against any and all claims, damages, losses, costs, and expenses (including reasonable legal, accounting, consulting, engineering, and investigatory costs and other expenses) that arise out of or relate to any act or omission by Contractor or any Subcontractor or any employee, officer, agent, representative, or consultant of any of them, that results in personal injury (including bodily injury), death, or property damage irrespective of proportional fault, except to the extent that such claims, damages, losses, costs, and expenses are caused by the sole negligence of Owner.”

• “Intermediate” language that provides indemnification for the owner and contractor from the subcontractor. Subcontractor must fully indemnify even if the event is caused in part by the owner and/or contractor. No indemnification is provided if the event is caused by the willful misconduct or sole negligence of the owner or contractor. The same contract provides NO mutual indemnification for the subcontractor.

• The best compromising language would specify “knock-for-knock” for the people piece, possibly with limitations, except in the case of gross negligence or willful misconduct. Also, the contractor’s liability for damage to the owner’s existing property should be capped except in the case of gross negligence or willful misconduct. Lastly, the contractor’s third-party liability should be capped, except in the cases of gross negligence or willful misconduct.

• An Owner-Controlled Insurance Program or Contractor-Controlled Insurance Program would both constitute as a compromise accounting for indemnification concerns.

• This type of clause would be an intermediate or broad-form clause drafted in the favor of the contractor.

13

3. Indemnity (continued)


“SUBCONTRACTOR hereby releases and shall indemnify, defend and hold harmless CONTRACTOR, OWNER and their subsidiaries and affiliates and the officers, agents, employees, successors and assigns and authorized representatives of all the foregoing from and against any and all suits, actions, legal or administrative proceedings, claims, demands, damages, liabilities, interest, attorney’s fees, costs, expenses, and losses of whatsoever kind or nature in connection with or incidental to the performance of this subcontract, whether arising before or after completion of the Work hereunder and in any manner directly or indirectly caused, occasioned, or contributed to in whole or in part, or claimed to be caused, occasioned or contributed to in whole or in part, by reason of any act, omission, fault or negligence whether active or passive of SUBCONTRACTOR, its lower-tier suppliers, subcontractors or of anyone acting under its direction or control or on its behalf.

The foregoing shall include, but is not limited to, indemnity for:

1. Property damage and injury to or death of any person, including employees of CONTRACTOR, OWNER, or SUBCONTRACTOR.

2. The breach by SUBCONTRACTOR of any representation, warranty, covenant, or performance obligation of this subcontract.

SUBCONTRACTOR’S aforesaid release, indemnity and hold harmless obligations, or portions or applications thereof, shall apply even in the event of the fault or negligence, whether active or passive, or strict liability of the parties released, indemnified or held harmless to the fullest extent permitted by law, but in no event shall they apply to liability caused by the willful misconduct or sole negligence of the party released, indemnified or held harmless.

SUBCONTRACTOR specifically waives any immunity provided against this indemnity by an industrial insurance or workers’ compensation statute.”

14


• ISSUES: Guaranteed maximum price (GMP) v. cost-reimbursable, performance v. prescriptive specifications, adequate definitions of mechanical completion, substantial completion, and contract or final completion, patent ambiguities, reasonable interpretations, Contra Proferentem, reliance…


• Language may specify that the contractor should perform until the work is “deemed acceptable by owner.”

• Language may specify that acceptance will occur when the work is “to the owner’s satisfaction” or “fit for purpose.” These types of acceptance phrases are especially troublesome in lump sum or GMP contracts because the owner may continue to delay acceptance by using the punchlist to its advantage – thus eating away at the contractor’s profit. However, in a cost-reimbursable contract, if the owner is going to require additional efforts to be made before acceptance is rewarded; the contractor will most likely be paid unless there is some other issue present that causes the owner to assert that the contractor performed the work negligently the first time.

• Language that states that the contractor shall construct and deliver the work “in accordance with the contract specifications.” This makes the contract documents the “approving” party.

• Generally speaking, when acceptance criteria language is well-defined, every party benefits. The contractor benefits because it feels that it has something at stake, and the owner benefits because it has assurance that it will get what it pays for.

• Acceptance criteria that cannot be measured should be avoided. Relative and qualitative terms such as “good” or “acceptable” should not be used.

• The terms “mechanical completion,” “substantial completion,” “contract or final completion,” and “final acceptance” should always be defined in an unambiguous, measurable manner.

• Language should be inserted that states that an unqualified acceptance of work under the construction contract will prevent an owner from recovering the cost of remedying defective work, but acceptance with the understanding that certain defects or deficiencies will be corrected will not bar recovery.

• In process-oriented work, language should specify the “performance” that needs to be achieved (performance specifications) by the completed product. For example, no more than X parts per million of carbon dioxide should be produced as a by-product of some sort of process. If the specific output requirements are not met, the contractor should be contractually required to pay liquidated damages based on the “gap” in efficiency of the process; however, the contract should specify an extended testing period before performance liquidated damages are assessed. This gives the contractor a chance to correct defects at its own cost. When a performance specification is not met in a design-build contract, the contractor should be required to redesign at its own cost until it meets the performance criteria. Note: if the work involves owner-specified new or unfamiliar technology, refer to the “new or unfamiliar technology” contract language table. The risk of performance of owner-specified new or unfamiliar technology should remain with the owner as long as the technology was constructed with appropriate, quality means and methods.

• Language that is looser than “in accordance with the contract specifications.” For example, “when the contractor deems the work acceptable or complete.”

• Language that states that after the contractor installs its work its contractual responsibilities are complete. This rarely occurs, because it is bad business, and no owner will accept this type of language.

• For process-oriented work, language that omits performance testing requirements. For example, if a mechanical contractor puts in pipes, but is not required to leak test them.

15

5. New or Unfamiliar Technology

• ISSUES: Means and methods, intellectual property, acceptance provisions…


• Language that shifts the responsibility of performance of an owner-owned/specified piece of equipment onto the contractor. For example: (i) the owner specifies a “black box” on a project and only the owner understands its function, (ii) the contractor is responsible for connecting pipes to the “black box,” and (iii) the contract language shifts the risk of output of the “black box” onto the contractor (who only constructed the input) – this is inappropriate allocation.

• Language that keeps the risk of the piece of equipment functioning correctly (output) on the owner, while the contractor is responsible for the installation of the equipment (input) according to the design documents.

• However, if the new technology pertains to the contractor’s means and methods, the contractor should retain the risk.

• Language that holds the owner responsible for the success of new or unfamiliar technology that the contractor chooses to use in its means and methods.

16

6. Force Majeure

• ISSUES: Time only v. time and money, foreseeability, reasonable efforts/due diligence, burden of proof, definition of triggering events, impacts of events, relief (suspension, termination), insurance, “catch-all” phrases v. specific events, time limits before cost recovery, notice provisions, time-is-of-the-essence clauses…


• If the contract is silent regarding Force Majeure, but contains a time-is-of-the-essence clause. See “No Damages for Delay” language under Favors Owner column. Language provides time relief as the sole remedy to the contractor for any delays.

• AIA language that favors the owner by giving the architect control of time extensions, and making weather related (Force Majeure) claims very hard for the contractor to prove (i.e. documentation required to show that weather events are abnormal, not foreseeable, and have an impact on construction).

“If the Contractor is delayed at any time in the commencement or progress of the Work by an act or neglect of the Owner or Architect, or of an employee of either, or of a separate contractor employed by the Owner, or by changes ordered in the Work, or by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or other causes beyond the Contractor’s control, or by delay authorized by the Owner pending mediation and arbitration, or by other causes which the Architect determines may justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine.” (AIA: A201-1997,¶8.3.1)

“If adverse weather conditions are the basis for a Claim for additional time, such Claim shall be documented by data substantiating that weather conditions were abnormal for the period of time, could not have been reasonably anticipated and had an adverse effect on the schedule construction.” (AIA: A201-1997,¶4.3.7.2)

• First and foremost, Force Majeure triggering events should be clearly, unambiguously defined.

• Compromising language will provide “equitable adjustment” for unavoidable costs incurred by the contractor during delays caused by Force Majeure events. These unavoidable contractor costs include rental equipment and management salaries. Recoverable damages should not be limited to the damage of physical property. Indirect damages should also be recoverable and clearly defined, possibly with limitations. Rebuild should be covered by Builder’s Risk Insurance.

• Compromising language will attempt to include both time and money compensation, with possible limitations. Often the cost recovery is limited to the direct cost of the delay and certain overhead items but will not include profit. In the alternative, limiting language could incorporate a cost recovery only after a certain number of days of Force Majeure have been encountered. Such a “deductible” allows both parties to share a set known-unknown risk, but does not put the contractor at risk for extreme or catastrophic risk that places its business in imminent jeopardy.

• Language that provides time relief to the contractor if a “workaround” cannot be developed and money relief to the extent of impact not covered by insurance or included in the “Contract Price” (contingency).

• Language that gives the contractor time, money, and termination rights without limitations.

• Language that gives time and money relief and specifies that the contractor must bear the first $XXX,XXX of a Force Majeure event, with not more than $XXX,XXX expended by the contractor for all Force Majeure events cumulatively. If after these limits the owner delays in paying the contractor for the Force Majeure impacts, the contractor may terminate the contract (after X number of days of non-payment). Note: This language may be viewed as a compromise if the project is very large in scope and is located in an area highly susceptible to Force Majeure events.

17

6. Force Majeure (continued)


• Language that restricts recovery to time only.

“Contractor agrees that its sole remedy for delays of any duration resulting from Force Majeure, shall be an extension of time, which extension shall be documented by Change Order.”

• Language that provides time relief only for a subcontractor. Furthermore, it requires very stringent notice requirements be met in order to pursue a time extension. Anytime an absolute timeframe is put in to place that denies or waives a right, the drafting party is unfairly benefited. The statute of limitations is 5 or 10 years and here the drafter gives 7 days.

“If SUBCONTRACTOR’S performance of this subcontract is prevented or delayed by any unforeseeable cause, existing or future, which is beyond the reasonable control of the parties and without the fault or negligence of SUBCONTRACTOR, SUBCONTRACTOR shall, within twenty-four hours of the commencement of any such delay, give to CONTRACTOR written notice thereof and within seven (7) calendar days of commencement of the delay, a written description of the anticipated impact of the delay on performance of the Work. Delays attributable to and within the control of SUBCONTRACTOR’S suppliers or subcontractors of any tier shall be deemed delays within the control of SUBCONTRACTOR. Within seven (7) calendar days after the termination of any excusable delay, SUBCONTRACTOR shall file a written notice with CONTRACTOR specifying the actual duration of the delay. Failure to give any of the above notices shall be sufficient ground for denial of an extension of time. If CONTRACTOR determines that the delay was unforeseeable, beyond the control and without the fault or negligence of SUBCONTRACTOR, CONTRACTOR will determine the duration of the delay and will extend the time of performance of this subcontract by modifying the Special Condition titled “COMMENCEMENT, PROGRESS AND COMPLETION OF THE WORK” accordingly. Such extension shall be the sole remedy for the delay.”

“Should the progress, performance or completion of any portion of the Work contemplated by this Contract be delayed as the result of catastrophic flood, hurricane (including hurricane readiness in accordance with the PROJECT NAME facility on-site hurricane preparation standards), tornado, windstorm which impacts the Work or delays the Work for safety reasons, earthquake, fire or other similar catastrophe; or as the result of Acts of God, the public enemy, terrorists, Acts of the Government; or epidemics, quarantine restrictions, strikes (other than of or against Contractor), freight embargoes or other casualty which is not in the normal course of business for Contractor and for which the Contractor is not responsible (a “Force Majeure Event”); the time of completion of the portion of the Work directly affected by such delay, shall upon timely written request of the Contractor, be extended by a period commensurate as defined below with time lost on the Substantial Completion Date if a reasonable workaround cannot be developed by the Parties which mitigates any delay or additional costs.

If a Force Majeure Event will increase Contractor’s cost for the performance of the Work, Contractor will be entitled to an equitable adjustment of the Contract Price to compensate Contractor for its actual additional costs reasonably incurred due to the Force Majeure Event, to the extent and amount not covered by insurance and not already included in the Contract Price. Contractor will use all reasonable efforts to mitigate the effects of any Force Majeure Event.”

18


• ISSUES: Notice provisions, mandated acceleration, constructive acceleration, recovery acceleration, control of recovery plans, liquidated damages as direction to accelerate, excusable delays v. non-excusable delays, ownership of float, expert testimony/studies, time extension requests, owner response time for determining if a delay is excusable, burden of proof of lost productivity, causation, liability, resultant injury…


• Language that specifies that the contractor should do whatever it takes to get the job done on time (regardless of the circumstances) using its own “means and methods.” If the required “means and methods” happen to include acceleration, the contractor is responsible for its extra costs.

• Language that either gives the contractor no compensation, or direct costs only for mandated or constructive acceleration. The example language below allows direct costs only.

“Even if Contractor’s work is otherwise in compliance with the Project Schedule, Owner may, at any time, direct Contractor in writing to accelerate the Work and to perform additional shifts or overtime and provide additional equipment. In this event, Owner’s sole liability to Contractor shall be to pay Contractors actual direct costs related to the acceleration. Any adjustment in the Contract Price for Owner’s voluntary acceleration of the Work shall be implemented by Change Order.”

• Language that forces acceleration by overmanning (with no means of recovery) if the contractor fails to meet milestones. The milestone mention is especially troubling because a contractor may fail to meet the first milestone and be forced to accelerate when it actually may have been on pace to finish the entire project early or on time. The inability of the contractor to meet early milestones may not necessarily mean that the contractor is on pace to finish late. The milestones may have just been inaccurately scheduled. Note: Elsewhere in the contract, overmanning compensation is allowed if it is necessitated and approved by the owner due to an increase in the scope of work via a change order.

“Should Contractor fail to achieve one or more milestones by the projected date(s), Contractor expressly agrees that it will add a sufficient number of qualified and experienced personnel to its design and/or construction management staff, as required, to recover the projected schedule and shall not seek reimbursement from Owner for such personnel even though they may be added to Contractor’s manloader.”

• Language that gives the contractor its direct costs and a portion of indirect costs and profit for the accelerated work when the acceleration is mandated or constructive. Similar to the “Cumulative Impact of Change Orders,” a good compromise might establish an unbiased “project neutral” expert on acceleration impacts to apply a certain model or method to quantify impacts.

• Compromising language should also specifically set out what type of documentation the contractor is expected to keep in order to prove causation, liability, and resultant injury of the mandated or constructive acceleration. The recovery plan for acceleration should also be agreed upon by both parties in a compromising contract.

• If the acceleration is recovery acceleration, the contractor should be held responsible for its extra costs and the recovery plan should be agreed upon since the owner may have to pay more labor expenses to increase its safety inspectors on site.

• Language that allows the contractor to recover its profit and direct and indirect costs for mandated or constructive acceleration. In essence, the contractor gets “Time & Materials” costs for the accelerated work. Although uncommon, language that allows the same compensation for recovery acceleration would clearly also favor the contractor.

19


• ISSUES: Cardinal change, abandonment, constructive change, waivers, reservations, causation, liability, resultant injury, burden of proof, expert testimony/studies, altered working conditions, foreseeability, accord and satisfaction, notice provisions, clause ambiguity, lack of consideration, performance, or authority; unilateral or mutual mistake, misrepresentation, duress, coercion…


• Language that explicitly waives the right of the contractor to impact costs and damages related to the execution of change orders. The language specifies that the contractor should account for any impacts in the change order submittal. This effectively cuts off any ability for the contractor to bring a claim for cumulative impact (unless reservation language is inserted). The justification for this language is that the owner does not want to be blindsided by a cumulative impact claim at the end of a project. Unfortunately, cumulative impact is not usually recognizable until the later stages of a project.

“Execution of a Change Order by Contractor, or acceptance of payment by Contractor constitutes waiver and release of all direct, indirect, consequential and impact costs and damages related to, or resulting from, that Change Order, and its effect, if any, on unchanged work, including, but not limited to, jobsite overhead, home office overhead, interest or carrying charges on Contractor’s investment, expenses arising from cost of capital, or for loss of use of, or under-utilization of labor, equipment or facilities. The execution of each Change Order, or acceptance of payment by Contractor shall constitute a full and complete settlement for all claims Contractor may have against Client, for any damages and/or increased costs as a result of any delay, acceleration, hindrance, disruption, inefficiency, or other interference related to the Change Order and all previous Change Orders. In estimating the effect of changes upon the cost of its Work and Contract Schedule, Contractor shall ensure that it has properly accounted for all cost and time impacts and shall not later make any claim for reimbursement of impact costs allegedly resulting from the number, nature or extent of Change Orders.”

• Language that allows the contractor to submit cumulative impact claims that can display causation, liability, and resultant injury. A good compromise might establish a “project neutral,” unbiased expert on cumulative impacts to apply a certain model or method to determine if cumulative impact occurred and to what extent the contractor should be compensated. Compromising language could also specifically set out what type of documentation the contractor is expected to maintain in order to prove causation, liability, and resultant injury to the owner.

• Some contractors consider it a compromise when language specifies that reservations of rights are “OK” only if the contractor cannot ascertain the cumulative impact of a certain change by its “good- faith” efforts. Furthermore, if the contractor then wants to file for a cumulative impact that includes that particular change order, the contractor must let the owner know of its intention to do so within X days of the change. Some contractors may take issue with this, since research shows that the total cumulative impact cannot be known until late in the project after many “single” changes have synergistically caused a cumulative impact. By definition, the cumulative impact is from multiple or cumulative change orders, not singular change orders.

• Language that specifies a fixed schedule of compensation for changes. For example, the contractor may try to draft language that awards the contractor a fixed amount of compensation for every “X” number of changes or disruptions to its work to account for the cumulative impact.

• Language that allows the contractor to fully recover its cumulative impacts after a certain amount (%) of change has occurred on the project.

20

8. Cumulative Impact of Change Orders (continued)


• Language that disallows the contractor to file for impact costs related to change orders after the change order is signed. This puts the burden on the contractor to try and anticipate all of the impacts that each change will have on the work directly or indirectly. This is difficult, since the cumulative impact of change orders usually cannot be known until the conclusion of the project.

“For any Change Order which warrants an addition to or deduction from the Contract Price or Project Schedule, the Owner and the Contractor shall execute a written Change Order, in a form to be provided by the Owner, and the Contractor’s signature thereon shall constitute acceptance of the change in price and/or schedule, and acknowledgement that said change in price and/or schedule represents full compensation for all costs associated with the Change Order, including delay costs, impacts, acceleration, inefficiency, disruption, consequential damages, and any other cost of any nature or type.”

21

9. Owner-Mandated Subcontractors

• ISSUES: Due diligence, owner-approved lists, contractor nominations, minority and women-owned businesses…


• Language that specifically mandates subcontractors and bars the contractor its “due diligence” rights.

• If an owner provides a contractor with a list of owner-approved (“mandated”) subcontractors, the owner should allow the contractor to nominate other qualified subcontractors to the list. The contractor should also be given “due diligence” rights to review the subcontractor list and make its selection based on the merits of the subcontractors. Once this is done, there has been a mutual agreement. In a lump sum contract, the only risk remaining is if the contractor has been lazy with its “due diligence” and ends up with a poor performing subcontractor. In a cost-reimbursable contract, some of the increased costs may end up being passed on to the owner. Regardless, inadequate “due diligence” can quickly lead to claims and disputes.

• If the owner mandates specific subcontractors, the contractor may be able to compromise if: (i) it requests the difference in pricing between the bid of a mandated subcontractor and the lower bid of an un-mandated subcontractor that the contractor would have used (this is only if the mandated sub’s price is more expensive than the contractor-selected sub’s price), or (ii) if it expressly limits its liability concerning the mandated subcontractor’s performance.

• Language that does not mandate the use of specific subcontractors, unless such a practice would be “practical.” The language states that the subcontractor shall support the owner’s and contractor’s policy to utilize small, minority, and women-owned businesses. No real mandation, just encourages a cooperative working relationship.

“SUBCONTRACTOR shall support CONTRACTOR’S and OWNER’S policy and commitment to maximizing, where practical, business opportunities for small, minority and women owned business enterprises (as identified in the Glossary appended to these General Conditions) by actively identifying, encouraging and assisting in their participation.”

• Language that allows the contractor to contract with any subcontractor (absolutely no owner-control in selection of subs). In other words, the contract is silent regarding “mandation” of specific subcontractors.

22

10. Insurance Allocation

• ISSUES: Liability of “Builder’s Risk” events, premiums potentially increasing, gaps in coverage, “difference in conditions” insurance, due diligence, Owner-Controlled Insurance Programs, Contractor-Controlled Insurance Programs, allocation of deductibles, “additional insured”…


• Language that specifies that the contractor will obtain the Builder’s Risk policy, name the owner as “additional insured” without qualification, and be responsible for the deductibles (deductibles are difficult to account for in a bid, so the contractor may become uncompetitive or financially distressed).

• Language that specifies that the owner will obtain the insurance, but will not be responsible for gaps in the insurance, while the contractor is not allowed “due diligence” to investigate the gaps.

• Owner purchases the Builder’s Risk policy (or is self-insured), or another party buys the policy and passes the costs to the owner. The deductibles are either shared based on the negligence of the parties (determined by good faith discussion), or the contractor is given a fixed portion of the deductibles that it must pay. This gives the contractor a stake in preventing Builder’s Risk events (if at all possible). This fixed deductible amount must be a reasonable amount that can actually be born and survived by the contractor.

• The contractor should also be able to look at the gaps in insurance, so that it is able to purchase “difference in conditions” insurance if necessary. Furthermore, any Builder’s Risk insurance policy should have the contractor named as “additional insured.” It may also prove useful to provide an incentive (reward/bonus) to the contractor if no claims occur. This will encourage the contractor to act “defensively” when it comes to preventing insurance losses if at all possible. All of these factors should be considered to establish a compromising situation that optimizes insurance for project-specific circumstances.

• An Owner-Controlled or Contractor-Controlled Insurance Program may satisfy the contracting parties as an equitable compromise.

• Owner is responsible for obtaining the Builder’s Risk policy, and the owner is responsible for the deductibles. The contract would also hold the contractor harmless for events covered by the insurance, and name the contractor as an “additional insured.”

23


• ISSUES: Which party determines the “equitable adjustment,” site inspections, special conditions clauses, notice provisions, differing site conditions clearly defined, foreseeability, Type I & II conditions, notice requirements, reasonable certainty, duty to disclose, impossibility, mutual mistake, misrepresentation, fraud, breach of implied warranty, review and reliance…


• The contract is silent regarding differing site conditions.

• Language that pushes all the risk to the contractor by giving it access to the site, and telling it to rely on its own investigation (or no site access is granted at all).

• Language that gives the owner supreme control over determining whether or not the contractor is entitled to an equitable adjustment to its contract time or price.

“Different or Concealed Conditions. If Contractor (i) encounters or discovers conditions that differ from those reasonably anticipated after Contractor’s examination of the Site and diligent examination of reference information made available to Contractor, (ii) encounters concealed conditions existing below the surface of the ground, (iii) encounters conditions in an existing structure that are at variance with the conditions indicated by the Contract Documents, (iv) discovers materials that are or that it reasonably believes are Hazardous Materials that are not controlled or have not been rendered harmless, (v) encounters a condition that is or that it reasonably believes is a Wetland Condition that is not protected, or (vi) encounters items or a circumstance that is or that it reasonably believes is a Native American Archaeological Site that is not protected, Contractor shall immediately notify Owner and cease performance of the Work in that area of the Project where any such condition or circumstance is encountered.

• Language that specifies that if differing site conditions occur, the contractor will be “equitably adjusted” for both time and money. The differing site condition should be something that the contractor could not have foreseen. However, this determination should not be independently made by the architect or the owner. If there is a disagreement as to whether or not a differing site condition is present, the disputes provisions should specify a third-party to settle the dispute. The sample language below is almost identical to the first example of “Favors Buyer” language, except the determination of the differing site condition is made by both parties - then a third party if no agreement can be made. If a differing site condition is determined to exist, the owner must grant an equitable adjustment to the contract (time and money).

• Language that excludes the contractor’s liability when there is insufficient time/effort available to investigate site conditions sufficiently. Language will also exclude contractor liability for any gaps that may exist in existing site condition reports.

24

11. Differing Site Conditions (continued)


Protective Actions. Upon ceasing the Work, or upon discovery of any occurrence or condition that constitutes or reasonably could constitute an immediate danger to persons, property or the environment, the Contractor shall take such emergency actions as are reasonably necessary to contain any suspected Hazardous Materials or limit their effects, to protect the suspected Wetland Condition or the suspected Native American Archeological Site, or to otherwise minimize the danger, shall take such temporary measures as are reasonably necessary to secure the involved area of the Project site from further disturbance. The Contractor shall not resume the Work in the affected area until it has received a written order from Owner to do so.

Owner to Review. Owner will promptly review the condition and determine the extent, nature and scope of the condition.

Course of Action. If Owner determines that the condition(s) could not have been discovered by Contractor through information available to Contractor, they do differ materially from the anticipated condition, and would cause an increase or decrease in the Contractor’s cost or time to perform the Work, Owner shall determine a course of action and may: (1) undertake mitigation activities or other acts as its deems appropriate; (2) terminate or modify the Contract in accordance with its terms; or (3) make an equitable adjustment by a Change Order to the Contract.”

“Different or Concealed Conditions. If Contractor (i) encounters or discovers conditions that differ from those reasonably anticipated after Contractor’s examination of the Site and diligent examination of reference information made available to Contractor, (ii) encounters concealed conditions existing below the surface of the ground, (iii) encounters conditions in an existing structure that are at variance with the conditions indicated by the Contract Documents, (iv) discovers materials that are or that it reasonably believes are Hazardous Materials that are not controlled or have not been rendered harmless, (v) encounters a condition that is or that it reasonably believes is a Wetland Condition that is not protected, or (vi) encounters items or a circumstance that is or that it reasonably believes is a Native American Archaeological Site that is not protected, Contractor shall immediately notify Owner and cease performance of the Work in that area of the Project where any such condition or circumstance is encountered.Protective Actions. Upon ceasing the Work, or upon discovery of any occurrence or condition that constitutes or reasonably could constitute an immediate danger to persons, property or the environment, the Contractor shall take such emergency actions as are reasonably necessary to contain any suspected Hazardous Materials or limit their effects, to protect the suspected Wetland Condition or the suspected Native American Archeological Site, or to otherwise minimize the danger, shall take such temporary measures as are reasonably necessary to secure the involved area of the Project site from further disturbance. The Contractor shall not resume the Work in the affected area until it has received a written order from Owner to do so.

25

11. Differing Site Conditions (continued)


• AIA language that gives control to the architect to determine if a differing site condition is present and what the adjustment in cost and time should be. Courts will enforce the architect’s decision unless proven malicious.

“If conditions are encountered at the site which are (1) subsurface or otherwise concealed physical conditions which differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature, which differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, then notice by the observing party shall be given to the other party promptly before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if they differ materially and cause an increase or decrease in the Contractor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall so notify the Owner and Contractor in writing, stating the reasons. Claims by either party in opposition to such determination must be made within 21 days after the Architect has given notice of the decision. If the conditions encountered are materially different, the Contract Sum and Contract Time shall be equitably adjusted, but if the Owner and Contractor cannot agree on an adjustment in the Contract Sum or Contract Time, the adjustment shall be referred to the Architect for initial determination, subject to further proceedings pursuant to Paragraph 4.4.” (AIA: A201-1997,¶4.3.4)

DSC Review. Owner and Contractor will conjunctly review the condition and determine the extent, nature and scope of the condition. If the Owner and Contractor cannot agree, a pre-selected “project neutral” will determine if differing site conditions exist.

Course of Action. If the condition(s) could not have been discovered by Contractor through information available to Contractor, they do differ materially from the anticipated condition, and would cause an increase or decrease in the Contractor’s cost or time to perform the Work, Owner shall make an equitable adjustment by a Change Order to the Contract.”

26


• ISSUES: Implied warranty (Spearin Doctrine), duty to inspect/review, reliance, express warranties (fit for purpose work), insurance, prescriptive v. performance specifications, patent errors/defects…


• Language that holds the contractor liable for damages if they would have been prevented if the contractor had performed a contract document and design review with field verification measurements to verify existing site conditions.

“Before beginning each component of the Work, Contractor shall carefully study and compare the Contract Documents (including the Drawings and Specifications) as well as reference documents and information provided by Owner, and shall check and verify pertinent figures therein and take field measurements of any existing Site and existing facility conditions related to the Work. If Contractor fails to diligently review and properly consider them, Contractor shall be responsible for costs and damages caused by its omissions to the extent that such costs and damages would have been avoided if Contractor had performed its document review, design review, and field verification obligations.”

• Language that expressly warrants that the contractor’s work will be: fit for the purpose intended, of good quality, and free from faults and defects. This type of express warranty has been interpreted by some courts as an exception to the applicability of the Spearin Doctrine. These courts have held contractors liable for design errors/omissions that manifest themselves in the work of the contractor.

“Contractor warrants that the Work shall be in accordance with all applicable plans, Drawings and Specifications, or to the extent not covered by such plans, Drawings and Specifications, in accordance with applicable professional and industry standards, and shall be fit for the purpose intended, of good quality, and free from faults and defects.”

• Language that requires the contractor to use reasonable care in reviewing the design documents and to report any defects or errors noticed. However, the language expressly waives any liability for a claim arising out of the contractor’s failure to discover design defects or errors. This encourages the contractor to check the plans thoroughly with no fear of liability for defects or errors not discovered.

“The Contractor is required to use reasonable care to check any Issued-For-Construction Drawings (IFC Drawings) provided by or to Engineer or the Owner for any Work or Equipment supplied under this Contract for compatibility with the Work. The Drawings shall be marked clearly with any errors in compatibility, dated and returned promptly to the Owner. Preliminary notice of any correction or comments shall in each case be sent by the Contractor to the Owner as soon as possible. Contractor expressly disclaims any liability arising out of any claim that Contractor failed to ascertain and/or report any error or omission in the engineering or design of such Drawings.”

• With Engineer/Procure/Construct lump sum work, bid tenders should be given by the owner with adequate time for the contractor to investigate the design. Oftentimes, not enough time is allotted to the contractor to discover deficiencies in the owner-provided design.

• Language that is in accordance with the Spearin Doctrine. This language attempts to remove all liability for design errors and omissions from the contractor, even if the contractor happens to know that there is an error or omission in the design documents.

“The contractor is bound to build according to plans and specifications prepared by the owner, and the contractor will not be responsible for the consequences of any defects (patent or otherwise) in the plans and specifications under any circumstances whatsoever.”

27

13. Waiver of Claims

• ISSUES: Time limits, delay claim waivers v. final releases, Statute of Limitations…


• Common delay claim waivers cause the contractor to lose its right to delay compensation if it does not provide notice within the contractually specified time limits. The language below comes from a contract that gives the contractor a five-day time limit “or else”... The contract gives the contractor five days from the occurrence of the event if it is contractor-initiated, or five days from when the owner provides notification if it is owner-initiated. The owner is given five days to respond to a contractor’s notice, but there is no contractual penalty if it does not.

“Waiver of Claims for Failure to Provide Notice: CONTRACTOR HEREBY EXPRESSLY WAIVES ALL RIGHTS TO ASSERT ANY AND ALL CLAIMS BASED ON ANY CHANGE IN THE WORK, DELAY OR ACCELERATION (INCLUDING ANY CONSTRUCTIVE CHANGE, DELAY, SUSPENSION OR ACCELERATION) FOR WHICH CONTRACTOR FAILED TO PROVIDE PROPER AND TIMELY NOTICE AS REQUIRED BY THIS ARTICLE XX.”

• Final releases of claims are appropriate. However, language that addresses final waivers may favor the owner if they don’t allow adequate time to the contractor to review the acceptance of the owner. Fair releases usually specify that any and all claims must be submitted within 90 days after substantial completion is achieved and approved for and by the owner.

• Reasonable time limits for delay waivers, and mutual, equal waiver of claims for final releases.

• A more detailed, fair compromise for delay claims would require “prompt” notice of impact events, with a written statement of when the quantification of the impact can be expected. However, a maximum time limit should be specified for the quantification to be submitted by the contractor. This time limit is needed to give the owner adequate time to respond to the claim. This type of language promotes dialogue.

• No final waiver of claims and no time limits on delay claims (other than the Statute of Limitations).

28


• ISSUES: Standards ambiguously defined, professional standard of care, ordinary standard of care (tort negligence), proximate cause, defenses of assumption of risk, contributory negligence, and independent contractor; Affidavit of Merit, foreseeability, economic loss rule, express duties and warranties…


• Language that specifies that “highest” or “best” industry standards should be used. This gives the owner leverage to be able to point at another similar project and say, “That is the highest or best standard. You are liable because you did not reach that standard.”

• Language that specifies that work should be performed in accordance with the plans and specifications with measurable tolerances defined for the contractor (construction standard of care).

• Language that specifies that the design be prepared in accordance with the care, skill, and diligence that other professional designers would ordinarily and reasonably conduct themselves by in the same circumstances to achieve a functional design product that is promptly usable (engineering standard of care).

• “Generally accepted” standards.

29

Chapter 3: Legal Research

Introduction

The legal research results are integral to an increased understanding of the respective risks and

the court’s interpretations as to their allocations. In some instances the intervention of a Legislature

will preempt either the precedental value of cases or the ability of parties to allocate risk on their own.

For example, the “Illinois Scaffold Act” effectively renders indemnification clauses unenforceable in

Illinois. Courts sometimes will not prohibit a seemingly oppressively one-sided clause but will require

that the statement of the requirement to be so clear as to leave no doubt as to the parties’ intentions

(this has frequently been the case with indemnity clauses).

Each of the 10 risks listed in Table 2 have been analyzed and are summarized in this chapter.

This implementation resource contains a summary of the legal research only. The legal research

in its entirety, along with all citations of case rulings and decisions relied upon, can be found in

Research Report 210-11. The overall intent of the legal research is to determine how a court would

likely allocate each risk if it is not done so in the contract documents and what types of exceptions

have been established when the risk is included in the contract documents. The highlight of each risk

discussion is the legal issues and considerations flow chart. Each flow chart will aid the parties in

understanding the courts’ viewpoints concerning the risk.

Table 2. The 10 “Hot-Button” Risks Researched

Legal Research Risks



3. Indemnity


5. Force Majeure






Research and Findings

The research team conducted its legal research by reviewing legal opinions and reviews expressed

in U.S. Federal and state cases from the Lexis Nexis™ database, legal articles, and construction law

books. The attorneys on the research team were also heavily relied upon to provide their expertise

regarding the legal issues and considerations associated with each risk that was researched.

Initially the research team’s hypothesis held that any particular risk is always best allocated to

one certain party regardless of project circumstances. After the data collection, the team concluded

that optimum allocation for any particular risk is not always best allocated to the same party in each

instance, but that it is in fact project-specific. Consequently, the team shifted toward legal research

that could aid contracting parties in determining the optimum allocation of the “hot-button” risks

on each specific project. The team found, however, that only 10 of the “hot-button” 14 risks yielded

readily available, documented legal information. As a result, the research team chose to limit its legal

research scope to the 10 risks that it: (1) had the most success in obtaining legal information for, and

(2) felt that the industry could benefit the most from.

Readers should recognize that each case or legal principle discussed has to be understood

in its totality recognizing that the British and U.S. legal systems are adversarial in nature and not a

Socratic search for the truth. As a result, the specific legal circumstances (i.e., the skills, motivations,

and biases of judges, juries, lawyers, and expert witnesses) may vary greatly from case to case and

thereby result in very different rulings from those discussed herein.

Application of Findings

Through a careful review of the analysis and study of the legal issues and considerations flow

charts, parties should increase their understanding of each of the 10 researched risks. With this

knowledge, along with the information provided by the contract language tables, contracting parties

should then be able to draft more effective risk allocation clauses and more effectively scrutinize

contract clauses that are proposed to them.


No damages for delay clauses attempt to shift the risk of delay caused by one party to

another. It can be the owner as to the general contractor (and by virtue of flow-down provisions,

to the subcontractors), or solely by the general to its subs. Time delays can be costly and can

accumulate quickly. By accepting a contract with a no damages for delay clause, the adhering party

greatly increases its risk exposure on a project. If both the owner and the primary contractor on

a project include a no damages for delay clause, a participating subcontractor can essentially be

held responsible for all delay costs that occur on a project, regardless of the source. Because no

damages for delay clauses are responsible for such a large and highly volatile risk transfer, many

legal jurisdictions have carved out exceptions to their enforceability. Among the legal principles that

govern the exceptions that have been carved out by the courts are the following:

1. Owners have an implied obligation in every construction contract to cooperate with the contractor and to not intentionally interfere with, hinder, or delay performance of the contractor, and;

2. If damages are foreseeable as a probable result of delay and advanced awareness of the risk is given to the contractor, the contractor has the responsibility to account for the risk in its bid price.

31

No damages for delay clauses may be enforced by courts unless specific exceptions are present

(“…no-damage-for-delay provisions are valid and enforceable so long as they meet ordinary rules

governing the validity of contracts” see United States v. Metric Constructors, Inc., 480 S.E.2d 447

(S.C. 1997)). Figure 1 generically lays out the allocation of owner-caused delays when this type of

clause is present. It should be noted that the figure depicts what the current legal trends indicate.

Jurisdictions may vary in their rulings regarding the enforceability of no damages for delay clauses

and even different courts within the same jurisdiction may not be entirely consistent. The following

figure (and all others in this chapter) should be used only as an educational tool and not relied upon

to predict how a court or arbitrator will rule.

Yes

No

Yes

No

Owner

No

Yes

Varies**

Contractor

Yes

No

Which partyassumes the risk?

No Damagesfor Delay

Identifycontract risk:

Delay clearlyforeseeable and/or

specific delayaddressed in clause?

Clause is silentregardingadditional

compensation?

Length of delayjustifies an

abandonment ofthe contract?

The owneractively

?*interfered?*

* Willful acts, bad-faith acts, gross negligence

** Mere negligent interference is not alwaysseen as an exception to the clause

Figure 1. “No Damages for Delay” Legal Issues and Considerations Flow Chart

If an owner-caused delay occurs and was clearly foreseeable and/or specifically addressed in

the no damages for delay clause, the contractor will assume the consequences associated with the

owner-caused delay. If the delay was not foreseeable and/or addressed in the clause, the next step

is to determine if the clause specifically bars monetary compensation for the owner-caused delay.

Many no damages for delay clauses allow only an extension of time; however, if the clause is silent

or ambiguous regarding monetary compensation, the owner may be held liable for costs incurred by

the contractor. If the clause does state that no additional monetary compensation will be allowed,

the court will then determine if the length of the delay qualifies as an abandonment of the contract

by the owner. If the length of delay does not justify abandonment, the next consideration will be to

investigate if the delay was caused by the owner’s active interference. Active interference includes

willful acts, bad faith acts, and gross negligence. If the owner actively interfered, it will be held liable

for the contractor’s damages. If the owner-caused delay was not due to active interference, some

jurisdictions will still hold the owner responsible if the owner-caused delay was due to the mere

negligence of the owner.

32

It should also be noted that if the owner refuses to grant a time extension as the sole remedy

when a delay justifies such an extension, the contractor may be able to recover for its time and money

impacts if it is “constructively accelerated” as a result (see “schedule acceleration” legal issues and

considerations flow chart).


A consequential damages clause either enables or disallows an owner to be compensated for an

indirect loss caused by the contractor, and likewise, enables or disallows the contractor to receive

compensation should indirect losses stemming from the owner’s actions occur. Consequential

damages claims differ, however, from owner to contractor. An owner usually files for consequential

damages caused by a contractor’s breach of contract when the breach causes the owner to lose

use of the final project and the profits that otherwise would have been realized if the breach had not

occurred. A typical contractor claim for consequential damages occurs when the owner’s actions/

inactions cause the contractor to lose potential business or destroy the contractor’s reputation

(sometimes these are referred to as business devastation claims).

Due to the indirect and specialized nature of the losses, the definitions of true consequential

damages are often misunderstood. If a consequential damages clause is not present in a contract,

the common law rule will generally enforce or disallow the damages according to the legal principles

of foreseeability and certainty. The foreseeability principle allows for recovery of consequential

damages if the party in breach of contract could reasonably foresee that a contract breach would

result in the indirect consequential damages to the other party. Certainty requires that damages be

reasonably calculable and not the subject of mere speculation.

Court rulings on consequential damages have been highly variable due to the difficulty in proving

losses with reasonable certainty. As a result, consequential damages waivers are increasingly

common and have thus set some standards of enforcement within the legal community. Traditionally,

contracts for construction of power plants and some other large industrial facilities have eschewed

consequential damages clauses in favor of liquidated damages for late completion.

In summary, several considerations should be made when drafting consequential damages

waivers. Foreseeable losses that are known at the time of contract signing should be specifically

addressed in the waiver. Waivers may contain language that specifies that consequential damages

are waived except for those included in a “liquidated direct damages” provision. This may effectively

disallow the owner from accounting for any consequential damages in its liquidated damages clause,

since there is really no such thing as “direct” liquidated damages. Unfortunately, it is for consequential

damages that liquidated damages provisions are most needed (Sweet, 2004). By definition liquidated

damages are damages which are indirect or consequential which cannot be directly calculated at the

time a contract is entered into (Wallace, 1998).

Theoretically, by including the limitation to “liquidated direct damages” alone, the parties

effectively eliminate liquidated damages altogether. However, it is ambiguous as to what indirect

liquidated damages versus direct liquidated damages can actually be defined as. Owners should be

wary of this type of language in consequential damages clauses. It seems more equitable that the

33

owner would be allowed to account for consequential damages within its liquidated damages, but

that a cap would be specified concerning the damages. However, the cap should be high enough as

to provide an incentive for the contractor to perform.

Figure 2 lays out the allocation of consequential damages awards to any party in situations

involving and lacking a consequential damages waiver. It should be noted that the figure depicts

current legal trends. As such, jurisdictions will vary in their rulings regarding the enforceability or

application of consequential damages clauses.

Yes

No

Yes

No

Yes, if court finds that thedamages fall under the

“catch-all” consequentialdamages definition.

Yes

No

Consequentialdamages waived?

ConsequentialDamages


Damages werereasonably

foreseeable byinjuring party?

Damages can beproved with

reasonable certaintyby the injured party?

Waiver ispresent in

the contract?

Yes

No

Specificdamages

addressedin waiver?

Yes

Yes

No

Figure 2. “Consequential Damages” Legal Issues and Considerations Flow Chart

First, considering the case where a waiver is included, a waiver with specific examples and a clear

definition of consequential damages is preferred to disallow award of the damages. As such, even if

the event is not listed in the waiver, it can still be ruled a consequential damage if the waiver contains

a “catch-all” consequential damages definition and the court interprets the definition to cover the

damages in question (courts will rely on the concepts of foreseeability and certainty to ascertain the

intentions of the contracting parties). When the event in question is included in the listed events, it will

normally result in a ruling upholding the consequential damages waiver.

If there are not clauses present in the contract that address consequential damages, the legal

principles of foreseeability and certainty become the only judicial guide as there is no contract

language to indicate the intentions of the contracting parties. As previously discussed, if the party

in breach of contract had no reason to foresee that their breach would result in losses to the other

party, then the party in breach is only at fault for breach of contract, and is not responsible for the

consequential damages incurred by the other party. If the party in breach of contract did have reason

to foresee that their actions would result in damages to the other party, however, the losses incurred

must still be proven with reasonable certainty before consequential damages will be awarded.

34

3. Indemnity

Indemnification can be defined as the action by which one contracting party (indemnitor)

holds another party (indemnitee) or parties (indemnitees) harmless for a loss that was caused by

the indemnitor. In other words, if the actions of the indemnitor cause a large loss which may or

may not manifest itself with a lawsuit, the indemnitor will shield the indemnitee from liability for the

loss. Depending on the contract and the legal jurisdiction in question, the indemnitor may also end

up indemnifying the indemnitee even if the loss was caused in whole or in part by the indemnitee.

Indemnity can be provided contractually through express written provisions or non-contractually

through the court’s application of the legal concepts of qualitative (common law indemnity) and

quantitative (doctrine of contribution) comparisons of negligence.

Typically, when a severe personal injury or loss occurs on a construction project that yields legal

action, most every project party is named in the lawsuit so that the injured party will have a higher

probability of collecting its damages. If there are no contractual indemnification clauses that prevent

or allow the shifting of guilt for the event, one of the contributing parties may end up bearing all of

the loss even when other parties contributed to the injury or loss. This may happen out of court when

the party with the “deepest pockets” chooses to absorb the entire loss in order to forgo the costly

legal process, or in the case of litigation, a court may allocate the entire loss to one individual party

through the application of common law indemnity (qualitative comparison of negligence).

When no contractual indemnity provisions exist, the party who pays all of the losses will oftentimes

be interested in recovering some of its losses from the other guilty parties. This reimbursement is

known as “contribution.” Most U.S. courts do not require contribution among wrongdoers (Sweet,

2004). In Johnson v. Chicago & P. Elevator Co., 105 Ill. 462 (1882), the court affirmed that, “There is

no right of contribution between wrong-doers.” However, approximately half of the U.S. states have

implemented some type of contribution statute (Sweet, 2004). These statutes vary from state to state,

but most of the statutes generally specify that a joint tortfeasor (wrongdoer) against whom judgment

is entered is entitled to recover from other joint tortfeasors whose negligence contributed to the

injury. Contribution will only be allowed if the other joint tortfeasors are not protected by workers’

compensation statutes (applicable if a joint tortfeasor is the employer of the injured party).

Indemnity can be provided by express written provisions in a contract or by application of

common law indemnity. In this manner, an offending party may find protection from losses that it

otherwise would have been liable for. The doctrine of contribution among wrongdoers is another

method by which contracting parties can mitigate losses by forcing other wrongdoers to contribute

to the loss. As such, the indemnity legal research efforts focused on differentiating and separately

discussing common law indemnity, contractual indemnity, and contribution among wrongdoers.

Indemnification is a highly complicated contracting issue, and as such, it requires extensive

attention when drafting associated clauses. Each party should investigate their state’s public policies

and/or statutes that regulate indemnification clauses in construction contracts to ensure that a

particular clause will be enforceable as written.

Rulings on requests for indemnity vary depending on the existence of an indemnity clause and

the laws regarding indemnity within a state. Figure 3 outlines the granting of indemnity based on

35

situations regarding contractual and non-contractual indemnities in states that allow indemnification

clauses in some magnitude. Indemnity is a complex issue and the figure attempts to generalize the

common principles regarding the risk. As such, jurisdictions will vary in their rulings regarding the

granting of indemnity.

Comparative-form clause

No clause*

Active

Passive

Indemnity


Type ofnegligence byindemnitee?

* Or clause rendered“general” or ambiguous,thus voiding it

Broad /Intermediate-form clause

Indemnificationclause present?

Yes

No

Clause “expressly”indemnifies

indemnitee’s sole/partial negligence?

Yes

No

Sole/partialnegligence indemnityprohibited by Public

Policy/Statute?

Yes

No

Yes

No

Contractualintention of theparties provides

indemnity toindemnitee?

Indemnityprovided toindemnitee?

Yes

No

No

Yes

No

Yes

No

No

Yes

Indemnitee’sfinancial

responsibility?

Comparativecontribution(quantitative)

Common lawindemnity

(qualitative)

Figure 3. “Indemnity” Legal Issues and Considerations Flow Chart

In instances where an indemnity clause is not present in the construction contract (or the clause

has been rendered void), the party seeking indemnity must show that they were only a passive

participant in bringing about the loss. Based on the results from the active and passive conduct

comparison, indemnity can be granted according to comparative contributory negligence (shared

financial responsibility) or common law indemnity (all-or-nothing). Common law indemnity simply

shifts the entire loss from one party to the other depending on active and passive conduct. Many

states, however, have moved to “comparative negligence” as a method of avoiding the all-or-nothing

aspects of common law indemnity. Comparative negligence determines what portion of the loss or

damages can be allocated to each party individually. In instances where each party has violated

the same duty (both active participants), indemnity is usually denied. The logic of these governing

factors, however, is ignored in situations where an indemnity clause is present in the construction

contract.

Where a clause is present, indemnification rights depend on the type of clause found in the

contract. Provided the clause is broad or intermediate, the written indemnification of the indemnitee’s

sole and partial negligence can only be upheld in states where this type of indemnification is not

against public policy or statute and the indemnification intentions are “expressly” or “clearly and

unequivocally” stated in the clause. Public policy restrictions stem from the belief that if the indemnitee

is indemnified in the case of its own sole negligence, it will become careless in its responsibilities.

When expressed indemnification is not present in the clause and the state does not prohibit complete

indemnification, an indemnitee can still receive indemnity where it is proven that the contractual

intentions of both parties were as such; this is often difficult to prove, however.


If a contract contains ambiguous acceptance criteria (especially troubling in design-build and

process-oriented contracts) costs can increase quickly. All parties will benefit when the acceptance

criteria avoid qualitative statements and contain clearly measurable, objective, and quantitative

criteria. Frequently, acceptance criteria may include phrases that specify that the work be completed

so that it is “fit for purpose” or “to the owner’s satisfaction.” This can lead to a situation where the

contractor may feel that it has achieved the acceptance criteria, but the owner views the contractor’s

performance as falling well short of acceptance. Some contractors feel that ambiguously defined

acceptance criteria can also lead to the owner using the punchlist as a “catch-all” to modify or fine-

tune the design to make it “acceptable.”

When ambiguous acceptance criteria do exist, delays will almost certainly result as the contractor

works towards criteria that differ from the owner’s actual needs. Both parties will likely absorb

direct and indirect costs that stem from the delays. In the end, the owner may be forced to accept a

finished product that does not meet its needs and may have to absorb additional costs for rework.

Ambiguous acceptance criteria closely relates to the scope definition of a project. If the scope is not

clearly defined, even well-drafted acceptance criteria may become unreasonable under the extrinsic

circumstances of the project.

Contracting parties may often disagree as to whether or not a certain clause provides clear

and unequivocal terms. Furthermore, parties may not possess an adequate understanding of how

U.S. courts commonly approach rulings when confronted with ambiguous acceptance criteria. This

section will discuss how courts determine whether or not a criteria is ambiguous or not, and which

party will be held responsible for the resultant increase in costs. After reading this section of the

publication, contracting parties should be able to more adequately draft acceptance criteria that

are not ambiguous. At the very least, contracting parties will have more knowledge of how courts

commonly deal with the risk of ambiguous provisions. Accordingly, parties may be able to make

better decisions regarding the pursuit of legal action if they have a good idea of how ambiguous

acceptance criteria will be interpreted by the court.

Ambiguous acceptance criteria commonly occurs within the contract clauses that address

“mechanical completion,” “substantial completion,” “contract or final completion,” and “final

acceptance.” Within these types of clauses testing, commissioning, and permitting requirements

37

will be established along with more generic requirements such as, “The Work is structurally,

mechanically, electrically and functionally constructed in accordance with the requirements of the

Contract Documents.” Ambiguities can surface within any sentence in a contract, but ambiguities

regarding acceptance of the project have the potential to fundamentally alter the entire objective

of the contract as perceived by the contractor versus as perceived by the owner. This conflict in

interpretation has the potential to severely delay a project since major completion milestones always

fall on the critical path of a project schedule.

The following discussion of legal principles pertains to any and all ambiguities that may be found

in a contract, not just in the acceptance criteria. A court will view all ambiguities in a similar manner,

so there is no specialized difference in interpreting ambiguous acceptance criteria.

Figure 4 displays the ambiguous acceptance criteria legal issues and considerations flow chart

that generically lays out the allocation of risk when an alleged ambiguity is present.

Yes

No

Yes

Drafter assumescosts resulting

from ambiguity?

AmbiguousAcceptance

Criteria

Identifycontract risk: Criteria has

more than onereasonable

interpretation*and/or does

not have a plainmeaning?

* Relied upon in preparing bid(NOT an “after-the-fact” interpretation)

No

YesYes

No

Ambiguity is patentto a reasonable

individual?

Prior to bidding,clarification is soughtfrom the drafter of the

ambiguity?

No

Yes

No

Established tradepractices or

customs evidence acompeting, alternate

interpretation*?

Yes

Interpretation* relied uponis consistent with the whole

portion of the contractcontaining the ambiguity?

No

No

No

Yes

Yes

Interpretation* relied uponconflicts with extrinsic

evidence speaking to theintention of the parties?

No

Figure 4. “Ambiguous Acceptance Criteria” Legal Issues and Considerations Flow Chart

If acceptance criteria do not have more than one interpretation or are seemingly plain in their

meaning, the only mode of recovery against the drafter will be when the party performing the contract

relies on an interpretation of the criteria that corresponds with established trade practices or customs.

Also, the interpretation must have been relied on when the contract was entered into.

If the contract terms are ambiguous, the court will determine whether or not the ambiguity is

patent or latent. If the ambiguity is patent, the bidder will be bound to inquire upon the drafter for

clarification. If the bidder does so, it will usually be able to recover its costs from the drafter if the

clarified interpretation later results in project difficulties.

38

If the ambiguity is latent, the bidder’s interpretation will be construed over the drafter’s

interpretation according to the Contra Proferentem rule, so long as the bidder’s interpretation does

not conflict with extrinsic evidence or other portions of the contract when read as a whole (Pari

Materiae).

5. Force Majeure

In any construction project, the fear of the unknown is an ever-present reality. At the time a

construction contract is entered into it is impossible to predict every single event that could occur

and have a devastating impact on the project. These unknown events are commonly referred to

as “force majeure” events. According to Webster’s dictionary “force majeure” can be defined as

a “superior or irresistible force” or “an event or effect that cannot be reasonably anticipated or

controlled.” The definition goes on to compare it to an “act of God,” which is further defined as: “an

extraordinary interruption by a natural cause (as a flood or earthquake) of the usual course of events

that experience, prescience, or care cannot reasonably foresee or prevent.”

Force majeure (“acts of God”) clauses, particularly considering the catastrophic hurricane

damage to Louisiana and Mississippi in late 2005, need to eliminate the risk for potential disputes.

Force majeure invoking events should be clearly and unambiguously defined along with the allowable

compensation measures. Oftentimes contracting parties will rely on insurance companies to provide

protection from force majeure events. However, the potential for insurance companies to go insolvent

in the case of a force majeure event makes it even more important that the contract documents

clearly address the risk factors surrounding force majeure events.

In construction law, the contractor is responsible for any damage or loss that occurs to

a structure during its construction (Clough, 1994). However, if a force majeure event causes the

damage, the contractor can find relief via a force majeure clause. If there is no force majeure clause

several common law principles may provide relief when a force majeure event occurs: impossibility,

impracticability, and frustration.

Impossibility is the common law rule that a court can use to relieve contracting parties if it can be

concluded that performance has become physically impossible. If a contracting party contributes to

the impossibility through its own actions, excuse from the contract will not be granted. Impossibility

doctrine is based on the assumption that both parties will be able to perform as originally contemplated

at the inception of the contract. Impossibility doctrine (along with impracticability and frustration) is

a default and does not apply when contracting parties have agreed to a different allocation of risks

through direct contract language.

The doctrine of impossibility includes physical impossibility as just described as well as extreme

impracticability of performance. Impossibility and impracticability doctrines are closely related

and often indistinguishable in application by courts. The application of impracticability allows for a

broader scope of circumstances that may allow a grant of discharge from a contract, since absolute

physical impossibility will not be a prerequisite for excuse. Instead, continued performance amounts

to an impractical venture instead of a literally impossible situation.

39

Frustration or “frustration of purpose” is the third and final common law principle that may allow

discharge from a contract in the absence of a contractual provision addressing force majeure. In the

absence of a force majeure clause, if an event occurs that causes performance of an obligation not to

become impossible or extraordinarily difficult, but to substantially frustrate the principle purpose for

which one of the parties entered into the contract, the doctrine of frustration may apply.

The doctrines of impossibility, impracticability, and frustration are similar concepts and thus

are often confused in their applications (“…some cases speak of a contract as “frustrated” when

performance has become impossible or impracticable” 7200 Scottsdale Rd. Gen. Partners v. Kuhn

Farm Mach., 909 P.2d 408 (Ariz. Ct. App.1995)). Although inferred by their definitions, in order for the

application of the doctrines of impossibility, impracticability, or frustration, the invoking event must

have been unforeseeable at the time the contract was entered upon.

Apart from a direct contract clause addressing force majeure events, an injured party’s only

hope is that the court will provide relief through one of the common law doctrines just discussed.

Because it is impossible to predict every event that could occur and have a devastating impact on

a construction project, Force Majeure clauses are usually incorporated in some form into modern

construction contracts.

Figures 5 and 6 illustrate the “force majeure” legal issues and considerations flow chart. For

the purposes of the flow charts it was assumed that a typical force majeure clause was being

examined, i.e., a clause constructed to give relief to the contractor in the case of a force majeure

event. Contracting parties should investigate their own legal systems to specifically determine what

portions of the flow chart do and do not apply. For example, Indiana law does not allow a buyer to

claim impracticability and does not recognize the defense of frustration (N. Ind. Pub. Serv. Co. v.

Carbon County Coal Co., 799 F.2d 265 (7th Cir. 1986)). Furthermore, Texas courts have abandoned

the application of the doctrine of impossibility (Perlman v. Pioneer Ltd. P’rship, 918 F.2d 1244 (5th Cir.

1990)).

* Even if a “force majeure” clause does not specifically exist, other clauses may allow or disallow recovery- Examples: “No Damages for Delay” clauses, “Labor Strike” clauses…

** Relief limited to the extent that the contractor could not reasonably mitigate against

Yes

No

Contractorrelieved?**


Contractcontains a

“forcemajeure”clause?*

See Figure 6…Yes

No

Did the contractorsubstantially

comply with noticeprovisions?

Yes

Impossibility,impracticability, or

frustration of purposeapply?

No No

YesForce

Majeure

Figure 5. “Force Majeure” Legal Issues and Considerations Flow Chart

40

The flow chart generically lays out the ability of a contractor to find relief in the case of a force

majeure-type event. Again, if the contract does not contain a specific clause addressing force

majeure, relief will be governed by the doctrines of impossibility, impracticability, and frustration. If

there is a clause, the contractor must comply with the notice provisions or its sole recourse will again

be to seek recovery under one of the three doctrines just mentioned.

Yes

No

Yes

No

YesYes

No

…Cont. fromFigure 5 Event

is inthelist?

* If contractor didn’t draft the clause, and it is not patently ambiguous

** Relief limited to the extent that the contractor could not reasonably mitigate against

Contractorrelieved?**

No

Yes*

Clause isambiguous?

Clausecontains

list offorce

majeureevents?

Yes

No

Clausecontains

“catch-all”phrase?

Yes

No

Event is of thesame type as

the listedevent(s)?

Relief available if courtfinds the event to be

covered by forcemajeure“catch-all” phrase

Figure 6. “Force Majeure” Legal Issues and Considerations Flow Chart (Continued)

If a contractor complies with notice provisions but the clause is ambiguous, the contractor will

find relief unless it drafted the clause or the ambiguity was patent. If the clause is not ambiguous

there are three different situations of contract language that will be present: a clause containing a

“catch-all” phrase, a clause containing a list of specific events, or a clause that contains a “catch-all”

phrase and a list of specific events. If the clause consists solely of a “catch-all,” boilerplate provision,

the court will have great liberty in deciding whether or not the event in question triggers relief. If

the clause solely contains a list of specific events, the clause will provide relief only if the event in

question is contained within the list. If the clause contains a “catch-all” phrase along with a list of

specific events, the event in question will trigger relief if the event is construed to be generally of the

same nature as the events listed per the legal rule of Ejusdem Generis.

It should be noted that if economic conditions are not specifically listed, they will not be construed

by a court to constitute a force majeure event. Also, contracting parties have a duty to mitigate their

losses whenever possible. If this is not done, relief will be adjusted to reflect the failure to mitigate.

41


Oftentimes a contractor may have to accelerate its work progress during a construction project.

This acceleration is typically accomplished by working overtime, adding more workers to the project

(overmanning), or working multiple shifts (shift-work). Mandated acceleration, recovery acceleration,

and constructive acceleration are the three main types of acceleration possible.

Mandated (or direct) acceleration occurs when the owner directs the contract to accelerate the

schedule merely because it wants an earlier completion (no excusable delays or substantial increases

in scope have occurred).

Recovery acceleration occurs when the contractor falls behind schedule due to its own actions or

inactions that have resulted in schedule delays. The contractor will need to accelerate the schedule in

order to finish by the original completion date. Although rare, the contractor may choose to accelerate

the schedule voluntarily in order to achieve an earlier completion.

Constructive acceleration occurs when the contractor files a justified time extension, the owner

denies it, the contractor is held responsible for the original completion date, and thus the contractor

is forced to accelerate its work. A justified time extension may result when the contractor experiences

an excusable delay, or a large increase in scope requires more time for completion.

Acceleration of work creates labor inefficiencies such as fatigue, low morale, loss of job rhythm,

and pacing, which tend to lower labor productivity and thereby increase construction costs. When a

contractor accelerates work because it has fallen behind schedule due to its own actions or inactions,

the contractor must absorb the additional costs associated with lost labor productivity.

An owner needs to recognize that when a contractor makes a request for an extension of time,

the owner’s failure to act in a timely manner may be interpreted by the court to constitute as a

justification for the contractor to constructively accelerate its work. Therefore, as soon as the owner’s

agent has decided whether or not the delay is excusable it should notify the contractor, even if the

exact amount of time extension is not known yet. This way the contractor will not accelerate the

schedule prematurely. When possible, the owner should always extend the project completion date

since a simple delay claim is usually much cheaper than a constructive acceleration claim (Interface,

2005). However, if the schedule is so sensitive that an extension in time is simply not possible, the

owner should seek to come to a contractual agreement concerning compensation for acceleration

prior to project commencement.

In summary, if the owner mandates acceleration for its own purposes, it will almost always pay

the additional contractor costs associated with that action. However, if acceleration occurs from no

fault of the contractor, it will be able to collect its extra costs only if it meets the specific constructive

acceleration stipulations outlined herein. Figure 7 (next page) illustrates the schedule acceleration

legal issues and considerations flow chart. Contracting parties should check to see if their local legal

jurisdictions recognize the concept of constructive acceleration.

If the owner mandates acceleration merely to achieve an earlier completion for its own

convenience, the contractor will be able to recover its acceleration costs unless the contract clearly

and unequivocally waives this right. Obviously, if the delay is not excusable, the contractor will not

42

Contractor accelerationcosts recoverable?

ScheduleAcceleration


* This can come in the form of liquidateddamages, direct command, or coercion

Yes

No

Ownermandates

acceleration?

Yes (unless the contract gave the ownerthe right to mandate with no additional

compensation)

Yes

No

No

Yes

No

Contractorexperiencesan excusable

delay?

Yes

No

Contractorsubmits timelyand sufficient

request for timeextension?

Yes

No

Ownerapproves

request in areasonabletimeframe?

Yes

No

Ownerrequiresschedule

adherence?*

Yes

No

If necessary,contractornotifies the

owner that itwill accelerateat the owner’s

expense?

Yes

No

Contractorattempts toaccelerate

the work andincreases its

costs?

Figure 7. “Schedule Acceleration” Legal Issues and Considerations Flow Chart

43

recover its costs for acceleration efforts stemming from the delay. If the delay is excusable, the

contractor must submit a timely and sufficient request for an extension of time. Failure to do so

will result in a forfeiture of acceleration costs. If the contractor submits an appropriate request, the

owner must approve the request in a reasonable timeframe. If the owner approves the extension in a

timely fashion, the contractor will not receive any compensation if it accelerates the schedule since

it has ultimately been awarded extra time for the delay. If the owner fails to grant a time extension

in a timely fashion, however, the court will look to see if the owner required the contractor to adhere

to the original completion date. If the owner did require schedule adherence through the threat of

liquidated damages, a direct command, or coercion, the court will then look to see if the contractor

subsequently notified the owner that it was going to accelerate under protest at the owner’s expense.

In some circumstances this duty of notification is not required: if (1) the acceleration has been directed

by the owner; (2) the owner has communicated that no time extensions will be granted; or, (3) the

owner has waived the need for notice (Wray, 2000). If the contractor meets notification requirements

(if necessary) and it actually attempts to accelerate the work, it must lastly prove that the acceleration

effort resulted in increase costs (even if the acceleration effort is not successful). If the contractor

can meet these final requirements, in most circumstances it will be able to recover its acceleration

costs.


Once a construction project has begun, the cost of making a design change tends to exponentially

increase as the project progresses. Because of the direct and indirect costs associated with change

orders they are often at the center of legal disputes. As change orders on a project multiply, their

disruptive impact to the project as a whole begins to exceed the sum of their individual impacts to

the project when analyzed individually. When the number of change orders becomes unreasonably

high, the cumulative impact of the change orders creates an excessive disturbance to the project in

terms of performance time and productivity. These changes come in primarily three forms of change:

directed, constructive, and cardinal.

A directed or actual change occurs when the owner directs a change and all parties agree that the

change is actually a change; consequently the change is then quantified for its impacts on time and

cost. A constructive change occurs when the contractor is ordered to perform work that it views as

an increase in its scope, whereas the owner feels that the work is included in the contractor’s original

scope. In order to collect compensation for the disputed work, the contractor must indicate that it

will perform the work, but will submit a claim at a later date. At the later date, the contractor must be

able to prove that a change order should have been issued by showing that the work was outside the

scope of the contract, the owner ordered the work to be performed, the contractor performed the

work in protest, and the contractor expended additional time and/or money to perform the work.

When a cardinal change occurs, it qualifies as a breach of contract by the owner. A cardinal

change can occur when the owner mandates (not proposes) that a contractor perform a change that

is outside the scope of the contract or when the owner directs multiple or drastic change orders that

cause the contracted work to become materially different from what was expected when the parties

entered into the contract.

In order to construct a successful cumulative impact claim, the contractor has the burden of proof

to establish liability, causation, and resultant injury. Liability can be established by merely showing that

a substantial amount of owner changes or disruptions occurred. Proof of both liability and causation

are satisfied within a cardinal change. However, simply showing that a large number of changes and

a cost overrun occurred is not enough to establish causation; rather, the substantial change must

be linked to the cost overrun. Therefore, contractors should make sure that they keep scrupulous

records in order to provide proof of causation via individual impacts of changes or changed working

conditions that led to an overall decrease in labor productivity.

Commonly, the resultant injury is calculated by using the total cost method, the modified total

cost method, or the measured mile approach. In any method, it is imperative that the claimant obtain

an expert witness who will provide an exhaustive analysis and defense of the project documents

associated with the cumulative impact.

Due to the poorly defined nature of cumulative impact, it is not clear how a jurisdiction will rule

concerning compensability. If an impact of a change order on the unchanged work was foreseeable, it

should have been included in the pricing of the change order and therefore is not recoverable. However,

the increased effects of cumulative change orders are often not considered or foreseeable.

Assuming the change orders did not include contingency options that were collected by the

contractor and the contractor did not knowingly waive its right to assert cumulative impact claims, it

will still possess the right to a damages claim due to cumulative change orders. In the past, courts

required that a cardinal change be established in order to allow recovery of cumulative impacts from

change orders; however, in recent years this has shifted to requiring proof of a constructive change

instead.

Figures 8 and 9 display the cumulative impact of change orders legal issues and considerations

flow chart. Each individual industry participant should investigate its own jurisdictional history

concerning cumulative impact in order to more fully comprehend how it might adequately prepare or

avoid a cumulative impact claim.

The flow chart establishes a generic guide for determining when a cumulative impact claim will

be successful or not. First, a large number of owner-caused changes must be issued. Secondly,

the contractor must be able to either: (1) separate owner and contractor caused labor inefficiencies

or (2) prove that the owner is the sole source of all inefficiencies (no other source is possible). If

the contractor is able to achieve one of these requirements it may be able to pursue a cumulative

impact claim by citing a constructive change, cardinal change, or abandonment of the contract.

If the contractor can establish one of these three recovery doctrines it must then prove liability,

causation, and resultant injury from the cumulative impact of change orders (although some courts

and boards may only require proof of resultant injury after one of the three recovery doctrines has

been established). Typically, the proof of resultant injury will require an expert’s assistance and

testimony.

45

CumulativeImpact ofChangeOrders


* Almost always requires an expert

Yes

No

A significantlylarge number

of ownerchanges

experienced?

Yes

No

Contractor is ableto separate owner

and contractorcaused productivitylosses or prove that

the owner is thesole source?

Yes

No

Cardinalchange,

abandonmentof contract, orconstructive

changeestablished?

Contractor may collectcumulative impact?

Yes

No

Contractor’sproductivity is

impacted?

Yes

No

Impact stemsdirectly from

synergy of # andscope of changes?

Yes

No

Liability, causation,and resultantinjury* proven

Yes

Yes

No

The cumulativeimpact waspreviously

foreseeable?

No

No

See Figure 9…

Figure 8. “Cumulative Impact of Change Orders” Legal Issues and Considerations Flow Chart

46

Yes

No

Changeorder formcontainsrelease?

Yes

No

Contractorreserved its

rights to assertcumulative

impact?

Contractor may collectcumulative impact?

No

…Cont. fromFigure 8

Yes

No

Release is ambiguous or boilerplateregarding umulative impact (AND)parties never discussed whether

or not cumulative impact wascovered by the release (OR) parties

discussed but never reached“meeting of the minds?”

Yes

No

Release voided by lack ofconsideration, performance, orauthority; unilateral or mutualmistake, misrepresentation,

duress, or coercion?

Yes

No

Yes

Figure 9. “Cumulative Impact of Change Orders” Legal Issues and Considerations Flow Chart

(Continued)

If the contractor is unable to establish one of these three doctrines of recovery it may be able to

continue through a more generic recovery method. First, it must prove that its productivity suffered

from the multiple change orders, the impact stemmed from the number and scope of the changes,

and the impact was previously unforeseeable. Once these elements have been established, a court

or board will typically examine the contract documents to see if there was a release. If a release

was present, the contractor can continue with its claim if it clearly reserved its right to assert a

cumulative impact claim. If the contract did not reserve its right, it may still be able to recover its

losses if the court establishes that the release was ambiguous or general (boilerplate) and the parties

either never discussed the applicability of the release to cumulative impact or they discussed the

concept but never reached a “meeting of the minds.” If neither of these situations applies the last

opportunity of recovery will hinge on whether or not the release is voided by lack of consideration,

lack of performance, lack of authority, unilateral or mutual mistake, misrepresentation, duress, or

coercion.


The risk of differing site conditions is broken into two distinct types (where the absence of such

conditions was an assumption upon which both parties entered into the contract): Type I – conditions

that materially differ from those indicated or represented in the contract documents, and Type II

– conditions that materially differ from those which can ordinarily be reasonably expected by the

contracting parties for the type of work being performed.

Since differing site conditions can increase costs drastically by causing severe delay and

mitigation costs, differing site conditions clauses are commonly used to allocate the risk. These

clauses typically provide a definition for a changed condition and specify the procedures and

cost reimbursement policies for both the owner and contractor when differing site conditions are

encountered.

47

The goal of many clauses is to shift the responsibility to the owner in an attempt to obtain a fair and

equitable bid price from the contractor. Yet general clauses often attempt to require the contractor to

assume responsibility for verifying the existing site conditions to assure that they do not differ from

what is specified in the design plans and specifications. This can become a heated source of debate.

The general clause puts this problem on the contractor, yet the contractor is essentially required

to use the information supplied by the owner in order to remove the contingency cost for unknown

site conditions from its bid price and remain competitive with other contractors. Consequently, the

assignment of responsibility hinges on the reasonableness and results of any existing site conditions

investigation.

Differing site conditions clauses are typically drafted with the intention of allowing a contractor

recovery if it encounters conditions that materially differ from those indicated in the contract

documents or conditions that materially differ from those that could reasonably be expected.

However, a contractor cannot expect to be able to rely on a differing site conditions clause to save

it from increased costs in any and all differing site condition circumstances. On the contrary, there

are several elements that may prevent a contractor from recovery notwithstanding the presence of a

differing site conditions clause: site investigation requirements, exculpatory contractual statements,

notice requirements, and proof of the certainty of resultant damages.

Generally, site investigation contractual requirements will not prevent a contractor from recovery

unless an encountered condition should have reasonably been discovered by a site investigation

conducted by a reasonably prudent contractor. Some investigation clauses also require the

contractor to review pertinent documents concerning site conditions made available by the owner.

If the contractor fails to review the documents, it may not be able to recover its losses if the site

condition causing the loss would have been exposed if the contractor would have reviewed the

required information.

If a contractor has examined and discovered all site information made reasonably available to it

and none of it conflicts with the owner-provided information within the contract documents, many

courts will rule that the contractor has reason to rely on the owner-provided information despite any

exculpatory language that appears in the contract in an attempt to disclaim the accuracy of owner-

provided information.

A differing site conditions contractual provision will typically state that a contractor has a certain

time limit in which in must notify the owner or its agents in writing of any conditions encountered

that may qualify as a “differing site condition.” If the contractor does not adhere to these notice

requirements, it may lose its ability to recover damages under a differing site conditions clause.

Just like any other claim, regardless of if there is a differing site conditions clause in the contract

or not, a claimant must be able to prove its injuries with a reasonable amount of certainty. If it is not

able to reasonably do so, it will not be able to recover said damages.

A contractor does have several means of compensation for costs relating to changed conditions

as a matter of common law when there is no contract clause present that addresses differing site

conditions, or there is a clause but it is rendered void through the contractor’s failure to adhere

to its requirements (e.g., non-compliance with notice provisions). Most commonly, the contractor

48

must be able to prove one of the following avenues of recovery: duty to disclose, mutual mistake,

misrepresentation, breach of implied warranty, or impossibility.

If the owner possesses site information that would have assisted the contractor in identifying

potentially differing conditions, the owner may be held liable for differing site conditions thereafter

discovered per the owner’s common law duty to disclose.

Mutual mistake can be claimed by a contractor to recover its losses associated with a differing

site condition if it can show that a condition existed of which both the contractor and owner were

equally unaware.

The concepts of duty to disclose and misrepresentation are closely related. Generally speaking,

the difference is that recovery under the duty to disclose concept can be sought when the owner

did not reveal information that would have allowed the contractor to account for the differing site

conditions, while recovery under the concept of misrepresentation can be claimed when the owner

fraudulently or innocently (unintentionally/negligently) misleads the contractor (orally or through

contract documents).

The Spearin doctrine (see “design responsibility” risk discussion) establishes that the owner

impliedly warrants to the contractor that the plans and specification will be adequate to achieve an

acceptable product. Pertaining to differing site conditions, if the plans and specifications indicate

what type of existing conditions may be encountered, the contractor may be able to make a claim for

breach of contract when conditions are encountered that materially differ from those indicated.

The doctrine of impossibility includes physical impossibility as well as extreme impracticability of

performance. If discovery of differing site conditions render performance impossible or impractical,

the contractor may be excused from the contract.

Differing site conditions clauses can be an effective method for achieving an equitable allocation

of this risk in a construction contract. By an owner accepting responsibility for such a risk, the

contractor will not have to price this risk, which may or may not occur, into the bid price. Regardless

of the allocation, if a differing site condition arises, the contractor should give notice to the owner and

detail its effects on schedule and performance.

The risk responsibility for existing and differing site conditions highly depends on the contract

language, or lack thereof, regarding this matter. Figures 10 and 11 contain the differing site conditions

legal issues and considerations flowchart. This flowchart represents the general persuasions of the

U.S. judicial system. However, it would be impossible to create a flow chart that would accurately

capture every manner in which a court may rule. The specific circumstances of each case along with

the controlling legal jurisdiction presiding over each case will carry the most weight in predicting how

differing site conditions issues will be resolved by a court.

The flow chart shows that first a contractor and owner must establish if site information

represented in the contract documents can be relied upon by the contractor. Investigations into

the local legal jurisdictions should be made in an attempt to determine if exculpatory provisions will

be strictly construed. If they are not construed as such, generally contractors will be able to rely

on the site information contained within the four corners of the contract. However, if the contractor

49

* Contractors cannot “reasonably rely” upon owner-providedinformation if a court strictly construes an exculpatoryprovision, or if there is no such information provided

** In the case of fraudulent misrepresentation, the contractorwill only be liable if it “did” in fact discover conditionsthat contradicted ALL of the fraudulent owner-providedinformation. In all other cases, the contractor will assumethe risk if it did or should have discovered and relied onconflicting site information


Yes

No

Was thereowner-

furnished siteinformation

that thecontractor

could reviewand

reasonablyrely upon*?

Differing SiteConditions

Yes

No

Didencounteredconditionsdiffer from

thoseindicated?

See Figure 11…

Yes

No

Was thecontractorresponsible

for further siteinvestigation?

Yes

No

Did the contractordiscover (or“reasonably”

should have)**and rely on

conditions indirect conflict withall of the owner-

furnishedinformation?

Yes

No

Was there adiffering siteconditions(Type I & II)

clause?

Yes

No

Did thecontractor

substantiallycomply withthe notice

requirements?

Yes

No

Yes

No

Duty to disclose,mutual mistake,

misrepresentation,breach of implied

warranty, orimpossibility

apply?

Owner

Contractor


Yes

No

Did thecontractor proveincreased costswith reasonable

certainty?

Owner

Contractor


certainty?

Figure 10. “Differing Site Conditions” Legal Issues and Considerations Flow Chart

50

*** If the contractor was required to investigate thesite conditions it will be held to the expectation thatit should have “reasonably anticipated” conditionsthat it did or should have discovered by conductinga “reasonable” investigation

Yes

No

Yes

No

Type II Recovery:Did the

encounteredconditions differmaterially from

those reasonablyanticipated***?


Owner

Contractor


Owner

ContractorWas there adiffering siteconditions(Type I & II)

clause?

Yes

No

Did the contractorsubstantially comply

with the noticerequirements?

Yes

No

Duty to disclose,mutual mistake,or impossibility

apply?

Yes

No

Did the contractor proveincreased costs withreasonable certainty?

Yes

No


certainty?

Figure 11. “Differing Site Conditions” Legal Issues and Considerations Flow Chart (Continued)

51

is required to investigate the site it will be held responsible if it discovers (or reasonably should

have discovered) site conditions that contradict or clarify what the contract documents indicate. If

a portion of misrepresented site conditions are not clarified after a reasonable investigation by the

contractor, it should still be able to recover for damages resulting from the undiscovered portion of

the misleading owner-provided information.

In the case of fraudulent misrepresentations of site conditions, the contractor’s site investigation

will shift the risk back to the contractor only if it did in fact discover conditions that contradicted

or clarified ALL of the fraudulent information. If the contractor discovers site conditions that only

render some of the owner-provided fraudulent information useless, it will still be able to recover for

damages stemming from the portion of the fraudulent misrepresentations that were not rendered

void by the contractor’s reasonably prudent investigations. If the contractor should have discovered

conditions that would have contradicted or clarified fraudulent information but did not discover

such conditions, the law will generally still allow the contractor to pursue a claim stemming from the

fraudulent misrepresentations.

If a contractor’s required site investigation, or lack thereof, does not shift the risk to the contractor,

it will be able to pursue equitable adjustment under a differing site conditions clause. Common law

mechanisms such as duty to disclose, mutual mistake, misrepresentation, breach of implied warranty,

or impossibility can be used by the contractor to seek recovery if: (1) a differing site conditions

clause does not exist, or (2) a differing site conditions clause is voided due to non-compliance with

notice requirements. Regardless of the mode of recovery sought (contractual or non-contractual), a

contractor will still have to prove its resultant injuries with a reasonable amount of certainty.

If the contractor cannot reasonably rely upon site conditions contained within the contract

(because of a strict enforcement of an exculpatory provision), or no such representations exist, it may

still be able to recover its increased costs stemming from differing site conditions. First, if there is a

differing site conditions clause, the contractor will be able to recover if the encountered conditions

could not have been discovered through a reasonably prudent contractor site investigation, or no

such investigation is contractually required. Furthermore, the contractor will also have to substantially

comply with the notice requirements to be able to seek equitable adjustment under the clause. With a

typical “type 1/type 2” clause, recovery will now come under a type 2 condition (conditions materially

different from what can normally be expected), since a type 1 condition (conditions differ from those

indicated in the contract) can not exist due to the strict upholding of an exculpatory provision, or the

fact that no owner-provided site information exists in the contract documents.

If there is no clause or the clause is rendered useless due to non-compliance with notice

provisions, the contractor may still be able to recover under the common law mechanisms of duty to

disclose, mutual mistake, or impossibility. Misrepresentation and breach of implied warranty do not

apply because at this point in the flow chart it has been established that there is no owner-provided

information in the contract documents that the contractor could reasonably rely on in the first place,

or there is no owner-provided information in the contract at all. Again, if the contractor is going to be

able to successfully recover its damages, it must be able to prove them with reasonably certainty.

52


The ultimate responsibility for defective plans and specifications can often be a source of ambiguity

in the construction industry. Oftentimes the owner will attempt to place the risk associated with

the plans and specifications onto the contractor through direct contractual language. Complicating

matters, a contractor may also attempt to include clauses within its subcontracts that attempt to

further shift the design risk down to the subcontractors. For the sake of simplicity, the following

discussions on design responsibility will focus on the owner–contractor relationship.

When an owner inserts a clause attempting to shift the design risk, the contractor will typically

be required to bring any and all errors and omissions in the design to the attention of the owner or

architect. In many cases, the contractor will demand compensation for the changes or delays caused

by undiscovered design inaccuracies, while the owner will claim that the contractor is responsible

for the associated costs since it was contractual responsible for reviewing the design plans and

specifications and discovering all inadequacies. These types of disputes often result in a construction

claim. Depending on the defective nature of the design along with the contractual language present,

the courts may or may not reject the notion that the responsibility of design lies with the contractor.

The following pages will provide insight as to the terms and conditions for which both an owner and

contractor can be held responsible for the risks involved in design responsibility.

In every traditional construction contract, the owner impliedly warrants that the plans and

specifications are accurate and sufficient enough to build the project. This implied warranty for the

plans and specifications on a construction project has been upheld as a result of the Supreme Court

case of United States v. Spearin, 248 U.S. 132 (1918).

Although the Spearin doctrine is considered “good law” on face value, there have been instances

where courts have not relied on a strict application of the doctrine. The following sections will

discuss several elements that may prevent a contractor from recovery under the Spearin doctrine.

These elements are the contractor’s duty to review the design documents, the presence of an

express warranty in the contract, and the existence of performance specifications instead of design

specifications.

First, the implied warranty of specification does not relieve the contractor from its duty to conduct

a reasonably prudent review of the plans and specifications and bring any noticeable errors and

omissions to the attention of the owner. If the contractor fails to notify the owner of a design error or

omission that the court deems obvious, the implied warranty of the design will not be upheld and the

contractor will be held responsible.

Secondly, oftentimes an owner may claim that a contractor cannot recover losses under the

Spearin doctrine if the contract documents contained either an express disclaimer of the owner’s

responsibility for the information represented in the plans and specifications, or an express warranty

that the contractor’s work would be free from faults and defects and that any defects in the work

would be reworked at the contractor’s expense. It is widely known that courts will typically not enforce

boilerplate or broad-form statements within a contract. However, clear and unequivocal language that

adopts express language may be enforced by some courts to shift the responsibility of the design.

53

Lastly, design specifications will specify the particular components, dimensions, and types of

materials to be used by the contractor, whereas performance specifications will simply specify the

qualities of the end product then leave the contractor to determine the means it will use to achieve the

desired product. Some contracts may contain a mixture of design and performance specifications.

In these cases, the Spearin doctrine will apply, but only to the portion of the specifications that are

design specifications.

The situations discussed herein outline a number of possible scenarios that may arise when

dealing with design responsibility in construction contracts. The Spearin doctrine plays a big role

in determining which entity will ultimately be held responsible for the design. It should be noted

that in a traditional design-bid-build contracting method, the owner’s implied warranty of the plans

and specifications will remain even if the design is completed by a consortium of A/Es which are

separately or conjointly contracted with the owner. Similarly, in a design-build contracting method,

the design-build contractor will impliedly warrant the overall sufficiency of its design according to the

Spearin doctrine regardless of how many specialty A/Es and/or consultants retained by the design-

build contractor assisted in the design process.

Figure 12 contains the design responsibility legal issues and considerations flow chart.

Yes

No

Varies

Yes

No

Owner retains designresponsibility through

implied warranty?

DesignResponsibility


Contractorreasonablyreviewed*

and relied uponthe contractdocuments?

* Reasonable review = contractor was not aware of design errors orcould not have reasonably discovered them. Also, if patent designambiguities existed, contractor must have sought clarification.

No

Yes

Design(prescriptive)specifications

(not performance)?

Yes

No

Contract containsan express

disclaimer orwarranty?

Figure 12. “Design Responsibility” Legal Issues and Considerations Flow Chart

The flow chart shows that if the design in question does not qualify as a design specification, then

the owner’s implied warranty of the design will not apply. However, when the design does qualify as a

design specification, the contractor must have reasonably reviewed all of the contract documents in

order to be able to claim reasonable reliance. A reasonable review will have occurred if the contractor

was not able to discover any design errors or could not have reasonably discovered them. Also, if

patent design ambiguities existed, the contractor must have sought clarification from the owner or

its agents (i.e., A/E). If a reasonable review and reliance can be established, it can be confirmed that

information represented within the contract documents may have misled the contractor. If the contract

54

contains express disclaimers or express warranties, the end result will vary. Some courts may strictly

construe such provisions, while others will narrowly construe them. Each case’s unique characteristics

and circumstances will determine whether or not an express provision will limit the applicability of the

Spearin doctrine. It should be noted that not all legal jurisdictions specifically recognize the Spearin

doctrine, but most recognize that the owner does have an implied duty nonetheless to provide plans

and specifications that are sufficient to produce a functional constructed product.


Standards of care in the construction industry are important concepts that help to ensure

the quality and cost-effectiveness of the constructed product, and most importantly the safety of

all participants during and after the construction process. If an individual does not conduct itself

according to the standard of care expected, it may be liable due to its negligence. If the negligent

party is a licensed professional (e.g., engineer) it will be held liable due to its “professional” negligence.

If the negligent party is not a licensed professional (e.g., contractor) it will be held liable due to its

“ordinary” negligence. Professional and ordinary negligence are similar legal concepts, and are both

used to recover losses associated with negligent performance of a duty to conduct oneself according

to a certain standard or care. One of the earliest legal definitions of the standard of care expected of

all business participants (licensed professionals and non-professionals) is given below:

“[T]o exercise the average degree of skill, care and diligence exercised by members of the same profession, practicing in the same or a similar locality, in the light of the present state” (Gillette v. Tucker, 65 N.E. 865 (Ohio 1902)).

The following pages will explore two separate standards of care within the construction industry:

(1) the engineering standard of care, and (2) the construction standard of care.

A design professional is held to a higher “professional” engineering standard of care than

other construction participants since it must be professionally licensed to practice its craft. Design

professionals in the construction industry consist of engineers and architects, often referred to as

“A/Es” when they are acting together under the same firm or in a joint venture. The discussions

herein will refer to a design professional’s standard of care as an “engineering” standard of care.

However, the standard of care concept remains the same for any design professional whether it is

an engineer, architect, or A/E. An engineering standard of care can be established through direct

contract language, but if it is not, an engineer will still be required to act according to a standard of

care implied by tort law outside of its contractual obligations.

A contractor is also responsible for performing its work according to a certain “construction”

standard of care. Contracting parties are free to specify what this standard will be within the contract

documents, but if they do not, a contractor will still be required to install its work without negligence

according to an implied standard of care through tort law.

Ultimately, all construction participants are held to a standard of care pertaining to negligence

standards implied by law. Regardless of whether or not the negligence in question is professional

negligence, a claimant must be able to establish the following for recovery:

55

“[A]n action in negligence may be maintained upon the plaintiff’s showing that the defendant owed a duty to him, that the duty was breached, and that the breach proximately caused an injury which resulted in actual damages…Duty and liability are only imposed where both the plaintiff and the risk are foreseeable to a reasonable person” (Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 677 P.2d 1292 (Ariz. 1984)).

The above language sets forth the parameters by which any contractual party can be held liable

to another for its negligent failure to fulfill a duty implied by law.

Standards of care in the construction industry involve several complex applications of contract

and tort law. Notwithstanding the difficulties in predicting how a court will accordingly rule, contracting

parties should clearly allocate the expected standards of care within the contract. Furthermore,

to the extent possible, contracting parties should attempt to include provisions which will provide

protection from economic losses caused by third-parties which are connected through the network

of contracts that tend to exist on a construction project.

Under the economic loss rule, a contractor is unable to collect its economic losses from an

engineer for a negligent design. However, if the contractor bargains with the owner to account for

the possibility of economic losses arising from the negligence of the engineer, recovery can be found

under the contractor’s agreement with the owner. The owner then has the opportunity to bargain with

the engineer to allocate the risk of economic losses caused by the engineer’s negligence. This type

of contracting strategy is consistent with the attitude of many courts that enforce the economic loss

rule.

Figure 13 (next page) displays the engineering standard of care legal issues and considerations

flow chart. This flow chart attempts to capture the general attitude that the U.S. judicial system has

assumed. Contracting parties should use the flow chart to educate themselves on the major issues

and considerations involving the engineering standard of care as generally perceived by the U.S.

judicial system. The chart adheres to the general or ordinary negligence rules of recovery.

When an engineer allegedly negligently fails to perform its professional design services according

to the standard normally expected, a claimant must first prove that the actions or inactions of the

engineer proximately caused the claimant’s injury. Next, the source of the allegedly breached duty

of care must be determined. If the standard of care duty expected was established in a contract, the

claimant will not be able to recover solely economic losses if the court strictly applies the economic

loss rule (applies to one-to-one and third-party contractual relationships). If the damages are physical

in addition to economical, the claimant will be able to pursue a claim under tort law regardless of

what the contract states pertaining to the expected standard of care. If the source of the breached

standard of care arises outside of the contract in the first place, the claimant will also be able to

pursue its negligence claim.

The next step in pursuing a claim is to determine whether or not the engineer acted “reasonably”

and “competently” as other engineers would have acted in similar circumstances. This determination

will typically require expert testimony unless the actions or inactions of the engineer are so obviously

negligent that any common “layperson” would come to the same conclusion. If the engineer acted

56

* Typically requires expert testimony speaking as to whetheror not a reasonably prudent design professional shouldhave foreseen the consequences of the acts or omissionsper the “foreseeable harm rule”

** Affidavit of merit not required when: (1) state legislaturedoesnot require one, or (2) breach of standard of care dutyso obvious that no expert is needed to establish burdenof proof

Yes

No

Yes

No

SeeFig. 14…

Yes

No

Designer liable due toimplied professional

standard of care?EngineeringStandard of

Care


Breach ofstandard ofcare duty

arises fromthe designer’s

contract? Breachresults

solely ineconomicdamages?

A proximatecausal

relationshipexists

between thedesigner’sactions or

inactions andthe claimant’s

injury?

Yes

No

Courtadopts theeconomicloss rule?

No

Yes

No

Yes

No

Designer actedcompetently*

and reasonably*as other

designerswould haveacted in the

samecircumstances?

Yes

No

An expressdisclaimer isenforced bythe court orthe claimant

deviatesfrom thedesign?

Yes

No

Affidavitof meritrequiredby the

state**?

Yes

No

Affidavitof meritfiled?

Yes

No

Designer owed aduty (e.g., asconstruction

manager) to theclaimant outside of

its professionaldesign capacity

(ordinary negligencecan be claimed)?

Designer owed aduty (e.g., asconstruction

manager) to theclaimant outside of

its professionaldesign capacity

(ordinary negligencecan be claimed)?

Figure 13. “Engineering Standard of Care” Legal Issues and Considerations Flow Chart

57

“reasonably” and “competently,” the claim will not be able to proceed. However, if the engineer failed

to conduct itself accordingly, the court may still bar the claim if an express disclaimer exists in the

contract, or the injury resulted from the contractor’s deviation from the engineer’s design. If neither of

these exceptions applies, the claim will proceed.

If required, an affidavit of merit must have been filed if a negligence claim based on the professional

standard of care expected is to be successful. If the negligence is so obvious that an expert is not

required, however, an affidavit of merit may not be required. If the affidavit of merit is not required,

or it is required and it is obtained and filed, the designer will typically be held responsible for the

damages produced by its negligence in acting according to the engineering standard of care. If the

affidavit is required but not filed, a claimant will need to establish a separate independent duty of

care apart from the professional duty of care in order to proceed with a claim. If this type of separate

duty can be established, recovery will be governed by Figure 14.

Figure 14 (next page) displays the construction standard of care legal issues and considerations

flow chart. Similar to Figure 13, this flow chart adheres to the general or ordinary negligence rules of

recovery. Again, this flow chart attempts to capture the general attitude that the U.S. judicial system

has assumed.

When a contractor allegedly negligently fails to perform its services according to the standard

normally expected, a claimant must first prove that the actions or inactions of the contractor

proximately caused the claimant’s injury. Next, the source of the allegedly breached duty of care must

be determined. If the standard of care duty expected was established in a contract, the claimant will

not be able to recover solely economic losses if the court strictly applies the economic loss rule. If

the damages are physical in addition to economical, the claimant will be able to pursue a claim under

tort law regardless of what the contract states pertaining to the expected standard of care. If the

source of the breached standard of care arises outside of the contract in the first place, the claimant

will be able to pursue its negligence claim.

The next step in pursuing a claim is to determine whether or not the contractor acted “reasonably”

and “competently” as other contractors would have acted in similar circumstances. This determination

will typically require expert testimony unless the actions or inactions of the contractor are so obviously

negligent that any common “layperson” would come to the same conclusion. If the contractor acted

“reasonably” and “competently,” the claim will not be able to proceed. However, if the contractor

failed to conduct itself accordingly, the court may still bar the claim if the defenses of assumption of

risk or contributory negligence apply. If neither of these defenses applies, the claim will proceed and

the contractor will be liable for the negligent fulfillment of its construction standard of care.

58

* Also may apply to designer in a construction manager role

** Typically requires expert testimony speaking as to whether or not reasonably prudentcontractor should have foreseen the consequenof the acts or omissions per the“foreseeable harm rule”

*** Comparative negligence used in many states, and will allow recovery proportional tocontractor’s contribution of negligence

Yes

No

Yes

No

Yes

No

Contractor liable dueto implied professional

standard of care?


Breach ofstandard ofcare duty

arises from thecontractor’s

contract? Breachresults

solely ineconomicdamages?

A proximatecausal

relationshipexists

between thecontractor’sactions or

inactions andthe claimant’s

injury?

Yes

No

Courtadopts theeconomicloss rule?

No

Yes

No

Yes

No

Contractoracted

competently*and reasonably*

as othercontractorwould haveacted in the

samecircumstances?

Yes

No

Defenses ofassumption

of risk orcontributorynegligence*

** apply ?


Figure 14. “Construction Standard of Care” Legal Issues and Considerations Flow Chart

59

Chapter 4: Conclusions

Inappropriate allocation of risk can result in financial consequences and ultimately litigation.

Contracting parties may find themselves blindsided by a court’s interpretation and resultant ruling

concerning a contract clause. This implementation resource provides industry participants with

contract language tables that may assist in drafting agreeable clauses that will keep the parties out

of court in the first place. Further, the legal research laid out in this publication will educate parties

concerning the legal issues and considerations as they are commonly viewed by the U.S. courts.

By examining the seemingly pervasive opinions of the current courts, contracting parties can obtain

a better understanding of how the “hot-button” risks will be allocated if the project does end up in

litigation.

When trying to establish risk allocation clauses, especially for parties unfamiliar with dealing with

contracts, the contract language itself can often become a confusing obstacle to incorporating such

clauses. Due to this understanding, the team created its contract language tables for each of the 14

“hot-button” risks researched. These cooperatively constructed tables provide contract language

seemingly favorable to the buyer (e.g., owner) and seller (e.g., contractor), as well as language that

may provide a compromising position between both sides. It is highly recommended that parties

involved with drafting or approving a risk allocation clause review the appropriate contract language

table before signing any documents.

As part of the research team’s task to develop a product to aid the construction industry in

“contracting to appropriately allocate risk,” the team felt the necessity to establish a base from which

to compare risk allocation. Consequently, the base was chosen to be situations where no contractual

allocation of risk was conducted and the resulting court rulings when that risk came to fruition. For

some of the “hot-button” risks, this analysis was not entirely possible. For example, a no damages for

delay clause and its associated risks of enforceability become non-existent if the clause is removed

from the contract, since owner-caused delays would subsequently result in equitable adjustment.

Therefore, the legal research for these types of risks focused on observing the exceptions courts

have carved out regarding the enforceability of the related contractual clauses.

Legal issues and considerations flow charts were developed for 10 researched construction

risks, each specifying either the allocation of a risk or the recoverability of damages caused by a risk,

given various circumstances and the existence and/or non-existence of contractual clauses. From

these charts, it becomes rather evident that there is far less ambiguity and chance of no damage

relief when appropriately drafted risk allocation clauses are included in the contract between the

owner and contractor.

The research team developed the Two-Party Risk Assessment and Allocation Model with the

intention of the contract language tables and legal research being used as risk allocation tools after

one of the 14 “hot-button” risks was cooperatively identified as a high concern by the two-party

risk assessment process. However, the research team realizes that not all industry participants will

embrace the model with the rigor that is intended. As a result, some parties may find it most useful

to utilize the contract language tables and legal research as legal perspective references on risk

allocation apart from the Two-Party Risk Assessment and Allocation Model’s full application. At the

60

very least, the research team recommends that contracting parties make this publication available

to its employees, especially the next generation, for the purpose of knowledge-transfer and overall

education on the widely misunderstood legal aspects of risk allocation.

Construction will always have risk associated with it, however, careful drafting of construction

contract clauses can allocate risk where it appropriately belongs and therefore eliminate some of the

uncertainty and legal arguing of common law principles if something does go wrong on the project.

With pre-contract meetings and discussions with the use of these CII materials, inappropriately

allocated and unallocated construction risk claims may be significantly decreased on a variety of

construction projects.

61

References

7200 Scottsdale Rd. Gen. Partners v. Kuhn Farm Mach., 909 P.2d 408 (Ariz. Ct. App.1995).

Clough, Richard Hudson, and Glenn A. Sears. Construction Contracting. 6th ed. New York: Wiley, 1994. 204.

Donnelly Constr. Co. v. Oberg/Hunt/Gilleland, 677 P.2d 1292 (Ariz. 1984).

Gillette v. Tucker, 65 N.E. 865 (Ohio 1902).

Holmes, Oliver Wendell. The Common Law. Boston: Little, Brown, and Co., 1881. 1.

Interface Consulting International, Inc. “Constructive Acceleration.” Industry Research: Articles. Interface Consulting Articles. 6/30/2005 <http://www.interface-consulting.com/articles/constructive_acceleration.html>.

Johnson v. Chicago & P. Elevator Co., 105 Ill. 462 (1882).

Merriam-Webster, Inc. The Merriam-Webster Dictionary. 50th anniversary ed. Springfield, Mass.: Merriam-Webster, 1997.

N. Ind. Pub. Serv. Co. v. Carbon County Coal Co., 799 F.2d 265 (7th Cir. 1986).

Perlman v. Pioneer Ltd. P’rship, 918 F.2d 1244 (5th Cir. 1990).

Sweet, Justin, and Marc M. Schneier. Legal Aspects of Architecture, Engineering, and the Construction Process. 7th ed. Toronto, Ontario, Canada: Nelson, 2004. 65-66, 245, 437, 593, 685, 688.

United States v. Spearin, 248 U.S. 132 (1918).

United States v. Metric Constructors, Inc., 480 S.E.2d 447 (S.C. 1997).

Wallace, Brian D. “Is the AIA’s Mutual Waiver of Consequential Damages Really Mutual?” Fairfield and Woods, P.C. (1998). 6/20/05 <www.fwlaw.com/aia.html>.

Wray, Russel W. “Constructive Acceleration.” FindLaw Library (April 2000). Wray & Pierce, LLP. 6/30/2005 <http://library.findlaw.com/2000/Apr/1/129764.html>.

Contracting to Appropriately Allocate Risk Research Team

Shameem Akhtar, Zachry Construction

Rick Bradford, Bechtel, Chair

Roland Frenck, U.S. Department of Energy

Jim Graham, ExxonMobil

** Awad Hanna, University of Wisconsin–Madison

William McCauley, Shell Global Solutions

Tom Miller, Zurich

DeWitt Patterson, AMEC

Joseph Peer, BE&K

Phil Peterson, Bibb & Associates

Stanley Scofield, U.S. Department of State

Rob Smith, CH2M HILL

Robert Smith, Wickwire Gavin

* Justin Swanson, University of Wisconsin–Madison

* Gregory Thomas, Fisk Electric

Past Members

Susan Alexander, Abbott

Frank Erichson, Fluor, past Chair

Jenny Morrow, AZCO INC.

Warren Nelson, GlaxoSmithKline

Curtis Strauss, ABB Lummus Global

* Principal Authors

** Principal Investigator

Editor: Rusty Haggard

Construction Industry Institute®

The University of Texas at Austin

3925 W. Braker Lane (R4500)

Austin, Texas 78759

construction-institute.org

(512) 232-3000

FAX (512) 499-8101

Bureau of Engineering Research

The University of Texas at Austin