William Underwood | ConsensusDocs
Construction projects can be inherently risky – often there are multiple parties (owners, architects, engineers, contractors, subcontractors, consultants, vendors, government officials, sureties, insurers, and many others), unforeseen site conditions, tangled supply chains, acts of God, inadequate funding, site safety matters, and a whole host of other issues that can make even a relatively straight-forward job complex. Parties necessarily want to minimize their individual risk to the greatest extent possible on construction projects. And to do so, they may seek to push as much risk as possible onto the other side through one-sided terms in their construction contract.
But is an entirely one-sided contract the best way to mitigate risk? In many instances, the answer is no. Every contract is different – and many considerations should be taken into account when drafting and negotiating contracts – but entirely one-sided can often have unintended consequences and create risks that otherwise might not exist in a contract that allocates and balances risk more equally across the parties.
This article reviews several considerations (although it is not an exhaustive list) for avoiding one-sided contracts, including some of the benefits created through the use of equitable contract clauses. And for context, some examples of one-sided contract clauses include no relief for other contractor/owner-caused delays; no relief for force majeure events; no relief for unforeseen site conditions; and broad form indemnification clauses (i.e. one party assumes the obligation to pay for another party’s liability even if the other party is solely at fault). Again, this is a non-exhaustive list, and many other standard contract provisions can be altered to become one-sided. But the general premise of a “one-sided contract clause” is that it shifts all risk, obligation, and liability to one party. And this article examines why that might not be the best idea.
Contracts Should Generally Allocate Risks to the Correct Parties
On the surface, it may appear that transferring as many obligations and risks as possible to the opposing is a good idea. But generally, the better practice is to allocate risks to the parties best situated to manage that risk. This concept is neither new nor novel. And countless articles address this basic concept in depth – but it still bears repeating at the outset here.
For example, if a contractor or subcontractor is forced to bear risks that it has no control over, then it has little chance to mitigate that risk. And the contractor must (or at least should) ensure against that risk or add a further contingency to the bid price. Either way, the costs go up (more on that below) and no one is well-positioned to mitigate the risk itself. In many instances, this functions as a lose-lose for everyone involved, as the project becomes both more expensive and potentially delayed.
So using a one-sided contract makes it difficult to properly allocate and assign risks to the correct parties. And everyone can suffer because of it. But the use of more equitable contract provisions that allocate risks to those best situated to manage the risk can lead to real-time benefits on the project.
Better Cost Control
As mentioned above, the allocation of risk to a party with no control over that risk is likely to lead to cost increases. Most contractors likely recognize that they must adjust their contract price upwards to account for increased risks and potential liability—particularly those risks that are outside of their control. So forcing all risk and liability for issues onto one party will often lead to increased contract prices. And depending on the size of the project and the risks involved, the price increases can be quite significant.
There are also additional “hidden costs” that may exist beyond just the contract price itself. For example, there is a heightened chance of increased claims, which adds to the cost of the project. And there is a real chance that bid competition itself may be more restricted and less competitive if one-sided risk shifting is made clear upfront. Fewer contractors may be willing to bid on the job and options become limited.
Finally, on a basic level, there is an increased chance that the relationship between the parties will simply be more adversarial if the contract is overly one-sided. Such adversarial relationships generally are not conducive to problem-solving and overall cost mitigation.
More Efficient Project Administration
Balanced contracts can also help reduce the cost and burden associated with basic project administration functions. For example, many one-sided contracts contain very short notice periods to submit claims for issues like unforeseen site conditions, force majeure events, or other sources of delays and increased costs. And often, these notices must contain detailed statements of the subject events and their impact on time and price. The general intent is to prevent contractor claims by creating narrow windows within which claims must be submitted or they are otherwise waived. But in reality, most contractors are still going to try to move forward with claims anyways, regardless of whether they provided notice outside of the contractually required window. And particularly diligent/administratively savvy contractors will simply paper every possible claim at the outset, which in turn creates a larger administrative burden on the project as everyone wades through claims.
So allowing for a more reasonable notice period can reduce the administrative burdens created by excessive claims and allow the parties to focus on other project execution-related matters. And this concept applies beyond just notice periods/requirements as well, as any sort of one-sided requirement could unintentionally lead to excessive administrative burdens on a project.
Keep Your Contract Realistically Enforceable
At the end of the day, a contractor most likely wants the provisions of its contract to be enforceable to greatest extent possible. Every state’s laws are different when it comes to one-sided or otherwise inherently “unfair” contract clauses. And contractors should understand the relevant laws that impact the enforceability of their respective contracts. But even one-sided contract clauses that are facially enforceable in a particular jurisdiction (for example, broad form indemnity clauses) may still not be a good idea.
On a practical level, if a judge or arbitrator wants to avoid the application of a certain contract clause – particularly when it is overly harsh and one-sided – he or she can usually find a way to do so, even if the clause is arguably “legal” on its face. This is not to say that courts and arbitrators will not strictly enforce black letter laws (they will), but most dispute resolution forums lean towards finding an equitable and just result. And the opposing party (i.e. the party harmed by a one-sided contract clause) will happily point the relevant decision-maker in the right direction.
Furthermore, few things will make a juror dislike a party more than the perception that someone is openly and willingly seeking to take unfair advantage of someone else. This can be particularly true within the context of a large owner or general contractor and a smaller party.
So one-sided contract clauses may not ultimately be enforceable. But using a more equitable approach to contracting can help increase the chances that the contract’s terms are enforced in the event of a dispute.
Although one-sided contracts may appear to be a good way to shift risk and avoid liability that may not always be the case. In many instances, one-sided contracts can lead to unmitigated risks, increased costs, and other negative impacts for all parties involved. So consider the benefits of equitably allocating risks to the correct parties while avoiding overly one-sided contract provisions – it may pay dividends in the long run.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email email@example.com.