By By Vasanth Kumar
It is understandable that no construction project is risk-free as risk is inherent in the contracting business. Project risks could arise from factors such as natural, political, social, economic, legal, and general behaviours. Whilst risks can be managed, minimised, shared, transferred, or accepted, they cannot just be simply ignored.
The common ways of handling risks in construction contracts are by means of due diligence, insurance, quantifying damages, indemnity, and enforcing liability caps of parties.
Construction contracts are expected to be well-drafted, balanced, and the risks allocated to the party that is best able to manage them or mitigate their effect. However, in today’s fiercely competitive construction landscape, the scale is tilted in favour of the client.
The end result is contractors and subcontractors often face contracts that are one-sided and infected with ‘killer’ clauses. Signing such contracts without reviewing them – and without understanding what each clause of the document legally means in terms of risk exposure – can seriously expose signees to significant liability, and could lead them to bankruptcy.
Whenever clients offer their own bespoke forms of contract with unfavourable and more oppressive contract terms – for example, with one-way conduit clauses that basically forfeit and deprive a contractor of its basic rights – efforts should be taken to use internationally accepted standard forms of contract like FIDIC, JCT, ICE, NEC, etc., which contain general conditions of contract together with locally modified particular conditions.
Again care should be taken to cross check whether modified particular conditions are well drafted and do not contain any vague clauses, as ambiguities lead to disputes and claims.
Contractors should carefully study both express terms and implied terms in the draft contract, and especially look out for flow-down clauses, which are nothing but ‘killer’ clauses that transfer both responsibilities and liabilities that are normally thought of as belonging to other parties: for instance, unforeseeable site ground conditions, design responsibility, decennial liability, constructability, performance, warranty, consequential damages, exculpatory clauses, and incorporation of reference clauses forcing contractors to agree to supplemental conditions, drawings, specs, schedules, and other information that may not be provided as part of the bid package.
In addition, many contract clauses may be either silent or ambiguous when it comes to owners’ responsibilities and liability, including contingent payment clauses (pay-if-paid and pay-when-paid), retention, change orders, no damage for delay, indemnification, and dispute resolution.
The common curse of the industry is such that even if the main contractor successfully negotiates and signs better contract clauses with the client, in the majority of cases they fail or refuse to pass the same rights and benefits contained in their contract down to the subcontractor agreements.
Everyone should understand that asking others to assume full responsibility and bear all consequences for a wide range of risks that are not in the standard form of contract will act as a deterrent to prospective bidders, and could significantly increase the project cost and even delay the project as it gives more room for claims, disputes, and arbitration.
In a nutshell, onerous contracts are not only detrimental to the project itself, but also to the entire construction industry. A good contract can mean the difference between making a profit and going out of business. Hence contractors and subs should not forget to weigh risk versus reward before entering into commitments, as contracts create legally enforceable rights and obligations.
Constrcution Week