Law Times

Law Times • August 5, 2013 FOCUS Page 11 Construction contract clauses hotly contested Bargaining strength key factor in how negotiations play out BY Julius Melnitzer For Law Times C lauses in construction contracts are more hotly contested today than ever. The primary reason, it seems, is that the ground is shifting under the allocation of risk and liability. "The heart of negotiations today are all about how you allocate risk and, if you accept risk, how can you cover yourself with performance security or insurance," says Sharon Vogel of Borden Ladner Gervais LLP's Toronto office. The ultimate goal is to cap the overall liability arising from a project. Generally speaking, the owner wants to shift it to the contractor who in turn wants to minimize it. "What the contractor will try to do is to limit liability to a percentage of the value of the contract or to a percentage of the insurance proceeds available," Vogel says. "The acceptable level, we have found, depends on the nature of the contract, the nature of the industry, and market practices, which tend to change over time." Parties are also spending time determining a realistic figure for liquidated damages. "The liquidated damages clause is not enforceable unless it is a genuine pre-estimate of damages and not a penalty," says Vogel. "One way to deal with it is to determine damages on a per diem basis if a project comes in late." Risk also comes into play in performance security negotiations that for the most part relate to performance bonds and letters of credit. "Again, the parties will have to decide whether a percentage of the project value is appropriate and, if so, what percentage," says Vogel. "Some of these instruments can be quite expensive, so the negotiations tend to be intense." When it comes to insurance, ensuring there are no gaps between core products is key. "For example, there might be a gap among the builders' risk, professional and commercial general liability policies," Vogel notes. Standard builders' risk policies, for example, that cover physical loss and damage and are commonly called all-risk policies, nonetheless have an important exclusion for faulty and improper design. "Professional liability policies, where the applicable standard is negligence or what is reasonably foreseeable, can cover faulty design, but the standard in builders' risk policies has a higher foreseeability standard that is measured in the context of state-of-the-art practices, which favours the insurer," says Vogel. "As a result, the wording of faulty-design clauses tends to be seriously contested as insured try to obtain wider coverage." There's also a great deal of negotiation around warranty issues. "Parties are demonstrating a growing appetite for understanding the nature and extent of warranties as they apply to individual products," says Vogel. "That means the negotiations can be time-consuming because the devil is in the details." For his part, Matthew Alter of Cassels Brock & Blackwell LLP's Toronto office points to withhold-payment clauses as another serious point of contention. "As for termination for "Owners will often seek to convenience, contractors will include a provision entitling want some assurance that them to withhold and apply a they are not left exposed to portion of the contract price existing subcontracts and to offset the cost of correcting trade supplier obligations." deficiencies or to reimburse Finally, negotiations bethe owner for damages for tween general and subcondelayed completion of the tractors can stall over the project," says Alter. pay-when-paid or pay-if"Contractors want cerpaid clauses. tainty that they will receive "Subcontractors do not payment for work perwant the general contractor's formed and will push back payment commitments to be on these provisions." tied to the contractor's receipt Owners are also not keen of payments from the owner, on waiving claims and will which is seen by subcontractry to exclude or modify tors as a risk that they have no such provisions to provide control over," says Alter. that it's only the contractor The market truism of barwho's waiving them. 'From the perspective of a mediator and arbitrator, As well, the parties' inter- what I've seen is a real appetite to push risk to the gaining strength, however, ests conflict when it comes to person least able to bargain for protection,' says seems to be a greater factor than ever on how all of these concealed or unknown con- Duncan Glaholt. negotiations play out between ditions having cost or schedthe parties. Similarly, owners and conuling impacts. "From the perspective of a "Some owners will want the tractors can clash over terminacontractor to assume the risk of tion-for-cause and for-conve- mediator and arbitrator, what I've seen is a real appetite to differing site conditions and will nience clauses. "In the context of termina- push risk to the person least able include broad provisions obliging the contractor to inspect and tion for cause, contractors will to bargain for protection," says examine the project site before want the triggering event to be a Duncan Glaholt of Toronto's Glaholt LLP. LT material breach," says Alter. work commences," says Alter. www.lawtimesnews.com

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