Construction Contract Pitfalls

Choice of law and choice of forum provisions can often be surprising and expensive contract pitfalls. Look carefully at these provisions to ensure that they make sense. If the project is in Florida, it does not make sense for the contract to say that all disputes will be resolved in Alaska applying Hawaii law. The place of any dispute resolution should be logical and the state's law to be applied should usually be the same. So, if the project is in Florida, it makes sense for the forum to be Florida and Florida law should apply.

Indemnification provisions can also cause huge problems. Generally, they act as a shield against claims "arising from" the project. They can even be used to shield someone from their own mistakes. A classic pitfall provision is when you are asked to indemnify another party for their own "negligence" or to cover all claims "whether or not they arise in part or in whole from any act or omission" of the other party. Such provisions are prevalent. If you are providing the indemnification, your exposure should be limited to risks that you create by your own actions, not the actions of other parties.

In addition to being overbroad, indemnification provisions can waive protection that you would ordinarily have. For instance, a classic form of indemnification provision waives worker's compensation immunity. So, in a situation where one of your workers is hurt because of the negligence of another party, the contract could expose you to liability where you would ordinarily be protected by the worker's compensation bar.

Usually, indemnification provisions implicate insurance coverage. There are so many pitfalls in the insurance aspects of construction projects, it would take a much longer article to address them all. Two suggestions to avoid pitfalls are: (1) Make sure your limits are appropriate for the value of the project, and (2) Make sure there are no exclusions that affect coverage for the project (cross-suit exclusions or wrap up exclusions are tricky).

Be sure you can live up to your contract. One last warning: Never agree to something you can't live up to. Some contracts say, "Contractor will provide only the most highly trained workers as foremen on the project" or "Workmanship shall be of the highest quality in the industry." These subjective provisions are big gaping pitfalls; if you can't live up to them without question - avoid them.

While the legal terms (as opposed to the business terms) of a contract can be confusing, if you read the contract and understand it thoroughly, you can avoid potential problems down the line.

Julie B. Negovan and Kevin M. Haas are members of Cozen O'Connor's construction industry sector. For more information, contact Negovan at 215-665-5510 or jnegovan@cozen.com and Haas at 212-509-9400 or khaas@cozen.com.