Quick Hit: The 3 Most Commonly Litigated Contract Clauses

I review a lot of construction contracts. I also spend a lot of time litigating over how construction contracts apply to project disputes. This gives me solid insights into what companies tend to disagree on after a project starts on both the micro and the macro levels. Understanding this interconnectedness can be valuable in discussing contracts and getting started on projects. At the outset, clarity is king – even if you cannot reach complete agreement on specific terms. Beyond that undeniable truth, here is a list of the 3 most commonly litigated contract clauses with a tip on how to approach them.

1. Payment clauses. Contractors and subcontractors need to be paid for their work. It’s the lifeblood of a project. Neither should be forced to finance the project by providing work without getting paid. Pay-if-paid clauses are unfair and shouldn’t be used. Instead, build remedies for non-payment into the agreements. The ability to stop work is one idea. When contractors or subcontractors become business partners because they continue to work without getting paid, it usually ends up in a messy business divorce.
   
   
2. Change orders. This is really a scope and price issue. Arguments over whether something is a change or not are usually a function of how clearly the scope is defined in the original agreement. The cost of the change is often related to the same issue. Remember to include time changes (even if it means denoting there is no change) in the change order. No one should be required to proceed with or pay for change order work unless there is a change order agreed to in writing and signed by all relevant parties.
   
   
3. Indemnity. There are countless indemnity “forms” in construction contracts. The question is really who should be responsible to pay for the mistakes on the job. Most people are agreeable to paying for their own mistakes. The disagreements come when indemnity is requested from a party to cover someone else’s mistake. Anti indemnity statutes are changing the landscape in this area, but many jurisdiction still allow a party to contractually agree to pay for someone else’s negligence or breach of contract. Make sure the contract only requires you to pay for your own stupidity or the stupidity of someone for whom you are responsible. The broader the indemnity obligation, the more likely you are to have a big dispute involving this clause.

If you understand that these 3 areas are very common subjects in construction litigation, you can try to make the clauses that deal with them more fair in the contract in advance. A fair allocation of those risks and clear contract language on the issues goes a long way to creating the right environment for a smooth project and fewer disputes ending up in court.

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