Ten design and construction contract provisions to negotiate (part one)

LAW
Courtney Moates Paulk and R. Webb Moore
Design/construction professionals routinely sign contracts, and many of them are form contracts that have been developed by professional and industry associations, such as American Institute of Architects (AIA), Associated General Contractors (AGC), Engineering Joint Contract Documents Committee (EJCDC), and ConsensusDocs. On occasion, construction and design professionals will revise, delete, or otherwise alter certain important contract provisions in a manner designed to give them a legal advantage should issues arise. When reviewing revised contract language prior to signing, design/construction professionals should pick their battles, and consider what is worth negotiating and what may not be worth compromising a project or client relationship.

In the first installment of this two-part series, we will discuss the design and construction contract provisions frequently subject to revision that should be carefully negotiated.

1. Indemnification
Sometimes referred to as ‘hold harmless’ provisions, the indemnification section of a design or construction contract can have profound legal consequences. The concept of indemnification is not complicated—indemnification is an agreement to assume a specific liability, potential or actual, of another party in the event of a loss. It involves shifting risk from one party to another—essentially as insurance. When a contractor or design professional indemnifies a client, she or he assumes some or all of the client’s potential or actual legal liabilities, which may include attorneys’ fees and other defense costs, such as expert witness fees.

When presented with a provision that requires you to indemnify or ‘hold your client harmless,’ the best solution may be to ask for the provision to be deleted. This will probably not work (although it should not discourage you from asking); Plan B might be to ask the client to indemnify you in the same way the client wants to be indemnified. Now, this will give the client something to think about, and may help in negotiating a mutual indemnification provision that is fair to both sides. In any event, you should not agree to indemnify your client for the client’s own negligence (which, depending on state law, may not even be enforceable), and you should always check with your insurance consultant to determine whether a specific indemnification provision is covered.

2. Insurance and waiver of subrogation
You should carefully review the insurance requirements of any contract presented to ensure your current insurance program complies in every respect, including types of coverages and monetary limits. Your insurance professional will be able to assist in this process.

Sometimes owners will ask to be named as an ‘additional insured’ on your policy. Should you receive this request, it is important to check with your insurance consultant to see if this is doable. It is generally not possible with respect to a design professional’s professional liability (i.e. E&O) policy.

Many design and construction contracts contain a waiver of subrogation provision in the contract’s insurance section. The purpose of this clause is to prevent an insurance company that has paid out for a loss from suing another party involved with the project that may have caused the loss. Subrogation allows an insurance company that has paid for a loss to step into the shoes of its insured and sue a party that may have been responsible for the loss. A waiver of subrogation provision in a design or construction contract may prevent an insurance company that has paid for a loss from exercising this right. Importantly, if you are presented with this provision in your contract, you must check with your insurer to determine whether it voids or otherwise adversely affects your insurance coverage. If so, inform your client and push back!