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Contractual Risk Allocation Provisions

Presented by:

Rolly Chambers & Gene Rash

Smith, Currie & Hancock, LLP

March 5, 2013

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Presenter Biographies• Gene Rash and Rolly Chambers

– Partners in Charlotte, NC office of Smith Currie & Hancock, LLP

• Smith Currie & Hancock, LLP (http://www.smithcurrie.com)– 60 attorneys devoted exclusively to construction and

government contracts– Focus on construction business legal matters– Offices in Atlanta, Charlotte, Ft. Lauderdale, San

Francisco & Washington, D.C.

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Risk-Shifting Provisions

• What will we cover?– Differing Site Conditions & Site Inspection

Provisions– Delays and No-Damage-For-Delay Clauses – Indemnity Provisions– Disclaimers of Implied Warranty of Plans & Specs– Green Warranties

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Risk-Shifting Provisions

• Why be concerned? – Clients might not account for them because they

may:• Overlook them in the rush of bidding• Misunderstand or misinterpret them• Believe them to be unenforceable• Not willing to risk losing the contract

– You can help with knowledge and expectations

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Differing Site Conditions

• What is a differing site condition? – A physical condition– Encountered during the work– Not known when contract was formed– Materially different from the condition believed to

exist when bid was prepared

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Differing Site Conditions

• What is a differing site condition?– Not readily apparent, hidden from view

• Examples:– Poor soils– Concealed Rock– Unknown subsurface piping– Unanticipated groundwater

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Differing Site Conditions

• Who bears the risk?– The General Common Law Rule: contractor bears

risks associated with his performance – The general rule creates problems:

• If GC bears all risk, GC must account for an unknown• Owner may overpay if GC includes a large contingency• If contingency was too small, GC incurs a loss

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Differing Site Conditions

• The Solution – changed conditions clause– Shifts at least some risk to owner for changed

(differing) site conditions– The shifted risks depend on the clause itself– May limit the types of conditions covered– May limit categories of costs recoverable

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Differing Site Conditions

• Changed Conditions Clauses:– Type I changed condition is a condition materially

different from those indicated in the contract documents (FAR 52.236.2; p. 257 of CSCL)• Need to have some representation indicated in the

contract documents regarding the condition at issue

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Differing Site Conditions

• Type II changed condition is:• an unknown physical condition at the site, • of an unusual nature, • which differs materially from those ordinarily

encountered and recognized as inherent in work of the character provided for in the contract

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Differing Site Conditions

• Type 1 Changed Condition Recovery:– Certain conditions indicated by contract docs– Contractor relied on those physical conditions– Nature of conditions encountered was materially

different from what was indicated– Proper notice given– Additional costs or time incurred

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Differing Site Conditions

• Type II Changed Condition Recovery– Conditions encountered were:

• Unusual & Materially different from those anticipated given–The locale–The nature of the work

• Notice + Damages• Totality of the circumstances analysis

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Differing Site Conditions

• Obstacles to Recovery– Site investigation provisions– Exculpatory Clauses

• Disclaiming liability for accuracy of contract docs

– Notice requirements– No Changed Conditions Clause

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Differing Site Conditions

• In the absence of a Changed Conditions clause:– Misrepresentation?– Mutual mistake?– Does Spearin doctrine apply?

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Spearin Doctrine

• What is it?– Party furnishing design impliedly warrants its

adequacy and sufficiency

• Shield/Sword– Defensive use – if Contractor complies with design– Offensive use – for additional costs/time

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Spearin Doctrine

• Chipping away at Spearin– Site inspection provisions– Require Contractor review/verification of

plans/specs– Express disclaimers– Design/Build– Performance specifications

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Delay Issues

• Delays are a major source of disputes• Understanding delay analysis:

– Excusable delays– Nonexcusable delays

• Excusable – depends on contract terms– Fault of owner or its agent– Not contractor's (or its subcontractors’) fault and

recognized by contract terms as excusable

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Delay Issues

• Excusable delay examples:– Design errors– Owner’s failure to provide site access– Owner’s interference– Unusual Weather?

• Nonexcusable means no right to additional time or money

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Delay Issues

• Excusable delays may be:– Compensable or Non-compensable

• Compensable:– Delay is fault of owner or its agent– Contractor entitled to time and money so long as

contract provisions do not shift risk to Contractor

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Delay Issues

• Non-compensable but excusable– Usually not owner’s fault (unless risk shifting

clause renders an owner caused delay non-compensable)

– Not contractor’s fault– Contractor entitled to an extension of time, but no

additional monetary compensation

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Delay Issues

• Multiple, overlapping delays?– Considered “concurrent delays” if excusable and

non-excusable delays occur in the same timeframe– Traditional rule is neither party bears responsibility– Modern trend is to attempt to apportion

responsibility if possible

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Delay Issues

• Delay Risk Shifting – The No-Damage-For-Delay provision– Common in prime and sub contracts– Generally enforceable– Exceptions to enforceability vary by jurisdiction

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Delay Issues

• Exceptions to enforceability of NDFD clause– Varies by jurisdiction– Fraud or misrepresentation– Active interference– So unreasonably long as to justify abandonment– Gross negligence– Not contemplated by the parties– Might be drafted in violation of anti pay-if-paid

statutes

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Indemnification Issues

• Contractual Indemnity Agreements– Promise by indemnitor to hold harmless another

for certain future losses, liabilities or damages. – Indemnitor does not have to be at fault– Heavily favors party with greater bargaining power– Potential for substantial liability

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Indemnification Issues

• Contractual Indemnity Agreements– Strictly construed by most courts– Some states have statutory limitations such as:

• Sole negligence of indemnitee• Partial negligence of indemnitee (less common)

– Prefer provisions with comparative negligence

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Warranty Issues

• Surety’s potential warranty liability– Performance issue, or– Material defect warranty (sealants, roofing….)

• Green issues:– 3rd party certification (USGBC/GBCI re: LEED)– Performance requirements mandating specific

energy reductions

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Warranty Issues

• Design/Build or performance based solicitation with extended energy reduction warranty obligation– Ripe for claims– Is the risk too high?

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Contractual Risk Allocation Provisions

QUESTIONS?If you do not have the opportunity to have your question addressed during the session, you may contact the presenters directly:

Gene Rash & Rolly ChambersCompany: Smith, Currie & Hancock, LLPPhone: 704-334-3459Email: gfrash@smithcurrie.comEmail: rlchambers@smithcurrie.comAddress: 1023 W. Morehead St., Suite 301

Charlotte, NC 28208