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If you’ve received a construction contract from a client, it can be difficult to understand what each clause means for you and your business. Some clauses that affect your legal responsibilities will be clearly labelled, whereas others might be hard to spot. It’s normal to feel overwhelmed when reviewing contracts from clients. Some important clauses often within construction contracts that may affect your legal responsibilities include those regarding:

  1. indemnities;
  2. consequential loss;
  3. liquidated damages;
  4. time bars; and
  5. warranties.

This article will explain how you can identify some of the critical issues that may be within your construction contracts so that you know what you should ask the other party to change.

1. Indemnities

An indemnity is an obligation for one party to compensate the other for:

  • damages;
  • losses;
  • expenses; or
  • costs caused by a specific event.  

When you breach an indemnity, the other party can then claim compensation. If you receive a construction contract, you might find many indemnities that go beyond accepted industry standards.

For example:

“The Contractor indemnifies the Principal for and against any loss, damage, cost, expense, fee, charge or liability suffered or incurred by the Principal or any claim against the Principal arising out of or in connection with a breach of the Agreement by the Contractor.”

This indemnity is extensive and will force you to compensate the other party for any breach of the contract, no matter how trivial the breach.

Some indemnities are acceptable, such as those for:

  • death;
  • personal injury; and
  • breaches of intellectual property.

Therefore, if you see an indemnity that you do not believe is acceptable, you should raise this with the other party and request them to change it.

2. Consequential Loss and Uncapped Liability

Consequential loss is a loss experienced by a party that is indirect and does not naturally flow from an event or breach.

For example, you were carrying out excavation works for a council and one of your workers hit electrical wiring. This caused a street-wide blackout, and a restaurant on the street lost profit as they were unable to open for dinner. This loss of profit would be considered consequential as it did not directly relate to the action of your worker.

Identifying which clauses affect your legal responsibilities regarding consequential losses can be difficult. There may be provisions which mention consequential loss, or there may be no mention of it at all. Therefore, you should make sure that, under the contract, you are not legally responsible for consequential loss and other losses of:

  • revenue;
  • profit;
  • use;
  • financial opportunity; and
  • economic loss.  

This exclusion of legal responsibility is particularly important if you agree to provide indemnities that favour the other party. Otherwise, you will be responsible for all losses, and your insurer will not cover those types of losses.

As a contractor, ensure you put a cap on liability. There must be a limit to your financial responsibility and this price is your financial decision. Also, ensure that you avoid any unusual exclusions to the cap that can put you in financial risk.

3. Liquidated Damages

When you are negotiating dates for the work to be completed, be careful on how the other party might charge for liquidated damages. Liquidated damages are the compensation that you might have to pay if you do not complete construction on time.

Liquidated damages usually represent pre-estimates of the loss they will likely incur if you do not complete the work on time. They are not meant to penalise you for finishing work late.

For example, you entered into a construction contract to build a shopping mall but did not complete the construction on time. Therefore, the rate of liquidated damages should reflect the other party’s costs of being forced to delay the opening of the mall. These costs might include the amount of rent they may have earned from future tenants of the shops if there was no delay.

The rate of liquidated damages in a contract should be reasonable. To avoid any legal responsibility to pay liquidated damages, your construction contract should include:

  • favourable extension of time provisions;
  • a practical date of completion that gives you sufficient time to complete the work; and
  • procedures that allow you to extend the period for practical completion without penalty.

You can also protect yourself by ensuring that you:

  • cap the amount that you must pay for liquidated damages; and
  • make it clear that the other party can only claim liquidated damages if there is a delay in the project.

4. Time Bar Clauses

A time bar clause limits the time within which you can enforce certain contractual rights.

For example, if you don’t meet your deadline and fail to ask for an extension of time within ten days, a time bar clause could stop you from seeking this extension without it being considered that you have breached the contract.

Construction contracts will often contain wording such as:

“Unless the Contractor complies with this clause #, it will have no claim against the Principal.”

“The Contractor must notify the Principal of a delay within 5 days of when it ought to have been aware of the delay, failing which it will have no claim.”

“Contractor must not bring a claim unless it provides notice within 5 days of becoming aware, or ought reasonably to have become aware, of a claim.”

You may not be able to negotiate out of these clauses so be sure to understand your time obligations when claiming:

Time bars are tough to overcome in a dispute, so be aware of how its wording might affect you before you enter into any construction contracts.

5. Warranties

The wording is important in construction contracts. Where you see the words “you warrant and agree that you will ensure the works are fit for their intended purpose” it has a different meaning to “you agree that you will ensure the works are fit for their intended purpose.”

In the first example, the contractor is asked to provide a warranty. Generally, if you breach a warranty (like in the first example), you will automatically have to pay compensation. In contrast, breaching a term under a contract (the second example) may not always result in you having to pay damages.

Ensure that you are aware of what you are warranting to the other party. If there is a warranty that goods be ‘fit for their intended purpose’, understand what the intended purpose of the goods is.

For example, you may warrant that the goods or services you provide when building a residential home is performed according to the contract as well as any relevant laws.

Key Takeaways

Parties will often include clauses that they know you will challenge. The five clauses you should be aware of include:

  • indemnities;
  • liquidated damages;
  • consequential loss;
  • time bars; and
  • warranties.

If you have any questions about the clauses within construction contracts, contact LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page.

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