What Keeps Me Up at Night? Contract Terms
Offner |
Way back in Project Management 101, I learned the most fundamental element of contract knowledge: All contract terms deal with time and money. Working as a manager in the design and construction industry during the last 30 years has taught me many lessons, often more valuable than those learned in the classroom.
One of my former mentors, the late Carl Morse, taught me it is better to say no to a project than agree to a one-sided contract. He stressed the importance of reading the contract and not getting fooled into thinking its terms wouldn’t be enforced when the going got rough.
When I review a proposed contract, I look for contract terms and clauses that overtly or subtly change the economic formula and give away what I worked so hard to achieve in finding and closing a deal.
Even if the contract is one where there is little to negotiate, I carefully read and understand the contract clauses to determine whether the terms make good business sense or whether to pass on the opportunity for one with better terms, conditions or profit opportunities.
Once in a while there is one word in a document that determines the difference between saying yes and saying no.
How can one word change a contract? Certain words are easily confused and often misunderstood. When reviewing a contract, care must be taken to identify words that do not exactly convey the desired deal. Failure to carefully read a contract could impact your bottom line.
Contract terminology can create a minefield for providers and purchasers. Take the term indemnify. Anytime you see indemnify in a contract, substitute the words “pay for,” and you will grasp the intent of the clause. Another common term is waiver. Whenever you see the word waiver, think of “surrender.” Look for these words and how they are used in the contract. If the use of these words creates a fair agreement, leave them in the contract.
That “W” word keeps me up at night. Waiver is a powerful term that under contract law eliminates your ability to seek damages in a court for loss caused by others or to seek relief from claims for damages brought by others. Contract clauses can be preceded or accompanied by the word “waiver,” although, the term may not appear at all in the contract body and the waiver is implied.
Every time you find the word “waiver” in a contract, read those sections carefully and seek legal counsel to ensure you grasp the intent of what is written. I make use of DMJM’s corporate counsel all the time to help me review agreements. Similar to quality checks of our plans and specifications, checking the contract terms and conditions ensures that the document meets expectations, with no surprises.
Signing a contract that contains a waiver clause indicates you voluntarily relinquish some legal rights. Contract waivers, even though you may unknowingly agree to them, are interpreted as an agreement to give up your legal rights in order to make the deal happen. In this sense, a waiver of a right is a type of consideration, in that although you don’t want to give up your rights, you are willing to do so for compensation. Here are a few common examples you will find in many contracts and what they mean in laymen’s terms:
- Waiver of Consequential Damage: You give up your right to collect for any damages indirectly attributable to the initial event that caused a financial impact.
- Waiver of Punitive Damages: Your right to be compensated beyond actual damages suffered as punishment to the party, which caused a financial impact.
- Waiver of Subrogation: You give up your right to seek payment elsewhere, such as an owner’s or contractor’s insurance policy.
I already mentioned another kind of contract waiver where the word “waiver” does not appear anywhere in the terms. This is occasionally referred to as an implied waiver. Here are a few common examples:
- Arbitration Clause: This is usually a waiver of your right to seek compensation through a court of law. An individual or a panel of experts will determine the outcome of a dispute. Arbitration is usually binding as though the decision is delivered by a court of law.
- Choice of Law Clause: This is usually a waiver of your right to use a law promulgated elsewhere as grounds for litigation where you are working.
- No Damages for Delay Clause: A waiver without the word, but a surrender of your rights to compensation if your project is delayed or postponed. Beware of this clause if no reasonable time limit is included.
Many professional services and construction contracts provide that no waiver of any of the contract terms will be effective unless stipulated in writing. Such a clause renders unenforceable any oral promises concerning a specific contract provision. In the final analysis, it’s always best to get it in writing, and if it’s in the contract, expect it will be enforced.
What do I look for when I read a contract? While several states and counties have adopted standard forms of agreement like an AIA or CMAA form of agreement, many jurisdictions do not have their own standard contract form. I have found the AIA and CMAA forms to contain equitable protection for both the buyer of services and the provider of services.
Many state, county and local public works contract forms are stand-alone. The public works contract form may also be called a Standard Form of Agreement. It is standard for them, not for the architect or contractor. Every time I see the word standard and the contract form is not an AIA or CMAA form the red flags go up. These contracts may contain clauses where legal departments used the aforementioned agreements as templates and customized them to suit their requirements, or purchasing regulations, etc.
Here are some content items I look for in a location-specific public works contract. First, I look for legalese or archaic phrases like “the party of the first part,” “heretofore,” etc. Such phrases generally add nothing in terms of clarity and are an indication that some clerk in the contracts department was pretending to be a contract attorney. I then look for overly long sentences, those not broken down into easily digestible components with comprehensible terms. I also look for repetitive clauses, where the contract repeats previous provisions verbatim rather than reference them according to number or heading. I get suspicious of the old double-whammy clause and I don’t assume the other party defines terms the way I do, so I look for a definitions section in the contract.
Don’t be in a hurry. It takes time to understand all of the possible nuances of the language used in an agreement. I won’t accept the other party’s oral explanation of a confusing term, unless I receive assurance from corporate legal counsel. Include everything in writing and don’t agree to a modification of the contract without putting it in writing.
Don’t assume that use of a standard or form contract eliminates the need for your lawyer’s review. Even if a standard contract worked well in one instance, a change of circumstances, date or party can change the whole equation. Finally, don’t start work according to the terms of the contract until both parties have executed the agreement.
How do I get the contract terms I want?
The answer is simple. Ask. You will be amazed how many states and counties are open to negotiated terms and conditions. If the other party is not receptive to negotiations, move on. If you agree to negotiate, the first order of business is to make sure you are dealing with the person who has the necessary authority. Many times, public sector competitive proposals provide a sample form of agreement. It is a best practice to communicate your contract concerns and provide suggestions to the state or county prior to submitting a fee or price proposal. Remember, your fee will be tied to the contract.
I like to start with a generic contract form as a guide, such as AIA or CMAA, and adapt it to my particular situation. Be sure to include the words “contract modifications required” on your communications so that there can be no mistake about its intent. Don’t be afraid to suggest common-sense headings to make it easier to find particular provisions in the contract and number the paragraphs for ease of reference.
Use plain language whenever possible and define technical terms. Suggest replacement of punctuation marks, since even a misplaced comma can change the meaning of a sentence. Carefully review the use of conjunctions, especially “and” and “or,” since the word you choose can have a dramatic impact on meaning. Make sure the contract addresses all possible contingencies and that nothing is left to chance.
Have your attorney or corporate counsel review every contract before you sign it. Ask your attorney any questions you may have about the contract. Remember, there is no such thing as a stupid question, but it can be stupid to let a question go unanswered and pay for it later.
Sign the contract in blue or other colored ink to make the original easily distinguishable from photocopies. Initial every page of the contract and be certain the other party does the same so that nothing is missed. Finally, retain an original form of the fully executed agreement in a safe place and make a photocopy of the contract for your daily use.
A sure way to eliminate your exposure to claims and disputes, and to guarantee you get a good night’s sleep, is to never enter into an agreement that jeopardizes either party’s balance sheet. If you agree to a contract with onerous terms and conditions, you could end up spending much more time, money and energy resolving the contract issues than you would have spent in negotiating better terms and conditions.
Gregory J. Offner is vice president of DMJM – AECOM in Arlington, Va. He is a member of the Correctional News Editorial Advisory Board.