The night is long for contractors who can’t sleep. Project problems and money worries are the monsters under their bed. But their biggest fear, the thing that keeps them up most, is not what they know—it’s what they don’t know. It’s the unknowns—risks and liabilities they don’t see coming until it’s too late—like a car you don’t see until it’s running you over. These unknown and potentially catastrophic risks lurking in the shadows of every project are what really worry contractors, because they can’t be controlled.
In this article we drag unknown risks and liabilities into the light and let you examine them. Because it’s not a question of “if,” but rather, “when” they will threaten you. Contractors who’ve been in business for long enough have encountered many of the risks we’re identifying today. They learned the hard way. And if their company survived, it is now stronger because of the experience. Because now they will be able to see a potential disaster coming in time to avoid it.
In our last article we described a common contract provision used by contractors to limit their liability on the project—a cap on liability. But there are some liabilities that smart owners would never agree to cap. And such risks and liabilities are often expressly excluded from such a cap. That is, the contract identifies the liability by name—like personal injury—and says that the liability cap does not apply to that kind of event. But remember that everything is negotiable, so as part of the negotiations regarding the amount of the cap (which our readers will recall from the last article should be the contract amount) you may also wish to discuss exactly what liabilities are included and excluded from the cap. First, your failure to perform the contract, for whatever reason, should always be included as one of the events to which the liability cap applies. But let’s consider some others.
Third Party Indemnification
This is very often excluded from liability caps. But what is it? These are lawsuits against you by people or entities that aren’t a party to your contract with the project owner. So, for example, a personal injury lawsuit brought against you by someone who was allegedly injured by your work. Maybe a pedestrian falls into one of your excavation trenches and is crushed. Another example—maybe an adjacent property owner sues you for damage to his property and alleges that a sinkhole was caused by your work. Another example—maybe a subcontractor on the project sues you for fraud. The project owner could potentially be dragged into any and all of these lawsuits, and since his liability to the third party isn’t capped, the owner would want to make sure that your liability to him isn’t capped either.
Warranty of Title
We’re not talking about workmanship or the quality and conformity of materials. We’re talking about liens. If you don’t pay your subcontractors or suppliers, they could file mechanic’s liens. The liens attach to the owner’s property and thus injure it. Liens diminish the value of the owner’s property, make it difficult for the owner to obtain or continue financing, and make it virtually impossible to sell. So owners obviously would want to be able to sue you for the full amount of the liability you allegedly created by failing to pay subcontractors and suppliers.
This one works both ways. Contractors don’t want to cap owner’s liability for preexisting conditions like hazardous materials discovered onsite once work gets underway. And likewise, the owner would never agree to limit or cap the liability of a contractor who improperly uses or releases hazardous materials onsite.
Gross Negligence or Willful Misconduct
Usually liability for mere negligence that is, acting in a way that is unreasonable under the circumstances, is often included as part of the cap. But gross negligence or willful misconduct—doing wrong on purpose maliciously or with what the law calls a “conscious disregard,” for the consequences, should of course be excluded from the cap, as liability for such extreme conduct is generally severe. This would include liability for fraud as well—which in many states can’t be capped by law.
Don’t forget about using sub-caps, as a possible negotiating tool. These caps are often referred to in contracts as “liquidated damages.” For example, you may wish to quantify the damages for certain events in give them their own caps. Take delays, for instance—“10% of contract price for delay liquidated damages, but 15% of the contract price for delay liquidated damages.”
And finally, here is something you may not know but should look for it in the contract. Owner’s, like you, buy insurance to protect themselves from some of the risks and liabilities and losses, and their contracts usually say that that coverage doesn’t reduce the cap on your liability to them. The reason, they say, is that they bought the insurance at their expense and you shouldn’t be able to benefit from it, and also because it was purchased to protect them, the owner, and not intended to alleviate your liability.