§3.2 Key Contract Provisions

• Jurisdiction: Washington

§3.2 KEY CONTRACT PROVISIONS

The fundamental purposes of any construction contract are to define the parties' rights and responsibilities on the project and to manage and allocate risks among the various stakeholders. The key to successful risk management is fairly allocating risks to the party best positioned to control the risks. Practitioners should consider these overarching principles in drafting the construction contract and negotiating particular provisions and not simply rely on the "standard" clauses in preprinted forms.

(1) Scope of work

The scope of work clause identifies what work must be performed by the general contractor, and it establishes the scope of work the general contractor must include in subcontracts. Along with provisions establishing a contract price and the time for performance, a defined scope of work is an essential element of virtually any construction contract.

Disputes over scope are common and expensive. A well-drafted scope of work clause documents what is included in the work, what is excluded from the work, and which party is responsible for various aspects of the project. Clarity benefits all parties. Wherever possible, the scope of work provisions should identify the design documents on which the contract price and schedule are based; which party is responsible for paying for and obtaining certain permits; and, if the scope is not fully defined at the time of the contract, the precise process by which the scope definition will be completed and how the contract price and time will be affected.

When industry standard forms, such as AIA or ConsensusDocs, are used, the scope of work must be separately drafted, because the form documents do not contain a section for the parties to insert scope language. Accordingly, the scope of work is often addressed in exhibits. Notably, all documents referenced in the contract will be deemed incorporated into it, including specifications and drawings, and the scope of work commonly includes a list of the applicable plan sheets specifications, and addenda.

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As an aid to allocating scope, the parties may consider using a "responsibility matrix," an example of which is included in Appendix A to this chapter. A responsibility matrix helps the parties to carefully include, exclude, and allocate scope responsibility among them.

Once the scope of work is defined in the prime contract, the general contractor must carefully ensure the agreed scope of work is covered by its subcontracts. One of the greatest risks to a general contractor is failing to define scope among subcontractors, resulting in a "scope gap." The converse risk to a subcontractor is being under contract to perform work it did not intend to perform. This can occur when the subcontract includes "dragnet" provisions such as, "all the work of the trade"; "everything necessary for a complete installation"; "all related and incidental work"; or "all labor, material and equipment that can be reasonably inferred from the contract documents." When feasible, general contractors should tie each subcontractor's work to the applicable scope provisions of the general contract and include a "flow down" provision tying each subcontractor's scope to the scope that the general contractor has accepted in the general contract.

Although it is common for parties to attach bids or quotes to construction contracts to define or clarify the scope of work, this should be done with care because it can result in conflicting terms, ambiguity, and disputes regarding scope.

(2) Indemnity

The indemnity clause is one on which many project owners and contractors defer to their lawyers. Indemnity is defined as "[a] duty to make good any loss, damage, or liability incurred by another" and "[t]he right of an injured party to claim reimbursement for its loss, damage, or liability from a person who has such a duty." Black's Law Dictionary (10th ed. 2014). In other words, indemnification requires the indemnitor to step into the indemnitee's shoes and cover liabilities, losses, or damages that may be assessed against the indemnitee. If the clause includes a defense obligation, the indemnitor must step in and defend the indemnitee from a third-party claim.

See Chapter 21 (Indemnity and Insurance) of this deskbook for additional discussion of indemnity issues.

Indemnification clauses are important risk-shifting devices. Typically, owners will seek the broadest defense and indemnification obligation possible from the general contractor, and the general contractor will seek the same from subcontractors. In contrast, contractors will often seek to limit their indemnification responsibility to specified losses and

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events, typically to align the indemnity obligations with the contractor's commercial general liability (CGL) insurance policy.

An example of a broad indemnification obligation follows:

To the fullest extent permitted by law, the Contractor shall defend, indemnify, and hold harmless the Owner, Lender, Architect, Architect's consultants, and agents and employees of any of them (Indemnitees) from and against claims, damages, losses, and expenses, including but not limited to attorney fees, arising out of or resulting from performance of the Work.

Notably, the above clause includes a defense obligation, is not limited to third-party claims, is not restricted based on the causes of loss, and does not distinguish among types of losses. In other words, it calls for the indemnitor (contractor) to defend and pay for any loss arising out of the work, regardless of whether the contractor was at fault or whether the loss is based on bodily injury, property damage, economic harm, intellectual property, or otherwise. This indemnity is, in effect, limited only by the applicable anti-indemnity statute, RCW 4.24.115.

An example of a more limited indemnity provision is §3.18.1 of the AIAA201-2017 "General Conditions of the Contract for Construction," which provides:

To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect's consultants, and agents and employees of any of them from and against claims, damages, losses, and expenses, including but not limited to attorneys' fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss, or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.

This more limited obligation does not include a defense obligation and confines the contractor's indemnification obligation to damages and losses attributable to bodily injury, death, or property damage

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"other than to the work itself." Arguably, this exclusion of the work itself precludes the indemnification clause from being an enhanced warranty clause or catchall breach of contract clause. This indemnity also applies only to the extent caused by the negligence of the indemnitor or others for whom the indemnitor is responsible. A significant feature of this form of indemnity is that the contractor obligation generally aligns with standard commercial general liability (CGL) insurance. This allows the contractor to set its pricing without a premium for uninsured potential indemnity obligations.

Section 10.1.1 of the ConsensusDocs 200 form includes an indemnification provision similar to the AIA standard:

To the fullest extent permitted by law, the Constructor shall indemnify and hold harmless the Owner, the Owner's officers, directors, members, consultants, agents, and employees, the Design Professional, and Others (the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured, including reasonable attorneys' fees, costs and expenses, that may arise from the performance of the Work, but only to the extent caused by the negligent acts or omissions of the Constructor, Subcontractors, or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Constructor shall be entitled to reimbursement of any defense costs paid above the Constructor's percentage of liability for the underlying claim to the extent provided for by the subsection below.

In general terms, for "downstream" contracts, a party should negotiate for the broadest indemnity reasonably available. For "upstream" contracts, a party should pursue a narrower obligation, in most cases with indemnity limited to insurable events: third-party claims for bodily injury, death, or property damage, to the extent caused by the indemnitor's negligence. As illustrated above, the most prevalent industry standard forms adopt the more narrowly focused indemnity approach.

Even when using the AIA or ConsensusDocs provisions, a commonly negotiated issue is whether the indemnity obligation will include third-party claims resulting from the general contractor's breach of contract. Owners and prime contractors negotiate to include such claims because they are within the indemnitor's control and are appropriately recoverable damages flowing from a breach of contract. Contractors and subcontractors often resist this approach because it

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recognizes uninsured potential indemnity obligations and can create conflict or ambiguity with other provisions of the contract defining and limiting available...