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Looking at some common risk allocation tools for construction contracts, P.2

Previously, we began looking at the issue of risk allocation in construction contacts and some of the tools that can be used to allocate risk between parties. We’ve already mentioned warranties and indemnification. Another possible tool for allocating risk is limitations of liability.

Limitations of liability are used to specify both the scope and magnitude of liabilities the parties have under a contract. Liability can, for example, be excluded for certain types of damages. Limitations of liability may apply to the entire contract, or only to specific terms or transactions. 

Moving along, express contractual remedies can be used to allocate risk in a couple ways. They can set limits on the scope of a party’s potential liability, for example, or they could specify what remedies are and are not available, including liquidated damages, equitable remedies, and other types of remedies.

Payment terms are another important way risk can be allocated in construction contracts. Delaying or accelerating payments can shift risk between the parties. In construction contracts, contractors are going to be interested in reducing the time between payments, while property owners are going to be interested in extending the period of time between payments. 

Another potential contractual agreement that can allocate risk between parties include force majeure, a provision which limits a party’s risk of breaching the contract for events or circumstances that fall outside its control. Termination rights, guaranties and insurance coverage can also be used for risk allocation.

Whenever parties are working to negotiate a construction contract, particularly large contracts, it is critical to work with an experienced attorney to ensure that their interests are well represented in the final contract with respect to risk allocation. Navigating the various available options isn’t always easy, but a skilled attorney will understand what tends to work well and what does not. Working with an experienced attorney is also important to defend contractual rights in court when they are violated by the other party.

Source: Thomson Reuters, “Using Contractual Risk Allocation Provisions to Minimize Risk and Maximize Reward,” Practical Law Commercial, July 10, 2013. 

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