Last time, we began looking at some of the strategies that can be used to allocate risk in construction contracts, and the importance of working with an experienced attorney to negotiate risk allocation in the formation of construction contracts. Last time, we mentioned warranties and representations, as well as payment terms and conditions, as potential ways to allocate risk.
Indemnification is another potentially important way to allocate risk. An obligation to indemnify means that a party is legally required to compensate another party for a specific loss. In construction contracts, indemnity can be used to compensate a party for risks it didn’t assume or for expenses that can’t otherwise be recovered, for minimizing the likelihood of litigation, or for shifting the cost of defending third-party claims.
Limitations of liability clauses can allocate risk in construction contracts by excluding or limiting liability for specific types of damages. Limitations of liability can be applied to specific terms of the contract or to the contract as a whole, or to one or both parties. Express contractual remedies are another way to allocate risk. They do this by either narrowing or expanding the remedies available under the contract, or by clarifying the scope of potential liability.
Risk allocation terms, like other contractual terms, need to be carefully negotiated according to the circumstances of each case and the interests of the parties. Working with an experienced attorney helps ensure that a party is well represented in the negotiation process, and that he or she has strong advocacy when issues with the contract arise.