By Tom Marks
In any service agreement, one party is trying to allocate risks to the other. This principle is especially true in the snow industry, where every contract should be viewed primarily from a risk allocation perspective. As business owners in a risk-heavy industry, success requires us to (1) identify which types of risk we are willing to accept; (2) understand the contract provisions that determine who assumes various risks; and (3) minimize our liability exposure as much as possible. As winter approaches, following is some insight on a few key risk allocation provisions:
Defense and indemnification
This is the top dog of risk allocation in any service agreement. Customers want to impose strict liability on their contractors through words like “achieving bare pavement at all times” and demanding defense and indemnification for “all claims” relating to services. In effect, the customer wants the contractor to pay for all liability associated with claims of unsafe conditions. General contractors (GCs) then try to pass this strict liability onto their subcontractors. None of this is fair. Nobody can guarantee “bare pavement.” Also, why would someone be responsible for “all claims,” which would include accidents for which someone else (maybe even the customer) was negligent?
A reasonable customer or GC will allow language modification so that liability applies only when the work is negligent, or to exclude claims arising from situations where the customer’s personnel or other parties are negligent. There is a caveat to my use of “reasonable.” Big customers often present contracts to GCs on a take-it-or-leave-it basis. They have been ordered by corporate not to accept any changes, no matter how fair or reasonable. A big GC may be willing to accept the risk but must then assign the risk to its subcontractors.
Thus, when presented with a tough defense and indemnification clause, a subcontractor should ask the GC to review the customer’s language. If the customer’s language is as strict as the GC’s, then there will be no room to negotiate. If the GC is asking for the subcontractor to assume strict liability (for example, bare pavement) while the customer restricts GC liability to negligence, then the subcontractor has ample grounds to demand a modification.
Applicable law, jurisdiction
In every contract, there is a provision regarding where legal disputes must be adjudicated and which state’s law will apply. Almost universally, the bigger party (that is, the customer when dealing with a GC, and the GC when dealing with a subcontractor) will have a provision requiring lawsuits or arbitrations in its “backyard” and subject to the laws of its state. Although the choice of a state’s law is important, much (but not all) of contract law is similar across jurisdictions.
So, if you are going to pick a battle, do it with the jurisdiction clause. Ask that jurisdiction be in either your home state or in the state where service is provided.
As an alternative, ask to be met halfway: If they allege your work was subpar and cost them money, they can sue in their state. If they don’t pay you, you can sue in your state. If they still won’t budge and you really want the work, then make sure you do advance scouting of legal counsel in the other states. Most lawsuits require detailed response within 20 days.
Failure to include certain defense and claims in your response can result in waiver. Thus, you never want to try responding on your own or in a hurry. Because your insurance never covers claims for breach of contract, you should have one or more “go-to” attorneys in the other jurisdictions.
In American courts, there is a general rule that provides that each party pay its own legal fees, even if the party is victorious. An exception is when the contract provides otherwise. The “bigger” party will always have a provision that requires the “smaller” party to pay all legal fees for claims where the “smaller” party loses. Don’t fall for it. Insist that the provision be reciprocal: If there is a lawsuit, the losing party should pay the legal fees of the other party. I almost never see the other side object to reciprocity.
Pay when paid
Many GC contracts provide that if the GC is not paid by the customer, the GC does not have to pay the subcontractor. The GC is trying to spread the risk of non-payment by the customer. A subcontractor should first push back and ask that the provision be eliminated. If the GC will not budge, then at least make sure that the customer paying everything is not a condition of you getting paid anything. If the customer pays the GC $50,000 on a $100,000 job (50%), then at a minimum, the subcontractor should be paid 50% of its fees. Yet, if you don’t insist on clear wording, you could find yourself getting nothing until the GC gets paid 100%.
To grow our business - and sometime even to pay the bills - we feel we have no choice but to accept terms, even if grossly unfair. Accepting risk is a reality of doing business. That said, be mindful and deliberate in accepting risks while ensuring that your insurance and finances are sufficient to cover them. Your contract attorney can help you identify and modify key risk provisions. Your insurance agent should also play a key role in reviewing your indemnification obligations and ensuring appropriate coverage when available.
- Watch the language. Flag unrealistic contract terms prior to signing to ensure you’re not accepting unreasonable risk.
- Have help on speed dial. Make sure you have attorneys and insurance agents in your corner.
- Raise the question. It never hurts to ask to negotiate contract demands that transfer an unfair amount of risk to the contractor and subcontractor.
Attorney Tom Marks specializes in business law and estate planning. Contact him at firstname.lastname@example.org.