Florida Construction Contracts: Six Key Risk Shifting Provisions
Reading Time: 5 minutes
Whether you are a Florida general contractor, subcontractor, vendor or supplier, there’s likely going to be a contract that articulates the parties’ respective rights and obligations. A well-drafted construction contract should include essential terms like payment, scope of work, and risk shifting provisions.
This blog focuses on six key risk shifting provisions that should be included in construction contracts to best protect you.
What Are Risk Shifting Contract Provisions?
Risk shifting contractual provisions will specify and allocate certain risks and liabilities among the parties to the construction contract. Sometimes, these provisions are referred to as exculpatory clauses. These types of provisions “relieve one party of the obligation to use due care and shift the risk of injury to the party who is least equipped to take the necessary precautions to avoid injury and bear the risk of loss.” See Loewe v. Seagate Homes, Inc.
Florida courts will enforce these types of risk-shifting provisions, so long as they are unambiguous and don’t contravene public policy. Id. Of course, parties cannot shift the risk for intentional torts or compliance with building code requirements. Id.
Below are six important risk shifting provisions in construction contracts for which all parties to a construction contract should be knowledgeable.
I. Pay-if Paid Provisions
These payment provisions, if worded properly, are enforceable and shift the risk of payment. For example, in the general contractor/subcontractor scenario, the general contractor will want payment to its subcontractor to be contingent on payment by the owner to the general contractor. Unless and until the owner pays, the general contractor will have no obligation to pay its subcontractors. When confronted with that contingent payment scenario, the subcontractor should include the same pay-if-paid provision in its downstream contracts.
Indemnity provisions in Florida construction contracts are governed by and must comply with Florida Statute 725.06. An indemnity provision “attempts to shift the responsibility for the payment of damages to someone other than the negligent party” and “sometimes back to the injured party.” See O’Connell v. Walt Disney World. Co. If one party (the indemnitee) requires another to indemnify it (the indemnitor) for the indemnitee’s actions, the contract provision must contain a:
- monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract; and
- that indemnity requirement is part of the project specifications or bid documents.
See Florida Statute 725.06. Indemnity provisions that are not properly worded will be rendered void and unenforceable by Florida courts.
III. Force Majeure
This is a French term that is defined as “superior strength.” These types of clauses, also known as “Acts of God” provisions, shift and limit liability for events that are outside the control of the contracting parties. In a world of labor and material shortages and escalations, pandemics, and natural disasters, this type of risk shifting provision is critical to account for these types of situations. Well-drafted force majeure provisions will account for these types of events and articulate any additional time and/or money that may be due.
IV. Liquidated Damages Provisions
Construction projects need to start and finish on time. When construction projects don’t finish on time, the financial impacts can be huge. Liquidated damages clauses specify a predetermined amount of compensation that the contractor must pay the owner for specific delays or failures to meet project milestones. Typically, liquidated damages are a set dollar amount for every day of delay.
However, in order for liquidated damages provisions to be enforceable and not deemed invalid they must satisfy the following:
- the damages upon breach of contract cannot be readily discoverable.
- the damages amount to be forfeited by a party must not be so grossly disproportionate to those damages that could be expected to follow from a breach of the contract.
Of course, if the owner insists on a liquidated damages provision, the contractor should include a provision in the contract that allows it to recover both time and money if the owner delays the project.
V. Termination Provisions
All parties to a construction contract should give careful consideration to all situations where termination of the contract is appropriate. The parties’ construction contract should have clear termination rights when any party fails to perform. Florida contractors and subcontractors should also consider whether to include termination for convenience language. Well-drafted termination provisions should specify the notice requirements to invoke termination and the rights and obligations of the parties after termination.
VI. Limitation of Liability
Whether you are a general contractor negotiating your contract with the owner, or a subcontractor negotiating a contract with a general contractor, limiting the dollar amount of liability is important. Limiting monetary damages in a contract can take various forms. For example, parties can agree to:
- waive consequential damages;
- limit the amount of recoverable damages to only those damages covered by policies of insurance;
- cap the total amount of any damages.
These types of limitation of liability provisions go a long way to minimizing a party’s financial risk on a construction project.
Whatever side of the contract negotiating table you’re on, it’s critical to understand and negotiate for these types of risk-shifting mechanisms. When in doubt, all parties involved in construction contract negotiations should consult counsel.