The terms and conditions of a contract are what create the legal obligations that flow between the parties. It is essential that one knows and understands what expectations exist between the various parties.
When negotiating a contract, extra care should be taken to ensure that contractual language is carefully reviewed and is the subject of discussion between the parties. One must not blindly accept standard form contracts presented to you for signature. These standard forms are typically slanted in favour of the party that has drafted the contract. Clauses which shift the risk in situations where this assumption of risk has not been expressly bargained for, are potentially problematic and must be at the forefront of the contractual review process. Negotiating a contract is an exercise in risk management. Properly structuring a contract is critical in evaluating and shifting as much of the risk as is reasonably possible to the other party. This article will briefly review some of the key "clauses of concern" when negotiating and entering contractual relations.
It is important to briefly set out some examples of "fine print" clauses that can cause difficulty for a contracting party after an agreement has been finalized.
Special attention should be given to situations where one is entering into contracts with large, sophisticated service providers. In these instances, the third party usually has a standard form of contract that they present for signature. These standard contracts have ordinarily been prepared by lawyers for the other party and may include several clauses that are "friendly" to the other party and that attempt to shift the majority of the risk.
Some of the above mentioned clauses may seem relatively harmless if read over quickly and without an understanding of what they mean. It is exactly these types of clauses that one must be careful of when contracting with outside parties. Giving proper consideration to these clauses before the contract is signed can pay off in the long run and should be considered the best kind of "preventative maintenance".
If you know what kind of insurance coverage your owner, contractor or subcontractor carries, you know both how much of your loss the other party can carry and how much third party liability your owner, contractor or subcontractor (as the case may be) will be able to assume. Where possible, it is prudent to have the other party provide notice of the coverage that they carry, and to have that insurance coverage spelled out in your contract for services or equipment.
Consider, for example, a situation where an owner is contracting with a third party to perform some construction-related work on a building. In order to provide a degree of "safety", the contract may contain an insurance provision similar to the following, changed, of course, to be suitable to the particular circumstances:
The Contractor shall provide, maintain, and pay for the insurance coverages specified herein. Unless otherwise stipulated, the duration of each insurance policy shall be from the date of commencement of the work until the date of the final completion of the work. Prior to commencement of the work and upon the placement, renewal, amendment, or extension of all or any part of the insurance, the Contractor shall promptly provide the owner with confirmation of coverage and, if required, a certified true copy of the policies, certified by an authorized representative of their insurer together with copies of any amending endorsements.
General liability insurance — General liability insurance shall be in the joint names of the Contractor and the owner, with limits of not less than $3,000,000 per occurrence …
Automobile liability insurance — Automobile liability insurance in respect of the Contractor’s licensed vehicles shall have limits of not less than $2,000,000 inclusive per occurrence for bodily injury, death and damage to property, covering all licensed vehicles owned or leased by the Contractor …
Contractor’s equipment insurance — "All risks" Contractor’s equipment insurance covering machinery and equipment used by the Contractor for the performance of the work, shall be in a form acceptable to the owner and shall not shall allow subrogation claims by the insurer against the owner.
Other possible provisions to include when stipulating the form of Contractor’s insurance are clauses that allow the owner to take out insurance on the Contractor’s behalf and deduct the cost of that insurance from the contract amount (in the event that the Contractor fails to provide or maintain insurance coverage) and a clause that stipulates that the Contractor will use only insurance companies licensed to issue insurance in the Province of Ontario.
Know the Details of Your Contract
The "nitty gritty" clauses of a contract are often overlooked when focusing on the major points such as price, time to perform the work, scope of the work and payment provisions. However, as the saying goes, people often get "tripped up" in the details. Some measures that you can take for ensuring predictability in your legal relations are the inclusion of the following types of clauses:
‘Four Corners’ Clause. Such a clause will help ensure that you are not taken to have made any representations or warranties beyond those expressly stipulated within the ‘four corners’ of the written contract.
An example of this type of clause is as follows:
The contract contains the entire agreement of the parties hereto with respect to the work and supersedes all prior agreements and understandings, oral or written with respect thereto and cannot be modified or amended except by written agreement signed by the parties hereto.
‘Jurisdiction’ Clause. A clause of this type will ensure that your contract is governed by the laws of Ontario. If your contract does not expressly provide for interpretation according to Ontario law, then depending where the contract was signed and the residency of the other party, you may find the contract being interpreted according to foreign laws or enforced in a foreign jurisdiction.
An example of a jurisdiction clause is as follows:
The laws of the Province of Ontario shall govern the work performed under this contract.
Local Law Compliance Clause. If your contracting party fails to abide by local workers compensation standards or to obtain the necessary licenses and permits, you introduce an interested third party into your contract — the government. You will lose control over enforcement of elements of your agreement with the outside service provider. Have your contractor warranty that it will comply will all relevant local laws.
The following example will illustrate what is meant by a local law compliance clause:
The Contractor shall give the required notices and comply with the laws, ordinances, rules, regulations, or codes which are or become in force during the performance of the work and which relate to the work and which are in place in the province in which the work is performed. Prior to commencing the work and prior to the final completion of the work, the Contractor shall provide evidence of compliance with Workers’ Compensation legislation for the Province of Ontario, including payments due thereunder.
‘Dispute Resolution’ Clause. Contracts that stipulate that disputes will be resolved in a particular manner reduce your flexibility in resolving the disputes and can introduce uncertainty. On the other hand, such mechanisms can be tailored to the needs of the parties. Consider the benefits and disadvantages to such a clause before completing your contract.
An example of a mandatory provision in a contract which stipulates the type of dispute resolution mechanism to be employed is as follows:
If a dispute or claim arising between the owner and the Contractor cannot be resolved to the satisfaction of both parties, the parties shall between themselves agree to submit the particular matter for arbitration by a panel of three arbitrators in accordance with the provisions of the relevant statute governing arbitrations, and amendments thereto, in place for work performed within the Province of Ontario.
‘Cleanup’ Clause. A clause that provides that a third party is responsible for cleaning up its work area when the work is completed may be appropriate in certain circumstances and helps to ensure that you will not be stuck with extensive and/or expensive remediation costs. Atypical cleanup clause states in part:
The Contractor shall maintain the work area in a tidy condition and free from the accumulation of waste products and debris.
The Contractor shall remove waste products and debris on a daily basis and shall leave the work area clean and suitable for occupancy by the owner prior to the final completion of the work.
It is important to be vigilant when entering into contracts with third party providers of services and/or equipment. The preceding are only a few examples of where contractual language needs to be scrutinized. Taking the time to review the contracts that are being provided to you for signature is crucial in avoiding problems and potential litigation.
Assessing risks and managing them are essential in the contractual setting. Knowing what to look out for is half the battle. Being able to draft contracts where the risks are properly allocated between the parties can go a long way in ensuring that disputes are avoided or can be successfully defended.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.