Contract Clauses to Avoid

By: Jim Mahoney

Many legal departments review contracts by demanding uninsurable or unenforceable terms. Rational, measured reasoning generally works out some of these problems.

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Uninsurable Contract Clauses

We all receive draft contracts from our customers with clauses that are absolutely or mostly uninsurable and often unenforceable – and many are so often throwaways. Some terms to avoid and suggested alternatives:

·                 “You shall defend, indemnify, and hold harmless [Customer], its officers, directors and employees from and against any and all claims, damages, causes of action, or allegations in any way arising out of or relating to Your work on the project.” Your liability policies may only provide coverage, including a legal defense, for your negligence. I can count on one hand the number of times insurers have willingly picked up a defense that’s this broad.

·                 “You shall perform the services in accordance with the highest standard of care.” This proposed language changes the coverage standard — it essentially requires perfect performance. Insurers are not in the business of insuring against a sure thing. Use alternative language.

·                 “You shall name [Customer] as an additional insured on all policies.” Not all policies allow this – Work Comp, professional e&o, etcetera have exclusions for several reasons, including insured vs. insured battles.

·                 “You warrant that the [service, project, etc.] will comply with all laws, codes and regulations.” Much more palatable: You shall make reasonable efforts to comply with applicable laws, codes, and regulations.

·                 “You shall inspect the Work to ensure that it is in strict accordance with the contract documents.” To the extent that this contractual language amounts to a guarantee of the Work, it is very possibly uninsurable. There is alternative language.

·                 “You shall report all safety hazards at the job site to Us.” Sounds innocent enough, but by agreeing to this language, you are possibly taking responsibility for a duty that belongs to the Owner to protect visitors or its own employees.

Then there’s the ominous clause:

·                 “Prevailing party shall be awarded its attorneys’ fees and costs.” Delete the clause. There are no great alternatives here. Are “we” really going to go to the mattresses all the way to verdict? Negative. We want to fix anything certainly before suit and very little gets to verdict. What does “prevailing” mean in that regard?

When negotiating contracts, the argument that a clause is “not fair” may be of limited value, kinda like the playground arguments that usually fell on deaf ears. “It’s my ball. If you want to play, you gonna play by my rules.”

It’s much more effective to point out that the Customer has as much interest as you do in having liability insurance coverage for the scope of work under the contract. That’s a valid argument and that’s easy for me to say, but sometimes difficult to get across. Many large and small legal departments review contracts by demanding these uninsurable/unenforceable terms. Rational, measured reasoning generally works out some of these problems.

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