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Construction Contracts

The Increased Importance of Contract Negotiation in a Pandemic Environment

By July 30, 2021No Comments
Contract Negotiation

Nearly every contract is negotiable. The importance of thoroughly reviewing, understanding and negotiating contract terms cannot be understated.  However, the importance of contract negotiation has taken on an increased role in our current pandemic environment.

The pandemic period has seen a significant change in the business environment.  Inflationary factors have caused steep increases in the prices of everything from foodstuffs and cars, to furniture and construction materials.  In addition to cost increases, supply-chain disruption issues have become more acute.  Thus, even if you are willing to pay more for goods and services, the odds are you are also waiting longer to receive those goods and services.

Against this difficult backdrop, thorough contract review and negotiation takes on an even more important role. Who bears the risk of cost increases and delivery delays?  Who bears the risk of projects being delayed, or the risk of further pandemic shutdowns?  The answer depends on the terms of the underlying contract and how best you can position yourself in the contract negotiation.

Contracts come in every size, shape and form imaginable.  However, there are some key features of a contract that should be scrutinized more closely in our current environment.  Below is a list of our top five.

  1. Price and Schedule

Nearly every contract contains a price and a time period for performance.  In exchange for payment of “x”, the other party will perform “y”.  In legal jargon, this is known as a “bilateral contract.”  However, in our new pandemic environment, further consideration needs to be given to both price and schedule.  Can the contract be performed for the originally quoted price, given the crush of inflationary forces that are impacting nearly every sector of the American economy?  Should additional carve-outs be added to the contract in the event that the cost of raw materials or other items outside of a seller’s control are impacted?  Should additional protections be added in the event that there are further lockdowns and disruptions to address pandemic variants?  It is difficult to negotiate contract price increases after the contract is executed and so price must be addressed at the outset.

Likewise, on the schedule front, can performance of the contract be delivered within the original schedule, or do specific carve-outs need to be added to provide additional time in the event that circumstances arise making timely performance difficult or impossible?  COVID-19 is now a known event, and contracting parties can no longer simply rely on force majeure clauses to save them.  Once again, if pandemic variants lead to further lockdowns and disruptions, have you protected yourself on the performance front?  Many contracts contain liquidated damages provisions for delayed performance.  Can these provisions be negotiated, or even stricken from the contract, due to the current environment?  It certainly does not hurt to ask.

  1. Dispute Resolution

If the parties have a dispute regarding the underlying contract, how will that dispute be resolved?  Most trial courts remain severely backlogged due to the pandemic and therefore parties should give serious consideration to alternative and faster dispute resolution options such as mediation, arbitration and judicial reference.  Each has its pros and cons and should be evaluated individually.

Does your dispute resolution clause contain a prevailing party attorney’s fees clause?  These clauses assure that if you have to pursue dispute resolution, you will be compensated for your legal expense should you win.  Oftentimes, in the absence of an attorney’s fees clause, it may be economically infeasible to chase money you are owed as the legal expense may outweigh any ultimate recovery.

  1. Indemnification Clauses

 Strong indemnification clauses also take on increased importance in a pandemic environment due to the unknown nature of COVID-19 legal protections.  We are in unchartered territory as it pertains to the legal liabilities associated with COVID-19.  Who will bear the ultimate cost of illness, injury, property damage, delays, etc. associated with the prolonged pandemic?  The courts have yet to decide those issues and likely will not so decide for years.  Having strong indemnification provisions in place helps to provide protections for you in the event that others are culpable for any underlying harm.  Shifting the risk and sharing that risk is critical in today’s world.

Additionally, it is also important to ensure that indemnification clauses are broad, and include not only a duty to indemnify, but also a duty to defend (including legal expense).  Those are two distinct, but equally important legal concepts. Include broad indemnification not only for yourself, but for anyone that you are in contract with to ensure that everyone is fully protected in the event of a dispute or claim.

  1. Timing of Payment/Remedies

 In a pandemic world, payments are being delayed.  Continued labor shortages assure that checks go out later than usual and many businesses are still cash-strapped from the nationwide shutdown earlier this year.  You must negotiate and include strong payment timelines to ensure you receive prompt and regular payment of amounts owed.  Include aggressive interest provisions for late payments and add clauses that provide that, in the event of delayed payment, your obligation to perform the terms of the contract is suspended, or even excused.  You are not obligated to work for free and your contract should reflect that.

Likewise, contract review is a good time to strengthen your contractual remedies in the event of delayed or missed payment.  If you are not paid, what are your options?  Can you immediately pursue dispute resolution, or force an immediate negotiation?  For larger amounts, will a lawsuit or arbitration demand get you paid?  For smaller amounts, Small Claims Court may be a quick and cost-effective way to get paid.  If you are concerned about getting paid prior to entering into the contract, consider payment protections such as bonds, letters of credit, or even personal guarantees of the contract.  If your customer is unwilling to provide any payment protections, what does that tell you about their ability, or desire, to timely pay you?  In this environment, any additional payment leverage that you can include in your contract may ultimately be the difference between you getting paid and not getting paid.  

  1. Jobsite/Worker Safety

 The most important contractual consideration in a pandemic environment is worker safety.  For contracts involving employees or work at project site, safety clauses must be carefully reviewed and strengthened to ensure worker safety, focusing on the ever-changing safety requirements related to COVID-19. Do you have an updated Injury and Illness Prevention Plan?  Are you regularly updating your safety policies, with an eye towards the evolving variant risk?  New rules, regulations and best practices are coming out almost weekly and you must keep up with this ever-changing landscape.

In addition to written policies, are you acting on those policies?  Are you auditing your worker safety protocols to ensure compliance with these written policies?  Actions, not just words. Although California has created legal presumptions that COVID-19 is covered under the State’s comprehensive Worker’s Compensation scheme, employer liability for pandemic-related safety violations continues to soar.  The California Occupational Safety and Health Administration (Cal OSHA) is aggressively pursuing and citing employers for worker safety violations related to the pandemic.  It is easier to defend against those claims if robust written policies and protections are not only in place, but are regularly audited and enforced, with documentation of such enforcement available for regulatory agency review.

For more information on specific contractual issues within the pandemic environment please contact Colin McCarthy, ckmccarthy@lanak-hanna.com.

 

The information contained in this post has been prepared by Lanak & Hanna, P.C. for educational and informational purposes only. It does not constitute legal advice, nor does it substitute for legal advice.

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