Colorado-Real-Estate-Journal_370091

November 1-14, 2023 - Page 29 www.crej.com Law & Accounting spencerfane.com © 2020 Spencer Fane LLP | The choice of a lawyer is an important decision and should not be based solely on advertisements. Spencer Fane LLP 1700 Lincoln Street, Suite 2000 | Denver, CO 80203 Phone: 303.839.3800 | Fax: 303.839.3838 Where your business leaders work with our business leaders The Real Estate attorneys at Spencer Fane are experienced in helping real estate owners and developers purchase, sell, exchange, develop, build and nance properties through both private and public funds. Jamie Cotter Nicole Detweiler Russ Dykstra Wendy Harring Jacob Hollars James Jacobson Ken Kramer Jim Kurtz-Phelan Charlie Leder Larry Martinez Lisa Mayers Gil McNeish Michael Miller Robin Nolan David O’Leary Sarah Sicotte Adam Veltri Kelly Vos John Watson To look forward and rise to the challenges ahead requires welcoming change with optimism. It’s how Moss Adams uplifts 1,650 real estate businesses to plan for, and go, where they want to be next. Discover how our industry-focused advisory solutions can help elevate your performance. MOSSADAMS.COM/UPWARD ACCOUNTING – CONSULTING – WEALTH MANAGEMENT U P WA R D Assurance, tax, and consulting offered through Moss Adams LLP. ISO/IEC 27001 services offered through Moss Adams Certifications LLC. Investment advisory offered through Moss Adams Wealth Advisors LLC. ©2023 Moss Adams LLP R ecognition and allocation of risk should be major concerns for all parties involved in a construction project. A major function of any construction- related contract is to allocate unavoidable risks of construc- tion between the parties. This article will outline some of the most significant risk-allocation clauses and discuss their impor- tance to the parties. Disclosures: This article is written from a general contrac- tor’s standpoint and deals with different types of clauses in sub- contracts. A general contractor typically has more flexibility in negotiating contracts with sub- contractors than in negotiating general contracts with develop- ers. Notwithstanding, most con- cepts are applicable to clauses in contracts between a general contractor and a developer. This article is not intended to provide a complete, detailed description or analysis of the clauses, nor does it deal comprehensively with all risk-allocation clauses. n Payment. Certain pay- ment clauses in subcontracts, frequently called conditional payment clauses, can be gener- ally categorized either as “pay- when-paid” or “pay-if-paid” provisions. The difference is the entity that bears the risk of the developer not paying the general con- tractor for the subcontrac- tor’s work. Under a pay- w h e n - p a i d clause, such risk is ulti- mately borne by the general c o n t r a c t o r ; under a pay-if-paid clause, that risk moves to the subcontractor. “Pay-when-paid” clauses typi- cally state that the subcontractor will be paid within a specified time after the developer pays the general contractor. These clauses may allow the general contractor to delay payment to a subcontractor for a period. However, unless they are specif- ically drafted to so provide, the clauses do not allow the general contractor to postpone payment indefinitely, nor do they allow the general contractor to avoid paying the subcontractor entire- ly. The period during which the contractor may delay payment to subcontractors depends on the facts and circumstances, including the payment clause language, which may set an out- side limit on the payment time frame. “Pay-if-paid” clauses, on the other hand, allow the general contractor to withhold pay- ment from the subcontractor until the developer pays the general contractor. This delay could be indefinite or even for- ever if the general contractor never receives payment from the developer. These clauses are enforceable generally, but courts analyze them carefully to ensure that they are properly drafted. The general rule is that the risk of the developer’s nonpayment should be borne by the gen- eral contractor rather than the subcontractor. An enforceable pay-if-paid clause must clearly and unequivocally state that the parties intend to shift such risk to the subcontractor. Any ambi- guity is typically interpreted as a pay-when-paid clause. Pay-if-paid clauses will prob- ably be enforceable if they state that payment by the developer is a “condition precedent” to the general contractor’s obligation to pay the subcontractor; and that the subcontractor “assumes the risk” of the developer’s non- payment; and that the subcon- tractor “waives and releases” any claim for payment by the general contractor if the devel- oper does not pay the general contractor. n Waivers of lien and bond rights. Another powerful tool for allocating risk of a develop- er’s nonpayment from a general contractor to a subcontractor is a clause by which the subcontrac- tor waives its rights to assert a lien claim against a private project or assert a claim against a payment bond in a public proj- ect. Foreclosure of a mechanic’s lien or bond claim is a critical right for a subcontractor seek- ing payment. A subcontractor’s waiver of such rights could effectively shift the risk of a developer’s failure to pay from the general contractor to the sub- contractor. n Indemnity. A well-drafted indemnity clause can provide some protection against the risk of a general contractor having to pay damages incurred by a third party due to a subcontractor’s actions or inactions. Several states have enacted special “anti-indemnity” stat- utes limiting the types of indem- nity clauses in construction con- tracts. This kind of legislation generally voids any indemnity provision in a construction con- tract that purports to require one party to indemnify another for the results of the other par- ty’s negligence or other fault. Accordingly, the general con- tractor has limited flexibility in drafting subcontract indemnity clauses, which are required to comply with such statutes. Notwithstanding this, some discretion may be allowed. For example, the relevant anti- indemnity statute may apply only to claims based on bodily injury or death, or damage or destruction of property. Such a statute may not on its face apply to clauses dealing with other types of claims, such as for pure- ly economic loss or other kinds of damages. In other words, a clause in a subcontract that purports to require the subcon- tractor to indemnify the general contractor against claims aris- ing from the general contrac- tor’s actions or inactions might be enforceable if the claims are based on causes other than per- sonal injury or property dam- age, if those claims do not fall within the strict terms of the statute. This could shift the risk of liability for the results of the general contractor’s negligence or other fault away from the general contractor. n Surety bonding. A general contractor should consider the wisdom of a clause in a sub- contract requiring the subcon- Allocation of construction risks through contract clauses J. David Arkell Attorney, Moye White Please see Arkell, Page 49