Gambling with contracts is a dangerous game
For three days in Las Vegas, Sept. 14-16, GlassBuild America: The Glass, Window & Door Expo will provide glass fabricators and manufacturers, glaziers and retailers, the chance to compare notes on the glass and glazing market. It also will give attendees the opportunity to learn a lesson in casino economics: The House always wins. Why does the House always win? The cynics say it’s because the games are rigged. The optimists say they haven’t hit their lucky streak yet. Wherever you fall on that spectrum, the reality is that when it comes to games of chance, the House is bigger and has more experience than the average gamer.
For many companies in the glass industry, contracting is a lot like going up against the House. Small contractors and businesses are presented with legal documents by large conglomerates with terms and conditions that may not be fully understood. Hungry for work, companies accept the small type and one-sided conditions of these contracts, gambling that the terms will not come back to haunt them later. Everyone understands these situations -- you may be there yourself -- but landing the job should never be at the expense of understanding the terms and contract conditions.
There are as many contracts as there are types of work. As a result, there is no one rule book for the interpretation of all contracts. There are, however, some basic contracting principals that businesses can incorporate into their best practices.
Contracting between companies should be fair, but many times it is not. Terms and conditions in form and standard contracts often impose harsh or unnecessary conditions on purchasers or contractors that can trap the unwary. Take, for example, one of the more common contractual conditions appearing on construction projects: clean-up charges. Under the guise of fairness, many general contracts group these charges together and then divide them amongst the subcontractors. At first blush, this might seem fair, but certainly the shower door installer does not want to pay for cleaning up the drywaller’s leftover debris and painter’s hazardous material disposal fee. Equality of contract terms can only be achieved when the context of the work is incorporated into the obligations incurred.
When examining a contract, two essential questions must be answered: What obligations are being imposed? And, are those obligations under my company’s control? Glass companies should be willing to contract and accept obligations they can control such as workmanship, labor allocation and direct supply. These items are within a company’s expertise, making the obligations easier to evaluate and meet.
When the obligations are not in a company’s control, serious thought is in order. For example, consider requirements that glazing companies ensure buildings meet specified energy performance levels. While glass plays an increasingly important role in overall building performance, the dynamic energy use of a living building is well beyond the control of a glazier alone. Does that mean that a company cannot accept such obligations? No. Considerations of energy performance, including a company’s impact on that performance, are the starting point for a broader analysis of the obligations imposed and whether to ask for alternative terms. The worst thing to do is recognize an issue — energy or otherwise — too late. Careful analysis of contractual obligations at the start of negotiations is an essential step.
Insurance and indemnity provisions
Insurance and indemnity take up the largest section of most contracts, and notably also contain the smallest print. Risk transfer through insurance and indemnity provisions should be key components of any company’s risk avoidance/management strategy. Companies must be well versed in reviewing, interpreting and complying with insurance/indemnity requirements when entering into contracts. No longer is a standard “vendor’s endorsement” or an “additional insured” certificate sufficient for most advanced companies. Specific exclusions, inclusions, waivers and brokerage requirements are becoming commonplace for all types of contracts. Adding to that complexity are specific requirements from individual states regarding indemnity and insurance regulation.
Consider that any contract requiring you to cover another company’s loss — through insurance or indemnity — is essentially a request that you risk your company at the expense of another. The fairly standard “additional insured” requirement noted above, for example, is a request that a company place another company onto its policy for a limited purpose. This allows one company to get the benefit of insurance they did not pay for. Although the complicated realm of insurance can avoid harsh results in these scenarios, the fundamental issue is the same: contractual risk transfer.
The question then is whether a company is prepared to accept the gamble posed by the proposed contract and take the steps necessary to protect itself against losing (through insurance or indemnity). There is no magic phrasing or special language that will protect a company from the complexities of insurance and indemnity contracts. Rather, companies must get help, get informed and get educated. Lawyers and risk managers can provide valuable resources in the interpretation of these issues. Where the job value does not permit such recovery, consider resources from the National Glass Association, McLean, Va., and other trade organizations. Even your local Better Business Bureau might help clarify some of these issues. Understanding the nature of risk being accepted and transferred is essential to surviving a potential loss.
Scope, breadth and longevity
The scope, breadth and longevity of an obligation must also be evaluated before the value of a contract can truly be assessed. For example, some contracts require product and services warranties in addition to bonding. These are important matters to consider when evaluating the potential long-term impacts of a bid. To start, note that product warranties may allow manufacturers to explain what a product can and cannot do, and what they will or will not do in response to a claim. They are useful tools that can convey a product’s utility and limitations. They are equally useful for those specifying and purchasing the materials to know what relief is available if they have a claim.
Trades and suppliers also now see warranty requirements of their own in contracts. Similar to manufacturers that support their product through a warranty, these companies are asked to stand behind their work. Compelled labor warranties — through bonding or direct performance — are being inserted into more and more site-specific project requirements. Evaluating what a specific contract requires in this regard is key. Does the contract require a bond? Does the labor warranty compel quality control or checklist implementation? Can your company’s personnel meet the demands of field service one year, five years, 10 years down the line? Will any value of the original contract be left after all warranty services are accounted for? Project-specific questions like these are important to ensure companies maximize value for their contracts.
Contracting is not gambling. At least, it shouldn’t be. In any contract, it is important to understand the obligations, the requirements they place on your company and whether you are willing to accept the associated long-term risk. Everyone wants to secure the job, but blind acceptance of contract terms without an appreciation of what must be done to meet those terms may prove to be a dangerous gamble.