COVERING ALL THE BASES – Five Questions Your HDD Contract Should Answer

I’ve practiced construction law for nearly 20 years. In that time, I’ve seen contracts for horizontal directional drilling work come in all shapes and sizes, running from single-page proposals to lengthier documents crowded with fine print and legalese. Despite this variety, most HDD contracts do work as intended, if for no other reason than most projects are completed without a hitch. But when projects go bad and losses begin to mount, the risks and limitations of a shoddy contract become glaringly obvious. On those occasions, bad contracts inflict additional damage by pushing a bad project into an expensive lawsuit.

While uncommon, claims and litigation over HDD projects are so incredibly expensive that it is worthwhile to invest some time and money to avoid them. One way to minimize these risks is to ensure that your contract anticipates and addresses the questions and issues that often lead to disputed claims. This article identifies five broad questions that any HDD contract worth its salt should be able to answer in terms that both sides understand and agree upon.

TERMS OF THE AGREEMENT: WHAT’S IN AND WHAT’S OUT?

A construction contract’s boundaries and scope are often contested territory in litigation. The flurry of activity that precedes a signed contract – phone calls, site investigations, test reports and price proposals – provides fertile ground for future disputes over what terms have made their way into the contract and those that, under the applicable law, are deemed ineffective or unenforceable once the contract has been signed.

This leads to a question that both sides should be able to answer before they sign. Of all that has transpired between the parties, expressed and implied, verbal and in writing, what are the actual binding terms of this deal? A good contract makes it easy to separate the wheat from the chaff by distinguishing between what information and assumptions about the project can be relied upon and those that cannot. A number of contract provisions can help prevent disagreements over the terms that actually comprise the contract. Among these, the most common are so-called integration and merger clauses which have the effect of nullifying any agreements or understandings which precede the contract unless they have been expressly included in the parties’ final written contract.

WHAT ARE THE CONDITIONS FOR PAYMENT?

At first blush, a contractor’s price may appear to be the most straightforward term in a contract. But disputed claims often lead to additional arguments, including fights over the contractor’s right to be paid. When that happens, payment terms take on additional importance.

When it comes to payment, clarity and specificity are your friend regardless of which side you are on. For those paying for HDD work, it is important to detail the entire scope of the contractor’s performance obligations, including any record-keeping requirements, as-built drawings and site cleanup and disposal services.

A contractor would do well to clarify any questions about their right to payment, including the extent to which payment may be withheld and whether the contractor may stop work for nonpayment or delayed site access.

WHAT HAPPENS WHEN THINGS CHANGE?

Questions over changes figure in many disputed claims. Stakeholders waste an incredible amount of time and money litigating questions of who must suffer the financial consequences of project delays, differing site conditions and other unexpected losses. Many of these disputes could be avoided with contract terms that clearly anticipate the possibility of such events and allocate those risks among the parties.

Not only should a contract answer the question of who bears each project risk, but that answer must be captured in the contract’s written terms in language that is clearly understood by both sides. Unfortunately, most contracts fail in this regard. The risk of “differing site conditions” is often mishandled in this way, with some owners and engineers furnishing prospective contractors with geotechnical reports in an effort to obtain more accurate pricing, while including contract language disclaiming the accuracy of this information. Such language leads to confusion, claims and lawsuits.

Those tasked with preparing or reviewing an HDD contract should determine how the contract addresses the types of risks commonly associated with HDD work, including delays, defective design work, differing site conditions and inaccurate geotechnical information, to name a few. A variety of contract provisions are commonly used to allocate these risks, but how they work with (and against) each other can get complicated and lead to unexpected results if the contract is poorly drafted. Failing to plan for these risks can quickly become a plan to litigate them at great expense to both sides later on.

“The decision to prematurely end a contract should never be taken lightly. The wrong decision can lead to significant legal liability for wrongful termination.”

HOW DO WE END THIS RELATIONSHIP?

Even though most contracts end well, anyone entering into an HDD contract should ask: What options do I have when the other side is not performing as promised? For the contractor, this is often a question of the contractor’s options when its customer is not meeting its payment obligations. Likewise, those paying for the work should ensure that their contract outlines the circumstances under which a contractor’s failure to perform is so problematic that the contract may be terminated and a new contract formed with a replacement contactor if necessary.

The decision to prematurely end a contract should never be taken lightly. The wrong decision can lead to significant legal liability for wrongful termination. For this reason, a contract that clarifies what it takes to fire a contractor (or when a contractor may quit) can help minimize the financial fallout from a soured relationship.

WHAT’S THE RELATIONSHIP BETWEEN THIS CONTRACT AND OTHER CONTRACTS ON THE PROJECT?

HDD work performed under a subcontract raises some additional issues for both contractor and subcontractor. Many of these issues concern the legal relationship between the subcontractor’s terms and those set forth in the project’s general contract. From the contractor’s perspective, it is important that its subcontractor’s obligations mirror the contractor’s obligations to its customer. This is usually accomplished through so-called flow-down clauses.

A subcontractor will want to know how far the flow-down clause extends. For example, one question that should be answered is whether the subcontractor is bound merely to the general contractor’s performance obligations or, in addition, to other provisions like those requiring arbitration or imposing limitations on the contractor’s rights and remedies. Clarifying the answers to such questions before the contract is signed is far less expensive than using a team of lawyers to do the same thing in a lawsuit.

CONCLUSION

Expensive claims and lawsuits do not happen simply because something goes wrong on a project. Even if a project’s costs suddenly increase because of the unexpected – bad geotechnical conditions, for example – an expensive lawsuit is unlikely if the issue has been anticipated and addressed by your contract.

The questions your HDD contract should answer are by no means limited to the five above. Still, knowing these questions are answered – and how they are answered – before entering into the contract will go far in avoiding the kinds of disputes and disagreements that come up frequently in lawsuits over HDD projects. For these reasons, focusing on the quality and content of your contracts remains one of the best ways to avoid the catastrophic cost of disputed claims and legal disputes.

Ted Roberts is an attorney and owner of Trenchless Legal Services based in the Twin Cities. He may be reached at ted@tedrobertslaw. com or 612-590-3547.

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