No one (except attorneys) gets excited drafting contracts, but these agreements between parties can prevent catastrophic problems for operators and vendors down the road. The time you spend understanding and negotiating contracts is a foundational investment in managing your business’s risk and can seriously impact your bottom line.
The adventure park industry is well acquainted with the idea of contracts between vendors—builders/designers, as well as engineers and inspectors—and operators. However, the involved parties often lack direct experience with how important those contract terms are until they’re embroiled in an expensive dispute.
It is important to understand the functions a contract serves, the key provisions a contract should include, and the outcomes a contract should ideally dictate—and help avoid.
WHAT A CONTRACT DOES
The primary functions of a contract are to set expectations between the contracting parties regarding how the objective of the contract will be completed, and to allocate and assign the various risks associated with the project. It is fundamental to managing risk to understand both the scope of that risk and how to shift risk to another party where appropriate. Contracts are the key mechanism for allocating risk between parties on a project.
This article assumes that operators and vendors are generally utilizing written contracts. If you are not using written contracts in your business, you are exposing your business to major risk if an unexpected event or problem occurs.
Even in the absence of a written contract, a verbal agreement is theoretically enforceable in most states. However, the details of that oral agreement will always be a matter of dispute due to the fact that memories fade, what was assumed to be understood often isn’t, and with large sums of money at stake, parties to the dispute have reason to take positions they wouldn’t have taken when the relationship between them was good.
By creating a clear roadmap to govern the project, a written contract can avoid most of these problems and can determine how disputes will be resolved if unforeseen problems are encountered.
KEY PROVISIONS TO INCLUDE
For those using written contracts, the question next becomes: What is actually important to include?
The most important provisions in contracts tend to be those that shift or allocate some identifiable risk. For example, in a contract between an operator and a designer/builder, the parties can agree that the risk of a design defect will remain with the builder even after the project is complete. By explicitly allocating that risk and including language in the contract to enforce that assumption of risk by the designer, the operator’s liability due to a design defect can be effectively shifted to the designer.
This is just one example, of course. Risk does not need to be fully allocated to one party or the other. Each allocation of risk is negotiable.
The following are some examples of risks that most attorneys experienced with both contract negotiations and lawsuits related to liability would agree should be covered in a written contract between the parties:
• Time. What is the timeline for project completion, and who bears the monetary risk of delayed completion?
• Cost and payment schedule. Is the project to be completed based on a fixed bid, on a time and materials fee schedule, with or without a contractor’s fee, and is there a guaranteed maximum price?
• Insurance. Which party will carry the insurance necessary to reduce or eliminate the risk of direct loss to either party? For example, ensuring that all workers on site have workers’ comp coverage or are otherwise insured; making sure that builder’s risk and commercial general liability coverage is extensive and with sufficient limits; making sure all subcontractors are appropriately insured; and addressing additionally insured certificates.
• Indemnification. In the event of liability arising from various sources—i.e., a claim by an injured subcontractor; a claim by a neighboring landowner; a future claim by a participant based on defective design or construction; a claim by a bystander injured by a falling beam during construction—who will be responsible to pay to defend that claim, and who will be responsible to pay any judgment? Parties to these types of contracts can assume that an injured plaintiff will name every possible defendant in sight, which frequently results in an expensive and stressful insurance quagmire unless good contract drafting anticipates and allocates the risk of liability. Indemnification clauses can allocate the risk of a claim to the party whose acts or omissions are at the root of the claim.
• Defects in construction, materials, or design. If a defect in materials, design, or construction occurs, who will be responsible for the cost of correcting the defect, and who retains the liability for any injury that results from it?
• Damage to the project during construction/force majeure. If the project is damaged or destroyed during construction, who bears that risk of loss? Similarly, if a catastrophic unforeseen event (a.k.a. an “act of God”) occurs, how is that risk allocated in terms of contract performance, time, and liability?
• Regulatory approvals. If a government body that must give approval for the project fails to timely do so or refuses project approval, how will the risk of a rebuild or redesign be allocated?
• Unexpected conditions. If there are conditions on the site that were unexpected and negatively impact construction, who will be responsible for the cost of overcoming the problem, and can the project be canceled without financial consequence?
• Changes to the project. How will changes to the project, either requested by the owner or necessitated by site conditions, be handled?
• Warranties. What is the scope and extent of any warranty by the builder, and any warranties by subcontractors?
• Disputes. How will disputes be handled? Will they be mediated, arbitrated, or filed in court? Is there a clause that allows a party to cure its default? (Meaning, avoid defaulting on the contract by fixing the problem being complained about.) How can the relationship be unilaterally terminated, and under what circumstances?
• Forum selection and choice of law. If a dispute arises that is to be handled by a court, where must the lawsuit be filed, and which state’s law will apply to the lawsuit? As contracting parties are often headquartered in different states, it is important to agree on where any court proceedings would take place, and which state’s law applies to interpretation of the contract. State laws can vary significantly, thus the agreed upon “choice of law” can make a substantive difference in the outcome of a dispute.
While certainly not exhaustive, this list illustrates some of the common issues that arise in contract disputes or may be implicated in claims by third parties. Each of these issues can have significant consequence.
Negotiating a contract is, at its core, an honest conversation between the individuals involved in the project who come to an agreement regarding what challenges to the project can be anticipated and how the risk of those challenges should be allocated. This allocation of risk is often informed by industry standards and customs.
For example, in a negotiation between a new operator and a builder regarding construction of an aerial park, the parties will need to negotiate whether the project engineers and inspectors will contract directly with the operator or will be subcontractors of the builder. If they are subcontractors of the builder, the builder will “own” the risk of the engineer’s or inspector’s errors. If the builder takes on the role of hiring and supervising the work of such subcontractors, the project fee should reflect the increased cost of insurance and risk, and the builder should have good subcontracts in place with the engineer and inspector. This arrangement will also impact how the day-to-day planning and construction of the project will take place.
Conversely, if the operator chooses to hire the engineer and the inspector separately, the contracts should reflect this arrangement. In this case, the builder should have no liability for the acts or omissions of the other project professionals, nor any supervisory duty or control over those professionals.
Ideally, you should understand and be able to negotiate the key provisions in a contract, and your attorney can help ensure that the drafting of the contract reflects those negotiated terms unambiguously and in accordance with governing law. Importantly, after initial negotiations and contract drafts, involving an attorney at the appropriate time will help ensure that you grasp the impact of the words in the contract.
Good contract drafting is all about understanding and allocating risk. The last thing a business owner wants is to be in the position of dealing with a major, unforeseen, and unallocated risk during a project. Business owners who invest time and money into understanding and prioritizing contracts will save legal fees, hassle, and heartache in the future.