The basic form of the construction contract has not changed drastically, but there has been much more attention paid to select areas in the last 5 to 10 years, partly because of changes in the law. Most notable are indemnity and insurance, and this is mostly due to states passing laws to limit the indemnity and/or insurance burdens that contractors have to bear in construction projects. Such laws are generally sought by contractor organizations. For example, in Texas and Louisiana, the jurisdictions that we deal with most often on construction projects on the Gulf coast, a series of legal changes of this sort have been adopted over the last five years. However, such laws are not unique to these two states.
There has also been evolution in the area of compensation and incentives on the contractor side. More grading schemes or incentive schemes which reward contractors for achieving key performance indicators are being used. This has been a definite evolution as well, especially in terms of the partnership aspects of the owner-contractor relationship.
2. After the incorporation of Anti-indemnification statute in Texas, do you think this trend to impose greater restrictions on the scope of indemnity will continue?
3. How common is the inclusion of mutual indemnity in Oil and gas EPC contracts? Are there any sector-specific elements to the way mutual indemnity is incorporated in the contracts?
For us, the term “oil and gas” incorporates everything from upstream to downstream, and there are different anti-indemnity statutes to apply to each segment. For example, there are differences in indemnity limitations between oil well operations and plant construction.
On the plant construction side, the traditional approach for injuries and some extent of property damage is called “knock-for-knock”. Each party takes responsibility for its own people and property, regardless of whose fault causes the injury, death, or property damage. For quite some time, this used to include some level of contractor responsibility for damage to the owner's property. With the anti-indemnity statutes, pure knock-for-knock idemnities are not possible anymore in most cases. Instead, fault-based indemnities are required. For instance - I, the owner, cannot require the contractor to indemnify me for damage to its property, unless the damage is its fault. If I damage the contractor's property, I am going to be responsible and cannot make the contractor absorb that responsibility. This is a change from the traditional knock-for-knock approach.
4. Have there been any cases where a failure to include a strong indemnity clause endangered the whole project?
We have certainly seen non-compliant contracts, including forms given to us that did not comply. But in fact, there has been very little litigation related to these new indemnity statutes, precisely because they are very new. In Texas, they came into effect in 2012, and so, if a contract was signed after this time, the project was likely finished in the last year or two. There haven't been that many projects that have given the courts the opportunity to test some of the bounds of these statutes. Overall, indemnities themselves are not likely to kill a project, but unexpected indemnity interpretations can translate into unexpected liabilities for the contracting parties. The goal of the construction contract should be to allocate these liabilities clearly, so that everyone understands the risks they are taking and can insure them. If the contract does not comply with the statutes, and so the apparent indemnities in the contract do not work, a party could have an unpleasant surprise when it is unable to enforce the indemnity that it thought it had.