Construction Contracts in Arkansas – Part I*
Construction is the single largest production sector in the United States economy, and construction related jobs account for 10% of employment in America. The transactions underlying the construction industry, therefore, certainly require attention. This article – Parts 1, 2, and 3 – discusses construction law as it relates to construction contracts in Arkansas. Although the construction law and construction contract drafting points covered here apply generally to contracts for design services and construction in all states, this article addresses a few Arkansas-specific construction law issues. Part I discusses common liability provisions – construction insurance, indemnity clauses, limitations of liability, and consequential damages – in construction and design contracts.
Insurance Provisions. The concept is simple, but proper insurance coverage in design services contracts with architects & engineers and in construction contracts with contractors & subcontractors is often overlooked. Design services agreements for construction projects should have insurance clauses providing that the architect or engineer has professional liability insurance for all services the design professional is providing for the construction project. In construction agreements in Arkansas and abroad, the contractor must provide sufficient commercial general liability insurance and ensure its subcontractors do the same in their subcontracts for the construction project. In addition to the insurance coverage above, the owner (or general contractor, design-builder, or construction manager) should purchase builder’s risk insurance for the full value of the construction project. Lastly, throughout the construction project the owner must confirm continuous insurance coverage from the architect, engineer, and contractor on a biannual basis, and the contractor must confirm continuous insurance coverage from its subcontractors on a biannual basis.
Indemnity Contract Clause. Though indemnity clauses are the least controversial provisions covered in this article due to the limited direct financial exposure to owners or contractors and the unlikely personal injury that would trigger the provisions, indemnity clauses are addressed here because many attorneys may assign indemnity clauses more importance than they deserve. In most cases, indemnity clauses will only be an issue if there is a personal injury on the construction site that results in litigation. Even then, the only attorneys who would be concerned are the insurance defense attorneys that the insurance carrier selected. In reality, indemnity provisions should not be a major concern in terms of direct financial risk to the insured. At any rate, three concerns to address in the construction contract indemnity clause are: (1) Make sure there is a comparative negligence scheme such that each party is responsible for costs and damages resulting from each party’s own negligence; (2) The indemnity clause should obligate the indemnifying party “defend, indemnify, and hold-harmless” the indemnified party from “all costs, damages” etc. from third parties “arising from or related to” the contract or project; and (3) Construction contract indemnity clauses in Arkansas must comply with Arkansas’ construction indemnity statute at Ark. Code. Ann. 4-56-104. The most important part of Arkansas’ construction agreement indemnity statute is that it aligns with comparative negligence indemnity clauses such that an indemnifying party cannot indemnify the other party for the other party’s own negligence (4-56-104(b)):
A provision in a construction agreement or construction contract is void and unenforceable as against public policy if it requires an entity or that entity's insurer to indemnify, defend, or hold harmless another entity against liability for damage arising out of the death of or bodily injury to a person or persons or damage to property, which arises out of the negligence or fault of the indemnitee, its agents, representatives, subcontractors, or suppliers.
Limitations of Liability Contract Provisions. Owners should be wary of design agreement and construction contract provisions that limit liability, and design professionals and contractors should always include a limitation of liability in the architecture agreement, engineering contract, or construction agreement. Design professionals should limit liability for tort claims and breach of contract claims from the owner (excluding all third-party claims) to a percentage of the design contract price. Similarly, contractors and subcontractors should limit liability for tort claims and breach of contract claims (excluding all third-party claims) to a percentage of the construction contract price. Such limitation of liability clauses should serve as a cap for all damages, including assessed liquidated damages in the liquidated damages sections of the contract.
Waiver of Consequential Damages Contract Clauses. Even if consequential damages are appropriate to negotiate for certain types of projects – such as casinos where nearly all damages are consequential damages – consequential damages are typically waived in construction contracts. The AIA contract documents, DBIA agreements, ConsensusDocs contracts, and all other custom contracts worth using contain waiver of consequential damages clauses.
When drafting or reviewing your next design agreement or construction contract, make sure you address these common liability clauses.
*The information in this article does not constitute legal advice and is for general educational purposes only. This article is provided only as a public service to the web community. The contents of this article should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice law in your jurisdiction. You should always consult a qualified attorney regarding any specific legal matter.