...there may be gaps in the insurance coverage, meaning that both the contractor and the design team may incur risks not covered by current insurance products.
Along these lines, in any third-party negligence suit for personal injury or property damage, the issue always arises as to what is the standard of care. With IPD contracts, this remains an unanswered question.
IPD Team Members Can’t Be Sued
Some notable IPD contract platforms have a process wherein IPD members may not sue each other.
This noble and creative idea no doubt originated from the parties, not their lawyers. However noble, its enforceability is questionable.
If a state statute imposed a law preventing parties from suing each other, it may be an unconstitutional denial of access to the court system. While the Constitution does not play a large role in private contracts, the theories carry over. These provisions may be viewed as a waiver of rights in advance, which are generally unenforceable. Courts may find these clauses invalid because a court believes they are against public policy, which is the contract version of unconstitutional.
If you look closely at many of the “no sue” provisions, they directly conflict with the default provisions. Also, some states have laws indicating that a party may not be required to waive lien rights in advance.
These IPD “no sue” clauses have the same material effect. There is also a question about the impact these clauses have on waivers of subrogation. Some of these problems may be partially solved by placing a limitation or cap on damages—with a reasonable basis for the cap—coupled with a waiver of consequential damages.
Some courts will enforce these no suit clauses. Some will not. It will depend on the court, what the laws of the jurisdiction are, and how the clauses are written—and even possibly what the judge had for breakfast.
Impact on Indemnity Clauses
Indemnity clauses must be closely examined in every contract. In a very general and oversimplified way, indemnity provisions can be divided into three groups: those in which the indemnitor indemnifies the indemnitee for everything including the indemnitee’s sole negligence, which is known as “broad form” indemnity; a second group in which the indemnitor is not responsible for the indemnitee’s sole negligence; and a third type in which each party is responsible for its share of comparative fault.
Most owners and contractors use the second type; many of the commercially available families of documents use the third. With IPD contracts, the second type is no longer available, partly because of the no-sue clauses.
Making It Work
These are only a few of the most important points regarding an IPD contract. A risk-reward evaluation of any IPD contract must start with the negotiated deal and how it is formalized in writing. The “risk-sharing” notion of an IPD contract has worked in the past, and it will work in the future.
Don’t let the new risks posed by IPD contracts scare you away. People at one time thought the world was flat until pioneering sailors went over the edge—and returned. If you evaluate your risk and draft your contracts accordingly, the success of an IPD project may be very rewarding.
