Construction contracts can be lengthy and complicated documents. While these agreements form the foundation for the relationship between the signing parties, it’s not unusual for construction participants to fail to thoroughly examine them.
Even if the contract is read completely, or if it is not examined by an attorney, technical legal clauses or phrases with profound effects may go unnoticed. While it may not be feasible to hire an attorney to review every contract, it is important for parties to understand that the contract can be used to carve out legal positions, limit rights and demand certain actions. Top-of-the-chain parties routinely attempt to shift financial risk further down the chain, sometimes through onerous contract provisions, because nobody wants to bear a project’s financial risk, but overall this type of onerous contract provision doesn’t help anybody.
Types of Onerous Contract Provisions
The following clauses are all used, to various degrees of success, by top-of-the-chain parties in attempts to shift financial risk onto subcontractors and suppliers.
- no lien;
- strict claim notice provisions;
- retainage requirements; and
- payment bond requirements.
While some of these clauses have been expressly outlawed by certain state legislatures, others are alive and well and working to shift risk or delay payment on construction projects throughout the country. While no-lien clauses have pretty much gone the way of the dodo, pay-if-paid clauses are alive and well and enforceable in some jurisdictions. Likewise, strict noticing provisions, retainage requirements and arbitration clauses are less irksome to courts and likely can be used to the upper-tiered parties’ benefit in the majority of contracts. However, using such provisions may not be beneficial.
Onerous Contract Provisions Hurt Everybody
It’s clear why these types of contractual provisions can be detrimental to the lower-tiered parties. Bearing a project’s financial risk, including that of non-payment, is a difficult position to be in. However, it’s not just the lower-tiered parties that may be harmed by this type of contractual provision.
To begin, from an ethical perspective, using the greater leverage of an upper-tier position to force onerous and detrimental contract provisions onto lower-tiered parties is not fair. It is the general public policy that the parties closest to the money should bear the financial burden of construction projects. Attempting to shirk that responsibility by unfair legal maneuvering doesn’t sit well with our notions of fair play. If an upper-tiered party gets the reputation of strong-arming the lower-tiered parties into unfair positions, they may end up losing out on potential business, or finding it hard to find parties with which to work.
Further, over-reliance on this type of contract provision may be a legally deficient position as well. Pay-when-paid clauses, while acceptable in many jurisdictions, are generally viewed as a timing mechanism – which means that contractual language stating a contractor will pay a sub when payment is received from the property owner is not interpreted to mean payment can be avoided indefinitely. Even in the absence of payment from the owner, the general contractor must pay the subcontractor within some “reasonable” time.
If an upper-tiered party relied on this pay-when-paid provision to withhold payment from a lower-tiered party, it may be subject to the strict penalty and interest provisions found in the prompt payment laws of many states. In fact, as recent cases show, the penalties and interest can end up being many times more burdensome to the paying party than the amount of the original claim. Further, prompt pay laws, or mechanics lien enforcement actions, often provide for the successful claimant to recover attorneys’ fees in addition to the other amounts that may be recovered. As anyone who has ever dealt with attorneys knows, this can be an expensive proposition.
Cleary, as well as not being a fair way to approach construction payment, the inclusion of onerous provisions in construction contracts can actually backfire legally.