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A Rogue’s Gallery of Construction Subcontract Terms

The term rogue’s gallery refers to a lineup of photographs of villains. The term was coined by the Pinkerton Detective agency in the 1850s as a description for its most wanted list of outlaws.

The term fits well in describing an accumulation of common, onerous terms contained in construction subcontracts. The following terms would make most rogue’s galleries.

Pay-if-paid and pay-when-paid clauses

Show me the money! These clauses seek to shift the risk of non-payment to the subcontractor when it has no control over the circumstances that may lead to non-payment. Pay-if-paid is absolute in many states and will result in a subcontractor not being paid even if the general contractor’s failure to be paid has nothing to do with anything that the subcontractor did or failed to do. A pay-if-paid clause also may preclude or impede bond and lien claims. Pay-when-paid is somewhat less onerous as many states hold that it is not absolute, but requires payment within a reasonable time. Reasonable time then becomes an issue to be determined on a case by case basis.

What to do? Negotiate that the company should get paid unless the owner’s failure to pay is due to actions or inactions by the subcontractor. One other tip: Find out if the state where the project is located has a prompt payment act. Many states are enacting these statutes and some of them actually render pay-if-paid and pay-when-paid clauses void as against public policy.

Indemnity clauses

The insurance clauses of a subcontract tend to make one’s eyes glaze over. These clauses should be shared with the insurance broker to be sure that the policy provides the required coverages. Most importantly, review the indemnity clause. Many times, these clauses will provide that the subcontractor will indemnify the contractor, owner and design professionals from anything that could go wrong on the project, from personal injury and property damage to environmental issues and economic damages. In addition, the clause will go so far as to require the subcontractor to indemnify these parties even when their own negligence causes the loss. Compounding the risk, many insurance policies do not provide coverage for indemnification of third parties for their negligence.

What to do? Work hard to negotiate a more fair result whereby the subcontractor will only indemnify the indemnified parties when, in fact, the subcontractor caused or participated in the cause of the loss and then only to the percentage extent its conduct was the proximate cause of the loss. Here, too, it can be useful to check the law of the state where the project is located because many states have anti-indemnity statutes. These statutes outlaw onerous indemnity terms whereby one party has the obligation to indemnify another party for its own negligence. Failing all of this and wanting the work, consider buying a rider to the insurance policy to protect the company when it comes to indemnifying someone for their own negligence.

Liquidated damage clauses

These clauses can provide for damages for late completion, at the end of the job, or on milestones or even, on some projects, for the failure of the completed project to meet specified performance criteria. Many times these clause are also written to allow the prime contractor or owner to also recover other consequential type damages, not included as part of its liquidated damages calculation.

What to do? One thing to do is to be sure to negotiate that the liquidated damages are the exclusive damages that the prime contractor or owner may recover. The other thing, which is even better, is to negotiate a cap on all damages based on a percentage of the contract value something like this: “Notwithstanding anything to the contrary herein, subcontractor’s liability for any type of damages, liquidated or otherwise, is hereby capped at 5 percent of the original subcontract value.”

No damage for delay clauses

These clauses, which are growing longer and longer, essentially provide that, if there is a delay not caused by the company, it gets more time, but no money.

What to do? Absent striking the term, negotiate to provide for some objective means to calculate damages based on a reasonable per diem or percentage that ties into the original bid estimated costs for field and home office overhead. Also watch to be sure that you can recover the damages from the prime contractor or if it will try to limit the recovery of those costs only when recovered by it from the owner. Another thing to consider is that there are exceptions to these clauses in many states, as they are viewed as exculpatory clauses. Even though that may be the case, it is still prudent to negotiate relief in the contract and to not rely on the common law for an escape hatch.

Incorporation by reference/flow down/order of precedence clauses

This one is likely a surprise, but it is so often overlooked. A subcontractor will take pains to negotiate changes to the subcontract, but then ignore the fact that all of those contractual “gains” may be trumped by the fact that the terms of the prime contractequally as onerous and one-sidedstill govern because of this quiet, silent rogue.

What to do? Get a copy of the prime contract. Read it. At a minimum, negotiate that the terms of the subcontract take precedence over the prime contract or else enter into a rider to the subcontract, incorporating the negotiated revisions and that states: “Notwithstanding anything to the contrary, the terms of this rider govern.”

The bottom line is that these rogue terms are here to stay; however, if recognized and dealt with during the negotiation of the contract, these rogues can be managed.

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