Litigation Topics for Prime / Subcontractor Contracts
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I had a speaking engagement today here in Kenner, Louisiana (a suburb of New Orleans) whereby I had the pleasure of speaking to a group of contractors and architects regarding construction contracts. The bulk of the discussion focused on the most contested provisions within construction contracts.
The information is very helpful to contractors and can be used a resource when a contractor begins the contracting phase of a construction project to help get a better understanding of what is going on within the contract documents.
Prime/Subcontractors Contracts
Contracts between prime/general contractors and their subcontractors make up a vital link in the construction project chain. Here both parties need to negotiate terms to better protect when a dispute arises. A well crafted contract can better protect a prime and/or a sub when default arises. Typically subcontractors are at the mercy of the prime. A good subcontractor will have his attorney review any agreement to make sure that the deal is an even one.
AIA – American Institute of Architects is the most common standard form contracts in the construction industry. AIA contracts are a good starting point and offer contracts for Prime/sub relationships, Architect/owner, Owner/Prime, and any other design professional/contractor relationship that may exist.
• Commonly litigated subcontract provisions
There are a number of provisions which could be contained in a prime/subcontractor contract that need to raise a red flag when present and should be negotiated by either party so as to keep the contract from becoming one-sided.
1. Incorporation by Reference Clauses: (flow-up & flow-down provisions)
- a Flow-down provision in a prime/sub contract will incorporate by reference terms and provisions of the owner/prime contract;
- conversely, a Flow-up provision incorporates the duties owed by the owner to the prime into the prime/sub contract;
- Many times parties enter into these agreements with out ever seeing the referenced document making them susceptible to unknown provisions;
- Enforcement depends on the reciprocality of the provisions and lack of ambiguity
2. Scope of Work Provisions
- Prime contractors want a broad scope of work provision with subs so that they can pin other work to them later on if needed;
- Subs should demand very specific scope of work provisions so as to know exactly what work is expected and what exactly they have bid on;
- This provision can incorporate other documents such as plans and specifications;
- Provision needed for extra work or change order if work called for is outside of the scope;
3. Change Order and Extra Work Provisions
- Very popular area for dispute in construction contracts – changes are always happening
- There should be a clear provision in the contract outlining the process whereby CO’s are made and approved;
- Define change order – modification to work already contemplated by the agreement; (ie different materials)
- Define extra – item of work beyond the original scope of work that is added during construction;
- MAKE SURE change orders and/or extras are in writing;
4. Notice Provisions
- Found in various places within a prime/sub contract
- Very important risk-shifiting devices – can determine a win or loss regarding a claim
5. Indemnity Clauses
- Typically these trickle down the line Owner -> Prime -> Sub
- These are generally enforceable, Subs should be careful and not allow indemnity for negligence of another party
- Insurance can be purchased by prime or sub to cover the indemnity obligation
6. No Damages for Delay Clauses
- Owners and Primes try to insert “no damage for delay” provisions in contracts for protection against unforeseen delays
- Parties want to check all referencing documents to see if this provision is in there
7. LD’s – Liquidated Damages Provisions
- Very helpful provisions because the pre-determine delay damages, usually on a per day basis;
- Enforceable unless determined to be a penalty or if they are a “one- size fits all” provision;
- LD’s are a good way to measure delay damage but can enhance the need for Contractor/Sub to accelerate work to avoid further damage, leading to defects and workmanship issues;
- For LD’s to apply the contractors work must be a substantial factor in the delay;
8. Lien Waivers
- reduce the chance for encumbrances to be placed on the title of the property;
- Usually not enforceable if lien waiver required before work performed;
- A good tool for Prime and Owner to reduce exposure;
- Can be used in an incremental fashion as payments are distributed
9. “Pay-when-paid” v. “Pay-if-paid”
- Pay-if-paid is defined as a subcontractor gets paid by the general contractor only if the owner pays the general contractor for that subcontractor’s work.” Requires a condition precedent.
- Pay-when-paid in contrast to the pay-if-paid; a pay-when-paid clause does not establish a condition precedent, but merely creates a timing mechanism for the general contractor’s payment to the subcontractor.
10. Retainage
- Typically 5%-10% of each payment will be withheld by the Owner/Prime until a later date, such as substantial completion
- Its purpose is to keep a pool of money to remedy any defects in workmanship by that sub
11. Termination provisions
- Termination for Cause
- Usually nonpayment, excessive delay, insolvency, or convenience are reasons to terminate the contract
12. ADR Clause (Arbitration/Mediation clauses)
- Arbitration (most popular) – binding way to avoid litigation;
- Mediation – non-binding way to avoid litigation;
- Both can be effective, typically arbitration can be more intimidating due to its binding and no (very limited) ability to appeal
13. Attorney fee provisions
- Very popular as no one likes to pay an attorney!
- Many provisions will say that the unsuccessful party must pay attorney fees but others to be careful will put the burden on one party
- Primes and subs should include an attorney fee provision in all contracts
- Good to be specific on the provision and include for litigation and ADR
14. Forum selection & choice of law
- If working out of state, make sure you know which venue a dispute will be held in;
- This can be a very costly provision
(list partially obtained from the ABA’s Fundamentals of Construction Law)
