Understanding Killer Contract Language

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Understanding Killer Contract Language
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This PowerPoint presentation is intended to
provide contractors and subcontractors with
practical information regarding problem areas of
contract language and interpretation.  It is not
intended to provide legal advice.  Individuals
and companies seeking legal advice are advised to
consult legal counsel
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The Dreaded Contract
Unfortunately, none of the parties typically
discuss the nature of the contract and its
provisions until after they have agreed upon the
scope of work and the price.
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Your Call!

• Sometimes bad contract language must be
  considered risk should not include the future of
  your company

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Buddys Top 7 Deal Breakers
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1. Contingency payment clauses

• Pay If Paid Pay When Paid

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Pay If Paid
Red Flag

• Under a "pay-if-paid" provision, the
  subcontractor will be paid only if the GC is
  first paid by the owner for the specific
  subcontractors work.
• A pay-if-paid provision creates a condition
  precedent to the GCs duty to pay its
  subcontractor and the risk of an owners
  non-payment is shared by the contractor and the
  subcontractor.

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Pay If Paid
Red Flag
Typical Contract Language

• Contractors obligation to pay Sub any sum due
  under the contract is subject to the condition
  precedent that Contractor has first received from
  Owner payment for Subs work. Contractor shall
  have no obligation to pay Sub for any particular
  work unless and until Owner first pays Contractor
  for such work. Sub expressly assumes the risk of
  nonpayment by the Owner to Contractor for any
  reason.

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Pay If Paid Examples
Red Flag

• Examples of these clauses might read
• "Notwithstanding any provision to the contrary,
  payment by Owner to Contractor is a condition
  precedent to payment to Subcontractor"
• "Receipt of payment from the Owner is a condition
  precedent to payment to Subcontractor and payment
  to Subcontractor will only be made after the
  Contractor is paid by Owner."

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Pay When Paid

• With a pay-when-paid clause, so long as the cause
  for non-payment to the general contractor from
  the owner is not related to the subcontractors
  work, the general contractor should be liable to
  the subcontractor immediately following the
  expiration of a reasonable time period.
• If the general contractor does not receive
  payment from the owner, and it is through no
  fault of the subcontractor, the general
  contractor is still going to be ultimately liable
  to the subcontractor.

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Pay When Paid

• These types of clauses deal only with the timing
  of payment and are construed merely as timing
  mechanisms, rather than as waiver/forfeiture
  clauses.
• They are referred to as pay-when-paid clauses,
  but they do not operate to preclude payment
  indefinitely. In other words, the clauses merely
  provide a GC with some reasonable period within
  which to make payment.
• The AIA 401 and the AGC 650 subcontract forms
  contain pay-when-paid payment terms.

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Lien Rights

• Subcontractors should always retain their lien
  rights in their contracts with general
  contractors. This is especially important when
  the parties contract contains the pay-if-paid
  language.

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2. Waiver of Lien or Bond Rights
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Waiver of Lien and Bond Rights

• Subcontractors should vigorously resist giving up
  the payment security provided by lien and Bond
  Rights.
• Most states have lien laws that require a Notice
  to Owner when a lien is filed most states have
  specific lien notice and filing timelines know
  state lien laws.
• However, some courts have upheld such "no lien"
  provisions against contractors that sign them.

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Pass Down

• If a contractor agrees to a no lien provision,
  the contractor must put the same language in any
  contracts he enters into with lower tiered
  contractors or material suppliers.

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Partial Lien Waiver

• Upon making progress payments, the owner or
  general contractor may require the contractor to
  waive all lien claims that the contractor may
  have for the work invoiced.
• Such partial lien waiver requirement must be
  contained in the contract.
• Only waive liens through the date of the invoice,
  not through the date of the payment.

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Final Lien Waiver

• Upon completing the job, the GC asks the Sub
  complete a final lien waiver.
• The requirement to sign a final waiver of claims
  in order to obtain final payment is against
  public policy in most states if the contractor
  has asserted a claim or request for an adjustment
  to the contract price.
• Subs should not be caught between waiving a
  previously asserted claim, and getting paid for
  its work.

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Protecting Lien Rights

• Look for no lien clauses in your contract, and in
  the contract with the owner, if that contract is
  incorporated by reference.
• Such incorporation language is usually enforced.
• If a no lien clause is in the contract, try to
  negotiate it out of your contract

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3. Waiver of Subrogation Rights
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Typical Waiver Language

• Contractor shall and does hereby waive any
  rights of subrogation that it or any of its
  insurers may have against the owner, its agents,
  employees or its insurers.
• "The owner and Contractor waive all rights
  against (1) each other and any of the
  subcontractors, sub-subcontractors, agent and
  employees, each of the other, and (2) the
  architect, architect's consultants, . . . for
  damage caused by fire or other perils to the
  extent covered by property insurance obtained
  pursuant to this contract.

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Limitations of Waiver of Subrogation Clauses

• 1. Typically, they apply "only to the extent
  covered by property insurance" obtained pursuant
  to the contract. Thus, if there is not coverage
  under the property insurance for any reason
  (exclusions, etc.), the waiver of subrogation
  clause does not apply, and the owner is free to
  pursue claims against anyone who allegedly caused
  or contributed to cause the event.
• 2. If the amount of the loss exceeds the amount
  of the property insurance limits of coverage,
  then the owner is free to pursue claims for all
  losses which exceed the amount of property
  insurance.

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Waiver of Subrogation

• The "waiver of subrogation" means that by giving
  up its right of recovery, the insurer accepts the
  fact that the policyholder and the parties with
  whom it has contracted have allocated the risk of
  the insured event to the insurer - the insurance
  would be the sole remedy and that all risk would
  be on the insurer.

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Insurance Policies

• If the owner has given up (i.e., waived) the
  right to pursue certain claims in the contracts,
  the legal effect is that the property insurer is
  bound by that waiver.
• Many insurance policies state that the insured
  may waive subrogation provided it is done as part
  of the contract between the insured and its
  client and is done at the outset of the job and
  not after a claim or loss has arisen.

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Deal Breakers

• Since builders risk policies are written on a
  great variety of forms, it is especially critical
  for an insured to determine whether the policy
  prohibits the insured from waiving recovery
  rights against another.
• If the policy does prohibit such waivers and the
  contractor enters into a typical construction
  contract containing a mutual waiver of
  subrogation provision, the contractor may have
  violated policy conditions and voided the
  coverage. This is particularly true in the case
  of waivers of recovery against architects and
  engineers.
• In the case of design professionals, builders
  risk insurers are hesitant to allow waivers of
  recovery since design errors often cause other
  covered losses under the policy.

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Ask Insurer

• Waivers of subrogation should be entered into by
  an owner or a contractor only after permission is
  obtained from the builders risk insurer.
• It is obviously prudent to seek a clarifying
  endorsement from the insurer. This, of course, if
  especially important where the policy form
  strictly prohibits all waiver of recovery against
  third parties, whether pre- or post- loss.

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Good Waiver Language

• Waivers of subrogation to prevent the builders
  risk insurer from bringing suit against the
  contractor and the subcontractor good.
• Another method to avoid that result would be to
  add the contractor and all of its subcontractors
  as named insureds to the policy since insurers
  are generally not allowed to pursue subrogation
  against their own insureds OCIPs/CCIPs.

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Deal Breaker Language

• Sub gives up right for its insurer to subrogate
  but owner and GC can subrogate.
• Another frequently disputed issue regarding
  waivers of subrogation is the length of time over
  which the waiver extends. Typically, as is the
  case with the AIA documents, the waiver is
  intended to be coextensive with the length of
  time during which the builders risk policy is in
  place, that is, usually the completion of the
  project.

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4. Incorporation by Reference
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Incorporation By Reference

• Be alert to prime contract provisions that
  contain incorporation by reference clauses.
• Particularly inequitable are provisions that
  incorporate only the contractors
  responsibilities, but not your rights against the
  owner.

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Example of Concern

• An owner and contractor used an AIA contract for
  a project. The contract incorporated by reference
  AIA general conditions requiring the parties to
  submit disputes to the project architect for
  decision. The contract provided that the
  architect's decision was "final and binding on
  the parties subject to arbitration." Under the
  contract, either party could demand arbitration
  of the dispute by filing "notice of demand for
  arbitration with the other party to the
  Agreement, with the American Arbitration
  Association and with the architect." The contract
  also provided that failure to demand arbitration
  within 30 days would result in "the architect's
  decision becoming final and binding."

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5. Change Orders in Writing.
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Change Orders

• There is no such thing as a contract that gets
  completed without change orders. Just contractors
  who end up taking it on the chin because of no
  change order procedures in their contracts.

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Change Orders

• Make certain that the key basic elements for
  change orders is addressed in the contract
• Who you have to notify and receive permission
  from for change order work?
• When and how do you have to notify them of
  potential change order work?
• What documents do you have to provide?
• How and when will the change order work get paid?
• Where will the additional funds come from for the
  change order work?
• What is the reasonable time for approval and what
  is the additional cost for your delays while
  youre waiting for approval?
• How will you and the owner resolve the change
  order issue if immediate approval for the work is
  not received in the agreed time?

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Change Orders

• Remember, change order work is not extra work.
  It disrupts the progress and productivity of the
  work as you had originally planned for when you
  bid the work. It is neither your fault nor your
  responsibility, and you should be justly
  compensated for this unanticipated disruption.

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Payment for Change Orders

• The owner has an obligation to build a building
  in compliance with adopted codes and standards.
  Subs should not pay for the owners obligation.
• If it is a code required item the owner should
  pay.
• The only potentially open issue if it is our
  design error is the difference between the cost
  to make the change verses the cost if the
  original plans addressed the item needing change.

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Design Errors

• There exists a propensity for design team members
  to reject change orders to fix errors they have
  made.
• Be cautious of language in design concept
  documents that shift or attempt to shift design
  responsibility to contractors.
• Successful bidder is responsible to ensure the
  system is installed to code.

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6. Broad form Indemnification.
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Indemnity Clauses

• Three Different Forms of Indemnity Clauses
• 1. Broad
• 2. Intermediate
• 3. Limited

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Indemnity Clauses

• Broad Sub shall indemnify and hold harmless GC
  and Owner from and against any and all claims,
  losses, damages, costs and expenses relating to
  the performance of the subcontract and involving
  personal injury, sickness, disease, death or
  property damages, including any resulting loss of
  use, REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN
  PART BY THE NEGLIGENCE OF GC OR OWNER. SUB
  ACKNOWLEDGES AND AGREES THAT IT IS INDEMNIFYING
  GC AND OWNER FOR THEIR OWN SOLE AND/OR PARTIAL
  NEGLIGENCE.

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Indemnity Clauses

• Intermediate Sub shall indemnify and hold
  harmless GC and Owner from and against any and
  all claims, losses, damages, and expenses
  relating to the performance of the subcontract
  and involving personal injury, sickness, disease,
  death or property damages, including any loss of
  use, REGARDLESS OF WHETHER CAUSED IN PART BY THE
  NEGLIGENCE OF THE GC OR OWNER. Subs indemnity
  obligation shall not extend to any claims,
  losses, damages, or expenses for which the sole
  cause is the negligence of GC or Owner.

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Indemnity Clauses

• Limited Sub shall indemnify and hold harmless GC
  and Owner from and against any and all claims,
  losses, damages, costs and expenses relating to
  the performance of the Subcontract and involving
  personal injury, sickness, disease, death or
  property damages, including any resulting loss of
  use, but only to the extent caused by the
  negligent acts or omissions of Sub, its
  employees, or other persons or entities for whose
  acts Sub may be liable.

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Indemnification

• Insurers refusing to cover indemnification
  clauses particularly indemnification of sole
  negligence.
• Refusing to sign indemnification because of no
  insurance is good argument.
• READ CONTRACTS hold harmless requirements can
  be worded many different ways.
• Laws to protect us.

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Indemnity Clauses

• 1. Express Negligence Test.
• 2. Conspicuousness Requirement.

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Express Negligence Test

• In Ethyl Corp. v. Daniel Construction, the Texas
  Supreme Court adopted the Express Negligence Test
  for indemnitee agreements.
• . . . parties seeking to indemnify the
  indemnitee from the consequences of its own
  negligence must express that intent in specific
  terms.

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Express Negligence Test

• Furthermore, the court added, Under the doctrine
  of express negligence, the intent of the parties
  must be specifically stated within the four
  corners of the contract.

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Conspicuousness Requirement

• The Conspicuousness Test states that a clause is
  conspicuous when a reasonable person against whom
  the clause is to operate ought to have noticed
  it.
• Language in CAPITAL HEADINGS, language in
  contrasting type or color, and language in an
  extremely short document, such as a telegram, is
  conspicuous.

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Indemnity Clause Satisfying theConspicuousness
Test

• Broad Sub shall indemnify and hold harmless GC
  and Owner from and against any and all claims,
  losses, damages, costs and expenses relating to
  the performance of the subcontract and involving
  personal injury, sickness, disease, death or
  property damages, including any resulting loss of
  use, REGARDLESS OF WHETHER CAUSED IN WHOLE OR IN
  PART BY THE NEGLIGENCE OF GC OR OWNER. SUB
  ACKNOWLEDGES AND AGREES THAT IT IS INDEMNIFYING
  GC AND OWNER FOR THEIR OWN SOLE AND/OR PARTIAL
  NEGLIGENCE.

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7. Additional Insured Endorsements.
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Additional InsuredEndorsements

• Sub shall, at no expense to GC, maintain in full
  force at all times Commercial General Liability
  Insurance. This insurance shall be written for
  not less than (limits specified) or required by
  law. The following AIE shall be furnished to GC
  prior to the commencement of the work. In
  consideration of the premium charged, GC is named
  as additional insured with respect to all
  liabilities arising out of the performance of the
  work.

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Additional InsuredEndorsements

• Sub shall, at no expense to GC, maintain in full
  force at all times Commercial General Liability
  Insurance. This insurance shall be written for
  not less than (limits specified) or required by
  law, and this insurance shall be primary to any
  other insurance of the GC. The following AIE
  shall be furnished to GC prior to the
  commencement of the work. In consideration of the
  premium charged, GC is named as additional
  insured with respect to all liabilities arising
  out of the performance of the work.

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Additional InsuredEndorsements

• . . . . insurance shall be written for not less
  than (limits specified), and this insurance shall
  be primary to any other insurance of the GC. In
  consideration of the premium charged, GC is named
  an additional insured with respect to all
  liabilities arising out of the performance of the
  work. Sub shall waive all rights against GC, its
  agents, and employees for all damages covered by
  insurance pursuant to this contract.

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Flow Through Provisions

• BROAD Sub is bound to Contractor by all terms of
  the Prime Contract and assumes toward Contractor
  all of the obligations and responsibilities that
  Contractor by those instruments assumes toward
  Owner.

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Flow Through Provisions

• The Subcontract consists of this Agreement and
  any Exhibits attached hereto, and, to the extent
  applicable to the Subs work, the Prime Contract
  consisting of the Agreement between Owner and
  Contractor . . . . Sub is bound to Contractor by
  all terms of the Prime Contract and assumes
  toward Contractor all of the obligations and
  responsibilities pertaining to the Subs work
  that Contractor by those instruments assumes
  toward Owner and Sub shall have the same rights
  and remedies against the Contractor as the
  Contractor has against the Owner.

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8. Acceptance of Final Payment as Wavier.
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Final Payment Waiver

• Acceptance of final payment by the contractor
  constitutes a waiver of all claims.
• Under this contract clause, unresolved
  subcontract claims may be inadvertently waived
  when final payment is received for the original
  contact sum.
• Avoid this provisions OR be careful not to
  request final payment in full until all claims
  are resolved.

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9. Dispute Resolution.
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Dispute Resolution

• Many subs favor arbitration over litigation.
• One should resist venue and jurisdiction
  provisions that attempt to force a dispute to be
  resolved in an inconvenient forum far from the
  project.
• It is important that a subs claims not be stayed
  pending resolution of any contractor/owner
  dispute.
• Be aware of AIA contract provisions.

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Dispute Resolution

• Insist that a subcontract state that the laws of
  the state in which the project exists shall apply
  and that any dispute should be arbitrated or
  litigated in that state.

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10. No Damage for Delay
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BAD DELAY CLAUSE

• The Contractor agrees to make no claim for
  damages for delay in the performance of the
  Contract occasioned by any act or omission to act
  of the Owner or the Architect and agrees that any
  such claim shall be fully compensated by an
  extension of time to complete the performance of
  the Work.

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Where to we go from here?

• Buddys Recommendations

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Use Conditional Bids

• One way to avoid the unpleasant experience of
  receiving an inequitable subcontract after the
  fact is to condition the bid upon acceptable
  contract language.
• This bid is conditioned upon the use of the AIA
  A401 Subcontract (2003 edition).
• A GC who accepts a bid is therefore not only
  accepting the price but also the level of risk
  found in A401. Cant force bad contract.

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Use ASA Addendum

• The ASA has prepared a generic addendum
  intended to defuse the typical proprietary bad
  contract language.
• While the ASA Addendum is not perfect, it will
  address most of the offensive contract provisions
  typically encountered.

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Educate Your Customer

• GCs want subs not only with low prices but also
  that read and strictly follow the details in the
  plans and specifications.
• Let the GC know your professionalism up front but
  also advise what subcontract terms are acceptable
  and be prepared to explain why certain language
  is one-sided and unfair.

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Walk Away From Unfair Contracts

• It is hard to lose a job but it is worst to lose
  your company. Look at past losses and determine
  if bad contract language was a factor.
• Unfair risk shifting have long-range implications
  on your companys future.

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Questions?
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