Introduction
The following subcontract clauses are taken from actual general contractor subcontract forms in use in the Southeast. Most of these provisions are buried within the “General Conditions” of the subcontract form, often in tiny print. While the precise language may vary, many general contractor-manuscripted form subcontracts contain similar provisions.
Normally, truss and component manufacturers can avoid many of these clauses by advising general contractors that the truss manufacturer is a supplier, not a subcontractor, and that the Uniform Commercial Code for the sale of goods applies to their contractual arrangement. So, truss manufacturers who provide no services at the project site other than to deliver the trusses can legitimately refuse to sign a subcontract form, but rather use purchase orders or a supplier agreement.
But, pressure is often applied to truss manufacturers to provide site-related services, including erection. Once a truss manufacturer undertakes labor-related services, the truss manufacturer becomes a subcontractor. So, it is important for truss manufacturers who take on the role of a subcontractor to understand the legal effect of these clauses, and negotiate through them at the commencement of a project. It is, of course, too late to renegotiate a burdensome clause once a problem occurs during the job.
Even if a subcontractor cannot negotiate the deletion or modification of these clauses, it is still important to understand their effect, so that care can be taken during the job to mitigate the risk of extra costs and other damages such clauses might cause.
Dragnet Scope Clause
Subcontractor shall perform all work necessary or incidental to complete the framing work for the Project in strict accordance with and reasonably inferable from the Contract Documents as being necessary to produce the intended results and as more particularly, though not exclusively, specified in [relevant contract documents]
Dragnet clauses that require the subcontractor to perform work not expressly detailed in the drawings and specifications often result in an expanded scope of subcontract work and the subcontractor having to perform work that was not included in its estimate.
“Necessary or Incidental” and “reasonably inferable … to produce the intended results” means the results intended by the owner and/or design professional, and to protect the General Contractor from scope gaps in its price. Often what is necessary for a complete job is more than what is actually shown on the contract documents. When you see one of these clauses, be careful. Prudent subcontractors often limit their scope of services by adding exclusions.
No-Damage-For-Delay Clause
Subcontractor will not be entitled to any claim for damages or increase in the subcontract price on account of hindrance or delay from any cause whatsoever; provided, however, if Subcontractor is hindered or delayed by any act of God, or solely by any act or omission on the part of Contractor, Subcontractor will be entitled only to an extension of time to complete the work, as Subcontractor’s sole remedy.
Clauses which exclude extra costs incurred due of a delay in exchange for an extension of time are generally enforceable. There are a few states which have enacted legislation making these clauses unenforceable in prime contracts by a public owner, but none which apply to subcontracts. Even there, the statute only bars the enforcement of such a clause for delays “caused solely by the owner or his agents.” Therefore, the general rule in most states is that no-damage-for-delay clauses will be generally enforced, by an owner against a general contractor, and by the general against a subcontractor. There are certain exceptions, but they are difficult to prove, and typically involve deliberate, willful acts by an owner or general contractor.
GC’s-Right-to-Accelerate-Subcontractor Clause
If, in the opinion of Contractor, Subcontractor falls behind in the progress of the Subcontract Work, Contractor may, in addition to any and all other rights provided for in this Agreement, and upon forty-eight (48) hours written notice, direct Subcontractor to take such steps as Contractor deems necessary to improve the rate of progress, including a requirement that Subcontractor increase the labor force, number of shifts and/or overtime operations, days of work, and submit for Contractor’s approval a schedule demonstrating the method under which the required rate of progress will be regained, all without additional cost to Contractor. Contractor may, upon reasonable notice, require the Subcontractor to prosecute, in preference to other parts of the Work, such parts of the Work as Contractor may specify.
This type of clause grants the general contractor great discretion in determining whether, and to what extent, the subcontractor must perform if the subcontractor is behind schedule in the performance of its work. The clause allows the contractor to order the subcontractor to accelerate its work without any additional compensation to the subcontractor. Moreover, the general contractor can revise the planned order of subcontractor work, which often results in labor inefficiencies and extra costs to the subcontractor.
Right-to-Withhold-Payment Clause
Contractor may withhold payment from Subcontractor, in whole or in part, for the reasons and circumstances by which Owner may withhold payment from Contractor under the Prime Contract General Conditions, regardless of whether or not the Owner has actually withheld payment from the Contractor.
This clause allows the general contractor, for example, to withhold payment from the subcontractor if the subcontractor is behind schedule even though the total project is not behind schedule and the circumstances do not warrant the owner’s withholding of payment from the contractor.
Pay-If-Paid Clause
Contractor shall pay to Subcontractor upon receipt of payment from Owner, and as outlined in the Subcontract Agreement, the amount that is allowed and paid by Owner on account of Subcontractor’s Work, less all previous payments and less the amount of current retainage. Payments to Subcontractor will be made out of funds received by Contractor from Owner, and Subcontractor shall have a right to be paid by Contractor if and only if Contractor is paid by Owner for such Work.
Payment of interest to the Contractor by the Owner shall be a condition precedent to the right of the Subcontractor to any interest payment from the Contractor, unless a delay in receipt of payment is caused solely by the fault of the Contractor.
This clause puts risk of owner nonpayment on the subcontractor rather than on the contractor. On many projects, general contractors or CMs do not self perform any actual project work. Therefore, the majority of the financial risk is being borne by the major subcontractors, for materials, equipment, and labor. For that reason, the North Carolina and South Carolina Legislatures have deemed such clause to be void as against public policy. (Delaware has also.) Such a clause is enforceable, however, in Pennsylvania, Maryland, Virginia, Florida, Georgia, Kentucky, Louisiana, Alabama, Tennessee, Texas and in many other states.
Notice-of-Claims Clause
Subcontractor shall make all claims to Contractor for extras and extensions of time for which Owner may be responsible in the manner provided for in the Contract Documents, if any, for like claims by Contractor upon Owner, and in sufficient time for Contractor to comply with the requirements of the Contract Documents for making such claims to Owner. Contractor shall be liable to Subcontractor only to the extent that Contractor actually recovers from Owner for each claim or extra, less Contractor’s costs, expenses, and attorneys’ fees associated with the claim.
Subcontractors must watch out for notice requirements that are different between events that are owner-caused and events that result strictly from the conduct of the general contractor. Generally, the subcontractor must give notice of a claim (e.g., a Change Order request) due to something the owner or design professional caused (or left out) within the time period set forth in the owner-general contractor agreement. If you don’t have that agreement, you must ask for it.
Failure to adhere strictly to the prime contract’s notice provisions may well result in the subcontractor’s claim being barred. This clause also contains another example of an attempt to marry the general contractor’s actual receipt of payment from the owner to the subcontractor’s right of recovery from the general contractor.
Sub-Must-Accept-What-GC-Can-Negotiate Clause
Subcontractor shall only be entitled to a change to the Subcontract Amount in connection with any change initiated by Owner upon the same terms and conditions that an extension of time or additional compensation is allowable to Contractor under the Contract Documents, and only to the extent actually allowed and paid to Contractor by Owner, receipt of payment from Owner being an express condition precedent to Contractor’s obligation to pay Subcontractor.
For owner-initiated changes to the subcontractor’s work, this clause limits the subcontractor’s recovery to that amount actually received by the general contractor from the owner on account of the subcontractor’s claim.
Application of Payments to Other Projects
Payments otherwise due hereunder shall be reduced by the amount of indebtedness of Subcontractor to Contractor whether arising under this Subcontract or otherwise.
This clause allows the general contractor to apply payment otherwise due the subcontractor on Project 1 to a backcharge by the general contractor on Project 2 involving these same parties, irrespective of whether there is a dispute as to amounts due under Project 1. If your company has regular, repeat business with a general contractor or CM, beware this clause – otherwise if there is a dispute on one project, your money due from work on other projects will be at risk.
Damage-to-the-Work Clause
All loss or damage to Subcontractor’s work resulting from any cause whatsoever shall be borne and sustained by Subcontractor and shall be solely at its risk until final acceptance by Contractor, Owner or the Owner’s Design Representative. Subcontractor shall at all times and at its expense protect all labor, materials, supplies, tools and equipment against any damage, injury, destruction, theft or loss and in no event shall Contractor be liable or responsible therefor, and likewise for those of its mechanics, laborers, and materialmen, for all of which Subcontractor shall be solely responsible.
This clause places risk of loss to subcontractor’s work on the subcontractor regardless of the cause of such loss until “final acceptance” by the general contractor or the owner. Further, it is unclear in this type of clause whether the risk of loss shifts upon final acceptance of the subcontractor’s work or acceptance of the entirety of the work.
Uninsurable Indemnity Clause
Subcontractor hereby assumes the risk of and covenants to indemnify and be liable to Contractor and Owner, their officers, directors and employees, for all costs or damages, direct or consequential, which Contractor or Owner incurs as a result of Subcontractor’s failure to perform the work or any part thereof in accordance with the Contract Documents. Subcontractor’s liability shall include but not be limited to (1) increased cost of performance; (2) costs, expenses and damages due to delays or corrective or warranty work; (3) liability to lenders and other third-parties; (4) re-procurement costs; (5) attorneys and consultants fees and related costs and expenses; and (6) any other economic loss.
An indemnification such as this goes far beyond risks that can be covered by general liability insurance. Typically, a subcontractor’s GL liability covers only personal injury and property damage to other parts of the project unrelated to the fire protection system, even with a Completed Operations coverage endorsement. Many of the itemized, economic damages set forth in the above would be far outside the bounds of GL coverage. Note also that several of these items include consequential damages.
Subcontractor v. Subcontractor Claims Clause
Contractor shall not be liable to Subcontractor for any adjustments to the Project Schedule, damages, costs, losses or expenses resulting from acts or omissions (whether or not negligent), failure to perform, delays in performance or defaults of any other Subcontractor or any supplier in connection with the performance of any of the Work. Any claim of Subcontractor for such adjustments to the Project Schedule, damages, costs, losses or expenses shall be made, and any action by Subcontractor shall be filed, directly against such other Subcontractors or suppliers on the Project who have a direct right of action against Subcontractor for damages, costs, losses or expenses claimed to result from acts or omissions (whether or not negligent), failure to perform, delays in performance or defaults of Subcontractor.
This sort of provision seeks to remove the general contractor from potential liability to the subcontractor for claims allegedly arising from actions or inaction by other subcontractors, and diminishes the general contractor’s potential liability for poor performance of its coordination-of-the-work responsibilities.
Prospective Waiver of Lien Rights
The Subcontractor covenants and agrees that it will not file any mechanics’ liens or claims against the Project, or the Property, or any part thereof or against any improvement thereon, or against any moneys due or to become due from Owner to Contractor or from Contractor to Subcontractor, on account of any work, labor, materials, services, equipment, or other items furnished in connection with the Work. Subcontractor does hereby expressly waive, release, and relinquish all rights to file or maintain such liens and claims and agrees further that this waiver shall be an independent covenant, and shall apply as well to work, labor, and services performed and materials, equipment, and other items furnished under any change order or other agreement for extra or additional work in connection with the Project.
The prospective waiver of lien rights (that is, waiving one’s future right to assert a lien) means that the subcontractor is giving up one of the subcontractor’s most important means of protecting and enforcing its right to be paid. The waiver may be included in the general contract and only incorporated by reference into the subcontract. The NC and Florida legislatures have made these sorts of provisions unenforceable. These provisions are enforceable in Virginia.
Termination for Convenience Clause and Limitation of Damages
Contractor, in its sole discretion and without notice to any guarantors or sureties, may terminate all or any part of this Subcontract without cause and for its convenience upon the giving of written notice to Subcontractor. If terminated for convenience, Subcontractor shall be entitled to be paid its demonstrable field costs of all Work provided hereunder prior to said termination, plus ten percent (10%) profit. In no event shall Subcontractor be entitled to recover overhead, lost profits or any other damages on work not yet performed as of the date of termination.
The termination for convenience provision is one-sided – only the general contractor may invoke its terms. In the event of a dispute between general contractor and subcontractor, this provision can be a powerful weapon, as it allows the general contractor to avoid otherwise recoverable extra subcontractor costs, and only pay for the subcontractor’s field costs for work installed.
It may also be used to improperly replace an apparent low bidder with a post-award bid-shopped price. As these provisions had their origin in federal contracting, there are plenty of federal law and court decisions upholding “T for C” clauses.
Holt Gwyn
Conner Gwyn Schenck PLLC
Greensboro, NC
Holt Gwyn has been a trial lawyer since 1976. His trial experience began as a federal prosecutor in the Office of the United States Attorney, where he prosecuted white‐collar, securities and environmental fraud. His practice today is in construction contracts and disputes, sureties, and environmental, business, and employment matters for construction industry clients.
Mr. Gwyn has co-authored several construction law books and two dozen articles on construction law. He lectures frequently to bar and industry groups, and serves as Counsel for AFSA’s Carolinas Chapter.
Mr. Gwyn is a Fellow in the American College of Construction Lawyers, and serves as its President for 2016-2017. For seven years he was the Editor‐in‐Chief of the College’s Law Journal published by Thomson‐West. He was elected Chair of the American Bar Association's Forum on the Construction Industry for 1999 to 2000, and was on its Governing Committee from 1995 to 2001.
Mr. Gwyn has extensive experience in alternative dispute resolution (ADR) procedures. He is a member of the American Arbitration Association’s Construction Mega Panel and Large Complex Case Panel. Since 1992, Mr. Gwyn has been certified as a Superior Court Mediator by the State of North Carolina and the Federal Courts, and in 2007, was asked to be a Charter Member in the NC Academy of Superior Court Mediators.
(Holt passed away in October 2017)