Your Subcontract: Deconstructed
A Provision-by-Provision Analysis of Your Subcontract
Part Five of a Five Part Series

By Alexander E. Barthet

Your subcontract. Done right, it can be both a sword and a shield in your dealings with your subcontractors. Careful consideration should be given to each provision such that the risk and benefit of each should be measured against the scope of the work and the contract price. This series is designed to give you a better understanding of each provision so that you can better manage the risks and exploit the benefits in your negotiations.

In this fifth and final part, we shall discuss Article 17: Submittals and Shop Drawings, Article 18: Liens, Article 19: Termination for Cause, Article 20: Termination for Convenience, and Article 21: Miscellaneous.

Article 17: Submittals and Shop Drawings

The devil is in the details. This is particularly true in construction. While the plans and specifications give a great deal of information about the project as a whole, submittals and shop drawings give tradesmen necessary information on how specific component parts fit together as well as the intent of the design professional.

There are at least three factors that one must keep in mind when dealing with the submittal process in a subcontract. First, submittals must be prepared and transmitted timely so as not to delay the performance of others. As a result, the subcontract should require all submittals to be prepared and transmitted timely so as not to delay or impede the progress of work.

Second, while the contractor need not approve submittals, it is prudent to at least review them so that incomplete or erroneous submittals are not passed along to the design professional only to be rejected. One reason this cursory review is particularly important is that during a dispute, one metric used by construction lawyers and experts to measure the performance of a contractor is the number of rejected submittals. Therefore, checking the completeness of submittals should reduce the number of rejected submittals. A provision such as the following should suffice: “Any submission that in Contractor's opinion is incomplete, contains errors or has not been fully and properly checked, may be returned unreviewed by Contractor for revision and resubmission.”

Finally, the subcontractor must understand that the approval of submittals does not constitute a “double check” of its work by the design professional. Said another way, if the subcontractor makes an error, the fact that the error conforms with the submittal (versus the plans) does not relieve the subcontractor of liability. A provision such as the following makes this clear: “In reviewing shop drawings, Architect/Engineer need not verify dimensions and field conditions. Architect/Engineer will review shop drawings and samples only for conformance with the design concept of the Work and for general detailing. Architect's and Contractor's review shall not be construed as a complete check nor shall it relieve Subcontractor from its responsibility for any deficiency that may exist or from any departures or deviations from the requirements of this Subcontract and the Contract Documents. Approval of submittals by Contractor or Architect shall not relieve Subcontractor of its obligation to perform the Work in strict accordance with this Subcontract and the Contract Documents or of its responsibility for the proper matching of the Work to contiguous work.”

Article 18: Liens

It is unenforceable to require a lienor to waive prospective lien rights. However, it is permissible to require a subcontractor to keep the property free and clear of liens of its subcontractors and suppliers. Such a requirement works hand-in-hand with the pay-when-paid provision discussed earlier. The goal is to limit the contractor’s liability for payments when it has not been paid by the owner. Therefore, if the contractor remains unpaid and a material supplier liens the job, the contractor can demand that the subcontractor satisfy the lien. This can be accomplished with the following provision.

“To the extent not expressly prohibited by law, Subcontractor shall not permit any lien or other encumbrance to be filed or to remain of record as a claim against the building or the Project site for any Work performed or materials furnished by, to or on behalf of Subcontractor, or any of its subcontractors or suppliers. Subcontractor shall defend, indemnify, save and hold harmless Contractor, Contractor's sureties and Owner from any lien or claim of lien filed or maintained by any laborer, materialman, subcontractor, or other person or entity directly or indirectly acting for, through, or under Subcontractor. Without limiting the foregoing, Subcontractor shall cause any such lien or claim of lien to be satisfied, removed, or discharged by bond, payment, or otherwise within ten (l0) days from the date of receipt by Subcontractor of written notice from Contractor. The failure of Subcontractor after ten (l0) days written demand by Contractor to satisfy, discharge and/or bond a lien shall constitute a material breach of this Subcontract.”

It is important to note that many prime contracts contain similar provisions. Therefore, it is prudent to demand the same from your subcontractors.

Article 19: Termination for Cause

A termination for cause provision allows the contractor to default the subcontractor for a material breach of the subcontract. To ensure that such right is as broad as possible and that the remedies that flow from such termination provide full relief, this article must be carefully drafted.

First, the provision should articulate the classes of events that will trigger the default. These could include:

1. the failure to supply the labor, materials, equipment, supervision and other things required of it in sufficient quantities and of required quality to perform the Work with the skill, conformity, promptness and diligence required hereunder;

2. causing interference, stoppage, or delay to the Project or an activity necessary to complete the Project;

3. the failure to properly and promptly make payment for all labor, materials and services provided in the performance of the Work;

4. the failure to promptly and timely prosecute the Work; or

5. the failure in the Contractor's opinion in the performance or observance of any of the covenants, conditions, or other terms of this Subcontract.

With the reasons for default identified, notice and articulation of the remedies are next. Notice, as well as an opportunity to cure, are important as it gives the subcontractor the ability to remedy the default prior to termination. It could read: “In the event of default, Contractor shall, in addition to any other rights or remedies otherwise provided by this Subcontract and the other Contract Documents or by law, after giving Subcontractor written notice of default and forty-eight (48) hours within which to cure said default, have the right to exercise anyone or more of the following remedies:

1. require that Subcontractor utilize, at its own expense, overtime labor and additional shifts as necessary to overcome the consequences of any delay attributable to Subcontractor's default;

2. attempt to remedy the default by whatever means Contractor may deem necessary or appropriate, including, but not limited to, correcting, furnishing, performing, or otherwise completing the Work, or any part thereof, by itself or through others and deducting the cost thereof (plus an allowance for administrative burden equal to fifteen percent (15%) of such costs) from any monies due or to become due to Subcontractor hereunder;

3. after giving Subcontractor an additional forty-eight (48) hours written notice (at any time following the expiration of the initial forty-eight (48) hours notice and curative period), terminate this Subcontract, without thereby waiving or releasing any rights or remedies against Subcontractor or its sureties, and by itself or through others take possession of the Work, and all materials and equipment of Subcontractor relating to the Work, all of which the Subcontractor hereby transfers, assigns and sets over to Contractor for and until the completion of the Work and securing Contractor the payment of its costs (plus and allowance for administrative burden equal to fifteen (15%) of such costs) and other damages under the Subcontract; it being intended that Contractor shall be the assignee of and have a security interest in the property described above to the extent located on the Project site; or

4. recover from Subcontractor all losses, damages, penalties and fines, whether actual or liquidated, direct or consequential (including without limitation any increase in Contractor's cost of insurance resulting from Subcontractor's failure to maintain insurance coverage required hereunder), and all reasonable attorneys fees suffered or incurred by Contractor by reason of or as a result of Subcontractor's default.”

Improperly terminating a contract has serious ramifications. One way to limit the exposure for such liability is to include a provision such as: “Should any termination for default under Article 19 be determined to be invalid, improper or wrongful, such termination shall be deemed to have been a termination as provided in Article 20.”

Article 20: Termination for Convenience

Termination for convenience is exactly what the name suggests; if for any reason, or no reason, the contractor wishes to end the relationship, it can do so without penalty. Effectively, this makes the subcontract nothing more than a day-to-day agreement. Such a provision could read: “In its sole discretion and without notice to any guarantors or sureties, Contractor may, at any time prior to final payment, terminate this Subcontract for its convenience for any reason whatsoever, or for no reason, upon the giving of written notice to Subcontractor. In no event shall Subcontractor be entitled to consequential damages or loss of profits on portions of the Work not yet performed. If terminated for convenience, Subcontractor shall be entitled to be paid all costs of all Work provided hereunder including reasonable and necessary costs of termination together with the Profit Percentage attributable to the costs so determined. Payment shall be made in accordance with and subject to the payment terms of this agreement.”

As with other articles, a provision similar to this will likely be in the prime contract. However, it may (and should) contain limitations on when the termination for convenience may be triggered, such as if a building permit is not issued or financing does not come through. Savvy subcontractors may request that the same limitations be placed in their termination for convenience provision.

Article 21: Miscellaneous

This section, as the title suggests, is a series of what lawyers typically call “boilerplate” language. Most of the subjects covered in this article, which could go on for pages, are not unique to construction agreements as they typically appear in contracts of all subjects. These include:

1. Governing law, which is typically the state where the construction takes place, but is not required to be;

2. Venue and jurisdiction for any dispute, which is typically the locale where the construction takes place;

3. Merger of all prior agreements into this subcontract, be they written or oral;

4. Waiver of trial by jury, as most contractors usually prefer the reduced expense of a nonjury trial;

5. Prevailing party’s right to recover legal fees and costs;

6. Severability of any unenforceable terms and the survival of the remaining terms;

7. Hierarchy of provisions upon conflict, such that the provision which places the greater duty on the Subcontractor shall govern;

8. No third party beneficiaries unless stated otherwise;

9. Nonwiaver of any provision or requirement of the subcontract unless the waiver was in writing and signed; and

10. The waiver of prior requirements does not constitute the waiver of future requirements.

There are at least two provisions, however, that are unique to construction subcontracts that could appear in this section. The first relates to temporary facilities and the second to the obligation to continue working through disputes. As to temporary facilities, unless such facilities will be provided, the subcontractor should be advised that all such facilities must be provided at its expense. A sample provision could read: “Contractor shall have no obligation to furnish or make available to the Subcontractor any temporary facilities and services, it being specifically understood, without in any way limiting the generality of the foregoing, that the Subcontractor is responsible for its own utilities, hoisting, parking, lighting, security, storage, mobilization, demobilization and clean up.”

Finally, it is critical that work does not stop when a dispute arises. This must be a requirement in the subcontract which could read: “In the event of any dispute as to whether any item or portion of the Work is within the scope of the Work to be performed by Subcontractor or any dispute as to whether Subcontractor is entitled to an extra payment or additional time, Subcontractor shall continue to proceed diligently with the performance of the Work, this Subcontract, and any disputed Work, pending any resolution. The existence of a dispute shall not be grounds for any failure to perform by Subcontractor nor limit the right of Contractor to proceed to remedy any default by Subcontractor.”

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This series only covers some of the many aspects involved in contracting. Each situation and contract is unique and you should contact a lawyer to assist with your specific situation.

This article was first published in the March 2008 issue of South Florida Homebuilder as the fifth of a five part series on contractor-subcontractor contracts.

© 2008, The Barthet Firm