Contractors should know that there are three clauses in most all construction contracts which could create significant exposure.
PAY-IF-PAID: Getting paid is obviously the most important part of any job. Not getting paid for one’s work is not anything a contractor would ever agree to, right? Well, in most every contract is a pay-if-paid provision stating that payment by the general contractor is specifically contingent on the general contractor’s receipt of payment from the owner. What this means is that if the general contractor isn’t paid for any reason, then it won’t have to pay the subcontractor, even though the subcontractor has done its work and is perfectly entitled to get paid. Such provisions are generally enforceable so long as they are clearly and unambiguously stated.
APPLICABILITY OF THE PRIME CONTRACT: General contractors like to protect themselves – no surprise. One way they do so is to incorporate their prime contract responsibilities into all their subcontracts. All rights, remedies and responsibilities in the prime contract then apply to the subcontractor so that the subcontractor becomes bound to the general contractor to the same extent that the general contractor is bound to the owner. Subcontractors could therefore find themselves taking on more responsibilities than they actually ever contemplated.
INDEMNIFICATION: Risk shifting is not new in construction; it is quite standard and most visible in the indemnification provisions within most subcontracts presented by general contractors to their subcontractors. Many of these clauses not only have the subcontractor indemnify the general contractor, owner, architect and engineer for damages and losses resulting from the subcontractor’s own negligent acts or omissions but surprisingly also include the negligent acts of the general contractor, owner or other third parties. This means the subcontractor is actually agreeing to indemnify the general contractor and other for their own negligence. May not sound fair but this shifting or responsibility is enforceable if clearly expressed.
Depending on the circumstances, subcontractors would do well to reach out to their construction lawyer who can negotiate or even neutralize these clauses.