The Scariest Terms in Your Contract

by | Mar 23, 2021 | Contracts

One-sided contracts present scary terms that can put your work and business at risk. These terms – heavily favoring “one party” of the contract over the other – generally put the most pressure on subcontractors. They find themselves caught between provisions that benefit the general contractor and those that protect suppliers.

Everyone signing a contract should be aware of managing these terms and their risks, to avoid finding themselves financing the project should things begin to go south. First, read the contract thoroughly and understand its provisions. Obtain help to decode the legal language if necessary. Secondly, try to make changes to those provisions – if not before signing, then over time. Most importantly, if the terms, relationship, and/or finances of the job truly make you uneasy, walk away. You are better off not taking a job than signing up with terms that could risk the financial well-being of your business.

The single scariest contract provision is this: The obligation to continue working, even if you are not paid.

This provision exists in many owner contracts with the general contractor but rarely in supplier contracts. For sure, it’s almost always inserted into a subcontractor contract.

Look for it! Here’s an example:

“Subcontractor shall not be entitled to stop the work on account of a contractor’s default, including non-payment, but shall proceed in accordance with the dispute resolution procedures in the Agreement.”

This means that if you, as a subcontractor on the project, are not getting paid, you must keep working, keep paying for supplies, and keep paying for labor. If you believe the nonpayment is out of alignment with your contract, you must move forward with the dispute resolution procedures outlined by your signed contract. Keep in mind that arbitration can take months and court litigation even longer, and both come at a cost.

Also, if your contract includes both a non-work-stoppage provision and a paid-when-paid provision, the fact the contractor hasn’t paid you isn’t a default or breach of contract. Therefore, even if you went forward with the dispute resolution process, there is no guarantee you would prevail and get paid.

These provisions are dangerous whether you are a subcontractor or a contractor, and they could ultimately put you out of business. If you don’t continue to work and fund the job, you can be found in breach of contract. Furthermore, if you are a subcontractor and you have issued a payment bond, you also extend your risk to claims being made on that bond. Your bonding company can then come after you – an extremely precarious position in which to put yourself.

So, what can you do about this contract language before you sign off on it?

The most obvious move is marking up the contract by hand or computer, initialing next to your changes. However, because some documents set up with DocuSign will not allow you to make changes, creating an addendum is the best option.

First, begin with a blank screen or sheet of paper. Start with this language:

“This Addendum shall modify and supersede any and all provisions contained in the Agreement, and all exhibits referenced therein, between Contractor and Subcontractor for the project.”

Then, begin writing or typing in the addendum all the changes you want to make. Detail anything you want to delete, alter, or add. The addendum should be signed by all parties at the same time they sign the contract.

Consider including this wording in your addendum:

“Subcontractor may slow or suspend work if any payment requests have not been paid in full within 30 calendar days from submission.”

Perhaps the contractor will insist on 45 or 60 days, but the important thing is that there is some timeframe for stopping work. It’s not never. Also, be wary of making partial payment requests that will require you to keep working and could still put you in financial jeopardy.

With the right to stop work being the most important provision to safeguard, the next crucial contract term involves time to cure any alleged default. The right to be notified of issues and be allowed to cure those issues can solve and prevent many problems.

Some contracts have this sort of language:

“Contractor shall be entitled, upon twenty four hours written notice to the Subcontractor, to correct any deficient work or materials and deduct the cost thereof from any money then due or that may thereafter become due to Subcontractor under this agreement, or at the election of Contractor, terminate the employment of Subcontractor under this agreement.”

Imagine getting such notice on a Friday afternoon! You can’t really fix anything in one day, so you’ll want more time.

Consider adding:

“Contractor shall provide Subcontractor ten calendar days written notice detailing the specific deficiency in performance and providing a reasonable opportunity to cure any performance issue or delay or claim before any payments are delayed or held back or any amounts are chargeable to Subcontractor.”

This slows everything down, giving you the subcontractor – or the contractor dealing with the owner – time to fix any issues before being back-charged or subject to any delay claims.

These two safeguards are critical to minimizing your risk. The right to stop work after a period of non-payment, as well as ample notice/opportunity to fix problems, are simple contract additions that can make a world of difference in protecting your financial interests.

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