1.
Pay-When-Paid Clauses:
The subcontractor agrees that
it will not be entitled to payment from the contractor
until payment is received by the contractor from the
owner. These type clauses are commonly called pay-when-paid
clauses. In the state of Georgia they are valid and
essentially shift the responsibility for payment from
the general contractor to the owner. The subcontractor
is required to look to the credit of the owner. These
clauses appear frequently in contractor contracts.
If the owner does not pay the contractor, then the
contractor is not legally required to pay the subcontractor.
If the subcontractor cannot delete a pay-when-paid
clause from the proposed contract, there is still
opportunity to defeat the clause. If the owner has
not paid the general contractor because of a failure
to perform or other breaches of the contract by the
general contractor which are not due in any way to
the actions or inactions of the subcontractor, then
the general contractor may not rely upon the pay-when-paid
contract clause.
2. Binding Provisions:
Another provision often found in contractor
contracts recites: The subcontractor agrees to be
bound to the contractor by the terms and conditions
of the contract documents, including the contract
between the owner and the general contractor and assumes
toward the contractor all the duties, obligations,
and responsibilities that the contractor has by the
contract documents assumed toward the owner. Without
a careful review of the owner/contractor contract,
no subcontractor can sign a contract with this provision
in it without doing so at its great peril. Frequently,
the owner/contractor contract contains a liquidated
damages clause which is not set forth in the subcontractor/contractor
contract. By adopting and incorporating the owner
contract into the subcontractor contract, the subcontractor
adopts the liquidated damages provision into what
was otherwise a document without such a provision.
Other dangerous binding provisions may also be in
the underlying contract.
3. Indemnification Provisions:
All the standard form contractor contracts
and many prepared by individual general contractors
contain an indemnification provision. This provision
typically states that: The subcontractor agrees to
indemnify and hold harmless the contractor, owner
and architect against any and all damages, claims,
attorney’s fees, costs, expenses or liability
arising out of or related to any personal injury,
death, or damage to property caused in whole or in
part by any negligent act or omission of the subcontractor.
Many subcontractors fail to realize that this indemnification
provision requires the subcontractor to assume the
portion of the negligence which could be allocated
to the owner and contractor. The subcontractor becomes
liable for a particular negligent act even though
the subcontractor’s negligence only partially
caused or contributed to the damages. If 99% of the
damages were proximately caused by the owner or contractor
and only 1% of the damages were caused by the subcontractor,
the subcontractor is still responsible for paying
100% of the damages. Obviously, this clause is patently
unfair to the subcontractor.
If the subcontractor requests that the
indemnification clause be deleted, the general contractor
asserts that the subcontractor’s liability insurance
would pay for the claim. Although, if the subcontractor
has insurance this would be technically correct, the
subcontractor should remember that additional claims
mean additional increases in premium costs. Finally,
and most importantly, if the subcontractor allows
such an indemnification clause, the subcontractor
should attempt to limit it to the amount of the liability
insurance coverage. Otherwise, in the event of a catastrophic
loss exceeding insurance coverage, the subcontractor
runs the potential risk of destroying its business.
4. No-Damages for Delay Clause:
No damages for delay clauses can be set
forth in many different ways in a contractor’s
contract. Typically, the provision will reflect that:
If delay occurs, the only remedy available to the
subcontractor is an extension of time. Often this
clause appears to be innocently worded in the contract,
but the intent and interpretation of the clause is
to eliminate any damages for delay which a subcontractor
might seek from a general contractor. Typically, the
contract will remain silent about the general contractor’s
ability to seek delay damages from the subcontractor.
The silence stems from the fact that under Georgia
law the contractor would be allowed to seek delay
damages regardless of whether the same were actually
addressed in the contract provisions.
The review of the proposed contract is
the subcontractor’s first line of defense against
problems that may emerge later on the project. Some
contracts are so one-sided that each and every paragraph
must be carefully reviewed and often modified to attempt
to keep a fairly level playing field.