Killer Subcontract Provisions

We are frequently requested by subcontractor clients to review the subcontract that has been prepared by the prime contractor, before our client signs it. While no two agreements are identical, there are a number of problematic contract provisions that appear in many agreements. Here is a list of ten such provisions (and their variations) that are potential “deal breakers”:

1. PAY IF/WHEN PAID (e.g. “Contractor shall have the right to exhaust all legal remedies, including appeals, prior to having an obligation to pay Subcontractor.”) “Pay-if-paid” provisions (“Receipt of payment from Owner shall be a condition precedent to Contractor’s duty to pay Subcontractor”) are illegal in California. However, the only legal limit on “Pay-When-Paid” provisions is that payment must be made “within a reasonable time.” The example above, as written, essentially affords the prime contractor a period of several years following completion of the project before that contractor has an independent duty to pay its subcontractors – not a “reasonable” amount of time, to those waiting to be paid. A compromise is to provide a time limit, such as 6 months or one year following substantial completion of the project.
2. CROSS-PROJECT SET-OFF (e.g. “In the event of disputes or default by Subcontractor, Contractor shall have the right to withhold sums due Subcontractor on this Project and on any other project on which Subcontractor is performing work for Contractor.”) Such provisions are problematic and likely unenforceable, as they potentially bar subcontractors’ lien rights. Such provisions should be deleted.
3. CONTRACTOR/SUBCONTRACTOR RESPONSIBILITY FOR DESIGN QUALITY (e.g. “Subcontractor warrants that the Work shall comply with all applicable laws, codes, statutes, standards, and ordinances.”) Unless a subcontractor’s scope of work expressly includes design work, this provision should either be deleted or modified, with the addition of the following phrase: “Subcontractor shall not be responsible for conformance of the design of its work to applicable laws, codes, statutes, standards, and ordinances.”
4. SUBCONTRACTOR CLAIM DEPENDENT ON OWNER PAYMENT OF CLAIM TO GENERAL CONTRACTOR (e.g. “Subcontractor’s sole and exclusive remedy for delays or disputed extra work shall be an extension of time, unless Contractor recovers additional compensation related to such delay or extra work from Owner.”) Such provisions should be deleted, as they ignore the fact that some subcontractor claims for extra work or delay are caused by the prime contractor or one of its other subcontractors.
5. “LIEN-FREE” REQUIREMENT, REGARDLESS OF PAYMENT STATUS (e.g. “Subcontractor shall keep the Project and its property free from all liens, stop payment notices, or other encumbrances or claims, from any source. In the event a subcontractor or material supplier of any tier files a lien, stop payment notice, or claim, Subcontractor shall promptly have such lien or claim removed at its own expense.”) Such provisions need to be modified to include the following qualifier at the beginning of the sentence: “Provided Contractor makes full and timely payments to Subcontractor,”
6. FULL CONTRACTOR OVERHEAD AND PROFIT ON DEDUCTIVE CHANGES (e.g. “In the event of deductive changes to the Work, the Contract Sum shall be reduced by a sum that includes costs associated with such deleted or reduced work, as well as Subcontractor overhead and profit equal to ____%.”) These provisions often originate with the prime contract, where the owner seeks a full credit for deleted work. The percentage should be either minimized or deleted, altogether, as deductive change orders are often as burdensome to administer as additive ones.
7. NO DAMAGE FOR DELAY (e.g. “In the event of a delay to the Contract Time, Subcontractor’s sole remedy, regardless of the source or extent of such delay, shall be an extension to the Contract Time. In no event shall Subcontractor have any claim against Owner or Contractor for additional costs, extended overhead, or other delay-related damages.”) Public Contract Code §7102 limits these provisions on public works to delays that are reasonable and within the contemplation of the contracting parties. The same restriction should be applied to private works subcontracts.
8. APPLICABLE LAW OTHER THAN CALIFORNIA (e.g. “Disputes arising from this Agreement shall be governed by Nevada Law.”) California projects, private or public, generally should be governed by California law.
9. VENUE OTHER THAN CALIFORNIA (e.g. “The sole venue for resolution of disputes arising from this Agreement or the Work shall be Maricopa County in Arizona.”) Such provisions should be revised to designate a California venue. Parties to a construction project located in California cannot be required to litigate their disputes in another state.
10. (LACK OF) MUTUAL WAIVER OF CONSEQUENTIAL (SPECIAL) DAMAGES. (e.g. “In the event of Subcontractor’s unexcused delay to Substantial Completion, Contractor shall be entitled to recover from Subcontractor Contractor’s costs and damages associated with such delay, including consequential damages.”) Any reference to “consequential damages” or “special damages” should be stricken. Liquidated damages, if included in the contract agreement, should be the sole remedy available to an owner and/or a general contractor for a subcontractor’s unexcused delays to a project.

Of course, having subcontract provisions revised requires agreement on the prime contractor’s part. Such agreement is particularly difficult if the provision in question also appears in the prime contract. If a general contractor (or, in turn, an owner) is unwilling to show any flexibility in these important terms, perhaps the subcontractor should reconsider whether signing the agreement is worth the additional risk.

Article by Patrick G. McNamara, Esq. in 2019. Mr. McNamara is part of Porter Law Group, Inc. in Sacramento, California, and specializes in Construction and Real Estate Litigation. www.porterlaw.com.