Negotiating Subcontractor Clauses

May 19, 2016| Presented by:

Ryan J. Hatton

Consulting Services provided through PH Health Strategies, LLC, an affiliate of Peterson Habicht, PA.

WEB: PetersonHabicht.com PHONE: 612.836.5500 © 2016 Peterson Habicht, PA. All Rights Reserved.

2

Introduction

Reading and understanding subcontract

agreements is essential to avoid unfair risk

allocation in the contracting process.

Understanding how to win the “battle of the

forms” is critical ensuring fair contracting.

Negotiating away killer provisions is important to manage risk and provide fair and competitive pricing.

3

Purpose of Contracting1. Formalize relationship2. Define scope of work3. Define compensation

methodology4. Allocate risk5. Set the rules of the relationship6. Reference guide in times of

trouble

4

Typical Battle of the forms scenario1. Solicitation Documents

1A – RFI’s & Responses

2. BID SUBMITTAL/Proposal

3. Subcontract

What happens when the subcontractor’s submittal does not match the solicitation documents? Or the subcontract does not match the proposal?

5

Common law1. Mirror Image Rule• Offer and acceptance much match

• If the terms of the acceptance differ from the offer at all, it constitutes a counter offer. A counter offer is a rejection of the original offer, plus a new offer, which gives the original offeror the power to create a contract by accepting the counteroffer.

6

Common law cont.• Last Shot Rule

• Buyer issues purchase order – terms (offer)•Seller responds by sending acceptance with seller’s standard terms and conditions of sale (which do not match the buyer’s terms on the purchase order) (counteroffer?)•No contract….•But if buyer sends payment, it functions as acceptance by performance of all of Seller’s terms.

• Executed subcontract – Last shot???

7

Subcontract FormsNo such thing as a “Standard” subcontract form. Two sources

of subcontract forms:

1. Those sponsored by associations in the industry • AIA A401 (designed to interact with AIA A201), general

conditions for prime contract between Owner and GC• AGC 650 and AGC 655 designed to interact with AIA

A201 as well as AGC 200.• AGC documents are weighted in favor of the GC.

8

Subcontract Forms2. The most onerous risk shifting to subcontractors is found

in proprietary forms of the individual general contractors.

3. Heavily revised association sponsored documents are essentially proprietary forms, and require vigilance during the review process.

9

Tips for Contract Review• Working knowledge of association sponsored forms

• History with contracting partner

• Identify and check for conflicts between contract documents

• Pay particular attention to modifications to association sponsored forms

10

Tips for Bid Proposal1. State the terms and conditions of your bid.

•Reference plan date, sections bid, addendums & RFI’s, if any2. Insurance amount assumed for pricing3. Any alternatives4. Specific exclusions5. Include:

•Payment terms•Retainage•Indemnity limitation•Warranty disclaimer

11

Tips for Subcontract Review1. Subcontract documents

• Require the bid proposal, including all terms, conditions and addenda to be identified as part of the subcontract documents.

• Conflict among documents – state the subcontractor’s bid proposal language shall control in the event of a conflict among the subcontract documents.

• (Failing to include this can cause the subcontractor to lose the battle of the forms due to the last shot doctrine.)

12

Flow Through Clauses AKA “flow-down”, “pass-through” or “conduit” clauses –

transfer responsibility for the project from the GC to the sub.

Should be ok with agreeing to assume the GC’s responsibilities owed to the owner with respect to the specific work of the subcontractor.

Often “flow-through” clauses go much further, and simply incorporate all of the prime contract documents into the subcontract.

Subcontractor assumes toward GC all of the obligations the GC assumes toward the owner. Absurd!

13

Flow Through Clauses (cont.) Best option to delete in entirety.

Middle ground: agree to transfer of the prime contract obligations limited, to the obligations pertaining to the plans and specifications that pertain to the subcontractor’s work.

Excluded from the transfer of obligations: insurance, indemnity, payment, and warranties.

14

Payment ClausesTwo primary different payment clauses in Minnesota: (1) pay – when –

paid and (2) contingent payment (aka pay if paid)

1. GC will pay sub within certain time (10 days) after GC receives payment from owner – considered a “pay when paid” clause and does not shift the risk of owner insolvency to subcontractor.

2. If clause clearly establishes the receipt by the GC of payment from the owner is a condition precedent to GC’s obligation to pay subcontractor, the sub bears the risk of owner insolvency.

15

Payment Clauses (cont.)When faced with a contingent payment clause, attempt to eliminate

the “condition precedent” nature of the clause.

A pay when pay clause entitles the subcontractor to payment within a reasonable time in the event the owner fails to pay the GC and the reason for the nonpayment is not the fault of the subcontractor.

16

Right to Stop Work for Nonpayment

Under Common law, one has a legally justifiable excuse to refuse to continue performance of a contract when the other party materially breaches.

Clauses that limit a subcontractors right to suspend work due to non-payment should be stricken, particularly where a contingent payment clause is included.

17

IndemnityThree types of indemnity provisions:

1. Limited – imposes liability only to the extent of the sub’s own fault or negligence

2. Intermediate – sub assumes all liability except for the sole negligence of the GC

3. Broad form – imposes the entire risk of loss on sub, even for the sole negligence of the GC

** Indemnity provision availability has been regulated by Minnesota statutes.

18

Indemnity

Add the following to any indemnity provision: The defense and indemnity obligations of this subcontract are limited to the extent of the defense and indemnity provided by the insurance the subcontractor is required to provide by this subcontract.

The clear intent is that the subcontractor does not agree to accept any contractual liability that expands its common law obligations, beyond that for which the subcontractor has purchased insurance.

19

Timing of Performance Subcontract pricing based upon sub’s costs on a project – labor

expense is a major component.

Based upon assumptions of industry standard time durations to perform various activities, that work will be performed in a certain sequence, and that GC will coordinate the project so that other trades will not obstruct or interfere with sub’s work.

Subcontract clauses that require the subcontractor to not only follow the GC’s schedule, but also any amendments or changes to that schedule are unfair.

20

Timing of Performance Insist that Sub be given right to provide input to sequences and

durations of the various work.

Subcontractor only required to follow mutually agreeable schedules, and that all of the GC’s schedules must be reasonable.

21

No Damage for DelayGC’s often attempt to provide an extension of time as the sole remedy for

delays, and state that subcontractor shall not be entitled to any increase in the Subcontract price or to damages or additional compensation as a consequence of such delays…

Best option is to strike the clause entirely.

Fall back position is to negotiate revisions that incorporate the concept of “reasonableness”

22

Termination for ConvenienceThese clauses permit the owner/GC to terminate the contract/subcontractwithout incurring liability for paying lost profits.

To prevent terminated subcontractor from being left in a pinch due toordering expensive equipment/materials that cannot be utilizedelsewhere, a clause should be inserted that makes the terminating partyresponsible for all cancellation charges and all consequential damagescaused by the termination (“non-cancelable materials and equipmentwhich were ordered in good faith in anticipation of use on the project)

23

Liquidating ClauseDispute resolution clause designed to insulate the GC from inconsistent

results. Require subcontractor to make claims in the same manner and time periods required of the GC in the prime contract.

Typically state that the GC is bound to the subcontractor in the same manner that the owner is bound to the GC. And provide that the GC can never be liable to the sub for more than the owner is liable to the GC.

Problem: does not recognize that the GC may be responsible for the subcontractor’s damages and losses.

24

Liquidating ClauseDo not contractually agree to be bound by a proceeding which the subcontractor

is not a formal party.

If forced to accept a liquidating clause, negotiate the following:

1. Right to assert subcontractor claims against the owner in GC’s name2. Right to accept or reject settlements3. Not be bound by decisions in proceedings where sub is not a party4. Be alert to any cost sharing formula5. Avoid releasing GC from claims caused by the GC, or the acts of the owner or

architect6. Insist on right to be present at all settlement negotiations

25

Good for the GooseBe sure to have formal subcontracts with flow down provisions with

all subordinate tier subcontractors and suppliers.

26

Ryan J. Hatton612.836.5504

33 S 6th Street, Suite 3900Minneapolis, MN 55402

Phone: 612.836.5500Fax: 612.836.5599

Or visit our website: PetersonHabicht.com

WE’D LIKE TO GET INTO YOUR BUSINESS.