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Killer Contract Clauses: Red Flag Clauses in Construction Contracts

by | Contracts, Legal Briefs

In both GC and Subcontractor contracts, there are various terms that really need to be reviewed by counsel to determine your rights.  Below, Palecek & Palecek, PLLC present some of those terms taken from actual contracts in our experience that you need to have on your radar before executing a contract:

I – Indemnity
Sample Proposed Subcontract Clause:
“To the fullest extent permitted by law, Subcontractor agrees to indemnify and hold harmless GC, the Owner, the Architect and all of their parents, subsidiaries, affiliates, agents, officers and employees from and against all claims, damages, losses, penalties, … , including but not limited to attorney’s fees and court costs, arising out of or resulting from the performance of Subcontractor’s work…regardless of whether it is caused in part by the acts, omissions or negligence of a party indemnified hereunder.”

Response: This needs to be reviewed and revised by counsel as your business may be exposing itself to potentially crippling damages over which it had no control.

II – Killer Contract Clauses II – No Damage for Delay
Sample Proposed Subcontract Clause:
“Extensions of Time:    If for reasons beyond its control Subcontractor shall be materially delayed at any time in the progress of the Work under such circumstances as would entitle Contractor to an extension of time for completion of the Work hereunder or other relief, provided that Subcontractor shall have filed with Contractor a written claim for such extension or relief that complies with the requisites for making a claim under the Contract and in sufficient time to permit Contractor to file such a claim against the Owner for an extension or other relief under the Contract.  In the event the Subcontractor’s performance of this Subcontract is delayed or interfered with by acts or omissions of the Owner, Contractor or other subcontractors, Subcontractor may request an extension of time for the performance of this Subcontract as provided above, but shall not be entitled to any increase in the Subcontract Price or to damages or additional compensation as a consequence of such delays or interference except to the extent that the Contract entitles Contractor to compensation therefor and then only to the extent of any amounts that Contractor, on behalf of Subcontractor, recover from Owner for such delays or interference.”

Response:    This needs to be reviewed and revised by counsel because a Contractor is entitled to reasonable compensation, not just extensions of time, associated with delays caused by others.

III. Killer Contract Clauses III – Condition Precedent To Payment – “Pay if Paid”
Sample Proposed Subcontract Clause:

“The Subcontract Amount will be paid subject to the terms of this Agreement in monthly payments of 90% of the work performed in any preceding month, in accordance with estimates prepared by Subcontractor and approved by Contractor, the Owner, and any other party whose approval is required by the Contract Documents and in accordance with the conditions set forth below, including, but not limited to, the condition precedent as set forth below of receipt by Contractor of payment from the Owner….Receipt by Contractor of payment from the Owner on the Project is a condition precedent to payment of the approved portion of Subcontractor’s monthly estimate as provided in this Section 2.1 and extra compensation as provided in 4.5 below.”

Response: This “Pay if Paid” clause needs to be reviewed and revised by counsel because its terms can have a drastic effect on getting paid.  For example, as a Contractor, you should not be subject to a “Pay if Paid” provision for a Change Order directed by the up-tier contractor, especially if the up-tier contractor is denied the same change from the Owner.  In such a case, you will never get paid for the Change.  Palecek & Palecek PLLC can help you understand the effects of such payment terms and how to negotiate revisions.  See “Change Orders” below.

IV. Killer Contract Clauses IV – Change Orders
Sample Proposed Subcontract Clause:

“Contractor and Subcontractor agree that Contractor may add to or deduct from the amount of Work covered by this Agreement, and any changes so made in the amount of Work involved, or any other parts of this Agreement, shall be by a written amendment setting forth in detail the changes involved and the value thereof which shall be mutually agreed upon between Contractor and Subcontractor.  Subcontractor agrees to proceed with the Work as changed when so ordered in writing by Contractor so as not to delay the progress of the Work, and without any determination of the value thereof….
Notwithstanding any other provision, if the Work for which Subcontractor claims extra compensation, which extra compensation shall be paid exclusively and solely out of funds paid by Owner to Contractor, is determined by the Owner or Architect not to entitle Contractor to a Change Order or extra compensation and since payment by the Owner is a condition precedent, as provided in 2.1 above, to payment to Subcontractor for such Work, then Contractor shall not be liable to Subcontractor for any extra compensation for such Work unless Contractor agreed in writing to such extra compensation specifically excluding Owner approval and payment as a condition precedent, as provided in 2.1 above, to payment by Contractor.”

Response:  If you signed this proposed term without identifying its pitfalls, your business may truly suffer.  Your business needs to be able to identify such proposed terms because they potentially have a severe effect on your bottom line.  On a project where Change Orders become a large part of the contract, you don’t want to be stuck with such an onerous Change Order provision that could lead to severe cash flow problems for your business.  See Palecek & Palecek for sample responses.

V. Killer Contract Clauses V – “Scope of Work” Provisions
It is critically important that a General Contractor or Subcontractor ensures that the Scope of Work for which it bid is the identical scope of work set forth in the proposed General Contract / Subcontract.  It is essential that the General Contractor / Subcontractor attach its bid proposal to the proposed contract / subcontract as an “exhibit” and that the General Contractor / Subcontractor ensure that the “other contract documents” to be included in the final contract / subcontract set forth the exact set of plans and specifications from which the General Contractor / Subcontractor prepared its bid.
Response:  Palecek & Palecek PLLC has identified specific language to include in the Scope of Work section of the proposed contract, which will ensure that your inclusions and exclusions become material terms of the executed contract.

VI. Killer Contract Clauses VI – Attorneys’ Fees / Arbitration Clauses / Forum
When reviewing the proposed contract, the Contractor must review and, often, revise the attorney’s fees provision and the arbitration provision.

Please contact Palecek & Palecek, PLLC for its preferred attorney’s fees language Such a provision is essential if the Contractor wants to be reimbursed for costs, after prevailing at trial, that are not typically allowed by the Courts unless they are agreed to in the contract.  This provision could save the Contractor tens of thousands of dollars.  Keep in mind, however, that this provision works both ways.  If the Contractor loses at trial, it must abide by this same obligation.

The Contractor must also be aware, before signing any contract, the forum for disputes.  That is, will any disputes be decided by the Superior Court in Maricopa County, Arizona, or will the American Arbitration Association (Phoenix Division) be the forum?  If it is the latter, and the Contractor prevails at the binding arbitration, it may not be entitled to attorney’s fees unless specifically incorporated into the contract.
Also, it will save your business money if you can identify the specific venue for any dispute.  If your principal place of business is Maricopa County, Arizona, then, of course, ensure that the venue for the dispute is Maricopa County, Arizona, and no other.

The decision as to whether or not to agree to binding arbitration is company specific.  Palecek & Palecek can identify for you the specific issues to consider based upon your specific business.  Some of the benefits of the Superior Court are the appeal process, the disclosure process, the evidentiary process, and the fact that one will have judges interpreting case law instead of “experts” in construction.  If one has a case that hinges on the interpretation of inconsistent case law, it makes sense to use the court process.

Having said that, once you agree in the contract to a forum, you are generally stuck unless you can get the Contractor to agree to an alternative process.  For our Arizona clients, It may make additional economic sense to use binding arbitration for cases less than $50,000.00 because there is a de novo appeal process in Maricopa County Superior Court.  That is, after the first round of trial, the other party could appeal “de novo,” very cheaply, without bond.  This effectively means that one would have to pay twice for the costs of an evidentiary trial if there is not an agreement to arbitrate such disputes.