September  11, 1998



Bulletin #20: The "Killer" Contract Part 3

The "Killer Contract" can take many forms. Seemingly minor changes to an AIA or the AGC-600 subcontract form can make a reasonable contract blatantly unfair. However, changes to the standard forms are obvious, since form language will be struck, new language will be added, or an addendum will be attached to the standard form. At least the subcontractor already knows how the basic form works and can focus on the changes. The danger that a subcontractor will enter into a "Killer Contract" without knowing it is greatest when the general contractor presents its own proprietary form. It is fair to assume that the general contractor and its attorneys have put some time and effort into developing the proprietary subcontract. Presumably, this effort was not focused on making the subcontract form more favorable to the subcontractor.

Since a proprietary subcontract may not look anything like the standard forms, the subcontractor will not have any point of reference as to unusual provisions (i.e. "they have changed the standard arbitration clause"). If the subcontractor is to truly understand its position in taking on the new work, every sentence of the proprietary subcontract must be examined. The subcontractor may ultimately choose to sign a "Killer Contract," but should only do so with a full understanding of what its position will be if there are problems with the project.

One of the dilemmas in confronting a "Killer Contract" is determining how many of the unreasonable and unfair terms should simply be accepted and which are so severe that they require an effort at negotiation. Few general contractors will be interested in completely renegotiating their subcontract form or making 50 changes to a five-page agreement. Therefore, the subcontractor will typically focus on those terms that are most likely to be triggered or would be most severe in their consequences if something goes wrong. This presents a difficult balancing act for the subcontractor in trying to negotiate a marginally acceptable agreement. Of course, the subcontractor always has the option of not taking on the work, but that is usually a last resort.

A skillfully drafted "Killer Contract" may actually look and read much like the standard contract forms. The general contractor wants its subcontractors to sign the form without a lot of negotiation or complaint. Such an artfully drafted proprietary subcontract is the most dangerous of all. Without even realizing it, a subcontractor may sign away essential rights and claims.

A few examples of actual proprietary subcontract language will demonstrate how a "Killer Contract" can operate.

1. Subcontract Default. Sample language: "Should the Contractor conclude that the Subcontractor is not prosecuting the work with promptness and diligence or failing in any way to comply with the provisions of the contract, the Contractor may make good any deficiency of the Subcontractor and charge the Subcontractor therefor, plus ten percent, and deduct the same from any money then or thereafter due to the Subcontractor under this or any other contract. The Contractor may also terminate the employment of the Subcontractor, cancel this contract and retain or remove the Subcontractor’s tools, implements, equipment and/or materials and retain, lease or sell the same, applying the proceeds against any amount due to Contractor under this contract or any other contract with Subcontractor."

Comment: Under this language, the contractor has no obligation to provide the subcontractor with notice of any job performance issues or any period for the subcontractor to correct deficiencies. The decision on non-performance is solely in the discretion of the contractor. The subcontractor could find all of its tools, equipment, and materials seized without notice and sold off. Even if the contractor incurs no losses in completing the subcontractor’s work, it can still sell off the subcontractor’s property and keep the proceeds to cover costs on other projects on which the subcontractor is working. 2. Delay Claims. Sample language: "Should the Subcontractor be delayed in the completion of the work for any reason, including by any act, neglect, delay or default of the Owner or the Contractor, the Subcontractor shall in no event and under no circumstances be entitled to additional compensation. If the delay is the result of the neglect or default of the Contractor, Subcontractor’s sole remedy shall be an extension of time if a written claim for an extension is delivered to the Contractor within twenty-four hours after the occurrence of the delay."

Comment: Delays cost a subcontractor in many ways. Its workforce may be idled, materials and equipment sit unused, and coordination of the work with other projects be impacted. The standard subcontract forms do not guarantee the payment of delay compensation, but at least offer the subcontractor the potential to recover under certain circumstances. This proprietary subcontract allows the subcontractor not even a glimmer of hope that it will ever be compensated for a delay, even if it is blatantly the fault of the general contractor. The twenty-four hour notice requirement is also unreasonable. To preserve its right to an extension of time, the subcontractor could find itself submitting notices to the contractor every day. By contrast, the standard AGC-600 subcontract form allows five days for submittal of a claim and the AIA A-401 subcontract form allows up to 21 days. 3. Dispute Resolution. Sample language: "Any dispute, controversy or claim arising out of this Subcontract shall be resolved by arbitration or litigation at the sole discretion and choice of the Contractor. If the Contractor chooses to resolve any dispute by litigation, it will be held in such venue as the Contractor chooses and the Subcontractor agrees to submit to jurisdiction of the court selected by Contractor. In the event of a dispute or a claim by the Subcontractor which would in any way, in the Contractor’s judgment, require the presentation of such dispute or claim to the Owner under the Contractor’s agreement with the Owner, the Subcontractor agrees as follows:

(i) Contractor may, in its sole discretion, either present such claim to the Owner on behalf of this Subcontractor or allow Subcontractor to present the claim. If Contractor chooses to present the claim, Subcontractor will pay all expenses incurred by Contractor, including costs and attorneys’ fees.

(ii)Subcontractor agrees to be bound by the resolution of the dispute or claim as presented to the Owner, whether such resolution is by arbitration, litigation or settlement. In the case of any recovery, such recovery shall be limited to the amount actually paid by the Owner less any expenses incurred by Contractor in pursuing the claim."

Comment: This "Killer Contract" language is full of problems for the subcontractor. Giving the contractor the choice of arbitration or litigation provides the contractor with a great advantage in any dispute. If the general contractor’s case is strong and the facts are clear, it can arbitrate and get a relatively quick and cheap resolution. If the claim favors the subcontractor, the general contractor can force the subcontractor to fight through a lengthy court proceeding in a court and location chosen by the general contractor (which may be highly inconvenient and expensive for the subcontractor). The language concerning contractor resolution of claims with the owner is also very troubling. If the subcontractor has a valid claim, the general contractor can settle the claim out from under the subcontractor (thereby maintaining good relations with the owner) or leave the subcontractor on its own to pursue the claim against the owner without any general contractor assistance. The general contractor could also run up exorbitant attorneys’ fees and costs in "pursuing" the subcontractor’s claim and the subcontractor could find itself recovering very little at the end of the process.

Conclusion

Many in the construction industry believe that a "teamwork" approach creates the greatest efficiency on a construction site. The evolution of the standard contract forms reflects this move toward cooperation, fairness, and a clear delineation of responsibilities. Some proprietary subcontracts also reflect this movement and not every proprietary subcontract is a "Killer Contract." However, the "Killer Contract" still lurks in the marketplace waiting to ensnare its next subcontractor/victim. Keep your eyes open!

 

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