Subcontractor Concerns

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.


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.


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 approximately 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.


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.