This article highlights common, but often overlooked, terms routinely found in construction contracts. Understanding how each clause operates is critical to protecting your rights and interests on every project. Because courts generally assume that parties to a contract read, understood, and agreed to its terms—and will typically enforce them as written—you should consult with an attorney to ensure you understand your contract and that it comports with applicable law.
Sample Incorporation by Reference: “In addition to this Agreement, documents forming this Subcontract include the Contract Documents identified in the prime contract between Contractor and Owner, which are incorporated by reference…”
Subcontracts routinely incorporate the prime contract and include “flow down” provisions, which bind subcontractors to the terms agreed to between the general contractor and owner. Examples of commonly incorporated terms include general conditions, plans, and drawings. By incorporating these terms and including “flow down” provisions in the subcontract, the subcontractor is bound to the prime contract terms as if it was also a party to that agreement, regardless of whether the subcontractor actually read (or received copies of) the prime contract.
Sample Pay-If-Paid Language: “Receipt of payment by Contractor from Owner for Subcontractor’s work is a condition precedent to payment from Contractor to Subcontractor.”
Sample Pay-When-Paid Language: “Payment to the Subcontractor for satisfactory performance of the Work shall be made seven days after receipt by Contractor of payment from Owner for Subcontractor’s work.”
“Pay-if-paid” clauses generally obligate the contractor to pay subcontractors only if the contractor receives the owner’s payment, while “pay-when-paid” clauses are typically interpreted as a timing mechanism, requiring the contractor to pay subcontractors within a specified timeframe after it is paid by the owner. While they seem similar, the difference in how each clause is interpreted is significant. In many states, “pay-if-paid” clauses are enforceable. When enforced, the clause shifts the risk of owner’s nonpayment to the subcontractor and, in the event of owner’s nonpayment, the contractor is not obligated to pay the subcontractor for its work. On the other hand, “pay-when-paid” clauses are interpreted requiring payment to a subcontractor within a reasonable time, and will not completely shield the contractor in the event of the owner’s nonpayment.
Sample No Damages for Delay: “If Contractor is delayed in performing the Work by any cause, regardless of whether the delay is caused by Owner or an event beyond Contractor’s control, Contractor’s sole and exclusive remedy shall be an extension of time.”
These clauses typically limit the contractor’s remedy for delay to an extension of time and prohibit it from seeking monetary damages, even if the delay is caused by the owner. Including a “no damages for delay” clause in an agreement could force the contractor to absorb all costs (including extended general conditions, overhead, etc.) of the delay, regardless of who was actually at fault for the delay. While some jurisdictions prohibit or limit the applicability of these clauses—viewing them as violating the contractor’s right to recover damages due to it—many jurisdictions permit and enforce them.
Sample Liquidated Damages: “Time is of the essence. Contractor’s failure to complete the Work within the Contract Time will cause Owner to incur substantial damages which are difficult to ascertain. The parties agree liquidated damages represent a fair, reasonable, and appropriate estimate of the losses Owner will incur if completion is delayed…”
These provisions permit an owner to recover against the contractor, or a contractor against lower-tiered contractors, for losses incurred due to delays. Liquidated damages are a predetermined (typically per day) amount, reflecting a reasonable pre-estimate of damages the non-breaching party anticipates it will suffer as a result of delay. Courts tend to review liquidated damages provisions with some scrutiny to avoid the imposition of an impermissible penalty on the breaching party. Notably, while some jurisdictions enforce liquidated damages provisions despite the omission of a “time is of the essence” clause, the vast majority require this language for a non-breaching party to recover liquidated damages for delay.
Sample Waiver of Consequential Damages: “Contractor and Owner hereby waive all claims for consequential damages arising out of this Agreement, including but not limited to: overhead or principal office expenses, lost profits…”
Consequential damages are generally understood as indirect or unanticipated damages suffered by a party as a result of the other party’s breach, and parties often fear that permitting their recovery may open the door to exorbitant (and potentially uninsurable) claims. As a result, many contracts include a mutual waiver of consequential damages, meaning the parties waive the right to recover these additional indirect damages from one another for breaches of the contract. Notably, waivers of consequential damages can preclude recovery of damages stemming from any number of breaches.
Sample Waiver of Subrogation: “Owner and Contractor waive all rights against each other for damages or other causes of loss, to the extent those losses are covered by property insurance…”
Another common, and often overlooked, provision is the mutual waiver of subrogation, under which the parties waive the rights of their own insurers to seek repayment for losses covered by insurance, but which losses are not due to the fault of the insured. Waivers of subrogation may relate only to specific types of coverage or broadly waive all subrogation rights. Typically, insurance carriers will not object to pre-loss waivers of subrogation, but it is important to confirm with your carrier before agreeing to such terms.
CONCLUSION
It is important to understand how these provisions operate and how they are enforced in your particular jurisdiction. While this article may help you identify these provisions in future agreements, it is important to check with a locally-licensed attorney to determine the contract terms best suited to your business’s particular needs.
About the authors:
Megan George is an attorney in the firm’s Lexington, Kentucky, office is a member of the Construction Service Group. She counsels clients on construction matters and routinely drafts, negotiates, and reviews contracts for clients. She can be reached at mgeorge@stites.com.
Rebecca Wichard Sherman is an attorney in the firm’s Lexington, Kentucky, office and is a member of the Construction Service Group. Rebecca’s practice focuses on advising clients throughout all phases of construction projects including planning, contract drafting and negotiation, project administration, and disputes. She represents owners, contractors and subcontractors in construction disputes and litigation. She can be reached at rsherman@stites.com.
Modern Contractor Solutions, December 2018
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