NEGOTIATING THE SUBCONTRACT
It is extremely important for subcontractors to review subcontract agreements in order to ensure that their right to prompt and full payment is adequately protected and is not compromised by these agreements. Many general contractors have standard subcontract agreements that are extremely oppressive and give them extensive rights against the subcontractors while at the same time failing to protect the subcontractor’s right to full payment, in a prompt and timely manner, for all work performed. There is no situation where the old saying “an ounce of prevention is worth a pound of cure” is more applicable than in the negotiation of a subcontract agreement. The time taken to carefully scrutinize a subcontract agreement, or to have an attorney review a proposed subcontract agreement, often turns out to be an extremely wise investment when, as almost inevitably happens, there are delays and/or disputes regarding payments, change orders, delays, or differing site conditions.
An example of certain clauses to be negotiated into or out of a subcontract agreement is included as Exhibit 1 to this section. The important thing to remember when reviewing this exhibit, is that the content of these specific clauses is not necessarily as important as the type of clause, and the type of language for which to be alert. For instance, the subcontractor should be extremely wary of language such of that included in Article IX of Exhibit 1 where payment of the subcontractor is expressly conditioned on payment of the contractor by the owner. Such a provision effectively provides a defense for the contractor of nonpayment to a subcontractor, even if the reasons for nonpayment of the contractor by the owner are unrelated to subcontractor’s work.
All clauses directly related to payment should be carefully reviewed. In addition, the subcontractor should scrutinize clauses addressing indemnity, default, and termination, as these also affect right to payment. Every contract should have a “changes” clause, and if appropriate, a “differing site conditions” clause. Finally, if the contract is for a federal project, any arbitration or dispute resolution clause should be reviewed to ensure that it does not waive the subcontractor’s “Miller Act” rights. Even on private projects, certain “disputes” clauses may seriously limit the subcontractor’s right to maintain an action against the general contractor.