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Never Forget the Prime Contract

Never Forget the Prime Contract
Pat Dickson - Fri Mar 30, 2012 @ 07:13PM
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Whenever you have a subcontract in hand for review, never forget to ask for the prime contract and all other contract/project documents. This may be an axiomatic caveat which goes without saying, but time and time again I've seen subcontractors sign subcontracts without ever considering the prime contract, the owner's contract, the contractor's contract or many of the contract/project documents that are technically a part of their subcontract and legally binding.

This can lead to big trouble, which means things can get expensive fast, which may mean bad project margins.

Long story short, if you are a subcontractor planning on working for a contractor or owner and it is time for you to review and negotiate a subcontract, you always need to make sure you get all of the documents that go with the subcontract. In many cases, the 20 page subcontract the contractor hands or emails you is really more like 1000 pages of binding legalese because there is a term in your subcontract which includes the prime contract, the owner's contract, the contract documents, and even multiple schedules and drawings. However, if you never ask for any of these documents, by signing the subcontract of 20 pages of terms and conditions, you are really agreeing to 1000+ pages of terms and conditions.

For example, your subcontract may say nothing specific about liquidated damages, however, there are $10,000 per day liquidated damages in the prime contract. If you or your contractor miss your substantial completion deadline, you may get a letter demanding $10,000 per day in liquidated damages. After you settle down from the shock of such bad news, you look at your subcontract and it says nothing about liquidated damages, right? No. Technically it does. Somewhere on the first page of your subcontract there is a bunch of legalese about the prime contract being incorporated into your subcontract. If it just so happens the prime contract says the contractor has to pay $10,000 per day for missing the substantial completion date, there is a chance you could be on the hook for all or part of this amount.

However, it gets worse. Even if your subcontract says nothing about a prime contract or owner's contract, or contract documents, drawings, etc. being included in your subcontract, I am of the opinion you are still not always in the clear. Why? In some cases, your contractor may have given you the wrong form subcontract and his contract with the owner subjects him to $10,000 per day liquidated damages. As a result, your contractor may always try to use some other legal argument which doesn't require going to your subcontract language for support. For instance, he may seek indemnity from you or claim you are otherwise liable for any liquidated damages he incurs, especially if there is a colorable argument you caused any delay. So, with all this said, what do you do? Here is what I always do, which I like to think is a simple approach which cuts through what appears to be an overly complicated matter:

1. Ask your contractor to review his prime contract, the owner's contract, the contract/project documents, any drawings or schedules, plus anything and everything included in your subcontract. If he says your subcontract is it, go to step 3, below. If he says there is more, then he will either provide you paper or email copies or will let you come to his office to review all this extra stuff. If he says there is more, but you can't see it, go to step 3 below.

2. Review everything, including the prime contract, owner's contract, contract/project documents, any drawings or schedules, and if you see anything you can't live with, negotiate better terms with your contractor and include them in an addendum you create for your subcontract in step 3. If what you are trying to do is too confusing or you are unsure your bases are covered, get a lawyer. In fact, I have to caveat that you should always use a lawyer when you are dealing with a sizeable project, unless you just can't afford it. As I've said before, this Checklist is only intended as a loose guide for you, not a failproof legal guide. At best it is something that will help you more than if you were on your own, and could not afford an attorney because you didn't have the budget for it.

3. Create a 1 page document titled "Addendum to [specific name of subcontract/name of project/parties to subcontract/execution date/project #, etc]. Include language such as:

"Notwithstanding any other term or condition in the [subcontract] including but not limited to those in the prime contract, owner's contract, contractor's contract or any other contract or project documents, drawings, schedules, maps, timelines, side agreements, or writings or oral agreements, or communications whatsoever ("Contract Documents"), the terms and conditions of this Addendum shall prevail."

"Subcontractor shall not be bound to any terms or conditions of any Contract Documents whatsoever that are not attached to this Addendum with each page initialled and dated by all the parties to this [subcontract]."

"Subcontractor shall not be obligated to pay any damages, fines, penalties or compensation whatsoever, or to indemnify or hold harmless any party for anything arising out of any Contract Documents that are not attached to this Addendum with each page being initialed and dated by all the parties to this [subcontract]."

Caveat, trying this Addendum approach often fails because the Contractor will only scoff at you and say, "No way sign it as is or you have no deal," but it can never hurt to always look at all the documents involved in a project from top to bottom. If you do find a liquidated damages clause of $10,000 per day in the prime contract, you can probably negotiate something better, which is better than just signing the subcontract without looking at the prime contract and later being hit with a big surprise.

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