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KILLER SUBCONTRACTOR CLAUSES
KILLER SUBCONTRACTOR CLAUSES

KILLER SUBCONTRACTOR CLAUSES

By
Richard Gary Thomas
Thomas, Feldman & Wilshusen, L.L.P.
Dallas, Texas

INTRODUCTION

The vast majority of commercial construction is performed by subcontractors. It has been estimated that subcontractors accomplish between 80% to 90% of the commercial construction in this country. The role of most general contractors in today’s construction industry is that of “brokers of construction services.”

Subcontractors, therefore, provide the majority of labor and materials that builds America. Subcontractors have more capital invested in a construction project than general contractors and design professionals. Thus, it could be argued that the subcontracting industry has more at risk that those other segments of the construction Industry. For these reasons, it is not an overstatement to say that subcontractors are “where the rubber meets the road” in the construction industry.

SCOPE OF PAPER

This paper is primarily for attorneys who represent subcontractors or material and equipment suppliers only on an occasional basis. Hopefully seasoned construction attorneys will learn information helpful in their practice as well. A selected few of the contract clauses that are the most troublesome for subcontractors and suppliers will be focused upon.[1]

HISTORY OF SUBCONTRACT FORMS

In the distant past, a subcontract documented the business relationship between the parties without any extraordinary attempt to shift risk from one party to the other. Subcontracts were commonly one page long. Beginning around the early 1970’s, a trend commenced to shift many of the risks on construction projects to the subcontractor. Around the early to mid-1980’s, this trend accelerated to the point where currently, some subcontracts are over one hundred pages long! Risk shifting became the norm in the industry. Under that trend, the vast majority of risks were transferred to subcontractors.

Many rationales were advanced to justify this trend. One of the most popular was that since subcontractors perform the majority of work, they are the ones that had the real control over most risks. Hence, the risks properly belong with the subcontractor.

One practical reason for risk allocation in this manner is that owners were frequently successful transferring many of these risks to general contractors in prime contracts. Having contractually accepted these risks in prime contracts, it became prudent for general contractors to attempt to pass them along to subcontractors.

Regardless of the merits of the rationale behind the extreme shifting of risks to subcontractors, the practice had many practical effects. First, most subcontractors were smaller than the general contractors and less sophisticated in these matters. That created an unequal bargaining position in favor of the general contractors. The result was that subcontractors were overpowered, which resulted in the mass shifting of risk that exists today.

The risk shifting practice, unfortunately, promoted an adversarial attitude between the parties which promoted disharmony on projects. Disharmony, in turn, created disputes on the job site resulting in legal battles where no one is the real winner. In the end, unreasonable and inequitable risk shifting in contracts worked to the detriment of overall project performance. This has been recognized by studies conducted by the Construction Industry Institute.[2]

A. Subcontract Forms

At some point after the subcontractor has been informed that the general contractor intends to award it the contract, the general contractor will forward a subcontract form to the subcontractor. Unfortunately, some subcontractors merely sign the document without reading it. This is because many subcontractors trust the general contractor to deal with them fairly, regardless of what the “paper work” says. Often the subcontractor discovers that its trust in the general contractor was misplaced, once a problem on a project erupts.

It is rapidly becoming the norm, however, for subcontractors to review their subcontract and propose revisions. Construction practitioners should encourage their subcontractor clients to do so. If there is anything in a contract that the client does not understand, he or she should obtain professional advice. Nobody should sign a contract containing terms that are not understood.

It is the responsibility of attorneys representing subcontractors to educate their clients of the need to seek revisions of clauses unfairly placing risks upon the subcontractor. In fact, they should be actively encouraged to do. Usually, general contractors appreciate the necessity of this process and do not object to reasonable changes in the language.

There is no such thing as a “standard” subcontract form. There are, however, two sources of subcontract forms: (1) those sponsored by associations in the industry, and (2) proprietary forms developed independently by general contractor companies.

1. Association Forms

The most frequently used subcontract form developed by industry associations is that sponsored by the American Institute of Architects, AIA Document A401 (1997 ed.) (“AIA A401”).[3] That document is designed to supplement or interact with the AIA Document A201 (1997 ed.), (“AIA A201”), [4] which are the General Conditions for the prime contract between the Owner and Contractor.

Other subcontract forms sponsored by an industry association are those published by the Associated General Contractors (“AGC”), the AGC 650 and AGC 655.[5] Both of those forms are designed to interact with the AIA A201 as well as the AGC Document 200 which is also General Conditions for the contract between the owner and general contractor.[6] The main difference between the two AGC forms is that the AGC 650 employs the philosophy of contingent payment, whereas the AGC 655 does not.[7]

None of these industry sponsored association forms are widely used in commercial construction. The AIA A401, however, enjoys much greater use than any other association sponsored form. It is generally considered to be balanced in risk shifting, and subcontractor associations are active participants in developing the terms of the form. Because it is sponsored by an architectural association, however, the interests of the architect and the owner are jealously guarded. Not surprisingly, the AGC documents are weighted in favor of the general contractor. On the other hand, they do not appear to be widely used.

The American Subcontractors Association (“ASA”) publishes materials explaining the benefits and pitfalls for subcontractors for both the AIA forms and the AGC forms. More importantly, ASA publishes excellent documents to be used as addenda for the AIA and AGC forms.[8] Using the ASA’s addenda with these forms will block much of the risk shifting to subcontractors presented by these forms. For the practitioner whose client is requested to sign these forms, it is strongly recommended that the ASA materials be obtained.

2. Proprietary Forms

The most onerous risk shifting to subcontractors is found in proprietary forms of the individual general contractors.  None of the association sponsored forms are as unbalanced and weighted toward the interests of general contractors as most proprietary forms. Unfortunately for subcontractors and suppliers, the vast majority of subcontracts and purchase orders used in commercial construction are of the proprietary type.

Interestingly, while these forms are used by individual companies, they appear to transfer the same identical risks from the general contractor to the subcontractor. Stated differently, the proprietary contracts have much more in common with each other than differences. The terminology may be different, but the effect is the same. Sometimes, identical terminology appears in risk shifting clauses of different proprietary contracts.

Discussed below are examples of some of the many risk shifting clauses found in proprietary subcontract forms. There is nothing special about the specific clauses used for discussion. They are merely representative of similar clauses that regularly appear in proprietary forms in general.

Also, this discussion is not an exhaustive of all risk shifting clauses regularly found in proprietary subcontracts. That would be better accomplished in a book (or at least a pamphlet) rather than a paper like this seminar handout material.[9]

B. Troublesome Contract Clauses

1. Flow Through Clauses

Flow-Through clauses (also sometimes referred to as “Flow-Down”, “Pass -Through” or “Conduit” clauses), in their most basic form, transfer responsibility for the project from the general contractor to the subcontractor.  Obligations owed to the owner by the general contractor “flow-through” to the subcontractor. When subcontractors bid plans and specifications, they should have no problem with agreeing to assume the responsibilities of the general contractor owed to the owner with respect to the specific work of the subcontractor described in the design documents (plans and specifications). That is the essence of what subcontractors sell to their customers.

However, “flow-through” clauses quite often go much further. Such clauses usually incorporate all of the prime contract documents into the subcontract. Those prime contract documents include not only the technical plans and specifications pertaining to the subcontractor’s installation and products, but also contain many other matters that govern the contractual relationship between the owner and prime contractor. The “flow-through” clause often provides that the subcontractor assumes toward the general contractor all of the obligations that the general contractor assumes toward the owner. Even though this is probably not the intention of the parties, taken literally, this clause could be argued to mean that the subcontractor agreed to build the entire project for the owner!

That result may truly be absurd. Nevertheless, such a clause transfers many more obligations in the prime contract to subcontractors than the obligations confined to the technical plans and specifications pertaining to the particular work of the subcontractor. Prime contract obligations transferred in these clauses likely include clauses that address: insurance, indemnity, payment, warranties, extras, time requirements for performance, suspension of performance, termination of contract, claims, and dispute resolution. Accepting an unrestricted “flow-through” clause means that the subcontractor agrees to whatever was agreed to between the prime contractor and owner on these subjects. It literally becomes the subcontractor’s agreement or contract with the general contractor. A “flow-through” clause, therefore, should not be taken lightly and should not be thoughtlessly accepted.

A typical proprietary “flow-through” clause is set forth below. Note how this clause makes the subcontractor obligated for all obligations of the general contractor contained in the prime contract.

The Contract Documents for this Subcontract consists of this Agreement and any Exhibits attached hereto, the Agreement between the Owner and Contractor dated July 22, 1999, the Conditions of the Contract between the Owner and Contractor (General, Supplementary and other Conditions), Drawings, Specifications, all Addenda issued prior to execution of the Agreement between the Owner and Contractor, and all Modifications issued subsequent thereto. Subcontractor agrees to be bound to Contractor by all of the terms of the Agreement between Contractor and Owner and by the Contract Documents and to assume toward Contractor all of the obligations and responsibilities that Contractor by those instruments assumes toward Owner. All of the above documents are part of this Subcontract and shall be available for inspection by Subcontractor upon his request.

To understand the significance of a “flow-through” clause and assuming the AIA A201 General Conditions of the prime contract is used, the clauses below, contained in the owner-general contractor agreement likely become a part of the subcontract and “flow through” to the subcontractor:

a. Review of Design and Field Conditions

3.2.1   Since the Contract Documents are complementary, before starting each portion of the Work, the Contractor shall carefully study and compare the various Drawings and other Contract Documents relative to that portion of the Work, as well as the information furnished by the Owner pursuant to Subparagraph 2.2.3, shall take field measurements of any existing conditions related to that portion of the Work and shall observe any conditions at the site affecting it. These obligations are for the purpose of facilitating construction by the Contractor and are not for the purpose of discovering errors, omissions, or inconsistencies in the Contract Documents; however, any errors, inconsistencies or omissions discovered by the Contractor shall be reported promptly to the Architect as a request for information in such form as the Architect may require.

3.2.2   Any design errors or omissions noted by the Contractor during this review shall be reported promptly to the Architect, but it is recognized that the Contractor’s review is made in the Contractor’s capacity as a contractor and not as a licensed design professional unless otherwise specifically provided in the Contract Documents. The Contractor is not required to ascertain that the Contract Documents are in accordance with applicable laws, statutes, ordinances, building codes, and rules and regulations, but any nonconformity discovered by or made known to the Contractor shall be reported promptly to the Architect.

b. Architect’s Delegation of Design Responsibilities

3.12.10 The Contractor shall not be required to provide professional services which constitute the practice of architecture or engineering unless such services are specifically required by the Contract Documents for a portion of the Work or unless the Contractor needs to provide such services in order to carry out the Contractor’s responsibilities for construction means, methods, techniques, sequences and procedures. The Contractor shall not be required to provide professional services in violation of applicable law. If professional design services or certifications by a design professional related to systems, materials or equipment are specifically required of the Contractor by the Contract Documents, the Owner and the Architect will specify all performance and design criteria that such services must satisfy. The Contractor shall cause such services or certifications to be provided by a properly licensed design professional, whose signature and seal shall appear on all drawings, calculations, specifications, certifications, Shop Drawings and other submittals prepared by such professional. Shop Drawings and other submittals related to the Work designed or certified by such professional, if prepared by others, shall bear such professional’s written approval when submitted to the Architect. The Owner and the Architect shall be entitled to rely upon the adequacy, accuracy and completeness of the services, certifications or approvals performed by such design professionals, provided the Owner and Architect have specified to the Contractor all performance and design criteria that such services must satisfy. Pursuant to this Subparagraph 3.12.10, the Architect will review, approve or take other appropriate action on submittals only for the limited purpose of checking for conformance with information given and the design concept expressed in the Contract Documents. The Contractor shall not be responsible for the adequacy of the performance or design criteria required by the Contract Documents.

c. Termination for Convenience

14.4.1 The Owner may, at any time, terminate the Contract for the Owner’s convenience and without cause.

14.4.2 Upon receipt of written notice from the Owner of such termination for the Owner’s convenience, the Contractor shall:

.1 cease operations as directed by the Owner in the notice;

.2 take actions necessary, or that the Owner may direct, for the protection and preservation of the Work; and

.3 except for work directed to be performed prior to the effective date of termination stated in the notice, terminate all existing subcontracts and purchase orders and enter into no further subcontracts and purchase orders.

14.4.3 In case of such termination for the Owner’s convenience, the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.[10]

The AIA A201 is literally forty-four pages of small print that sets forth enumerable obligations of the contractor to the owner. A broad “flow-through” clause extrapolates all of them upon the subcontractor.

The best option for the subcontractor is to delete “flow-through” clauses in their entirety. One should be aware that these clauses are likely to be very important to the general contractor. That is because it is most important to the general contractor to make sure that the subcontractor is obligated to the general contractor in the same manner the general contractor is obligated to the owner with respect to the technical requirements of subcontractor’s work in the plans and specifications. A good middle ground, therefore, is to agree to the transfer of the prime contract obligations limited, however, to the obligations pertaining to the plans and specifications of the design professional which pertains to the subcontractor’s work. Excluded from the transfer of obligations are those that pertain to the subjects mentioned above, including insurance, indemnity, payment, warranties, and so forth. In addition, the subcontractor should insist that if the subcontractor must assume the general contractor’s obligations to the owner, then the subcontractor should be granted the same rights and remedies that the general contractor has against the owner.

This can be useful in several situations. For example, most jurisdictions hold that the Owner warrants the suitability of plans and specifications to the general contractor.[11] Texas appears to have conflicting authority on this issue.[12] Assuming the warranty exists, however, it is unsettled whether subcontractors are the beneficiaries of it. Since subcontractors do practically all the work, they stand to lose the most if the owner’s plans and specifications are defective.

It is advisable, therefore, that subcontractors revise “flow-through” clauses so that they obtain, against the contractor, the contractor’s rights and remedies against the owner. In that way, the subcontractor should be able to recover against the general contractor under the warranty. The general contractor, on the other hand, would be allowed to pass the subcontractor’s claim through to the owner. The owner, likewise, should be able to recover from its design professional who is responsible for the defective design in the first place.[13] One way to revise the above “flow-through” clause in this manner is a follows:

The Contract Documents for this Subcontract consists of . . . the Agreement between the Owner and Contractor, . . . Subcontractor agrees to be bound to Contractor by all of the terms of the Agreement between Contractor and Owner and by the Contract Documents and to assume toward Contractor all of the obligations and the responsibilities pertaining to the Subcontractor’s work that Contractor by those instruments assumes toward Owner and Subcontractor shall have the same rights and remedies against the Contractor as the Contractor has against the Owner.

If the subcontractor is unable to negotiate such middle ground revisions, the subcontractor should at least make sure the clause cannot be interpreted so broadly as to mean that the subcontractor assumes virtually every obligation of the general contractor that is owed to the owner.

Even if the subcontractor is successful in obtaining agreement to these revisions, it is still faced with two undesirable choices: (1) the subcontractor must obtain a copy of the prime contract and carefully review it prior to signing the subcontract so that it can object to any terms that are totally unacceptable and be aware of specific time deadlines and other requirements; or (2) sign the subcontract without reviewing the prime contract and hope that it does not contain anything very bad and that no requirements and deadlines of the contract are missed. The former is most time consuming, while the latter is careless, risky, and most ill-advised (but probably most commonly practiced).

Article 5.3.1 of the AIA A201 provides that upon written request of the subcontractor, the general contractor shall identify to the subcontractor the terms and conditions of the "proposed subcontract" that may be at variance with the Contract Documents. Since the word "proposed" is used, it appears that an obligation is intended for the general contractor to provide this information during the negotiation process. It is unclear precisely what rights this clause confers upon the subcontractor prior to the formation of the subcontract. Nevertheless, the clause is clearly intended to benefit the subcontractor, and hence, perhaps the subcontractor has rights as a third party beneficiary. Furthermore, silence when there is a duty to speak can be a misrepresentation supporting common law fraud[14] and equitable estoppel.[15] Since Article 5.3.1 of the AIA A201 creates the duty to speak, the general contractor’s failure to respond to a written request, pursuant to that Article, could provide either a defense based upon estoppel, or an affirmative action based upon fraud in favor of the subcontractor. In any event, it is difficult to see how invoking this clause during the negotiation process could harm the subcontractor.

Therefore, if the subcontractor is neither successful in deleting the "flow-through" clause in its entirety nor negotiating a middle ground revision, it should at the very least send a letter requesting the general contractor to identify those terms in the prime contract that conflict with the terms of the subcontract. [16] If the AIA General Conditions apply, the general contractor's failure to comply with the request could be used adversely against the general contractor. It could well operate as a defense to any rights of the general contractor contained in the General Conditions.

2. Payment Clauses

The payment clause in a subcontract is probably the most important clause to the subcontractor.  There are two different categories of payment clauses in Texas: (1) pay - when - paid and (2) contingent payment (also known as "pay if paid").

If the clause states that the general contractor will pay the subcontractor within a certain time period (e.g. seven days) after the general contractor receives payment from the owner, it is considered a "pay when paid" clause and is not interpreted to absolve the general contractor's obligation to pay the subcontractor in the event that the owner never pays the general contractor.[17] On the other hand, if the clause clearly establishes the receipt by the general contractor of payment from the owner is a condition precedent to the general contractor's obligation to pay the subcontractor, that condition must be met before the payment obligation ever arises.

Texas courts will go to great lengths to avoid construing these clauses to be contingent in nature. For example, an appellate court held the following clause did not constitute a condition precedent to the general contractor's obligation to pay the subcontractor:

[W]hen the owner or his representative advances or pays the general contractor, the general contractor shall be liable for and obligated to pay the subcontractor up to the amount or percentage recognized and approved for payment by the owner's representative less the retainage required under the terms of the prime contract. Under no circumstances shall the general contractor be obligated or required to advance or make payments to the subcontractor until the funds have been advanced or paid by the owner or his representative to the general contractor.” [18]

The court reasoned that where the intent of the parties is doubtful or where a condition would impose an absurd result, the clause should be interpreted as creating a covenant rather than a condition. [19] The court also relied upon the rule that forfeitures are to be avoided when possible under another reasonable interpretation of the contract.[20] The court noted that words commonly associated with creating conditions precedent, such as "if” and "on condition that" were not used in the clause. [21]

A typical clause that likely qualifies as a contingent payment (or pay if paid) clause, is the one set forth below.

In addition to any other requirement of this Subcontract and the Contract Documents, Final Payment shall not become due unless and until the following conditions precedent to Final Payment have been satisfied:  (a) Approval and acceptance of Subcontractor’s work by Owner, Architect and Contractor; (b) delivery to Contractor of all manuals, “as-built” drawings, guarantees and warranties for material and equipment furnished by Subcontractor, or any other documents required by the Contract Documents; (c) receipt of Final Payment for Subcontractor work by Contractor from Owner; (d) furnishing to Contractor satisfactory evidence by Subcontractor that all labor and material accounts incurred by Subcontractor in connection with his Work have been paid in full; (e) furnishing to Contractor a complete Affidavit, Release of Lien and Waiver of Claim by Subcontractor in the form attached hereto as Exhibit “D”, and as required by the Contract Documents. Subcontractor expressly assumes the risk of non-payment by the Owner to the Contractor.

The practitioner for the subcontractor should at least advise the client of the effect of this clause. It is suggested that appropriate revisions be made to eliminate the "condition precedent" nature of this clause as follows:

In addition to any other requirement of this Subcontract and the Contract Documents, Final Payment shall not become due unless and until the following conditions precedent to Final Payment have been satisfied: (a) approval and acceptance of Subcontractor’s work by Owner, . . .; (b) delivery to Contractor of all manuals, . . . or any other documents required by the Contract Documents, (c) receipt of Final Payment for Subcontractor’s work by Contractor from Owner, (d) furnishing to Contractor . . .; (e) furnishing to Contractor a complete Affidavit, Release of Lien and Waiver of Claim by Subcontractor . . . , and as required by the Contract Documents. Subcontractor expressly assumes the risk of non-payment by the Owner to the Contractor.

As revised, the clause likely would not be construed as a contingent payment clause in Texas. It would probably be construed as a “pay when paid”, entitling the subcontractor to payment within a reasonable time in the event the owner fails to pay the general contractor and the reason for the nonpayment is not the fault of the subcontractor.

Occasionally, general contractors, as a compromise to an objection from a subcontractor, will suggest adding language that the contingent payment clause should not be construed to limit the subcontractor’s right to perfect a mechanic’s and materialman’s lien. Whether the language has that effect is unsettled in Texas. Arguments could be made both ways. The argument of the owner is that mechanic’s and materialman’s liens create claims against the owner and the owner’s property. The owner would further argue that since the owner is not a party to the subcontract, no provision in it is binding upon the Owner.

Counsel for subcontractors, therefore, should be aware that the value of this “compromise” may prove disappointing to the subcontractor. A more effective compromise for the subcontractor is to revise the contingent payment clause so that the subcontractor gets paid within a reasonable time if the reason for the owner’s nonpayment is not because of the subcontractor’s work. [22]

A somewhat less desirable compromise is to contractually obligate the general contractor to assign to the subcontractor its account receivable for the subcontractor’s work. The disadvantage of this alternative is that the account receivable is subject to defenses of the owner against the general contractor even if they do not relate to the subcontractor’s work. On the other hand, the assignment puts the collection process within the subcontractor’s control.

a. The Prompt Pay Act--Right to Stop Work for Nonpayment

Under common law, one has a legally justifiable excuse to refuse to continue performance of a contract when the other party materially breaches that contract.[23] The difficulty for the construction lawyer is that predicting whether a certain breach of contract constitutes a “material breach” cannot be done with any degree of certainty. The difficult issue under common law, therefore, is: When can a subcontractor suspend performance or terminate the subcontract for nonpayment when there is a contingent payment clause in the subcontract, and the owner has not paid the general contractor?

The answer to that problem is provided by the Texas Prompt Pay Act.[24] The Texas Legislature, in 1999, passed amendments to the Prompt Pay Act.[25] While not a panacea, these amendments may prove to be most beneficial to subcontractors when they have accepted contingent payment clauses.

Under the amendments, when the general contractor is unpaid for at least thirty six days, and the general contractor has not paid the subcontractor, the subcontractor may notify the owner (and in some cases, the lender) of the subcontractor’s intention to suspend performance.[26] If within ten days the subcontractor receives no response from the owner stating that (a) the general contractor was paid, or (b) that a good faith dispute for payment exists, the subcontractor may suspend performance without exposure to damages for doing so.[27] If the owner responds that there exists a good faith dispute for payment, specific reasons for the dispute must be expressed.[28] If the stated reason for the dispute does not involve the subcontractor’s work, presumably the subcontractor should be able to suspend work without liability.

Even with these amendments, however, suspension of performance should only be done after careful consideration by the subcontractor’s counsel. Stopping work can have extremely adverse consequences to a project, and all other parties involved with it. Nevertheless, the Prompt Pay Act is a new tool for subcontractors, and will hopefully encourage timely payment to general contractor, subcontractors and suppliers.

3. Indemnity

A "hot topic" in the construction law bar is "indemnity." That refers to the clauses where the subcontractor indemnifies the general contractor (and sometimes the owner and even the design professionals) from the consequences of accidents resulting in personal injury or property damage on the jobsite. It is generally accepted among construction lawyers that there are three types of indemnity clauses: (1) limited, (2) intermediate, and (3) broad form.

A “limited” indemnity clause imposes liability upon the indemnitor (i.e., the subcontractor) only to the extent of the indemnitor’s fault or negligence. It is the most favorable type of indemnity clause for subcontractors. An example of such a clause is set forth below:

INDEMNIFICATION The Subcontractor shall indemnify and hold the Contractor, Owner, Architect, their agents, consultants and employees harmless from and against all claims, losses, costs and damages, including but not limited to attorney’s fees, pertaining to the performance of the Subcontract and involving personal injury, sickness, disease, death or property damages, including loss of use of property resulting therefrom but not damage to the work itself, but only to the extent caused in whole or in part by the negligent acts or omissions of the Subcontractor, or any of the Subcontractors’ suppliers, manufacturers, or other persons or entities for whose acts the Subcontractor may be liable. The indemnifications agreement is binding on the Subcontractor, to the fullest extent permitted by law, regardless of whether any or all of the persons and entities indemnified hereunder are responsible in part for the claims, damages, losses or expenses for which the Subcontractor is obligated to provide indemnification. This indemnification provision does not negate, abridge or reduce any other rights or obligations of the persons or entities described herein with respect to indemnify.

Under an “intermediate” indemnity clause, the indemnitor assumes all liability except for the sole negligence of the indemnitee (general contractor, owner or design professional). An example of such clause is set forth below:

The Seller shall indemnify and hold harmless the Contractor and all its agents and employees from and against all claims, damages, losses and expenses, including attorney’s fees, arising out of or resulting from the seller’s work whether it is caused in part by the negligence of Contractor. In any and all claims against the Contractor, or any of its agents and employees, by any employee of the Seller, anyone directly or indirectly employed by him or anyone for whose acts he may be liable, the indemnification obligations under this paragraph shall not be limited in any way by any limitation on the amount of type of damage, compensation, or benefits payable by or for the Contractor under workers’ compensation acts, disability benefit acts, or other employee benefit acts. This clause is not intended to indemnify the Contractor for claims, damages, losses and expenses caused by the sole negligence of Contractor.

“Broad” form indemnity clauses impose the entire risk of loss upon the indemnitor, even for the sole negligence of the indemnitee. This is the least favorable type of indemnity clause for the subcontractor. An example of a broad form indemnity clause is set forth below:

The Seller shall indemnify and hold harmless the Owner and Contractor and all their agents and employees from and against all claims, damages, losses and expenses, including attorney’s fees, arising out of or resulting from the performance of the Subcontractor’s work whether it is caused in whole or in part by the negligence of Owner or Contractor. In any and all claims against the Owner and Contractor, or any of their agents and employees, by any employee of the Seller, anyone directly or indirectly employed by him or anyone for whose acts he may be liable, the indemnification obligation under this paragraph shall not be limited in any way by any limitation on the amount or type of damages, compensation, or benefits payable by or for the Contractor under workers’ compensation acts, disability benefit acts, or other employee benefit acts. It is specifically understood that this indemnity shall be interpreted as indemnifying Contractor and its agents and representatives from their own sole and/or partial negligence.

The indemnitor’s obligation exists in this regard under the broad form even if the indemnitor is not negligent or in any way the cause of or directly involved in the cause of the accident or loss.

  In most states, indemnity clauses are strictly construed and interpreted under the "clear and unequivocal" test. That is, contractual language that "clearly and unequivocally" expresses an intent that the indemnitor assumes the liability for the indemnitee's negligence is enforceable. [29]

Whether specific language meets the "clear and unequivocal" test can be difficult to determine. The Texas approach, however, resolves that problem by eliminating the potential for ambiguity.[30] The Texas Supreme Court rejected the “clear and unequivocal” test and adopted the “express negligence” test.[31] The court stated:

We hold the better policy is to cut through the ambiguity of those provisions and adopt the express negligence doctrine. The express negligence doctrine provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms. Under the doctrine of express negligence, the intent of the parties must be specifically stated within the four corners of the contract." [32]

The broad form and intermediate form indemnity clauses set forth above are likely to meet the express negligence test. It is in the best interest of the subcontractor to modify such language so that the “express negligence" test is not met. At least, attempts should be made to dilute the scope of such clauses so that they become a limited (or alternatively an intermediate) form of indemnity.

4. Additional Insured

A subcontractor may successfully negotiate the reduction of the scope of an indemnity clause from broad form to limited form, but that victory may be hollow, and perhaps, totally worthless. This is the case if the subcontractor agreed to a clause in the contract obligating it to make the general contractor (and perhaps also the owner and construction manager) an "additional insured" under the subcontractor's general liability insurance policy.

An "additional insured" is no more or less than the name implies: the general contractor becomes an "insured" under the subcontractor's policy. Just as any other “insured,” an “additional insured” is entitled to the benefits and coverages afforded by the policy. Simply stated, and “additional insured” is an “insured” under the subcontractor’s policy in every sense of the word.

When a subcontractor is sued for something covered by its insurance policy, its insurance company will normally provide the legal defense and pay any settlements or judgments connected with the suit. This occurs regardless of whether the subcontractor was negligent. The same is true when a general contractor is sued if the general contractor has been made an "additional insured" under the subcontractor's insurance policy. The general contractor turns the suit over to the subcontractor's insurance company for handling. Since the general contractor is entitled to benefits and coverages afforded by the subcontractor's policy, the general contractor expects the subcontractor's insurance company to provide its legal defense and pay any settlements and judgments connected with the suit. The negligence of the subcontractor is irrelevant to the general contractor's rights under the subcontractor's insurance policy.

The result is identical when the subcontractor agrees to a broad form indemnity clause. When the general contractor is sued, it turns the defense of the suit over to the subcontractor's insurance company. Regardless of whether the subcontractor is negligent, the subcontractor's insurance company must provide a legal defense for, and pay any settlements or judgments against, the general contractor.

Insurance premiums are determined, at least in large part, by the experience rating of the insured. When the subcontractor's insurance company expends funds in defense of suits against the general contractor, it is likely to cause the subcontractor's insurance premiums to be increased in the future. It makes no difference whether the insurance company expends funds in defense of the general contractor because it is an "additional insured" or by virtue of an indemnity clause. The result is the same. The subcontractor likely pays increased premiums in the future.

The result is identical, therefore, to the subcontractor when it consents to either a broad form indemnity clause or a clause that requires the subcontractor to make its customer an "additional insured." The inescapable conclusion is that it is totally illogical for someone who is philosophically opposed to broad form indemnity clauses to accept a clause requiring them to make another party an "additional insured" under their insurance policy.[33]

"Additional insured" clauses can be located in several places in subcontracts. They are most commonly located in the provisions relating to insurance. Counsel for subcontractors who pay particular attention only to indemnity provisions of contracts are likely to miss "additional insured" clauses. Therefore, the insurance provisions should be just as carefully reviewed as the indemnity provisions.

If the subcontractor is unsuccessful in "negotiating out" the additional insured clause and it is determined that the clause should be accepted, counsel and the subcontractor should be aware that an endorsement to their insurance policy must be purchased from the insurance agent making the designated parties in the subcontract "additional insureds." Failure to procure such endorsement constitutes a breach of the contract exposing the subcontractor to substantial damages that are uninsured.

Many "additional insured" clauses go farther than simply requiring the subcontractor to purchase the "additional insured" endorsement. These clauses commonly require that the subcontractor's insurance policy provide "primary" coverage for the general contractor, and that the general contractor's own insurance coverage be "non-contributory." If this clause is accepted, it means that the subcontractor's insurance company will not seek any contribution from the general contractor's insurance company.

The problem with that is, ordinarily, subcontractors have no such control over the actions of their insurance company. Most policies contain an "other insurance" provisions allowing the carrier to seek varied types of contribution from other insurance covering the loss. If it is possible for the subcontractor to achieve the result required by that clause, a special endorsement would have to be purchased from its insurance carrier. Failure to procure such endorsement could expose the subcontractor to liability for large damages for that breach of contract. Therefore, it is imperative that the subcontractor's insurance agent or consultant be consulted on this subject before consenting to that undertaking.

5. Timing of Performance

One of the major components of a subcontractor’s costs on a project is usually labor expense. The amount of the subcontractor’s estimate for labor expense, in the amount of its bid, is usually based upon the assumption that it will be allowed industry standard time durations to perform its various work activities. In addition, the subcontractor’s estimate and bid assumes that its work will be performed in a certain sequence, and that the general contractor will coordinate the project so that other trades will not obstruct the subcontractor’s work. It is only the extraordinary circumstance where both the general contractor and all subcontractors on a job do not know this.

Nevertheless, the overwhelming majority of proprietary subcontract forms attempt to confer the right upon the general contractor to require that the subcontractor’s work be performed under any schedule that it deems appropriate. Most proprietary subcontract forms require the subcontractor to not only follow the general contractor’s schedule, but also any amendments or changes to that schedule.

A typical clause to that effect is as follows:

CONTRACTOR reserves the right to require SUBCONTRACTOR to perform its work at times convenient to CONTRACTOR. SUBCONTRACTOR shall perform its work in sequence according to CONTRACTOR’S Project Schedule. CONTRACTOR also reserves the right to change or amend the Project Schedule to accommodate conditions encountered during the progress of the Project. SUBCONTRACTOR understands and agrees that changes in the Project Schedule will not change the Subcontract amount or the Project Completion Date.

First, the Subcontractor should insist that it be given the contractual right to provide input to the general contractor for the sequences and durations of the various work activities of the subcontractor. Secondly, these clauses should be revised so that the subcontractor is only required to follow mutually agreeable schedules, and that all of the general contractor’s schedules must be reasonable. Care should be taken to assure that any revisions of the general contractor to its schedule are likewise reasonable. One way to revise the above clause in that manner is as follows:

CONTRACTOR reserves the right to require SUBCONTRACTOR to perform its work at mutually agreeable times convenient to CONTRACTOR. SUBCONTRACTOR shall perform in sequence according to CONTRACTOR’S reasonable Project Schedule. CONTRACTOR also reserves the right to reasonably change or amend the Project Schedule to mutually agreeable times to accommodate conditions encountered during the progress of the Project. SUBCONTRACTOR understands and agrees that reasonable changes in the Project Schedule will not change the Subcontract amount or the Project Completion Date.

6. No Damage for Delay

Somewhat amazingly, most proprietary subcontract forms declare complete liability of the subcontractor to the general contractor for delays, while contemporaneously, declaring that the general contractor has no liability to the subcontractor for delays. A typical clause to that effect is set forth below:

If Subcontractor is responsible for any delays in the time and sequence of the schedule, Subcontractor shall pay Contractor for all costs and damages suffered by Contractor as a result of such delays, including any damages against Contractor under the Contract Documents.

In the event that Subcontractor’s performance of the Work is delayed or interfered with, for any reason and for any period of time, by acts or omissions of Owner, Contractor or other subcontractor, Subcontractor may request an extension of time for performance of the Work, but shall not be entitled to any increase in the Subcontract price or to damages or additional compensation as a consequence of such delays or interference, except to the extent that the Contract Documents entitle Contractor to compensation for such delays, and then only to the extent of any amounts that Contractor may, on behalf of Subcontractor, actually receive from Owner for such delays.

The viability of these clauses is unsettled in Texas when certain facts exist supporting traditional exceptions to the enforceability of "no damage for delay" clauses. For example, one Houston State Court of Appeals appeared to reject the well accepted exception known as “not within the contemplation of the parties.”[34] Under that exception, claims for delays arising from reasons or for durations not contemplated by the parties at the time of contracting are not precluded by the clause.

On the other hand, the Texas Supreme Court appears to recognize several widely used exceptions to the enforceability of no damage for delay clauses, including the “not within the contemplation of the parties” exception.[35] Another well established case in Texas held that arbitrary and capricious conduct on the part of a party using the clause as a defense renders the clause unenforceable. [36] In almost every delay claim scenario, the practitioner for the subcontractor will be able to cite to the court conduct of the general contractor that is, at least, arguable, arbitrary and capricious.[37]

The best option for the subcontractor is to delete the clause in its entirety. Failing that, it is suggested that attempts be made to negotiate revisions that incorporate the concept of "reasonableness." That is, there will be no damage for delays unless they are of an unreasonable duration under the circumstances. It is difficult for the general contractor to maintain the right to be unreasonable during negotiations about the clause!

The suggested revision of this clause is set forth below:

In the event that Subcontractor’s performance of the Work is delayed or interfered with, for any reason reasonable cause and for any reasonable period of time, by acts or omissions of Owner, Contractor or other subcontractor, Subcontractor may request an extension of time for performance of the Work, but shall not be entitled to any increase in the Subcontract price or to damages or additional compensation as a consequence of such delays or interference, except to the extent that the Contract Documents entitle Contractor to compensation for such delays, and then only to the extent of any amounts that Contractor may, on behalf of Subcontractor, actually receive from Owner for such delays.

While lacking precision, incorporating the standard of reasonableness provides a way to use the circumstances as the basis for the enforceability of the clause.

7. Partial Lien Waivers

It is standard in the construction industry for the general contractor to require subcontractors to sign certain forms in order to receive periodic payment during the course of the subcontractor's performance of its contract. These forms usually intend that the subcontractor waive or release its lien rights and claims against the owner, the owner's property, and the general contractor. The intent usually is that this waiver or release is limited to the amount of the payment to the subcontractor. In other words, partial waivers or releases are not intended to hamper a subcontractor's rights to get paid for any amounts not yet received by the subcontractor.

Unfortunately, many partial waiver forms literally release much more than contemplated, even though they are entitled "Partial Waiver and Release." Quite often, when read literally, these documents operate to waive and release claims for which the subcontractor has not been paid. For example, it is not unusual for a "partial waiver" to release the right of a subcontractor to receive payment for unapproved "extras." It is also not uncommon for a "partial waiver" to release the general contractor's obligation to pay for work performed by the subcontractor, the payment for which is not yet due under the contract (e.g., retainage). An example of such a "partial release" form is set forth below:

PARTIAL RELEASE

NOW, THEREFORE, in consideration of the premises and of the sum of $ lawful money of the United States, being the full and entire sum due to Subcontractor for Subcontractor's performance of the contract aforesaid for all work performed from the beginning of the contract to (date this is signed), in hand paid by Contractor receipt of which is hereby acknowledged, said Subcontractor does hereby remise, release, and forever discharge Contractor and Owner of and from any and all manner of actions, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, covenants, controversies, agreements and demands whatsoever in law or in equity which the said Subcontractor has or may have for or on account of or in connection with the contract aforesaid for Subcontractor's performance thereunder from the beginning date of said contract to (date this is signed).

It may well be that the job site management of the general contractor does not intend this result. Nevertheless, if the subcontractor finds itself in a dispute and the problem falls into the lap of upper management of the general contractor or its attorney, they may well take the position that the subcontractor has waived and released its claims. Whether the general contractor should prevail with such contentions is beside the point. The subcontractor has many available arguments to defeat the general contractor. Traditional principles of contract interpretation, fraud and estoppel likely apply to defeat the position of the general contractor. Of importance in the contract formation stage is for the subcontractor to refrain from contractually obligating itself to sign such a "partial release" form to obtain monthly progress payments.

Therefore, subcontractors and their attorneys should be forewarned not to sign such forms during the course of performance. Be cautioned, however, that these "partial waivers" are often exhibits to the general contractor's contract form. There is usually a clause in the contract requiring the subcontractor to "submit the Partial Waiver and Release form attached as Exhibit .” When reviewing the general contractor's form subcontract, be sure to review the exhibits as carefully as all other clauses, and avoid obligating the subcontractor to the use of a form like that discussed above. Corrections should be made on the body of the partial release form in the exhibit itself or noted on an addendum to the subcontract.

8. Termination for Convenience

Normally, neither party to a contract may terminate a contract without becoming liable to the other party for all resultant damages, including lost profits and any consequential damages. A termination for convenience clause, however, gives a party the right to terminate the contract without cause and without any liability to the terminated party. These clauses are often found in public contracts, but are not at all uncommon in the context of private contracts.

It is common for a termination for convenience clause to provide that if the right to terminate is exercised, the terminating party's liability is limited to the reasonable value of any material or labor furnished to the project up to the point of termination. An example of such a clause is set forth below:

The Contractor may, at its option, at any time, terminate the whole or part of this Agreement for the convenience of the Contractor. Subcontractor agrees that upon any such termination, the Subcontractor’s sole remedy, shall be payment of full value for all work properly performed or materials delivered, plus reasonable profit thereon, less all payments Subcontractor has previously received on account of such work performed. Subcontractor agrees to waive all claims for damages, including lost or anticipated profits, arising from or related to any such termination by Contractor.

Under this clause there is no obligation for the terminating party to compensate the terminated party for any profit that may have been included in the contract price. The subcontractor will lose the benefit of his bargain which is a legally cognizable right.[38]

Many subcontractors may prefer not to run the risk of termination and potential loss of their profits, but will agree to a termination for convenience clause in order to get the job. That is a business decision that should be best made by the subcontractor. However, termination for convenience clauses may contain hidden risks involving much more than the potential of lost profits.

The unseen dangers of the termination for convenience clause lie in the subcontractor's obligations to suppliers and lower tier subcontractors once the contract has been terminated. The subcontractor may have ordered expensive equipment or materials that have been specifically designed for that particular project that is unusable elsewhere. Furthermore, specially fabricated materials may be on order at the time that the contract is terminated which cannot be canceled. In other words, the party whose contract has been terminated may be legally obligated to buy these items, but may have no one to whom the items can be sold. These dangers should be recognized and dealt with accordingly.

To prevent a terminated subcontractor from being left "holding the bag," there may be a couple of options which can be utilized. First, a provision may be inserted in the contract that makes the terminating party responsible for all cancellation charges and all consequential damages caused by the termination. In this way, the terminating party is responsible for all "non-cancelable" materials and equipment which were ordered in good faith in anticipation of their use on the project.

If that cannot be done, a subcontractor should try to include its own termination for convenience clause in any of its lower tier subcontracts or purchase orders related to that project. This can be accomplished by using appropriate "flow through" language in the subcontract or purchase order or by using an independent termination for convenience clause. If an independent clause is used, care should be taken to assure that there is no liability for lost profits and any other consequential damages. By the contractor or subcontractor using its own termination for convenience clause, the risk of termination will be shared by all parties involved.

9. Liquidating Clause

Most subcontract forms address dispute resolution in one way or another. Many proprietary forms contain a specialized type of "flow through" clause designed to insulate the general contractor from the possibility of inconsistent results in proceedings fixing the liability of the owner and general contractor, on the one hand, and the general contractor and subcontractor, on the other hand.

To accomplish this end, the forms typically require the subcontractor to make claims in the same manner and time periods required of the general contractor in the prime contract documents. These clauses are commonly known as “Liquidating Clauses.”  They typically provide that the general contractor will present all claims of the subcontractors to the owner. They usually make the general contractor bound to the subcontractor in the same manner that the owner is bound to the general contractor. Liquidating Clauses typically state that the general contractor can never be liable to the subcontractor for more than the owner is liable to the general contractor. They also provide that the subcontractor will pay the general contractor’s legal expense pursuing the subcontractor’s claim.[39]

At first blush, none of these requirements appear unreasonable. However, this scheme does not recognize that the general contractor's deficiencies may be responsible for part, if not all, of the subcontractor's damages and losses. If the contractual scheme explicitly covers, in great detail, situations where the claims result from deficiencies of the owner, shouldn't it likewise provide for instances when the general contractor caused or contributed to the subcontractor's damages? It is suggested that the subcontractor's counsel attempt to revise these clauses in that manner.

Liquidation clauses commonly include language similar to the following:

Subcontractor agrees to submit all claims against Contractor to Contractor within a sufficient time for Contractor to timely present same to the Owner under the Contract Documents. Contractor shall submit such claims to Owner and prosecute same at the discretion of Contractor. Subcontractor shall cooperate and assist in the preparation and prosecution of all such claims, and shall pay or reimburse Contractor for all expenses and costs, including, but not restricted to, costs of litigation incurred by Contractor in connection with the preparation and prosecution of such claims. Subcontractor expressly consents to be bound to Contractor to the extent that Contractor is bound to Owner by all decisions and determinations made in accordance with any procedure for the resolution of claims expressly provided for in the Contract Documents, whether or not Subcontractor is a party to any such proceeding.

Initially, this type of clause may not seem threatening, especially to a layman not experienced in legal disputes. As an attorney for a subcontractor, it is suggested that one should advise the client to never contractually commit, at the pre-dispute stage, to be bound by a proceeding to which the subcontractor is not a formal party. To be represented by counsel of someone else's choosing whose loyalty is to that other party, may be most ill-advised. To have no control over such things as the jury or arbitrator selection process and opening and closing statements in such a proceeding is frustrating at best. To have no control over the order and presentation of evidence is ill advised for a subcontractor when it will be bound by the outcome of the proceeding.

It may be advisable for the general contractor and subcontractor to jointly pursue the subcontractor’s claim against the owner. Indeed, that can often be advisable and is a common practice. To contractually commit to that approach in advance of the dispute is unnecessary. It can always be done after the dispute arises. It is, therefore, recommended that subcontractors be advised to refrain from consenting to these clauses at the pre-dispute contract formation stage.

If one is forced, however, to agree to a Liquidating Clause, it is suggested that the subcontractor’s counsel consider the suggestions listed below, and seek to revise the Clause accordingly:

a. Strive for the right for the subcontractor to assert claims against the owner in the general contractor’s name.

b. Strive to acquire the right to accept or reject settlements. Be alert to recovery allocation formulas.

c. Avoid agreeing to be bound by decisions in proceedings where the subcontractor is not a party.

d. Be alert to any cost sharing formula. Strive for reasonable costs.

e. Avoid releasing the general contractor from claims caused by the general contractor, and claims barred by the actions of the general contractor, which effectively released the owner by reason of exculpatory provisions, releases or change orders settling all possible claims.

f. Insist on the contractual right to be present at all settlement negotiations, regardless of who controls the prosecution of the claim.

g. Strive to avoid any provisions that release the general contractor for the acts of the owner or the architect.

CONCLUSION

Subcontractors are challenged now more that ever to conduct their businesses in a professional manner. This requires attention to matters that tradesmen of the past were able to ignore. Wise selection of general contractors as customers and insistence upon fair contract terms are essential to economic survival. Counsel for subcontractors are challenged to educate their clients of these needs and be prepared to meet them.


[1] The term “subcontractor” shall be used throughout the remainder of this paper to refer to both subcontractors and material and equipment suppliers. The subcontract clauses discussed are generally applicable to terms of purchase orders used with the sale of materials or equipment from suppliers.

[2]See, Construction Industry Institute, “Determining the Impact of Various Construction Contract Types and Clauses on Project Performance,” Vol. I (Analysis and Recommendations”), C. William Ibbs, et al., CII Source Document 10, (April 1986); Construction Industry Institute, “Analysis of Construction Contract Change Clauses” Vol. 1, David D. Ashley, et al., CII Source Document 14, (April 1986); Construction Industry Institute, “Contract Risk Allocation and Cost Effectiveness” by Contracts Task Force, CII Publication 5-3, (November 1988); Construction Industry Institute, “Management of Project Risks and Uncertainties” by Cost/Schedule Task Force, CII Publication 6-8, (October 1989).

[3] Standard Form of Agreement Between Contractor and Subcontractor, AIA Document A401 (1997 ed.).

[4] General Conditions of the Contract for Construction, AIA Document A201 (1997 ed.).

[5] Standard Form of Agreement Between Contractor and Subcontractor (Where the Contractor Assumes the Risk of Owner Payment), AGC Document No. 650 (1998 ed.); Standard Form of Agreement Between Contractor and Subcontractor (Where the Contractor and Subcontractor Share the Risk of Owner Payment), AGC Document No. 655 (1998 ed.).

[6] Standard Form of Agreement and General Conditions Between Owner and Contractor (Where the Contract Price is a Lump Sum), AGC Document 200 (1997 ed.).

[7] Contingent payment clauses are discussed on pages 15-18, infra.

[8] The Addendum to Standard Form of Agreement Between Contractor and Subcontractor, AGC 650/655 (1998), is for use with the AGC forms. The ASA Addendum to Subcontract, ASA/FASA Document No. 4191, is for use with the AIA A401. These forms may be obtained from the American Subcontractors Association, Inc. At 1004 Duke Street, Alexandria, VA 22314-3588; Phone (703) 684-3450.

[9] Suggested revisions to subcontract clauses appearing in this paper are for the purposes of illustration only.

[10] See discussion on pages 32-35, infra, on termination for convenience clauses.

[11] See, e.g.,  United States v. Spearin, 248 U.S. 132 (1918).

[12] See Lonergan v. San Antonio Loan & Trust Co., 104 S.W. 1061 (Tex. 1907); Emerald Forest Utility Dist. v. Simonsen Constr. Co., 679 S.W.2d 51 (Tex. App.--Houston [14th Dist.] 1984, writ ref’d n.r.e.); Great American Ins. Co. v. North Austin Mun. Utility Dist. No. 1., 902 S.W.2d 488 (Tex.App.--Austin 1993), rev’d on other grounds, 908 S.W.2d 415 (Tex. 1995), for holdings that the Owner does not warrant suitability of plans and specifications. See Board of Regents of University of Texas v. S&G Constr. Co., 529 S.W.2d 90 (Tex.Civ.App.--Houston [1st Dist.] 1975, writ ref’d n.r.e.); Shintech v. Group Constructors, Inc., 688 S.W.2d 144 (Tex.App.--Houston [14th Dist.] 1985, no writ); Newell v. Mosley, 469 S.W.2d 481 (Tex. Civ.App.--Tyler 1971, writ ref’d n.r.e.); City of Baytown v. Bayshore Constr., Inc., 615 S.W.2d 792 (Tex.Civ.App.--Houston [1st Dist.] 1980, writ ref’d n.r.e.) for holdings that the Owner does warrant the suitability of plans and specifications. See also, IT Corp v. Motco Site Trust Fund, 903 F.Supp. 1106 (S.D.Tex. 1994) for a discussion of both lines of Texas cases.

For a good general discussion on this subject, see, Leaderman, Arthur I., “The Spearin Doctrine: It Isn’t What It Used to Be”, 16 The Construction Lawyer 4, (October 1996). For a good discussion of the diverse Texas approach, see, Avery, Richard W., “Responsibility for Defective Specifications and Defective Workmanship”, handout materials, University of Texas School of Law 3rd Annual construction Law Conference (Feb. 15-16, 1990).

[13] In addition to the warranty of design, there are many other rights in the prime contract that may prove beneficial to the subcontractor.

[14] Smith v. National Resort Communities, Inc., 585 S.W.2d 655 (Tex. 1979); Storms v. Tuck, 579 S.W.2d 447 (Tex. 1979); Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997); American Tobacco Co, Inc. v. Grinnell, 951 S.W.2d 420 (Tex. 1997).

[15]  Smith v. National Resort Communities, Inc., supra; Storms v. Tuck, supra; Humble Oil & Refining Co. v. Harrison, 205 S.W.2d 355 (Tex. 1947); Williams v. Stansbury, 649 S.W.2d 293 (Tex. 1983).

[16] An example of the wording of such a letter is as follows:

“If AIA A201 (1997 ed.) is a part of the contract documents, please consider this our written request to identify to us the terms and conditions of your subcontract form which may be at variance with the contract documents.”

[17] Prickett v. Lendell Builders, Inc., 572 S.W.2d 57, 59 (Tex. Civ. App -- Eastland 1978, no writ).

[18] Gulf Const. Co., v. Self, 676 S. W. 2d 624, 624 (Tex. Civ. App. -- Corpus Christi 1984, writ ref'd n. r. e. ), (emphasis supplied).

[19]  Id.

[20] Id.

[21]  Gulf Const. Co., v. Self, 676 S.W.2d at 629; see also, Wisznia v. Wilcox, 438 S.W.2d 874 (Tex. Civ. App. -- Corpus Christi 1969, writ ref’d n.r.e.).  For an excellent discussion on this subject, see Kirksey, Gerald B. and Sherri L. Brown, The “Pay-When-Paid/Pay-If-Paid” Dichotomy and the Florida Trilogy--Bright Line or Murky Fog?, 11 Construction Lawyer 4 (October 1991) ; Kirksey, Gerald B.,“Minimum Decencies”--A Proposed Resolution of the “Pay-When-Paid/Pay-If-Paid” Dichotomy, 12 Construction Lawyer 1 (January 1992); Hendrick, David R., John I. Spangler, III and Robert B. Wedge, “Battling for the Bucks: The Great Contingency Payment Clause Debate”, 16 Construction Lawyer 3 (July 1996); Hill, William M. and Donna M. Evans, “Pay When Paid Provisions: Still A Conundrum”, 18 Construction Lawyer 2 (April 1998).

[22] An example of a clause to that effect is as follows:

In addition to any other requirement of this Subcontract . . . Final Payment shall not become due unless and until the following conditions precedent to Final Payment have been satisfied: (a) approval and acceptance of Subcontractor's work . . . (c) receipt of Final Payment for Subcontractor's work by Contractor from Owner; . . . Subcontractor expressly assumes the risk of non-payment by the Owner to the Contractor. If the Owner delays final payment for the Subcontractor's work, or Contractor does not receive final payment for the Subcontractor's work for any cause which is not the fault of the Subcontractor, the Contractor shall make payment to the Subcontractor within a reasonable time.

[23] Mead v. Johnson Group, Inc. 615 S.W.2d 685 (Tex. 1981).

[24] Tex. Prop. Code § 28.001, et. seq.

[25] The amendments apply to all contracts where the prime contract is dated September 1, 1999 or thereafter; see, An Act of June 19, 1993, H.B. 1815, §(2)(a)(1), 73rd Leg., Reg. Session (to be codified at Tex. Rev. Civ. Stat. Ann. Art. 601f).

[26] Tex. Prop. Code § 28.009(a).

[27] Tex. Prop. Code § 28.009(c).

[28] Tex. Prop. Code § 28.009 (d).

[29] See, Black Diamond Coal Mining Co. v. U.S.X. Corp., 581 So.2d 839, 840-41 (Ala. 1991); Industrial Tile, Inc. v. Stewart, 388 So.2d 171, 175 (Ala. 1980); J.E. Eley v. Brunner-Lay Southern Corp., 266 So.2d 276, 380 (Ala. 1972); Batson-Cook Co. v. Industrial Steel Erectors, 257 F.2d 410 (5th Cir. 1958); Murray v. Texas Co., 174 S.E. 231, 232 (S.C. 1934).

[30] Texas uses the “fair notice” doctrine to determine enforceability of indemnity clauses. “Fair notice” includes the “express negligence” requirement discussed above, as well as the “conspicuousness” requirement. Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993).  The “conspicuousness” requirement demands that something must appear on the face of the contract to attract the attention of a reasonable person. Id.; see also, Littlefield v. Schaefer, 955 S.W.2d 272, 274-75 (Tex. 1997), citing, Dresser, at 508. The opinion in Dresser adopted the standard expressed in Tex. Bus. & Comm. Code Ann. § 1.201(10) to determine whether the “conspicuousness” test has been met. Dresser, at 511. For example, larger or contrasting type or color likely suffices.

[31] Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705 (Tex. 1987).

[32] Id. at 708; see also, Houston Lighting & Power Company v. Atchison, Topeka, & Santa Fe Railway Company,  890 S.W.2d 455, 457 (Tex. 1994), citing, Ethyl, at 708.

[33] See, Malecki and Gibson, The Additional Insured Book (4th Ed. 2000) for an excellent resource on the subject of “additional insureds.” It can be purchased from the International Risk Management Institute, Inc., 12222 Merit Drive, Suite 1450, Dallas, Texas 75251.

[34]  City of Houston v. R.F. Ball Construction Company, Inc., 570 S.W.2d 75, (Tex. Civ. App.--Houston [14th Dist.] 1978, writ ref’d n.r.e.),

[35] Green International v. Solis, 951 S.W.2d 384 (Tex. 1997). The Court in Solis ruled against the claimant because there was no factual finding in the trial court supporting the exceptions to the enforceability of the “no damage for delay” clause. Id. at 387-388.

[36] Housing Authority of City of Dallas v. Hubbell, 325 S.W.2d 880, 890-891 (Tex. Civ. App.--Dallas 1959, writ ref’s n.r.e.).

[37] See Thomas, Richard G. and Fred D. Wilshusen, “How To Beat A ‘No Damage for Delay’ Clause,” 9 Construction Lawyer 1 (January 1989), for an article containing the authors’ thoughts and theories on avoiding the adverse effects of “no damage for delay” clauses.

[38] The AIA A201 confers upon the owner the right to terminate the prime contract for convenience. A broad “flow through” clause likely results in conferring the same right upon the general contractor to terminate the subcontract for convenience. See discussion, above, at pages 7-15.

[39] It is not unusual for Liquidating Clauses to contain potentially unreasonable provisions for the subcontractor. For example, Liquidating Clauses sometimes give the general contractor total decision making power as to the amount of the settlement of the subcontractor’s claims.

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