Construction Law Blog

Essential Provisions for Subcontractor Agreements

Posted on Thu, Jul, 21, 2011

 

When it comes to subcontractor agreements, there are numerous types of agreements that might be used and the fine print in these agreements can be crucial. Some documents, such as the American Institute of Architects (AIA) 401 and the Associated General Contractors of America (AGC) Form 640 serve as standard forms of agreement. However, subcontract agreements may also be drafted by contractors, subcontractors or architects. Regardless of the format or author of the agreement, the following typical and general provisions should be included in most subcontracts to avoid litigation over what the parties meant or intended.

Although boilerplate terms in an agreement are often referred to as insignificant or meaningless, they are actually far from insignificant. The bulk of boilerplate terms may consist of general matters and do not discuss project specifics, however, they often also include numerous terms which impact the subcontractor.

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One such significant term hidden within a boilerplate may be an ‘incorporation by reference.’  This is a clause which seeks to bind the subcontractor to the general contractor in the same way that the general contractor is bound to the project owner.  Therefore, it is wise for any subcontractor to also review the terms of the general contractor’s agreement with the owner, as the subcontractor’s working conditions may be governed from beyond their own agreement. Such important issues as retainage, certification of completed work, notice requirements, delay damages, termination, arbitration and other terms could then flow down from the general contractors prime contract with the owner.

But all contract terms are not created equal, and even a valid ‘incorporation by reference’ provision will not automatically make the subcontractor bound to all the terms of the prime contract. For example, where a subcontract simply states that the terms of the prime contract are incorporated, with no other mention as to specific portions of the prime contract, only those provisions of the prime contract which specifically relate to the scope, quality or manner of performance of the work by the subcontractor are incorporated and binding upon the subcontractor.
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Unless specifically stated, however, prime contract terms relating to dispute forum selection (whether a dispute would go to litigation or arbitration), no damage for delay or waiver of damages are all limited to the scope of the prime contract only. For a subcontractor to be compelled to arbitrate any construction dispute, the subcontractor must have that term either expressly stated in their subcontract or the incorporation by reference must be specifically stated. Otherwise, the prime contract will not be binding upon the subcontractor.

Any time multiple documents are used to define the entire agreement, there is a chance of conflicting terms in the agreements. For example, where a subcontract clearly and properly incorporates the prime contract terms for a specified requirement, but the prime contract happens to be silent on that requirement, it is the subcontract that will be controlling for that term in New York.  This is distinguishable from the situation where the prime contract is not silent, but expresses a different term than what is provided for in the subcontract with a valid incorporation provision. In this case, terms relating to payment in the subcontract will control so long as they do not interfere or conflict with the terms for the owner’s payments under the prime contract.

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In reviewing this type of contract conflict in Fehlhaber Corp. v. Unicon Management Corp. (1969), the New York court held that the subcontract payment terms would apply over the terms in the prime contract because “the payment terms were not in conflict with the owner’s right to retain installments from the general contractor.”

The rule in New York, however, is not as clear when the two agreements are not in complete agreement with the incorporated prime contract. In the situation where both the subcontract and the incorporated prime contract both contained arbitration clauses, but the clauses were not the same, the New York courts in Pearl Street Development Corp. v. Conduit & Foundation Corp. held “the courts or arbitrator must decide which clause the parties intended would control the issue.”    

Your comments are invited in the field below.

John Caravella construction attorneyThe author, John Caravella Esq., is a construction attorney and former project architect at The Law Office of John Caravella, P.C., representing architects, engineers, contractors, subcontractors, and owners in all phases of contract preparation, litigation, and arbitration. He also serves as an arbitrator to the American Arbitration Association Construction Industry Panel. Mr. Caravella can be reached via email at  John@LIConstructionLaw.com or (516) 462-7051.


This is a general information article and should not be construed as legal advice or a legal opinion.  Readers are encouraged to seek counsel from a construction lawyer for advice on a particular circumstance.


Tags: Construction Contract, construction contract terms, Construction, Construction Contract Drafting, subcontractor agreements