March 29, 2016
By: Alan J. Wolf
Subcontractor Contract Review
I am often asked to review subcontract agreements between those of you who are subcontractors and the general contractor you are going to work for. In a project like this I advise my clients that I will take a practical approach to the contract review. I don’t nitpick the contract. If I did the process of obtaining work would be severely hampered. This is not what my clients need or want. I focus on what I view as the most important issues from a legal standpoint and business perspective. On business issues I point them out and ask that the client make a sound business decision as to how to approach the issue. On legal issues I may suggest modifications to the contract language or in certain instances suggest an entirely revised provision. The following are the usual issues that arise and the advice I give.
Notice provisions. A 24 hour time limit is too short and I recommend at least 72 hours. If there is a breach of contract on your part are you liable for consequential damages? Does anyone else besides the contractor you are working for have the right to reject your work? Permits: who is responsible for obtaining and who pays for them. If hazardous materials are encountered whose responsibility is it and are you compensated for demobilization and remobilization if the job is shut down. When does the warranty period for your work begin, one year from the time your work is completed or completion of the entire project. This can make a difference.
The indemnity provisions are a significant issue. Generally they are too broad and need modification. Under Illinois law you cannot indemnify another party for that person’s negligence.
What are the limitations on making claims for additional expenses, time limit and method for making the claim. Are there provisions for dispute resolution by mediation and arbitration? If so what is your position on this process and do you have to keep working while the mediation and arbitration takes place. If dispute resolution is by litigation are there any restrictions such as where a lawsuit has to be filed and/or waiver of the right to a jury trial.
Does the contract have a pay if paid clause. Most general contractor form contracts provide for this. Under Illinois law this provision is enforceable and you need to be aware of the risk it poses. What are the rights and responsibilities of each party under the termination for cause and termination for convenience provisions? If there is a suspension of work are you compensated for increased costs and demobilization and remobilization.
Retainage: What is the amount held back and when is it to be released. Is there a provision for reduction when the job reaches a certain level of completion? What are the insurance requirements? With regard to insurance I advise that you consult your broker as to what is being required and can you comply. Does the contract call for payment and/or performance bonds. If so, can you obtain them and who pays for them.
If your work is dependent on the work of others, what does the contract provide for detecting deficiencies. Generally the contract provides for you to report them otherwise you are deemed to have accepted the work and are responsible for how it affects your work. If payments to you are overdue is there an interest provision and when does it kick in? If you have a dispute with a sub-subcontractor or material supplier and they assert a lien on the project what are your responsibilities to resolve the issue, for example bond over.
Another issue of concern is what documents are incorporated by reference into the subcontract and what impact they have on the subcontract provisions. For example is the Owner-General Contractor contract made a part of your agreement. Are the Owner-General Contractor general conditions of the contract made a part of the subcontract. If there is a default or dispute on this job does the contract allow the general contractor to withhold payments from other jobs you are doing for him. Does the agreement prohibit subcontracting out portions of it or does it only allow you to do so with the general contractor’s permission?
These are the usual types of issues that arise in reviewing a subcontract agreement. I recommend to my clients who have me do this type of contract review that they maintain a library of these reviews. In this way if they work for the same general contractor on subsequent occasions they can use the prior review as a reference. In addition since most of these issues reoccur they can use a prior review to go over a new contract that they are asked to sign. This can make the process run more smoothly and contain legal expense.
Many general contractors have started to request that potential subcontractors submit pre-qualification statements before they are allowed to bid on projects or before a subcontract is awarded. Obviously the general contractors are trying to determine the financial strength and integrity of a subcontractor to avoid potential problems. I have seen a few of these forms and while for the most part they ask legitimate questions and want a subcontractor to submit basic operating information there are a few issues of concern. While asking about the structure of your company i.e. are you a corporation, partnership or limited liability company is proper, I see no reason to disclose who the shareholders or members are and their percentage ownership interest. Also these pre-qualification requests want your financial statements and information usually for the past three years. This is confidential information and I would advise furnishing this information only if the request provides at the very least that this information will be held in confidence. To be safe I would submit financial statements only if a confidentiality agreement is executed by the general contractor that gives you some relief should the sensitivity of this information be compromised. If you want a short and basic agreement for the general to sign please contact me and I can furnish one for you. Also perhaps you as a subcontractor should ask the general contractor for the same type of financial information especially in these difficult economic times. One form I have seen requires the subcontractor to sign the pre-qualification statement under oath and affirmatively state that none of the information provided is misleading. Obviously you should never provide inaccurate information but signing under oath raises significant issues not the least of which is liability for any misstatement even should it be non-intentional.
In a recent Illinois Appellate Court opinion a developer’s predecessor in interest sought and was granted a special use permit for a residential development that required 96 acres of the property be maintained as a golf course or other open space. The ordinance granting the zoning required execution of a restrictive covenant that required maintenance of the open space for 35 years unless the covenant was released by vote of five of the seven members of the Village’s board of trustees. Several years later the developer’s successor in interest approached the Village and requested that it be allowed to amend the zoning to permit the closing of the golf course, reduction of the open space from 96 acres to 51 acres and construction of approximately 350 new residential units on the once golf course land. The Village declined to release the covenant and refused to refer the rezoning request to its planning and zoning commission.
The developer’s successor in interest brought a lawsuit seeking to void the restrictive covenant and disconnect the property from the Village or in the alternative to force the Village to allow it to apply for the rezoning. The trial court held the restrictive covenant was valid but allowed the request for disconnection.
On appeal the Appellate Court upheld the trial court’s decision. The Appellate Court reasoned that one cannot agree to conditions in order to obtain a special use permit, take advantage of the special use in developing a portion of the land and then dispute the validity of the conditions. According to the Appellate Court, development of the land by the successor in interest’s predecessor was an acceptance of the benefits of the covenant along with the agreement to be bound for 35 years unless five of the Village’s trustees voted to release the covenant. The Appellate Court held that the trial court was correct in holding that acceptance of the covenant’s benefits prevents the successor in interest from seeking a release from the burdens of the covenant more that a decade later.
While the covenant regarding the open space was upheld, the Appellate Court also affirmed the trial court’s decision that the covenant did not prohibit the disconnection of the property from the Village. The covenant made no reference to any obligation to keep the property within the Village’s jurisdiction. Since the statutory conditions for disconnection were proven, disconnection of the property from the Village was allowed.
In this case, it appears that the original developer’s successor in interest may have won the battle but lost the war One has to wonder what good disconnection from the Village has if the covenant has to be followed in any future development of the land. Further development of the land as unincorporated property will still have to comply with the restrictive covenant and may not be as advantageous without certain municipal services. I wonder if a changed conditions argument may have helped the successor’s cause since it does not appear from the Appellate Court decision that this argument was made. The morale of the story is be careful as to what you agree to since you and your successors in interest may be bound to your agreement for some time to come.