UNDERSTANDING AND NEGOTIATING SUBCONTRACTS
INTRODUCTION
In my opinion, this is one of the more important articles for materials suppliers and subcontractors to read and understand. My experience has been and is that subcontractors don’t understand many of these issues.
The purpose of this article is to discuss various common subcontract terms, their meaning and the possible ramifications of these terms. This exercise will take place principally within a discussion of three common subcontract forms used in the Commonwealth of Massachusetts. These include the so-called ‘statutory subcontract’, otherwise known as the pink subcontract, which form is specifically provided for in the competitive bid statute, Chapter 149, §44F of the General Laws. Another subcontract form that we will take a look at is the AGC subcontract short form, which is also commonly used. We will also discuss the standard AIA subcontract, which is form A401.
Recognizing that these forms are not on the website, they are fairly readily available. Also, the basic purpose of looking at these subcontracts is less to understand the individual forms and more to discuss and explain the legal issues that they suggest.
Like Mr. Syms, the only thing that we can hope for a relatively short article on this subject is to create “an educated consumer.” I cannot on a clause by clause basis suggest ideal language for each and every subcontract. A clause which might cause a difficulty in one subcontractual setting would be less likely to cause a difficulty in another. Factors such as the length of the job, the length of (or lack of) a relationship between the general contractor and the subcontractor and whether or not the work is public or private, bonded or unbonded are factors which can determine whether or not any particular clause is merely difficult or is unacceptable. It may be that in any given situation a clause which could cause you or your attorney difficulty cannot be changed. An example comes to mind. If my recollection is correct, when they rebuilt the Southeast Expressway many years ago, the Commonwealth of Massachusetts had a $10,000.00 per day liquidated damage clause. That type of clause could rapidly deplete any job’s potential profit! However, as a practical matter, attempting to have this removed from the general contract documents would have proved to be impossible.
I. SOME PRELIMINARY STUFF
What is a contract?
Let’s start with something simple. What is a contract?
In legal terms, a contract is when one party makes an offer to do something and the other party accepts that offer. These are critical concepts to contract making: offer and acceptance.
A contract - from a written standpoint - is one or more pieces of paper, signed by the parties to be charged and expressing agreement on the fundamental aspects of the undertaking. “I will paint your house for four thousand dollars using one coat primer and one coat exterior satin latex paint.” This is the fundamental deal: what you are going to pay for what the other guy is going to do.
Why should the contract be in writing?
If it is not in writing, then it isn’t clear what the terms of it are. If you picked your customer wrong or you picked the wrong job or if problems develop - as they will - your memory and your contracting party’s memory of what ‘the deal’ is is frequently going to vary. Neither your lawyer nor the judge is going to be sympathetic: this is a ‘beginner’s’ mistake. Without a written contract, you can’t file a mechanic’s lien. Without a written contract, settling your bond claim will be more protracted.
Simply put, unless you are planning to be ‘the thief’ in the relationship, there are no good reasons not to have a written contract.
But it’s all so complicated! There are so many forms! I don’t have any one to type it! Next thing I know, you’ll be asking me to write letters for changed conditions! (Check the website: we have an article about this.)
My quick response is that if I needed a contract in the next ten minutes, I would grab an AIA form and cross off arbitration. These forms don’t discriminate between subcontractors and general contractors and they are pretty fair.
Who is your customer?
Lawyers cringe when a subcontractor brings in a claim against “John Jones Co.” or John Jones Construction. Since your client might be a sole proprietorship, a corporation, a limited liability company, a limited liability partnership or possibly another form, knowing this up front will make a lot of sense. The Department of Corporations in Massachusetts (617-727-2850) will tell you over the phone whether your customer is a corporation, a limited liability company (LLC) or neither. You can also punch in “Massachusetts Secretary of State” on your browser and this will connect you directly to the Corporations website, where you can search databases.
If your customer is not a corporation or an LLC or an LLP, changes are he/she has had poor legal advice or is dumb as a stump or both. For, anyone willing to risk his house every day when this can easily be avoided is a few screws short of a hinge. Knowing, for example, that your customer is or is not a corporation can affect how you might negotiate the contract. For example, Massachusetts has a homestead exemption of three hundred thousand dollars for one’s principal residence. If your customer is a person acting as a ‘d/b/a’ - in other words, in a personal capacity - he or she quite likely could be judgment proof (meaning, not having an ability to pay any court judgment issued against him/her.)
What is a letter of intent and how does it differ from a contract?
How is this different from a ‘letter of intent’? Well, a letter of intent under some circumstances might be considered a contract and under others, not. When the parties have agreed that there will definitely be a later contract and that the letter of intent is preliminary, most of the time this is not sufficient to establish a contract.
Here’s the law on letters of intent. For enforceable contract to be created,
parties must have progressed beyond the stage of imperfect negotiation. Situation
Management Systems, Inc. v. Malouf, Inc. , 430 Mass. 875, 724 N.E.2d 699 (2000).
Whether preliminary agreement which contemplates execution of further document
represents understanding of parties on all essential terms cannot be read from text of
preliminary paper alone, as provisions of subsequent agreement, or subsequent events,
may expose disagreement between parties about significant business terms. Vickery v.
Walton , 26 Mass.App.Ct. 1030,533 N.E.2d 1381 (1989). A purported contract which is
no more than an agreement to agree in future on essential terms or one which does not
adequately specify essential terms ordinarily will be unenforceable. Air Technology
Corp. v. General Elec. Co. , 347 Mass. 613, 199 N.E.2d 538 (1964). Even though an
action may be brought upon a contract which contemplates another more formal contract,
agreement to enter into a contract which leaves terms of that contract for future
negotiation is too indefinite to be enforced. Caggiano v. Marchegiano, 327 Mass. 574, 99
N.E.2d 861 (1951).
There is a commercial that says: “life is messy: clean it up!” While (they tell me) it is hard to be a little bit pregnant, it is not hard to have some elements of a contract but be missing some elements of an enforceable or clearly-understood contract as well.
How to avoid your letter of intent from becoming a contract
How to avoid this type of problem? The appellate courts have indicated what language should be used in the letter of intent.
In Goren v. Royal Investments, Inc., 25 Mass.App.Ct. 137, 140, 516 N.E.2d 173 (1987), on pages 142-143, the Appeals Court gave some suggested language for parties trying to make it clear the letter of intent is not final:
“A proviso of that sort should speak plainly, e.g., " The purpose of this document is to memorialize certain business points. The parties mutually acknowledge that their agreement is qualified and that they, therefore, contemplate the drafting and execution of a more detailed agreement. They intend to be bound only by the execution of such an agreement and not by this preliminary document."
Incorporation by reference into your subcontract of your proposal and other preliminary contractual documents
Since the enforcement of a contract can be rather strict and draconian, courts take the position that they will only enforce what seems to be the final deal. It is for that reason that the courts have fashioned ‘the parole evidence’ rule that says, in essence, that in enforcing a contract’s obligations, the court will only look at the final expression of the parties’ wishes. In other words, unless they are incorporated into the contract, a court will not ordinarily look at any specific offer or any specific acceptance or the various back and forth drafts. Many subcontractors have absolutely killer proposals (which, from a legal standpoint, are “offers”). The proposal limits the work to be performed by excluding certain things, includes interest for late payments, attorneys’ fees if the subcontractor has to sue and other kinds of wonderful things. The only problem becomes when the general contractor sends you a subcontract which does not list the proposal. In the ordinary situation, if you want the proposal to have continuing vitality and meaning, you have to have it expressly included in the contract itself. For, otherwise, a court is ordinarily going to find - except in instances of fraud, which is hard to prove - that you ‘waived’ the terms of your proposal. (A waiver is an intentional relinquishment of a known legal right.) And, so there is no confusion, there needs to be a provision in the subcontract which expressly says: “John Doe Construction’s proposal dated October 2, 2002 is included in this Subcontract. In the event of any discrepancy or contradiction between the terms of that proposal and any other part of this Subcontract, the express language of the proposal will control.”
Incorporation by reference of various contract documents
This introduces a concept, which I will try to emphasize, reemphasize and re-re-reemphasize (if there were such a word) throughout the course of this article: a subcontractor in many (most) circumstances is bound to the general contractor as is the general contractor bound to the awarding authority in terms of the general conditions.
What does that mean? What that means is that depending on the language of your subcontract, most subcontracts have provisions such as that contained in the statutory subcontract under paragraph 1(a):
“The Subcontractor agrees to be bound to the Contractor by the terms of the herein-before described plans, specifications (including all general conditions stated therein) and addenda No. . . ., and . . . , and . . ., and to assume to the Contractor all the obligations and responsibilities that the Contractor by those documents assumes to the . . . hereinafter called the “Awarding Authority”, except to the extent that provisions contained therein are by their terms or by law applicable only to the Contractor.”
Put simply - but with some exceptions - general conditions which require the general contractor to assume obligations to the owner (liquidated damages, warranty or punch lists) will be owed by the subcontractor to the general contractor as is applicable to his work unless explicitly excluded in the subcontract. More on this later.
Therefore, we have to accept as a given that in many instances you will not be able to negotiate away each and every ‘bad’ subcontract provision.
At the same time, in many instances you will be able to negotiate some of the contract language - depending upon your leverage and how badly the general contractor wants you - and a primary purpose of this seminar will be to help identify some common ‘difficult’ clauses and discuss what they mean so that in those circumstances where you do have some negotiating ability, you can concentrate on those clauses which make sense for those particular subcontracts.
At the same time, even where you cannot affect specific subcontract language which you would prefer to change, being aware of the possible ramifications of having that language in the subcontract may be of assistance to you in the administration of the subcontract. For example, when there is a $10,000.00 per day liquidated damage clause, that subcontract gets worked on first!
II. WHY A WRITTEN CONTRACT, ANYWAY?
There are several substantial legal and factual reasons to support having anything but the most simple (inexpensive) contractual dealings reduced to writing.
The first reason - a legal one - is the requirement of the so-called ‘Statute of Frauds.’
Chapter 259, Section 1 of the General Laws provides in pertinent part as follows:
“No action shall be brought: . . . Fifth, Upon an agreement that is not to be performed within one year of the making thereof; Unless the promise, contract or agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or by some person thereunto by him lawfully authorized.”
What this simply means is that something which is forbidden by the Statute of Frauds can not be sued upon. This could mean that without a written contract, you might not have any remedy (be able to sue) in the event of breach.
The purpose of the Statute of Frauds is to suppress fraud, i.e., “cooked up claims or agreement sometimes fathered by wish, sometimes imagined in light of subsequent events, and sometimes simply conjured up.” Pappas Industrial Parks, Inc., v. Psarros, 24 Mass. App. 596 (1987).
To satisfy the Statute of Frauds a writing must incorporate the promise that the plaintiff seeks to enforce. Harrington v. Fall River Housing Authority, 27 Mass. App. 301 (1989).
Let’s take a look at the case of M.J. Pirolli & Sons, Inc. v. Mass. Equipment & Supply Corp., 401 N.E.2d 146 (1980).
In this case a supplier of building materials brought an action against the general contractor seeking to recover payment for various materials which the supplier had delivered to the original mason subcontractor on a construction project prior to the original subcontractor’s insolvency and replacement by another subcontractor. Apparently, the defendant and general contractor had made promises to the supplier to the effect “I’ll see that you get paid.” The Appeals Court held that this claim was barred by the Statute of Frauds.
Therefore, in virtually all cases with no imaginable exceptions, your subcontracts with subcontractors and general contractors - as a material supplier, second tier subcontractor or first tier subcontractor - should be in writing. And, if your original contracting party becomes insolvent and either the general contractor or the owner attempts to keep you performing, enter into a written agreement with that substituted party containing the basic ideas of the original deal, especially including a promise to pay. 1
A contract to be enforceable need not be complicated in terms of terms, pages or forms. The basic idea of a contract is that there is an “offer” and an “acceptance.” The law wants to see a meeting of the minds as to the essential terms of the deal between two parties. What this means simply is that one can demonstrate fundamental agreement in writing as to the fundamental terms of the performance. In a construction context, this would usually mean agreement as to the following terms: Price; nature of the performance (what is to be done); the time for performance (when the work begins and when it ends). In different situations more might be required, but these are really the only fundamental terms in any construction contract.
It is not necessary that both parties sign the same document to constitute a legally enforceable contract. But, somewhere, there needs to be a signature by each party.
Let’s assume that you make a quotation in writing to a general contractor to perform a certain item of work. The quotation may not even be on a written purchase order form. It might say simply, reduced to fundamental terms: “I will perform the HVAC work at new Boston Garden for the price of $3 million.” If the general contractor were to write you a letter stating that it accepts the terms of your proposal without changing any terms, a legally enforceable contract has been entered into, notwithstanding that it is on two separate pieces of paper.
From a factual standpoint, apart from whether or not a contract is legally enforceable - by not being in writing - you should want it to be in writing for any number of other reasons. A bonding company wants to see a separate contract for each separate job as it will assume otherwise that there might be some unbonded work in the claim. Regarding mechanic’s liens, there is case law (and statutory law) which provides that for a supplier to bring an action against a contractor and a subcontractor enforcing a mechanic’s lien, there can be no mechanic’s lien where there is no preexisting written agreement for the job for which the lien is sought to be enforced. Having a series of purchase orders and invoices issued from time to time without any preexisting written agreement imposing an obligation on either the supplier or the subcontractor or both of them does not satisfy the requirement for a mechanic’s lien that there be a written contract between the supplier and subcontractor. Gettens Electric Supply Co., Inc. v. W.R.C. Properties, Inc., 21 Mass. App. 658 (1986).
Not having an agreement in writing means that there are no demonstrable terms to the agreement between the parties. When was the work supposed to be done by? What was the price? Were certain alternates taken into consideration when the price was submitted?
For these and numerous other reasons, do not work in the construction area without at least a simple written document signed by both parties, even if on separate papers, demonstrating a fundamental agreement as to the basic terms of performance or work, price and time.
Remember that an unwritten contract is worth the paper it is not printed on! Verbal orders don’t - and shouldn’t - go!
III.SIGNIFICANT PROVISIONS UNDER THE MASSACHUSETTS STATUTORY SUBCONTRACT
A. THE SUBCONTRACTOR OWES TO THE GENERAL CONTRACTOR THE GENERAL CONTRACTOR’S OBLIGATIONS TO THE OWNER.
Recited earlier in the paper was the language from the statutory subcontract contained in paragraph 1.(a) to the effect that the subcontractor agrees to be bound to the general contractor by the terms of the plans and specifications including all general conditions stated therein and to assume to the contractor all of the obligations and responsibilities that the contractor assumes to the owner.
What does this mean? What this means is that you have to read the general conditions. It is not sufficient for you to make a bid reading only that section of the technical specifications and applicable drawings which applies to your work and then expect (hope) that your knowledge of the technical specifications will sufficiently protect you. Most of the ‘tough’ stuff is either in the form of general contract, the general conditions or supplementary general conditions.
As indicated above, my recollection is that when the Southeast Expressway was rebuilt several years ago there was a $10,000.00 per day liquidated damage clause between the Commonwealth of Massachusetts and the general contractor. (I believe Deer Island was $14,000.00 per day.) In that particular case, the general contractor used his own form of subcontract with his subcontractors. Let’s assume, for the moment, that he did not: that he used a contract similar to the statutory subcontract. 2
Assuming, for the moment, that if a form of subcontract similar to the statutory subcontract were used for the reconstruction of the Southeast Expressway and its bridges, my opinion is that if the general conditions for that particular project provide for liquidated damages for late performance in an amount of $10,000.00 per day, a subcontractor would be bound to that liquidated damage clause to the extent that his work caused the general contractor to exceed the time requirements of the job. Also, the very time limits of the job and other special requirements in the general conditions - e.g. minority or female participation, for example - would apply to the subcontractor (unless by statute or otherwise such provision(s) only applies to the general.)
Let me give you a case in point from the “Sauer files, ” back when I did a lot of work representing bonding companies.
Some years ago, I had a situation where a general contractor was performing some renovation work for a public owner, a municipality. For various reasons, the architect was very hard on the general contractor and, in particular, on the painting subcontractor, which was a principal on a bond supplied by my client, a surety company. The architect issued a series of punchlists - very detailed in nature, and requiring quality which would be excessive, in my judgment, for commercial work - over a period of a year and one-half. There were probably eight to ten separate punchlists over that year and one-half period.
My principal, the painting subcontractor, performed all but the last one or two of these lists. At one point in time, the person in charge at the painting contractor said “enough is enough” and refused to continue performing these various painting punchlists. The general contractor caused the remaining punchlist work to be done by its own forces and then presented a relatively substantial claim to the bonding company.
I advised the painting subcontractor that as the general subcontractor was required by the general contractor’s contract documents with the owner to perform punchlist work to the point that the work was accepted by the architect as the owner’s representative, since the subcontract with the general contractor incorporated the general conditions, the fact that his work may have been acceptable on an objective basis and to the successive superintendents of the general contractor was not sufficient to defeat the general contract language requiring performance of punchlist work until the owner through its architect was satisfied.
You must read the contract documents, including the general conditions, supplementary general conditions and special conditions to know what your obligations will be as a subcontractor in any particular circumstance. The failure to do so could cause you to be bound to the general contractor by terms which are not contained in your subcontract but which are clearly applicable to the subcontractors in the general conditions.
What happens if when I bid the job or when I sign the job I haven’t had a chance to review all of the contract documents?
The short answer is that if your contract references or incorporates by reference various documents, whether you read the document - or not - or understand what is in them, you will be bound by the documents incorporated into your contract.
Here’s what the lads and lasses in the black robes have had to say about this:
In absence of fraud, a person who signs written agreement is bound by its terms regardless of whether person reads and understands those terms. Tiffany v. Sturbridge Camping Club, Inc., 32 Mass.App.Ct. 173, 587 N.E.2d 238 (Mass.App.,1992). In absence of fraud, one who signs a written agreement is bound by its terms whether he reads and understands it or not, or whether he can read or not. Cohen v. Santoianni, 330 Mass. 187, 112 N.E.2d 267 (Mass.,1953) Where what is given by one to another purports on its face to set forth terms of a contract, one who receives it, whether he reads it or not, by accepting it assents to its terms and is bound by any limitation of liability therein contained, in absence of fraud. Kergald v. Armstrong Transfer Exp. Co., 330 Mass. 254, 113 N.E.2d 53 ( Mass.,1953) Ignorance through negligence does not relieve a party from his contractual obligations, unless the negligence is not inexcusable.
Century Plastic Corp. v. Tupper Corp ., 333 Mass. 531, 131 N.E.2d 740 ( Mass.,1956).
Where what is given to a person purports on its face to set forth terms of a contract, a person assents to its terms by accepting it, whether he reads it or not, and is bound by any limitation of liability therein contained, in absence of fraud; but where what is received does not purport to be a contract the person receiving it is not bound by limitation of liability unless actually known to him. Polonsky v. Union Federal Sav. & Loan Ass'n, 334 Mass. 697, 60 A.L.R.2d 702, 138 N.E.2d 115 ( Mass.,1956).
Therefore, be on the lookout for language such as contained in the statutory subcontract in paragraph 1.(a) that the subcontractor agrees to be bound to the general contractor in the same way that the general contractor is bound to the owner. Whether in a public context - such as within the context of the statutory subcontract - or within a private work context, a court will enforce against a subcontractor provisions in the general conditions which are not by their terms exclusively restricted to the general contractor.
Similar to the language in paragraph 1.(a) is the language in paragraph 1.(b) of a reciprocal nature: namely, that the general contractor will be bound to the subcontractor in the same way that the owner is bound to the general contractor. In my opinion, in most cases involving disputes which will find their way to litigation, this obligation of the general contractor to the subcontractor is nowhere near as strong as the obligation of the subcontractor to the general contractor is described in paragraph 1.(a).
Why is this? The reason for this is quite simply that the general contract documents, including plans, specifications and general conditions, are primarily drawn to enforce the obligations of the general contractor to the owner and not vice-versa. Since the owner pays an architect and engineers to draw the contract documents to make sure the owner gets what the owner wants, there is not customarily as much emphasis from the owner’s standpoint in making sure in the contract documents that the contractor’s rights against the owner are as sufficiently protected as the owner’s rights (and desires) against the general contractor. This should not require much explanation: this is simply human nature and reflects the owner’s self-interest.
Particularly in the context of public work, it would be a mistake to view the general’s obligations to the subcontractor as only being the same as the owner’s obligations to the general contractor. The concept of pay-when-paid clauses, as an example, comes to mind. In most instances, a general contractor has an obligation to pay its subcontractors even if it has not been paid by the owner for the subcontractor’s work.
Also, there are a lot of protections built-into various statutory provisions for subcontractors on public works, which include things such as demands for direct payment as well as claims against the general contractor’s statutory payment bond pursuant to Chapter 149, section 29 of the General Laws, which gives not only subcontractors but sub-subcontractors not in privity - not having a contract with - the general contractor rights against that bond. 3
B. THE SUBCONTRACTOR’S TIME TO COMPLETE IS THE SAME AS THE GENERAL CONTRACTOR’S
With regard to the statutory subcontract, from a subcontractor’s standpoint in paragraph 2, the language to look at is that completing the sentence, namely, that: “. . . the Subcontractor agrees to begin, prosecute and complete the work described in this Subcontract in an orderly manner and with due consideration to the date or time specified by the Awarding Authority for the completion of the entire work.” This provision effectively ties the subcontractor in to the general’s date for completion.
Therefore, can you tell by looking at the statutory subcontract how much time you have to complete the project? The answer is quite simply “no.” You must look at the general contract as that is most likely the only place which will have the general contractor’s contract time. The fact that the period for contract time is not specified in the subcontract does not excuse the subcontractor from performing whatever time is indicated in the general contract based on the provisions of paragraph 1.(a) of the statutory subcontract as well as the provisions of this particular paragraph.
C. THE STATUTORY SUBCONTRACT HAS A LIMIT ON THE TIME IN WHICH A GENERAL CONTRACTOR CAN ASSERT BACKCHARGES FOR DOING A SUBCONTRACTOR’S WORK.
Paragraph number 4, in my experience in construction litigation over 28 years, is not well-understood among the construction community. What this language means is that if the general contractor performs work otherwise due and performable by a subcontractor under a subcontract, unless that general contractor gives the subcontractor notice in writing within the first ten days of the calendar month following the month in which the general contractor provided services or materials, the general contractor cannot backcharge the subcontractor for such labor and/or materials.
What does what I just said mean? Let’s assume, for a moment, that your general contractor has two disputes with you as to work you claim is not your obligation to perform. The general contractor performs the first item of work on November 29 and the second item of work on December 1.
Applying this section to these facts achieve the following results.
As to the item of work performed on November 29, unless the general contractor gives you written notice of the fact that he did perform that work and provides you with written intention to backcharge you for the same by December 10, he is forbidden by this subcontract form, which is directly incorporated into a statute, from backcharging you. (Better said, while he can and will issue backcharges at any time and for any reason, the potential judicial enforcement of such a backcharge in this circumstance is highly suspect because of this contract provision which, for filed subbidders, also is set forth in C. 149, §44F of the General Laws.) Thus, as to that particular item of work, the general contractor must give you his written notice within 12 days.
As to the item of work performed on December 1, the general contractor must give you notification of an intention to backcharge you as to that item by January 10. In this case, the general contractor has 40 days to give you this notice.
Thus, in dealing with a situation such as a backcharge from a general contractor under a statutory subcontract, there is a certain amount of counting days that one does to calculate the time period for the written notice.
It can be readily imagined that in many instances the general contractor might not give the 12 day notice as to work performed on November 29. Legally, if he does not give you that notice, he does not have a right to backcharge you. Performing an item of work for your account on December 1, only 2 days later, because this is in a different month, the general contractor would have until the 10th day of the following month or some 28 days more than he had to give you the notice from the first item of work performed only two days earlier.
Should a situation arise where a general contractor attempts to backcharge your account for work performed under a statutory subcontract, carefully measure the backcharge asserted against paragraph number 4 on the second side of that subcontract. If the general contractor missed the time requirement, he is unable to backcharge you as a matter of law irrespective of the factual merit of the backcharge.
Although this contract bears a provision for “seal attest,” this is an unsealed contract and can be sued on for only 6 years. (More on this later.)
The necessity for a subcontractor to substantially perform its subcontract
Without exhaustively defining the following statement, generally speaking, it is Massachusetts law that in order to collect on a contract, it is necessary in most instances for a subcontractor to have substantially performed that subcontract.
Here’s what the lads and lasses in the black robes have to say about that:
Contractors cannot recover on the contract itself without showing complete and strict performance of all its terms. Andre v. Maguire, 305 Mass. 515, 516, 26 N.E.2d 347 (1940). Cf. J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 794, 494 N.E.2d 374 (1986).
This legal principle is referenced in the case of Handy v. Bliss, 204 Mass. 513 518-519, 90 N.E. 864 (1910). As stated by the Court, the general principles in construction cases are:
“To entitle the plaintiff to recover in a case of this kind there must be an honest intention to perform the contract and an attempt to perform it. There must be such an approximation to complete performance that the owner obtains substantially what was called for by the contract, although it may not be the same in every particular, and although there may be omissions and imperfections on account of which there should be a deduction from the contract price. It is not necessary that the work should be complete in all material respects, nor that there should be no omissions of work that cannot be done by the owner except at great expense or with great risk to the building. There may be omissions of that which could not afterwards be supplied exactly as called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable. Notwithstanding such an omission, there might be a substantial performance of the contract.”
Can a subcontractor pull off the job in the event of non-payment? (Second question: should the subcontractor pull off the job in the event of non-payment?)
Absent such specific provision allowing for you to stop work, to make sure that you have preserved your right to sue under a subcontract, it is almost always necessary for you to complete your performance under that subcontract or such aspects of your performance as are not specifically excused by an act or omission on the part of your contracting party.
Ordinarily, unless your contract specifically provides for it or unless a failure of payment is to the point where only fraud can explain it, the fact that your contracting party is late paying you may not be legal justification for pulling off the job. In fact, in many instances, pulling off the job can be seen as an act of abandonment, which would be a material breach of contract on your part. The reason you can’t ordinarily pull off for non-payment is pretty complicated. I’ll summarize it as well as I can. The law deems an obligation to perform as (ordinarily) an ‘independent covenant’ from the obligation to pay, which is another ‘independent covenant’. From a legal standpoint, unless there is something in the contract which makes these clauses interdependent, they are as two ships passing in the night, deserving of individual respect and enforcement.
Having said that, there are a couple of Massachusetts cases which indicate a subcontractor can pull off for lack of proper and timely payment.
In Drinkwater v. D. Guschov Co.196 N.E.2d 863, Mass. 1964
the Supreme Judicial Court said:
“By any evaluation of the evidence the plaintiff was entitled to substantially more than the $11,000 which he had received. This underpayment was a material breach of the contract and justified the plaintiff's stopping work prior to the completion of the contract. C. C. Smith Co., Inc. v. Frankini Constr. Co., 334 Mass. 379, 384, 135 N.E.2d 924.”
As stated by the Court in C. C. Smith Co. v. Frankini Const. Co. 334 Mass. 379, 384, 135 N.E.2d 924, 926-927 Mass. 1956:
“. . . . But under the law of contracts and apart from the question of security the petitioner was not obliged to pursue either of these courses. Frankini had broken its contract with the petitioner by not making the payments to it as called for by the subcontract. The finding of the master in the petitioner's favor against Frankini and the decree below thereon establish that the petitioner was not in default. In these circumstances the petitioner could treat the contract as still subsisting but could withhold further performance until it had received the payments in arrears. Restatement: Contracts, § 276, Illustration 5. Williston, Contracts (Rev.Ed.) § 848. Hence its failure to perform between December 8, 1953, and August 11, 1954, when the authority abrogated its contract with Frankini, was justified.”
Now, even though there is some decisional law which says a subcontractor can pull off for lack of payment, such activity should be looked at very warily. This is because if a subcontractor pulls off for lack of payment and a court later on determines that the subcontractor was not entitled to be paid, pulling off the job thus constitutes an abandonment, which is a material breach of contract. It is axiomatic in the contract world that one should not easily allow another (i.e. the general contractor) to finish your work for a couple of reasons. First of all, generally speaking, no one can finish your work cheaper than you can: you have the benefit of the learning curve and know where all of the dead bodies are buried (or not buried). Also, if you allow your contracting party to finish your work, it will be very difficult after the fact to determine whether or not the price of completion included some non-contractual work or expenses.
What does ‘quantum meruit’ mean?
Subcontractors have heard of the concept of “quantum meruit” and think that quantum meruit is an alternative cause of action under which a subcontractor can be paid when it has not completed its work for the fair value of the work completed.
The words “quantum meruit” from the Latin mean simply “how much it is worth;” it does not excuse in the main a failure to perform by a party claiming under a contract. What it attempts to do is to offer an alternative theory when there has been very substantial performance of the subcontract by the complaining party but where there have been relatively minor acts of noncompliance or relatively minor items not completed by the plaintiff. In such a case, the law allows a claim to be made in quantum meruit for the fair and reasonable value of the labor and materials installed by a subcontractor. The concept of quantum meruit nonetheless requires a subcontractor absent specific allowance in its subcontract of terms otherwise constituting sufficient excuse not to perform, to complete its subcontract before suing on the same.
Under what circumstances can (should) a subcontractor pull off the job for other issues?
Whether or not a subcontractor has a sufficient cause to cease performing in any given factual circumstance is one of the most common and often complex issues confronting both a subcontractor and the subcontractor’s lawyer! The purpose of this fairly short article is not to give you a definitive list as to those circumstances which will justify non-completion or acts which do not constitute non-completion. It is sufficient to say for these purposes that, generally speaking, it is almost always better to complete a subcontract and sue afterwards for such additional monies or other remedies you feel entitled to.
A reasonable question is “Why?” The answer to this question is that perhaps your claim of breach on the other party’s part will not be sustained by a judge or appellate court considering your case. If you have “guessed wrong” and have not completed the project, you might be liable to the general contractor for damages for non-completion. Therefore, unless you have specifically left something material out of your bid price, it is generally axiomatic that no other contractor can complete your subcontract cheaper than you can.
To the extent that you are a bonded subcontractor, and speaking as someone with a great deal of bonding company experience, your bonding company will want to see the contract for which it has a performance bond completed to obviate a possible performance bond claim against the surety company. Although you might hope in any specific situation that you can control your bonding company’s actions in an incomplete job situation, as a practical matter, almost all agreements of indemnity allow a bonding company to take such action as it deems necessary concerning both unpaid labor and materials suppliers as well as with regard to incomplete jobs, holding the bonding company only to the standard that it acts in reasonable good faith, a standard not hard for the bonding company typically to meet. (In fact, there is a Massachusetts case which says that in an action by a surety on an indemnity agreement, defenses claiming that the surety did not act in ‘good faith’ is not a legal defense at all.)
One final word concerning the statutory subcontract. This statutory subcontract is provided for in Chapter 149, section 44F of the General Laws. The sentence preceding the form of the subcontract provides as follows: “The subcontract shall be in the following form: . . . ”
A question suggests itself: what happens if you do not have the statutory (pink form) subcontract in a public building situation?
My opinion would be that if the parties choose to use some other form of subcontract, they will be governed by the terms of that other form of subcontract. I say that inasmuch as I have not seen any cases specifically requiring a general contractor and a subcontractor to use the statutory subcontract form on public work. There are those who take the position that inasmuch as the statute specifically provides that the subcontract “shall be in the following form,” in those situations where the statutory subcontract has not been used, any form to the contrary will be disregarded as to inconsistent provisions. Case law about the statute recently seems to suggest that the parties can modify it if there is mutual agreement.
Without trying to resolve this particular controversy, it might be a handy thing to tuck away in the back of your mind that in circumstances where you have a less advantageous subcontract than the statutory subcontract on public work - assuming you are a filed subbidder - should a situation arise where the difference might be important, it may be helpful to argue that your specific form of subcontract is controlled by the content of the statutory subcontract.
IV. THE AGC SUBCONTRACT (SHORT FORM), DOCUMENT 603
This short form is a two page subcontract (one sheet front and back) which you might see in jobs with general contractors from the Associated General Contractors.
It is my experience generally in the law business that I am a little leery about documents which purport to represent “an arms length transaction” between two parties as drawn by a trade association for one of the parties! There should be no doubt, as an example, that the AIA documents are drawn primarily to protect the interest of the architect first and the owner, second, should there be some dispute between the subcontractor and the general contractor or between the general contractor and the owner which involves, even peripherally, the architect or the owner. Thus, I approach the discussion of this particular subcontract form, placing myself in the position of a subcontractor or subcontractor’s attorney, with a little trepidation. 4
In the initial paragraph, as to the date of the document and the date of its being effective, I would ordinarily want those two dates to be the same, unless we are involved in private work and the owner has not obtained its financing or for some other good cause.
As a practical matter, apart from an ability to sue on a contract being restricted by a statute of limitations (either six years or twenty years, unless a shorter period is provided in the contract) or by a statute of repose (between a period of three years and six years in claims alleging negligence arising out of the construction of a building), the law views contracts as, in effect ‘eternal’ in the sense that until they are released or otherwise expire because of term or by stipulation, they have unlimited effect.
A. ARTICLE I (Contract Payment)
What are “pay-when-paid” clauses and when are they effective and when are they not effective?
Article I begins by discussing a subcontractor’s favorite subject: payment.
When does the general have to pay you, his subcontractor? Generally speaking, this will depend on a whole variety of factors, including whether or not you are a subcontractor on public work or not. As pertains to public work, there are time limits by which the awarding authority must pay the general contractor and the concept of “forthwith,” which is the time requirement a general contractor must comply with in paying subcontractors once the general contractor has received monies for those subcontractors’ line items, applies.
Two questions suggest themselves.
First, let’s suppose that the general contractor through either negligence, mean-spiritedness or otherwise fails to requisition monies from the owner for your line items, notwithstanding your timely and proper requisition to the general contractor.
Or, let’s assume that the general contractor does requisition monies for your account but that the owner neglects or refuses to pay.
Let’s additionally assume that in either case the general contractor has a provision in his purchase order to you, the subcontractor or materials supplier, with one of those hardly readable provisions on the back side of the purchase order which says something to the following effect: “Last Chance Construction Company’s responsibility to make payments under this purchase order is limited to payment of those funds received for this subcontractor’s account from the owner.”
What do you do when forty-five days after submitting a substantial requisition (or materials invoice) to your contracting party, your contracting party tells you that it has not even passed on that requisition (or materials invoice) to its contracting party or that its contracting party has not paid?
Enter the realm of the “pay-when-paid” clause! Namely, is language in a contract to the effect that payment will be made under that contract only when your contracting party gets paid binding on your rights to get paid?
Massachusetts’ law is somewhat critical of “pay-when-paid” clauses, but there is authority to support these clauses when the language in the clause is reasonably clear to operate as a ‘risk transference’ from the general contractor to the subcontractor of the risk that the owner will not paid.
One of the leading modern cases on this subject is the case of A.J. Wolfe Company v. Baltimore Contractors, Inc., 244 N.E.2d 717 (1969). This was an action at law brought by a subcontractor against a general contractor for amounts due under the subcontract and for extras. The Supreme Judicial Court, which is the highest court in the Massachusetts state court system, held that a provision of the subcontract that payment would be made by the contractor to the subcontractor on monthly requisitions for progress payments as received by the contractor from the owners as merely setting the time of payment and not creating a condition precedent to payment by the contractor to the subcontractor.
The specific language in question was as follows: Payments were to be made “. . . and within 10 days after (the owner’s) payment of such monthly progress payments. . . (has) been received by . . . ( Baltimore).”
The Supreme Judicial Court said on pages 720-1 of the decision that:
“We interpret Art. II(a) merely as setting the time of payment and not as creating
a condition precedent to payment. In the absence of a clear provision that
payment to the subcontractor is to be directly contingent upon the receipt
by the general contractor of payment from the owner, such a provision should
be viewed only as postponing payment by the general contractor for a reasonable
time after requisition (and completion of the subcontractor’s work mentioned
in the requisition) so as to afford the general contractor an opportunity to obtain
funds from the owner.”
In other words, the general contractor would be required to make payment irrespective of whether or not payment had been received from the owner and language as to when payments were to be made was to simply set forth a time period during which the general contractor could make a requisition to the owner for that subcontractor’s work. Such a clause is typically referred to as a ‘timing clause’.
Nine years later, the Appeals Court decided the case of Bayer & Mingolla Industries, Inc. v. A.J. Orlando Contracting Co., Inc., 370 N.E.2d 1381 (1978).
This was a case where a subcontractor brought an action against a general contractor on a state construction project for release of retainage held by the general contractor, inter alia. The Appeals Court held that where more than 65 days had passed since the subcontractor’s substantial completion and where there was no dispute as to the quality of the work performed by the subcontractor, the entire balance of retainage was due the subcontractor and was not contingent upon final payment from the owner. The pertinent portion of this decision is on page 1382 as follows:
“The plaintiff is correct in its contention that the phrase ‘upon receipt of
final payment by the owner’ should be interpreted as setting a time for
payment which is sufficient to give the general contractor an opportunity
to obtain funds from the owner, and not as creating a condition precedent
to payment where there is a dispute between the owner and the
general contractor not involving the subcontractor. (Case citation). The
defendant attempts to distinguish the Wolfe case on the grounds that it
involved progress payments whereas the present case involves retainage.
That argument is unpersuasive. The court in Wolfe, at 366 n. 8,
244 N.E.2d 717, cited with approval the case of Eastern Heavy
Constructors, Inc. v. Fox, 231 MD. 15, 19-20, 188 A.2d 286 (1963). In
that case, in which a retainage was to be paid to a subcontractor within ten
days after final payment by the owner to the general contractor, the court
upheld a decision awarding the subcontractor the full amount retained,
although the general contractor had not yet been paid in full by the owner,
on the basis that the subcontractor’s remuneration should not depend upon a
dispute between the owner and the general contractor as to matters not
concerning the subcontractors.”
A recent Massachusetts case on this issue in the case of Jeremiah Sullivan & Sons, Inc. v. Kay-Locke, Inc., 459 N.E.2d 837 (1984).
The court on page 838 cited both the Wolfe case and the Bayer & Mingolla case with approval noting that the latter case held that a ‘similar provision did not create a condition precedent to payment where there is a dispute between the owner and the general contractor not involving the subcontractor. The Appeals Court on page 838 talked of “clarity of language” necessary to establish a condition precedent. Moreover, in reviewing the record on appeal, the Appeals Court was looking for evidence that it was “clearly understood (by the parties) as a condition to payment” before finding a condition precedent.
In considering these three Massachusetts cases, it appears to me that the Massachusetts appellate courts have tightened up or restricted somewhat the ability to enforce a “pay when paid” provision. In the Wolfe case, the court would enforce such a provision where there was a clear provision that payment to the subcontractor would be directly contingent upon the receipt by payment to the general contractor from the owner. This rule was tightened up in the Bayer & Mingolla case as requiring the reason for non-payment to be involved with that subcontractor’s trade. The general contractor would not have to make payment when (but only when ) the dispute between the owner and the general contractor pertained to matters involving the subcontractor. This tightening up of the law was made more clear in the Sullivan case.
It is my sense that a court will generally enforce a “pay-when-paid” clause if the risk of loss clearly is transferred to the subcontractor (by the general contractor) or to the materials supplier (by a subcontractor or a general contractor).
What kind of language should you be looking for? What are the operative words? The following type language is probably a legally-enforceable pay-when-paid clause: “General contractor’s obligation to pay the subcontractor will be triggered when, and if, the general contractor receives funds from the owner as to the subcontractor’s line items.”
That language “and if” gives notice fairly clearly that the subcontractor is assuming the risk of the owner’s not paying the general contractor.
The following clause will most likely be enforced as a pay-when-paid clause: “In accepting this purchase order, the subcontractor acknowledges and agrees that the general contractor’s obligation to pay the subcontractor is strictly limited to when the general contractor has received monies from the owner on the subcontractor’s line items.” This language is a little more subtle than the prior example but will most likely accomplish the same result.
The key thing to keep in mind when evaluating a tendered subcontract or purchase order is to look for language which predicates or establishes as a condition precedent to your getting paid a payment received by your contracting party from its contracting party. Or, in other words, is the general contractor telling you that he will only pay you when and if the owner pays him?
Pay-when-paid clauses while not favored in Massachusetts are generally legally enforceable if clearly-enough drawn. Therefore, you should train those in your organization whose job it is to review tendered purchase orders and subcontracts for sufficiency to look at the language contained in the payment provisions to see if there is any attempt by your contracting party to transfer the risk of nonpayment from another to you. If that language is fairly clearly there, you could have difficulties convincing a court at some point in time that your contracting party is in breach for nonpayment.
As a practical matter, the presence of a fairly clear-cut pay-when-paid clause might be a factor you wish to take into consideration as to whether or not you want to do business with the party tendering this kind of language. As a practical matter, however, we see these clauses very frequently in custom drawn subcontracts, along with ‘no damage for delay’ clauses (only remedy a time extension, not money where there is a delay or suspension) and ‘unilateral right of termination’ clauses (the general contractor can terminate the further performance of the subcontract for any or no reason and not be subject to breach of contract lawsuits for lost profits.)
As in so many other areas in business (and in life) an ounce of prevention is worth more than a pound of cure.
Article I provides for retainage and provides for payment “no later than seven (7) days after receipt by Contractor of payment from Owner for Subcontractor’s work.”
This purports to be a pay-when-paid clause but, in my opinion, would not be a legally enforceable pay-when-paid clause in Massachusetts. In my opinion, this language does not constitute under Massachusetts law the ‘risk transfer’ which the three cases which have recently discussed the issue have found to be required to give effect to a pay-when-paid clause. As Article I of the AGC short form does not specifically provide that the subcontractor assumes the risk that the owner will not pay the general contractor, I believe that a Massachusetts court interpreting the language in Article I would simply state that payment is due from the general contractor within seven days from when the general contractor should receive monies form the owner for the subcontractor’s account, whether or not the general contractor actually does. 5
Concluding the discussion of Article I, keep in mind that ‘lien waivers’ apply only to mechanic’s liens which would be applicable to private work only, as only private work in Massachusetts (and, in every other jurisdiction I have been involved with) is subject to a mechanic’s lien. While there is little or not harm in signing a lien waiver (unless the lien waiver reads as a release), a public owner should not be concerned with having lien waivers inasmuch as its land is not subject to attachment by mechanic’s lien. This is so because of a specific provision in the Massachusetts General Laws which says so.
(ED: See our articles on “Making Sense of Lien Waivers and Releases” and “The New Massachusetts Mechanic’s Lien Law.)
B. ARTICLE II (Scope of Work)
The language in “SCOPE OF THE WORK” is probably sufficient to tie the subcontractor to perform in accordance with the schedule of the general contractor as contained (or provided for) in the general contract documents. As such, even though that deadline or deadlines are not set forth in the subcontract, the subcontractor will have to comply with them. It is best up front to be sure you have all milestones, including substantial completion and final completion, from the general contract documents in hand before signing the subcontract. Indeed, it is additionally helpful to know whether or not this job will be done under a critical path method, which might establish numerous potential mini ‘drop-dead’ dates, violation of which critical path dates possibly constituting a breach of your subcontract.
As this SCOPE OF WORK references the ‘Contractor’s schedule’ you should know whether or not such a schedule exists before you sign your subcontract. A subcontractor can get into problems when a general contractor, perhaps unknown to the subcontractor, has decided to accelerate its work. If your general contractor has a desire to accelerate this job above and beyond such dates as might be indicated in the contract documents, the time to know that is before you sign “on the dotted line.”
C. ARTICLE III (Schedule of Work)
Phrases such as “time is of the essence” often indicate that the contract might have a liquidated damages clause (whether in the subcontract or incorporated by reference from the general contract). When I am wearing my subcontractor’s attorney’s hat – I also represent material suppliers, general contractors and owners - I do not like the second paragraph of Article III which states that the subcontractor will comply with changes in the Schedule of Work for no additional compensation. If that language stands, if the job would change from a two year job to a one year job, which could possibly have a deleterious effect on the subcontractor, the subcontractor might not be entitled to additional compensation. Similarly, if the contractor took a one year job and made it into a two year job, that could rob any profit that there might be in the job or place the subcontractor into a precarious situation. I would want a clear understanding before signing this subcontract what the anticipated schedule of work was and attach the purported schedule of work to the contract, so that if the general contractor very substantially changed the schedule of work I would have some negotiating room for claiming that a significant change in the performance of the work would constitute a ‘cardinal change’ or a ‘ material change’ which was beyond any reasonable expectation at the time of executing the subcontract, thus entitling the subcontractor to additional compensation. Otherwise, I would like to x out that particular paragraph.
D. ARTICLE IV (Changes)
Article IV deals with changes. It will be no surprise for me to say that the issue of ‘changed conditions’ is one of the more difficult and complicated contractual provisions and issues.
Under this language, the subcontractor is required to make such changes as directed by the general contractor.
Note that adjustments for price and time are to be set forth in a change order “pursuant to the Contract Documents.” This is a particularly important issue to research through the general conditions, supplementary conditions and special conditions as to how and, more importantly, when a change order request is processed. If no specific procedure is provided for in the general contract documents for subcontractors’ changes, those provisions providing for how a general contractor’s change order is processed between the general and the owner will probably control the subcontractor absent contrary language in the subcontract.
E. ARTICLE VII (Indemnification)
What is a subcontractor’s obligations with regard to indemnifying the general contractor in personal injury situations?
Article VII attempts to provide indemnification by the subcontractor of not only the general contractor, but the owner, architect and the architect’s ‘consultants’, whoever they may be!
The indemnification is limited to claims or losses “caused in whole or in part by any negligent act or omission of Subcontractor or any of its agents, employees or subcontractors.”
The language in that second sentence is modified (to the subcontractor’s disadvantage) by the third sentence which requires indemnity even though the “claim or loss is caused in some part by a party to be indemnified.” What this means is that if any of the parties the subcontractor must indemnify caused some portion (but not a defined portion, such as less than 50% ) of the claim or loss, nonetheless, the subcontractor must indemnify them.
To the extent that a subcontractor is required by any contractual provision to indemnify a general contractor or others for the negligence of anyone other than the subcontractor or the subcontractor’s employees, agents or its subcontractors is void and unenforceable in Massachusetts because of Chapter 149, section 29C of the General Laws, providing as follows:
“Any provision for or in connection with a contract for construction, reconstruction, installation, alteration, remodeling, repair, demolition or maintenance work, including without limitation, excavation, backfilling or grading, on any building or structure, whether underground or above ground or on any real property, including without limitation any road, bridge, tunnel, sewer, water, or other utility line, which requires a subcontractor to indemnify any party for injury to persons or damage to property not caused by the subcontractor or its employees, agents or subcontractors, shall be void.” (Emphasis added)
Therefore, on the go in, at least a portion of this language is going to be unenforceable as a matter of law to the extent that indemnification is for acts and omissions other than the acts and omissions of the subcontractor. The reader should be cautioned, however, in that this is one of the more frequent appellate construction issues and there are usually several cases each year which consider, evaluate and tweak this issue.
Generally speaking, it may not be strictly (legally) necessary to x out language in a written document which is in violation of certain statutes and which cannot be waived by agreement of parties. As a practical matter, I would favor ‘x’ing out any language above and beyond indemnifying the general contractor for claims or losses caused by some act or omission of the subcontractor or of its agents, employees or subcontractors.
I can see no reason to indemnify the architect or the architect’s (mysterious and unnamed) ‘consultants.’ I cannot even see a reason to indemnify the owner, which is not a party to the subcontract and which would deny any obligations to the subcontractor because of a lack of privity of contract with the subcontractor.
As a practical matter, the way to protect oneself in large measure, particularly as regards negligence claims, is to give the contractual indemnity language to your insurance agent. Thus, you should not only give the insurance requirements portion of a subcontract to your insurance agent but also provisions which specifically require you, whether contained in the subcontract or in the general conditions of the general contract, to provide anything more than nominal indemnity for your allegedly negligent acts and omissions.
I suspect that actual practice among some subcontractors is to generally ignore insurance provisions and to nearly completely ignore indemnification provisions. These are things which must be arranged in advance of contract performance to protect yourself from possible business-threatening claims.
While I would want any subcontractor to take this most seriously, I would specifically encourage those subcontractors involved with hazardous activities such as electricians, excavators and demolition contractors to especially be sensitive to these particular issues. In today’s civil tort litigation, seven figure (million dollar) verdicts are no longer uncommon and I have personal knowledge of some cases where seven figure or near seven figure awards have been given for injuries as relatively small as losing a finger with some damage to a hand.
Insurance subjects and matters which could be covered by insurance, such as most indemnification provisions involving negligence, should be addressed by an insurance agent before you begin working; to address these matters after you begin working is too late.
What are liquidated damages? When are they operative?
Liquidated damage clauses provide, in essence, that a general contractor will be entitled to receive from the subcontractor so many dollars for each calendar day that the subcontractor exceeds its contract time without proof of special damages. This is not in and of itself or by definition innately harmful to a subcontractor’s interests.
Absent the specific provision for a liquidated damages clause, general contract rules suggest that a party which breaches a contract is responsible for all consequences which flow from the breach, introducing the concept of consequential damages. Thus, in a particular circumstance the costs in actually remedying a breach might be relatively insignificant, while the consequences of that breach might be disproportionately large. 6 Assume, for an example, that a life-safety subcontractor for one reason or another fails to order a long-lead item necessary to achieve certification of a nursing home. It may be that if the general contractor has to order this part (or the subcontractor orders this part and completes the work itself) that the actual costs to the general contractor for doing this work might be relatively insignificant. If, on the other hand, the owner was deprived of income from the nursing home for a period of 6-8 weeks, the consequential damages could geometrically be larger than the costs of providing the missing items.
The concept of liquidated damages, therefore, has some sense of inherent fairness in that a subcontractor will not generally be aware (or, as aware) of the particular consequences of not meeting a completion date. By specifying a certain sum for each calendar day of late completion, at least the subcontractor can have an accurate understanding of his downside for failure to meet a contract date.
Massachusetts will generally enforce a liquidated damage clause. If, however, the liquidated damage clause does not appear to approximate a prior and good faith expectation of attempting to liquidate consequential damages in advance, but, rather, the figure constitutes a penalty, a Massachusetts court will not enforce the same. The following are some judicial statements on the subject.
In regard to situations in which liquidated damages provided for in a default provision of a contract are unreasonably and grossly disproportionate to the real damages from a breach, the damages recoverable are limited to actual damages. Begelfer v. Najarian, 409 N.E.2d 167 (1980).
Where actual damages for breach of contract are difficult to ascertain and where a sum agreed on by parties for payment in event of breach represents a reasonable estimate of the actual damages, such a contract will be enforced. A-Z Service Center v. Segall, 138 N.E.2d 266 (1956).
Under Massachusetts law a liquidated damages provision will be enforced where actual damages are difficult to ascertain and where the sum agreed upon by the parties at the time of execution of the contract represents a reasonable estimate of those damages. The clause will not be enforced where the sum is unreasonable or grossly disproportionate to real damages. In Re: Lipman Brothers, Inc., 35 B.R. 178 (Bankruptcy, 1983).
What are ‘sealed contracts’? How do they differ from ‘unsealed’ contracts?
Note that in the signature paragraph are the following words: “. . . the parties have executed this Agreement under Seal . . .”
Massachusetts, in effect, recognizes two levels of formality of contracts: unsealed contracts and sealed contracts.
Now, I am not talking about the seals at Sea World! I am talking about a rather archaic Massachusetts concept – which started in the Old Country across the Pond - that certain contracts when signed with the impression of sealing wax have an inherent presumed increased degree of formality so that one can sue on them for twenty years rather than the six year period normally allowed for on actions on Massachusetts contracts.
Many contract forms include provisions for execution “under seal.” Merely having that language in the signature paragraph can extend the limitations period (the time within which suit can be brought) from a period of six years to a period of twenty years without anything further.
As six years is plenty of time to commence an action against a subcontractor (or, for that matter, an action by a subcontractor against a general contractor), I would try to x out these words - “under Seal”- to keep the limitations period to within six years.
V. AIA A401 SUBCONTRACT
I have saved a longer version of a form subcontract for the last part of our discussion: perhaps, in a sense the best for last.
The AIA documents, inasmuch as they are all intended to more or less complement one another and inasmuch as the subcontract is lengthy (this version some ten pages in length), calls for us all to be a little more on our toes and to understand what we are doing when we sign one of these forms of contract. The fact that the document starts out with the sentence that: “This document has important legal consequences; consultation with an attorney is encouraged with respect to its completion or modification” is not an exaggeration or an overstatement.
The reason that this document is reasonably fair to subcontractors is not hard to divine. The AIA drafts documents to reflect the interests of the architect and of the owner and the one thing that an owner wants is a project to go through with a minimum number of changes and without any mechanic’s liens, if possible. By providing for prompt pay from the general contractor and clearly defining a general contractor’s obligation to pay subcontractors even where the general contractor has not retrieved monies for the subcontractor’s account from the owner are only two provisions which a subcontractor would find to be highly desirable and are designed to keep the subs working.
One of the most important things to do, however, when dealing with AIA contracts is that most of them have accompanying general conditions, which need to be looked at (if not studied.)
Don’t guess on whether your insurance is sufficient: your agent gets paid commissions to ‘service the account’ and your questions about coverage are part of the deal
As I indicated above, in any subcontract situation, a subcontractor must give the indemnification and insurance requirements to his insurance agent and make sure that the subcontractor’s insurance is sufficient to meet indemnification and/or insurance requirements of the subcontract. Indeed, failing to meet the insurance requirements of the subcontract could cause the subcontract to be deemed as breached. Many of the larger general contractors have sufficient staff with sufficient expertise to check insurance coverages from insurance certificates and are not reluctant to advise subcontractors when they are technically in breach of contract for failing to meet the insurance requirements.
Indemnification often requires ‘contractual liability’ coverage, which may not be a standard part of an insurer’s comprehensive general liability policy. In many instances it is often good for a subcontractor to have excess umbrella coverage above and beyond the underlying comprehensive general liability insurance. For example, if a subcontractor ordinarily carries a $1 million comprehensive general liability insurance policy, he might also carry another $5 to $10 million in excess coverage to cover him for a really big “hit.”
Other types of coverage within the excess (umbrella) coverage might be helpful. For instance, it may be very worthwhile for a subcontractor to make sure that his excess coverage has a ‘first dollar defense’ or ‘drop down’ provision. These two types of provisions require the excess carrier to defend the subcontractor in tort litigation should a claim be made against the subcontractor and for whatever reason the primary insurer does not come in and defend. Often times, when there are claims made against subcontractors, insurance companies because of a failure of completely understanding the situation, ignorance or for good and valid reasons will refuse to provide a defense under the comprehensive general liability policy. By having a ‘first dollar defense’ or ‘drop down provision’ in the excess coverage policy, the subcontractor (insured) is guaranteed another insurer to come in and at least pay for the cost of defense of the litigation, which with a serious injury can be rather substantial.
The issue of change order work without the change order
Article 5. 2 requires the subcontractor, prior to the commencement of changed or revised work, to submit promptly to the contractor written copies of a claim for adjustment and for contract time.
From a legal standpoint, it is hard to visualize a situation where a subcontractor should perform changed work without having, at minimum, written direction from the general contractor to do so. If there is no written direction to do what the subcontractor considers as extra work, there might be a difference of opinion at some later point in the job between the general and the sub as to whether or not that piece of work was extra work or not. If at all possible, there should be a fundamental agreement on price and any extra conditions involved with performing the changed work - including any necessary extension of time to complete the subcontract work, including the change - before the work is actually done.
I recognize, after saying this, that the realities of the construction business are going to dictate in many instances - probably the majority of instances - against having the proper paperwork in place prior to doing the work. In my view, simply having a general contractor’s superintendent sign a so-called “extra work order” indicating the names of individuals, times of performance and materials used in performing an alleged extra item of work is not sufficient for these purposes. General contractors may later argue that a superintendent in signing these types of documents is simply verifying that labor and materials were performed by a subcontractor on the date indicated; but, that such signature does not constitute an acknowledgment that the performance of such labor and materials was extra work and/or that the prices added on to the labor and material (whether in the field or, as more usually happens, later in the office) do not represent an acknowledgment of the value of this work. Calling your lawyer after you have a problem is not unlike contacting the health club and a nutritionist after one has one’s first heart attack; it is very late, perhaps too late to do much good.
Arbitration: pluses and minuses
Article 6 discusses arbitration. Arbitration has certain advantages over court. At present, a superior court case is not reached for trial for a minimum period of about three years in an average construction case. (ED. Elsewhere on this site is an article entitled “The Litigation Process”, which may be of some value to litigation neophytes to get some idea of what the process entails.) Prior to trial, various discovery mechanisms such as depositions, interrogatories, requests for production of documents, the propounding and answering of requests for admissions take place. Often times, these procedures can be very expensive and an economically superior adversary can take advantage of his adversary’s lesser ability to pay for the same. It is not at all unusual to have a construction case cost ten or more thousand dollars in attorneys’ fees before the case ever goes to trial - often more.
Arbitration in some ways is more attractive or, at least, superficially so. For one thing, the only discovery procedure allowed prior to hearing - and only with the permission of the arbitrator, although usually give - is an exchange of documents. Ordinarily, there are no interrogatories and no depositions.
Theoretically, the matter will come to trial more quickly than with court. The AAA often is very quick to schedule the first date of hearing, although sometimes cases have a way of bogging down in having to wait a period of time between arbitration dates.
Arbitration is not inexpensive for a multi-day hearing with multiple arbitrators. (Generally speaking, on the majority of arbitrations, the American Arbitration Association usually only assigns one arbitrator.)
There is a filing fee when the case is filed. These fees are pretty high. Based on the most recent rules I have found published, the filing fee is five hundred dollars for cases less than ten thousand dollars, seven hundred fifty dollars for cases between ten thousand and seventy-five thousand dollars and fifteen hundred dollars for cases between seventy-five thousand and one hundred fifty thousand dollars. As the elevator operator on the forty-five floor at the Empire State Building says: “and we go up from here”.
Apart from that, there is also a daily fee for an arbitrator. Most of the better arbitrators charge between three and four hundred dollars per hour, which ain’t bad pay in any man’s army. The parties have to split and ‘up front’ these costs as the case goes along. My sense is, generally, that cases take longer to try before an arbitrator because of several factors, including the fact that rules of evidence are not strictly adhered to, parties are probably generally less prepared than they are in a court trial and with periods of days and weeks between hearings continuity is lost.
There is a case set up fee and a daily room fee, as well. Compare these fees with the cost of an ordinary civil case. For example, the filing fee for a superior court civil action in 2004 is two hundred seventy-five dollars. That used to be the only fee paid. Recently, there is now a new ‘anniversary fee’ of one hundred twenty dollars that the Plaintiff has to pay for each year the case is pending after the first year.
From a legal standpoint – and my biggest problem with arbitration - a court judgment in some ways is preferable to an arbitrator’s award in terms of appeals. Quite simply, there are very few grounds for attacking an arbitrator’s decision, unless one can demonstrate clear partiality or bias on the part of the arbitrator.
Massachusetts case law is very clear that even if it can be demonstrated that an arbitrator made a misapplication of legal principles to the facts or simply did not understand the law involved with the issue in the case that courts will not easily disturb arbitration awards.
With a district court civil trial in the Massachusetts Court system, generally speaking, at least the defendant has a right to appeal to the superior court for a new trial if he loses. With a superior court trial, an unhappy litigant can appeal directly to the Appeals Court for a review of the legal issues and in some circumstances can appeal directly to the Supreme Judicial Court, the highest court in the state court system in Massachusetts. After one has had one’s hearing in the Appeals Court, one can petition the Supreme Judicial Court for further appellate review. With either an appeal before the Appeals Court or before the Supreme Judicial Court, the matter including all contentions of error of law or evidence being admitted are fully-briefed and each party is given an opportunity to fully argue its position.
These remedies are largely unavailable in an arbitration case. From a practitioner’s standpoint, the possibility of an appeal keeps judges honest. What I mean by that is that judges tend to be more conservative and tend to follow the law more closely when they are aware that they are subject to having their knuckles rapped by an appellate judge. There is no such safety mechanism in arbitration. The arbitrator is more powerful than a judge and most of the arbitrators know this and some act with that knowledge. While arbitration is supposed to be ‘gentler and more kind’ than litigation,
it quite often isn’t, particularly in terms of the very short time periods the American Arbitration Association gives the attorneys to respond to different issues as they come up.
Pursuant to Chapter 251, section 12 of the General Laws, a court will only vacate an arbitration award if it finds that:
“(1) the award was procured by corruption, fraud or other undue means; (2)
there was evident partiality by an arbitrator appointed as a neutral or
corruption in any of the arbitrators, or misconduct prejudicing the rights of
any party; (3) the arbitrators exceeded their powers; (4) the arbitrators
refused to postpone the hearing upon sufficient cause being shown therefor
or refused to hear evidence material to the controversy or otherwise so
conducted the hearing, contrary to the provisions of section five, as to
prejudice substantially the rights of a party; or (5) there was no arbitration
agreement . . . .”
Proving “corruption, fraud or other undue means, partiality or misconduct” on the part of an arbitrator is exceptionally difficult to do.
The following are some brief notes as to decisions demonstrating how difficult it is to attack an arbitrator’s finding. Arbitration awards are viewed with great deference; this judicial deference extends to the area of remedies. Taunton Mun. Light Plant Com’n v. Paul L. Geiringer & Associates, 360 F. Supp. 1249 (District Court of Massachusetts, 1983). The role of courts in reviewing an arbitrator’s award is limited. The Supreme Judicial Court cannot pass on an arbitrator’s alleged errors of law and, absent fraud, cannot overrule an arbitrator because the court gives a contract a different interpretation. Concerned Minority Educators of Worcester v. School Committee of Worcester, 466 N.E.2d 114 (1984). Under the statute governing the limited scope of judicial review of an arbitrator’s award, a court’s determination in the absence of fraud, arbitrary conduct or procedural irregularities in the hearings, is largely confined to whether or not the arbitrator’s award conforms to the terms of the reference submitted to him by the parties. The City of Worcester v. Borghesi, 477 N.E.2d 155 (1985). In the absence of fraud, neither errors of fact nor errors of law are sufficient to set aside an award of an arbitrator, and substantially the same rule which applies to the award of an appraiser applies to an award of an arbitrator. Cambridge Sheet Metal Co., Inc. v. Corrao, 566 N.E.2d 1145 (1991). Once an arbitration award is rendered, it is to be judicially enforced in the absence of fraud, even if the arbitrators have committed errors of fact or law in arriving at the decision. Geller v. Temple B’Nai Abraham, 415 N.E.2d 246 (1981).
In any event, it is almost a moot question to even attempt to question the findings of an arbitrator, inasmuch as typically an arbitrator makes a one or two sentence award without subsidiary findings. By contrast, a superior court judge hearing a case jury-waived is required by rule to make subsidiary findings which explain the factual basis of his decision. Similarly, a master 7 makes subsidiary findings as well as ultimate findings of fact in his reports.
Some cases do favor arbitration, however. There is a common conception about arbitration among both lawyers and litigants that arbitrators tend to give “half a loaf.” One might think, for example, that with a case with very questionable claims or defenses a party would do better in arbitration than in court, particularly where the claims or defenses which are being asserted may or may not have been in compliance with notice or other requirements in a contract or as required by statute. Because arbitration is not done strictly in accordance with the rules of evidence, failing to comply with “conditions precedent” and other contractual niceties might be easier to explain before an arbitrator than before a court of law. Also, often contractors and architects sit as arbitrators and have a more practical orientation to construction problems than do judges. For instance, another contractor would be a lot less inclined to be critical of another contractor’s failure to write a letter in a certain circumstance.
What is mediation?
Mediation is a more-or-less non-adversarial process whereby the parties go in front of a non-judicial neutral for three or four hours (each side pays somewhere between one and two thousand dollars for the pleasure) and through a controlled series of meetings, the parties try to work out a solution. The mediator does not ‘decide’ the case but points out to each side the flaws in its own position and works to fashion some kind of solution. In other words, this is a kind of ‘controlled’ settlement meeting. There is very little preparation that is needed for this meeting - typically, each party submits a relatively short memorandum to the arbitrator before the day of hearing - and no ‘decision’ is issued. This is, also, non-binding. If this doesn’t work, then the parties can go to arbitration or sue, as their contract allows.
In summary as to this particular form, which comments apply to any form of subcontract which is tendered to you or which you tender to a general contractor, care should be given to tailor specific provisions for specific projects. Factors such as your familiarity with the general contractor, your familiarity with the owner and/or the owner’s sufficient capitalization (financing) for the project to include change orders, your immediate need to have that particular project and the profitability of any particular subcontract are only a few factors to be taken into consideration before agreeing to sign any particular form of subcontract with or without modification.
VI. CONCLUSION
In the course of this article, we have attempted to hit some of the more significant points of contract law. This paper is taken from a course I teach at the National Association of Credit Management every winter (usually, three successive Mondays in late January, early February.) If you are interested in attending, they are in the book and are located in Needham, MA.
(This paper and presentation is intended for educational purposes and should not be considered as specific legal advice for specific situations facing you. This subject matter is complicated and cannot be presented with any ultimate degree of accuracy and finality in a one-half day session to non-lawyers. For teaching purposes, some cases and trends have been generalized. The fact that some cases have been recited does not mean that there are not other cases which have held differently. Really, the purpose of this article is not to provide an exceptionally accurate ‘snapshot’ of Massachusetts law at present. Rather, the purpose of the seminar has been to identify what the issues are and what the key concepts are in working one’s way through them.)
Copyright 2002 Jonathan Sauer
1Analogous to the subcontractor-general contractor relationship and of direct importance to material suppliers, whose relationships with subcontractors and general contractors involve only the supplying of materials without the provision of labor inherent in the subcontractor-general contractor relationship, is the Statute of Frauds provision in the Uniform Commercial Code applicable to situations involving the sale of goods: C. 106, §2-201(1) of the General Laws provides:
“Except as otherwise provided in this section a contract for the sale of goods for the price of five hundred dollars or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker . . . .”
Therefore, absent a writing, you might not be able even to sue a contracting party - let along recover - if your “deal” is not in writing.
2The statutory subcontract applies specifically to the construction of “buildings,” which is, generally, the subject of Chapter 149, Section 44 and its various subsections. The reconstruction of the Southeast Expressway and its bridges would be considered “public works,” which is generally contained within Chapter 30, Section 39 of the General Laws. These provisions in many instances overlap and in many instances are mutually exclusive. Therefore, to be filed for future reference in terms of public work in Massachusetts is to remember that the laws relating to “public works” and laws relating to the construction of “public buildings” are largely separate and may be in many instances inconsistent.
3Chapter 149, section 29 of the General Laws by its terms applies equally to public buildings and public works.
4This is not unanalogous to a situation of filing a short form income tax: which of the two parties, taxpayer or Internal Revenue Service, obtains the real advantage in filing a short form?
5There are several circumstances whereby the general contractor would not receive monies from the owner for the subcontractor’s account. Sometimes in order to obtain leverage between the general contractor and the subcontractor, the general contractor might simply fail to requisition for the subcontractor’s line items. Or, the owner might not pay the general contractor for the subcontractor’s line items because of a dispute between the general and the owner not pertaining to those line items; in other words, the owner is exerting leverage over the general. Of course, in addition to these two circumstances, an owner might refuse to pay a general because it feels that the sub’s work is overstated or otherwise deficient.
6In the summer of 1988 while representing a surety, I advised the surety to finance an ailing subcontractor bond principal - which is not favored in the surety business - because the owner was going to allegedly incur $35,000 per week consequential damages for each week its nursing home remained unopened after the completion date.
7A ‘master’ is a lawyer sitting as a judge, technically bound by the rules of evidence, but whose hearings otherwise are not dissimilar from an arbitrator’s hearings, inasmuch as cases generally take several, non-sequential days to try.