Taking Care of Details in GC-Sub Contracts

The relationship between general contractors and subcontractors can be very informal, but that’s an invitation for legal problems down the line.

by C. Jaye Berger

General contractors spend weeks, if not months, negotiating contracts with owners on new projects until they “get it right.” They and their legal counsel spend hours refining the terms and contract language so that both sides can trust that everything is included in the contract and so that the work can move forward.

However, after all of this work has been done refining the contract with the client, many general contractors then drop the ball in passing on contract obligations to the subcontractors, who may be performing the majority of the work.

No matter how large the project, subcontractors can still be found doing work with little more than a purchase order outlining the terms, if there is even that. Many important provisions from the prime contract should trickle down to the subcontractors, but that requires the parties to spend just as much time negotiating, drafting, and signing those contracts as the general contractor did with the owner.

There are many terms that should be black and white in written agreements with subcontractors, but often are gray instead. Here are a few examples I come across in my negotiations for clients:

Insurance 

This is a black and white issue: You either have the proper insurance or you don’t. I have seen subcontractors provide certificates of insurance with another company’s name on it, not their own, and on a couple of projects, no one even noticed this until there was a problem. It makes for a very complicated litigation.

I have also seen a situation where the contract required the subcontractor to provide insurance, but no one ever checked to see that the firm actually acquired it. The subcontractor acquired it several weeks after the project had started – and after two accidents had occurred.

Some general contractors seem to believe that if a subcontractor provides a certificate of insurance before it begins work, then nothing more is needed. That is short-sighted and incorrect thinking. Many insurance policies call for a signed contract between the parties requiring the subcontractor to have insurance, because having the certificate alone is not enough to trigger coverage.

There are also instances in which the subcontractor never acquired workers’ compensation insurance. If one of the subcontractor’s workers is injured and the firm does not have workers’ compensation insurance, the worker will likely look to the general contractor’s policy.

Indemnification 

The owner always passes down indemnification to the general contractor and it should also flow to the subcontractor. Even though common law indemnification exists, in order to also have contractual indemnification, there must actually be a provision in the contract.

The presence or absence of such a provision becomes a big issue when someone is injured on the job and all parties are joined in the lawsuit. Who should bear the cost of the damages and the burden of defending the lawsuit? Such provisions can result in one party taking over the defense for another party.

Dispute resolution 

General contractors will often negotiate to have dispute resolution provisions, such as mediation and arbitration, in their contracts. But general contractors do not always have these provisions in contracts with their subcontractors.

This can create strange and inconsistent results because while the owner and the general contractor may be arbitrating their dispute, a related conflict between the general contractor and subcontractor may be litigated in court.

It is rare for a party to agree to arbitrate voluntarily once a dispute has arisen. However, a subcontractor may voluntarily agree to mediation at the start of a project.

If the owner and general contractor have alternative dispute resolution provisions in their contract, it is wise to consider having such provisions in the contract with the subcontractor from the beginning.

C. Jaye Berger, principal of Law Offices C. Jaye Berger, is a construction, real estate, and litigation attorney in Manhattan whose clients include owners, developers, contractors, architects, engineers, interior designers, co-ops, and insurance carriers.