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Subcontractors have little bargaining power, even in the best of times. The situation is exacerbated in a down economy, when new projects are scarce and competition is fierce. Contractors experience the same market forces, albeit on a different scale, and yet the current reality is that many contractors are successfully forcing onto subcontractors standard terms that are so unfair, onerous and one-sided that were they proposed by an owner, the same contractors would never agree to the terms, even in this economy.

Why should owners care if subcontractors are getting the short end of the stick? Because subcontractors must inevitably build the costs of the additional risks into their prices, in the long run if not at present. This is already evident in contractors鈥� increased use of 鈥渟ubguard鈥�-type insurance 鈥� that is, insurance taken out by contractors against default by the subcontractor, usually for the contractor鈥檚 sole benefit, the cost of which may be passed onto subcontractors but is ultimately borne by owners one way or another.

Which subcontract terms are so egregious as to warrant concern about rising project costs? Subcontractor indemnities tend to make the best candidates. Indeed, indemnities broader than Greg Oden鈥檚 wingspan seem to have become the norm. But indemnities are not the only culprits. To belabor that point, here are the 鈥渢op 10鈥� egregious clauses from subcontracts issued so far this year (excluding indemnities and in no particular order):

Adhesion contract
鈥淭his subcontract must be executed below鈥�without modification. If not, and if subcontractor elects to perform any of the subcontract work without first securing a fully executed subcontract, then subcontractor shall be deemed to have accepted this subcontract, unmodified, as issued. Subcontractor鈥檚 delivery of the subcontract without modification鈥�(is an) express condition precedent to any payment to subcontractor.鈥�

Contract interpretation
Where there is a conflict between provisions of the subcontract, 鈥渢he interpretation that is more costly to, or which imposes the greater duty upon the subcontractor shall control.鈥�

Payment waivers
Subcontractor鈥檚 receipt of final payment 鈥渟hall constitute a waiver of any past, present or future claims by subcontractor arising out of or relating to the subcontract.鈥�

Pay if paid, with a twist
鈥淪ubcontractor acknowledges and agrees that owner鈥檚 payment to contractor鈥�is a condition precedent to contractor鈥檚 obligation to pay such amounts to subcontractor. Subcontractor further acknowledges that it is relying on the credit and ability of the owner to pay for work performed and not contractor and accepts the risk that it will not be paid by contractor for work performed in the event contractor is not paid by owner for such work.鈥�

A condition precedent to final payment
A 鈥渃omplete and full satisfaction of all claims, demands and disputes鈥�arising out of or related to the subcontract,鈥� expressly including disputes between subcontractor and any third party.

Responsibility for the design of others
鈥淪ubcontractor shall be responsible for the coordination of all drawings and design documents relating to subcontractor鈥檚 work, whether or not such drawings and documents are prepared or performed by subcontractor, subcontractor鈥檚 subtier-consultants, or others. If design work has been performed by others, subcontractor is nevertheless fully responsible for, and accepts full responsibility for, such earlier work, as fully as if all work had been performed by subcontractor itself.鈥�

All control and no risk
鈥淐ontractor shall be entitled to decide the time, order and priority for performance of the various portions of the subcontract work to the extent necessary, in contractor鈥檚 judgment (to comply with the prime contract schedule), and to direct the performance of the work accordingly. Subcontractor shall not be entitled to an adjustment of the subcontract amount or an extension of time in connection with any such direction by contractor as the subcontractor shall anticipate and provide for such activities in the (subcontract price and schedule).鈥�

Unilateral limitation of liability and release
鈥淚n no event shall (contractor, owner or their employees, affiliates, etc.) be liable to subcontractor鈥�for any consequential, special, incidental, indirect, exemplary, multiple or punitive damages or damages arising from or in connection with loss of use or loss of revenue or profit, actual or anticipated or otherwise, and subcontractor hereby releases each of (the above-noted parties) from any such liability.鈥�

Unilateral dispute resolution
鈥淓xcept as otherwise provided in the subcontract, contractor shall initially decide all disputes arising out of the subcontract鈥�Contractor鈥檚 decision shall be final and conclusive unless subcontractor advises contractor in writing within 48 hours of receiving the decision of the basis for its disagreement with the decision. Subcontractor agrees that if it does not contest the contractor鈥檚 decision within the time and in the manner required under this (section), contractor鈥檚 decision shall be final and conclusive and the subcontractor shall be deemed to have waived any right to contest the decision.鈥� (The provision gives contractor the unilateral power to choose arbitration or litigation as the means for resolving disputes not waived pursuant to this clause.)

Pre-assignment of agreements
鈥淪ubcontractor hereby assigns to contractor, as security for subcontractor鈥檚 performance hereunder, all lower tier subcontracts and all other contracts, purchase orders, equipment leases and other agreements entered into in connection with the project, and appoints contractor its attorney in fact to enforce said contracts according to their terms.鈥� Such assignments are 鈥渙perative only upon notice by contractor.鈥�

So, what is the solution? One possible solution, provided that contractors accept it, is for the owner to impose on the contractor an obligation to ensure that its subcontracts for the project treat subcontractors no less favorably than the contractor is treated under the prime contract, except where reasonably necessary to enable the contractor to meet its obligations thereunder. It is not uncommon, after all, for prime contracts to require contractors to include various 鈥減ass-through鈥� provisions in their subcontracts. Why not a pass-through of fairness?

Adam Walters is an attorney in the construction and design practice group at Stoel Rives LLP. Contact him at 206-386-7675 or [email protected].