Construction contracts have become quite ambiguous and, as such, open to interpretation. Yet, a written contract entered into by two agreeing parties is the primary document used to substantiate work to be done and, consequently, liabilities to be undertaken.
There are standard contracts used in construction (such as the AIA contract), but each party must pay attention to what they are agreeing to.
If we think back to the 70s and 80s, contractors did their work and litigation was much more scarce. Today, it’s not the same; the higher-up party on the food chain (i.e. developer, general or prime contractor) usually requires full contractual indemnification from the parties they are hiring to do the work.
Developers, general contractors, subcontractors and their tiers, all enter contracts agreeing to take on and defend much more liability than they may be aware of.
But if you want the job, you must sign the contract with the developer and/or the general contractor. This has become normal, where the contractor must “indemnify and hold harmless to the fullest extent of law” the party they are contracting with.
This is how upstream and downstream liabilities are created as pictured in the graph below:
So now that the stage is set, what could go wrong? The answer is: A lot!
Here are some examples:
The bottom tier sub-subcontractor signs a contract with the subcontractor to perform work.
This contract states that they must name the subcontractor as additionally insured on their insurance policies. A claim occurs due to the sub-subcontractor’s activities, and the subcontractor, general contractor and developer are all brought into a lawsuit.
Each party seeks indemnification from the sub-subcontractor’s insurance.
The problem here is the sub-subcontractor only entered a contract with the subcontractor, who is indemnified and so the insurance company responds.
But the general contractor and developer are not privy to that contract and are not indemnified. They will have to defend themselves. Their own insurance “may” respond, although many insurance carriers now require that proper downstream contracts are correctly in place.
It should be noted that the developer and/or general contractor may have required the subcontractor to obtain proper indemnification from the sub-subcontractor.
If this contractual chain of indemnification is not correctly written, the chain is “broken” for the upstream/downstream liability. This usually results in lawsuits that could have been avoided.
By now, everyone should be aware of Labor Law 240/Scaffold Law.
This law was written in 1895 for New York and basically gives strict liability to a property owner for safety of all construction work done on their property.
If a contractor or any tier subcontractor is hurt due to job-site safety issues, they can look to sue the property owner/developer.
Property owners now require contractors and subcontractors to indemnify them to “the fullest extent of law,” so now this safe workplace responsibility contractually moves downward from the developer to the general contractor, to the subcontractor, etc.; as long as the contract is written correctly.
In this scenario, the contracts are correctly written so that downstream liability flows consecutively to each contractor.
Each tier of contractor also requires their subcontractor to maintain insurance policies applicable to the subs work, with no exclusions for what they are doing. If any tier subcontractor’s insurance excludes a claim (i.e height exclusion, labor law exclusion, etc.), that claim will move up the ladder to the next tier and their insurance.
A contractor or developer of any tier will need a good team of back-office vendors to tackle these obstacles on an ongoing basis.
For the two scenarios discussed above, a good attorney and insurance representative can assist to ensure a contractor or subcontractor has property drafted contracts and insurance policies that apply to and cover their responsibilities.
It is prudent to address these items and responsibilities prior to any issues taking place, so that all parties are exactly where they need to be in the stream if and when incidents occur.
Claims, litigation and insurance should remain where they belong — without any surprises in the chain — for the longevity of each entity.
CMC Network brings together these back-office vendors, along with others, to assist our members with issues just like these.
Our members have a complete team of professionals who work together and share information to protect from issues that can be avoided. We have the foresight to set our members up for success and avoid the pitfalls of the construction industry.
We welcome new members to learn about our processes to help them succeed with a profitable legacy.