Beware of 'subcontract cancer' • Legal Desk, October 2018
November 27, 2018 - While the title of this article may seem somewhat harsh, there is a trend in subcontract language today we need to address because it could cause ‘project cancer.’
That trend involves a subcontractor’s ability to make a claim against the general contractor only to the extent that the general contractor can advance a claim against the owner and is successful in that particular claim. The phenomenon is sometimes also referred to as ‘equivalent project relief.’
This dangerous wording manifests itself in the following example:
The Subcontractor acknowledges the rights of the General Contractor under Article 6 of the Prime Contract, in respect of Equivalent Project Relief. Accordingly, except as may be specified elsewhere herein, the Subcontractor shall be entitled to the benefit of any Equivalent Project Relief to which the General Contractor becomes entitled under the Prime Contract arising out of any Variation or Supervening Event thereunder, but in any event to no greater extent than that received by the General Contractor under the Prime Contract in respect of the Subcontract Work.
(a) With respect to such Equivalent Project Relief, it is further understood and agreed that this Subcontract incorporates by reference the provisions of the Prime Contract in respect of Equivalent Project Relief, applied on a mutatis mutandis basis to the General Contractor and the Subcontractor in connection with this Subcontract, such that the Subcontractor shall, subject to this Section, be entitled to seek the benefit of the rights and relief available to the General Contractor in relation to Equivalent Project Relief on the basis that the General Contractor is entitled to seek such rights and relief under the Prime Contract, provided that such entitlement of the Subcontractor shall be limited to the extent such rights and relief are applicable to, and available for, the Subcontract Work performed or to be performed by the Subcontractor under this Agreement.
(b) For greater certainty, in no event shall the Subcontractor be entitled to receive any compensation or extension of time relating to the Subcontract Work in an amount greater than the compensation or extension of time that the General Contractor actually receives from the Owner in respect of the Subcontractor's claim for Equivalent Project Relief as described in this Section. For greater certainty, in the event that the General Contractor seeks or claims rights or relief under Article 6 of the Prime Contract in relation to the same matter for which the Subcontractor is seeking or claiming rights or relief pursuant to this Section that are different from or in addition to the Subcontractor's claims, such claims by the General Contractor shall be pursued by the General Contractor in its own right and not for the benefit of the Subcontractor. The Subcontractor shall not be entitled to any portion of the Equivalent Project Relief acquired or recovered by the General Contractor from the Owner in respect of the General Contractor’s claims for such differing or additional rights and relief.
What does it really mean?
I doubt you read the entire foregoing excerpt. No one does. The wording is so difficult to read and absorb, it is completely understandable that you would simply move on to the next and more readable portion of the text.
The danger in doing so is the foregoing wording acts as a waiver of claims that you, as a subcontractor, might have against the general contractor, except for when that general contractor (a) can advance your claim against the owner and (b) is successful in the claim against the owner. In other words, you will only recover what the general contractor recovers from the owner and, thus, you effectively provide a waiver to the general contractor for any damages to you.
If you were delayed, for example, and that delay were caused or contributed to by the general contractor, then you would have no claim. By agreeing to such language at the outset, you have effectively waived your ability to make any claims against the general contractor, the party with whom you have a contract, when the general contractor causes or contributes to that delay.
Ultimately, the danger lies in ignoring the wording and not pushing back on it or addressing the associated risks in your price and your project execution plan.
To some degree, it is the same as not wearing sunscreen and standing out in the sun for hours. At first, you may just get the odd ‘burn’ here or there—but ultimately, agreeing to such clauses on an ongoing basis could eventually give you project cancer.
This column originally appeared in the October 2018 issue of Electrical Business.