By Craig T. Watrous:
Here is a short list of 8 items for the subcontractor to consider when negotiating in its Master Services Agreements (MSAs) with the owner/general contractor.
1. Standard of Care. A specific standard of care should be spelled out in the MSA. Leaving your work open to the
“satisfaction” of the general/owner is a dangerous proposition. Consider where the standard is applied, for example the location of where the work is being provided. Putting in a defined quantifiable standard helps avoid possible confusion and disputes. Typical language might read something like the following: “the subcontractor shall perform in a manner consistent with and limited to that degree of care and skill ordinarily exercised by members of the same profession currently practicing under similar circumstances at the same time and in the same or similar locality.” Keep in mind that being silent on the standard of care or agreeing to complete the work to owner’s satisfaction leaves a lot of discretion with the owner/general to complain about work that may be perfectly compliant with industry guidelines.
2. Warranty. Disclaim warranties if possible, certainly those that are implied. If a warranty is given, then think carefully about the term and what is covered. Do you want the ability to repair/replace vs. being hit with damages returning money you’ve been paid? What length of warranty is reasonable? What notification process from the owner/general do you want to include? Give yourself enough time to evaluate and address warranty claims. Things can’t be fixed immediately, and you may be off of the project when a claim is made, so remember it may take time to mobilize and correct any issues.
3. Limits on Damages. A waiver of consequential, punitive and special damages can significantly reduce legal exposure. Keep damages limited to those that are directly related to the work you perform. Consequential damages can include such things as lost profits and lost use. Consequential damages are usually large. If possible, go even further and put a specific monetary limit on damages.
4. Termination Rights. Do you have any? Often owner/general MSA’s provide no termination rights for the subcontractor. Some even require the sub to continue to work through disputes and owner/general defaults. Termination for breach should be a no-brainer. The main breach an owner/general has is failing to pay its subcontractors. If you aren’t being paid, make sure you have a mechanism and right in the MSA to suspend and/or terminate your work.
5. Payment Terms. Spell them out. How long after an invoice is issued is it due? Avoid paid-if-paid and paid-when-paid clauses like the plague. As the subcontractor, you have limited to no ability to control the owner’s actions. If the owner does not pay the general contractor, under a paid-if-paid clause, you won’t be paid for your work. Often, the non-payment by the owner has little or nothing to do with the work you are actually performing. A general contractor’s breaches under its contract with the owner should not affect your ability to be paid for the work and materials that you provide.
6. Indemnifications. What are the scope, types, terms and breadth of the indemnifications being requested? Are you being asked to assume responsibility for liabilities and exposures outside of your direct control? Make sure that they are reasonable (they often are not), and tied in to the actual performance you are providing under the contract. Look out for indemnification clauses that make you indemnify the owner for its own negligence. These often look something like the following:
TO THE FULLEST EXTENT PERMITTED BY LAW, IT IS EXPRESSLY UNDERSTOOD THAT CONTRACTOR BY THE TERMS OF THIS PARAGRAPH, HEREBY AGREES TO DEFEND AND INDEMNIFY AND HOLD Indemnified Party HARMLESS WHETHER Indemnified Party IS ALLEGED TO BE, OR IS FOUND TO BE, SOLELY, CONCURRENTLY, OR COMPARATIVELY NEGLIGENT OR AT FAULT IN ANY WAY. IT IS FURTHER EXPRESSLY UNDERSTOOD THAT CONTRACTOR NEED NOT BE PROVEN TO HAVE ACTED NEGLIGENTLY FOR ITS DUTY TO DEFEND AND INDEMNIFY TO BE TRIGGERED.
In some states these sorts of indemnifications are not permitted. Enforceable or not, it’s often unreasonable for an owner/prime to require that you indemnify them for their own negligence.
7. Work Orders. Having written work orders vs. oral work orders helps ensure that both parties are on the same page regarding the work that is being requested. Oral work orders, while convenient, make for great disputes. Written work orders should also be signed by both parties. Verify how work orders are actually issued under the MSA. If it’s simply upon request of the owner/general, you may be expected to work even if the terms are not ideal. Work orders work best when they supplement MSA terms and spell out the specific project(s) that the subcontractor is being retained for.
8. Insurance Requirements. Are the insurance requirements under the MSA consistent with your policy? More importantly, are they directly related and relevant to the actual work you are going to be providing? Many MSAs are simply form contracts that get recycled over and over. If the insurance requirements are not in alignment with the work being provided, then they should be modified appropriately. If specific insurance certificates are required, make sure that you speak with your carrier to verify that they can be provided. Many MSAs have provisions which require insurance compliance prior to the sub receiving payment for its work.
These are just a few of the key areas a subcontractor should consider when negotiating a master services agreement with the owner/general. If the relationship is a good one, a MSA may remain in place for years down the road, so it’s important to get the proper terms in the Agreement from the outset of the relationship. Robust contract negotiation allows the parties to negotiate and make appropriate shifts in risks and exposure. A good MSA should be nuanced, complete, and tailored to meet the specific needs of the subcontractor on the project. We hope these general ideas have been useful.
(Mallon Lonnquist Morris & Watrous, LLC, is a business, employment, real estate, and litigation law firm. Craig T. Watrous is a Colorado business attorney and partner at MLMW, based in Denver, Colorado. Craig regularly represents clients on both sides of master service agreements. Craig can be reached at firstname.lastname@example.org and (303) 722-2165.)