Waiver of Subrogation - PowerPoint

							Understanding Killer
Contract Language
  The Dreaded Contract
Unfortunately, none of the
parties typically discuss
the nature of the contract
and its provisions until
after they have agreed
upon the scope of work
and the price.
   Your Call!
 Sometimes bad contract language
must be considered; risk should not
include the future of your company
      Buddy’s
Top 7 Deal Breakers
1. Contingency payment clauses


   Pay If Paid; Pay When Paid
 Red Flag    Pay If Paid
• Under a "pay-if-paid" provision, the
  subcontractor will be paid only if the
  GC is first paid by the owner for the
  specific subcontractors work.
• A pay-if-paid provision creates a
  condition precedent to the GC’s duty to
  pay its subcontractor and the risk of an
  owner’s non-payment is shared by the
  contractor and the subcontractor.
 Red Flag       Pay If Paid
Typical Contract Language
• Contractor’s obligation to pay Sub any sum
  due under the contract is subject to the
  condition precedent that Contractor has first
  received from Owner payment for Sub’s
  work. Contractor shall have no obligation to
  pay Sub for any particular work unless and
  until Owner first pays Contractor for such
  work. Sub expressly assumes the risk of
  nonpayment by the Owner to Contractor for
  any reason.
 Red Flag    Pay If Paid Examples
• Examples of these clauses might read:
• "Notwithstanding any provision to the
  contrary, payment by Owner to Contractor is
  a condition precedent to payment to
  Subcontractor;"
• "Receipt of payment from the Owner is a
  condition precedent to payment to
  Subcontractor and payment to Subcontractor
  will only be made after the Contractor is paid
  by Owner."
            Pay When Paid
• With a pay-when-paid clause, so long as the
  cause for non-payment to the general
  contractor from the owner is not related to
  the subcontractor’s work, the general
  contractor should be liable to the
  subcontractor immediately following the
  expiration of a reasonable time period.
• If the general contractor does not receive
  payment from the owner, and it is through no
  fault of the subcontractor, the general
  contractor is still going to be ultimately liable
  to the subcontractor.
           Pay When Paid
• These types of clauses deal only with the
  timing of payment and are construed merely
  as timing mechanisms, rather than as
  waiver/forfeiture clauses.
• They are referred to as pay-when-paid
  clauses, but they do not operate to preclude
  payment indefinitely. In other words, the
  clauses merely provide a GC with some
  reasonable period within which to make
  payment.
• The AIA 401 and the AGC 650 subcontract
  forms contain pay-when-paid payment terms.
           Lien Rights
• Subcontractors should always
  retain their lien rights in their
  contracts with general contractors.
  This is especially important when
  the parties’ contract contains the
  pay-if-paid language.
2. Waiver of Lien or
   Bond Rights
 Waiver of Lien and Bond Rights
• Subcontractors should vigorously resist
  giving up the payment security provided by
  lien and Bond Rights.
• Most states have lien laws that require a
  “Notice to Owner” when a lien is filed – most
  states have specific lien notice and filing
  timelines – know state lien laws.
• However, some courts have upheld such "no
  lien" provisions against contractors that sign
  them.
           Pass Down
• If a contractor agrees to a no lien
  provision, the contractor must put
  the same language in any
  contracts he enters into with lower
  tiered contractors or material
  suppliers.
         Partial Lien Waiver
• Upon making progress payments, the owner
  or general contractor may require the
  contractor to waive all lien claims that the
  contractor may have for the work invoiced.
• Such partial lien waiver requirement must be
  contained in the contract.
• Only waive liens through the date of the
  invoice, not through the date of the payment.
          Final Lien Waiver
• Upon completing the job, the GC asks the
  Sub complete a final lien waiver.
• The requirement to sign a final waiver of
  claims in order to obtain final payment is
  against public policy in most states if the
  contractor has asserted a claim or request
  for an adjustment to the contract price.
• Subs should not be caught between waiving
  a previously asserted claim, and getting paid
  for its work.
      Protecting Lien Rights
•   Look for no lien clauses in your
    contract, and in the contract with the
    owner, if that contract is incorporated
    by reference.
•   Such incorporation language is
    usually enforced.
•   If a no lien clause is in the contract,
    try to negotiate it out of your contract
   3. Waiver of
Subrogation Rights
    Typical Waiver Language
• “Contractor shall and does hereby waive any
  rights of subrogation that it or any of its
  insurers may have against the owner, its
  agents, employees or its insurers.”
• "The owner and Contractor waive all rights
  against (1) each other and any of the
  subcontractors, sub-subcontractors, agent
  and employees, each of the other, [and] (2)
  the architect, architect's consultants, . . . for
  damage caused by fire or other perils to the
  extent covered by property insurance
  obtained pursuant to this contract.
     Waiver of Subrogation
• The "waiver of subrogation" means that
  by giving up its right of recovery, the
  insurer accepts the fact that the
  policyholder and the parties with whom
  it has contracted have allocated the risk
  of the insured event to the insurer - the
  insurance would be the sole remedy and
  that all risk would be on the insurer.
          Insurance Policies
• If the owner has given up (i.e., waived) the right
  to pursue certain claims in the contracts, the
  legal effect is that the property insurer is bound
  by that waiver.
• Many insurance policies state that the insured
  may waive subrogation provided it is done as
  part of the contract between the insured and its
  client and is done at the outset of the job and not
  after a claim or loss has arisen.
               Deal Breakers
• Since builders risk policies are written on a great
  variety of forms, it is especially critical for an insured
  to determine whether the policy prohibits the insured
  from waiving recovery rights against another.
• If the policy does prohibit such waivers and the
  contractor enters into a typical construction contract
  containing a mutual waiver of subrogation provision,
  the contractor may have violated policy conditions and
  voided the coverage. This is particularly true in the
  case of waivers of recovery against architects and
  engineers.
• In the case of design professionals, builders risk
  insurers are hesitant to allow waivers of recovery
  since design errors often cause other covered losses
  under the policy.
                Ask Insurer
• Waivers of subrogation should be entered into
  by an owner or a contractor only after
  permission is obtained from the builders risk
  insurer.
• It is obviously prudent to seek a clarifying
  endorsement from the insurer. This, of course, if
  especially important where the policy form
  strictly prohibits all waiver of recovery against
  third parties, whether pre- or post- loss.
     Good Waiver Language
• Waivers of subrogation to prevent the builders
  risk insurer from bringing suit against the
  contractor and the subcontractor – good.
• Another method to avoid that result would be to
  add the contractor and all of its subcontractors
  as named insureds to the policy since insurers
  are generally not allowed to pursue subrogation
  against their own insureds – OCIPs/CCIPs.
      Deal Breaker Language
• Sub gives up right for its insurer to subrogate but
  owner and GC can subrogate.
• Another frequently disputed issue regarding
  waivers of subrogation is the length of time over
  which the waiver extends. Typically, as is the
  case with the AIA documents, the waiver is
  intended to be coextensive with the length of
  time during which the builders risk policy is in
  place, that is, usually the completion of the
  project.
4. Incorporation by
     Reference
 Incorporation By Reference
• Be alert to prime contract provisions
  that contain “incorporation by
  reference” clauses.
• Particularly inequitable are provisions
  that incorporate only the contractor’s
  responsibilities, but not your rights
  against the owner.
       Example of Concern
• An owner and contractor used an AIA contract
  for a project. The contract incorporated by
  reference AIA general conditions requiring the
  parties to submit disputes to the project
  architect for decision. The contract provided
  that the architect's decision was "final and
  binding on the parties subject to arbitration."
  Under the contract, either party could demand
  arbitration of the dispute by filing "notice of
  demand for arbitration with the other party to
  the Agreement, with the American Arbitration
  Association and with the architect." The
  contract also provided that failure to demand
  arbitration within 30 days would result in "the
  architect's decision becoming final and
  binding."
5. Change Orders in
      Writing.
           Change Orders
• There is no such thing as a contract that
  gets completed without change orders.
  Just contractors who end up taking it on
  the chin because of no change order
  procedures in their contracts.
                 Change Orders
• Make certain that the key basic elements for change
  orders is addressed in the contract:
   – Who you have to notify and receive permission from for change
     order work?
   – When and how do you have to notify them of potential change
     order work?
   – What documents do you have to provide?
   – How and when will the change order work get paid?
   – Where will the additional funds come from for the change order
     work?
   – What is the reasonable time for approval and what is the
     additional cost for your delays while you’re waiting for approval?
   – How will you and the owner resolve the change order issue if
     immediate approval for the work is not received in the agreed
     time?
           Change Orders
• Remember, change order work is not
  “extra work”. It disrupts the progress and
  productivity of the work as you had
  originally planned for when you bid the
  work. It is neither your fault nor your
  responsibility, and you should be justly
  compensated for this unanticipated
  disruption.
  Payment for Change Orders
• The owner has an obligation to build a building
  in compliance with adopted codes and
  standards. Subs should not pay for the owner’s
  obligation.
• If it is a code required item – the owner should
  pay.
• The only potentially open issue if it is our design
  error is the difference between the cost to make
  the change verses the cost if the original plans
  addressed the item needing change.
            Design Errors
• There exists a propensity for design team
  members to reject change orders to fix
  errors they have made.
• Be cautious of language in design concept
  documents that shift or attempt to shift
  design responsibility to contractors.
  – “Successful bidder is responsible to
    ensure the system is installed to code.”
 6. Broad form
Indemnification.
      Indemnity Clauses

• Three Different Forms of
  Indemnity Clauses:
 –1. Broad
 –2. Intermediate
 –3. Limited
         Indemnity Clauses
• Broad: Sub shall indemnify and hold harmless
  GC and Owner from and against any and all
  claims, losses, damages, costs and expenses
  relating to the performance of the subcontract
  and involving personal injury, sickness,
  disease, death or property damages, including
  any resulting loss of use, REGARDLESS OF
  WHETHER CAUSED IN WHOLE OR IN PART
  BY THE NEGLIGENCE OF GC OR OWNER.
  SUB ACKNOWLEDGES AND AGREES THAT IT
  IS INDEMNIFYING GC AND OWNER FOR THEIR
  OWN SOLE AND/OR PARTIAL NEGLIGENCE.
          Indemnity Clauses
• Intermediate: Sub shall indemnify and hold harmless
  GC and Owner from and against any and all claims,
  losses, damages, and expenses relating to the
  performance of the subcontract and involving
  personal injury, sickness, disease, death or property
  damages, including any loss of use, REGARDLESS
  OF WHETHER CAUSED IN PART BY THE
  NEGLIGENCE OF THE GC OR OWNER. Subs
  indemnity obligation shall not extend to any claims,
  losses, damages, or expenses for which the sole
  cause is the negligence of GC or Owner.
         Indemnity Clauses
• Limited: Sub shall indemnify and hold
  harmless GC and Owner from and against
  any and all claims, losses, damages, costs
  and expenses relating to the performance of
  the Subcontract and involving personal
  injury, sickness, disease, death or property
  damages, including any resulting loss of use,
  but only to the extent caused by the
  negligent acts or omissions of Sub, its
  employees, or other persons or entities for
  whose acts Sub may be liable.
           Indemnification
• Insurers refusing to cover indemnification
  clauses particularly indemnification of sole
  negligence.
• Refusing to sign indemnification because of
  no insurance is good argument.
• READ CONTRACTS – hold harmless
  requirements can be worded many different
  ways.
• Laws to protect us.
    Indemnity Clauses
• 1. Express Negligence
  Test.
• 2. Conspicuousness
  Requirement.
   Express Negligence Test
• In Ethyl Corp. v. Daniel Construction,
  the Texas Supreme Court adopted the
  Express Negligence Test for
  indemnitee agreements.
• “. . . parties seeking to indemnify the
  indemnitee from the consequences of
  its own negligence must express that
  intent in specific terms.”
  Express Negligence Test

• Furthermore, the court added,
  “Under the doctrine of express
  negligence, the intent of the
  parties must be specifically
  stated within the four corners
  of the contract.”
  Conspicuousness Requirement

• The Conspicuousness Test states that a
  clause is conspicuous when a reasonable
  person against whom the clause is to
  operate ought to have noticed it.
• Language in CAPITAL HEADINGS,
  language in contrasting type or color, and
  language in an extremely short document,
  such as a telegram, is conspicuous.
  Indemnity Clause Satisfying the
      Conspicuousness Test
• Broad: Sub shall indemnify and hold harmless GC
  and Owner from and against any and all claims,
  losses, damages, costs and expenses relating to
  the performance of the subcontract and involving
  personal injury, sickness, disease, death or
  property damages, including any resulting loss of
  use, REGARDLESS OF WHETHER CAUSED IN
  WHOLE OR IN PART BY THE NEGLIGENCE OF
  GC OR OWNER. SUB ACKNOWLEDGES AND
  AGREES THAT IT IS INDEMNIFYING GC AND
  OWNER FOR THEIR OWN SOLE AND/OR
  PARTIAL NEGLIGENCE.
7. Additional Insured
   Endorsements.
           Additional Insured
            Endorsements
• Sub shall, at no expense to GC, maintain in
  full force at all times Commercial General
  Liability Insurance. This insurance shall be
  written for not less than (limits specified) or
  required by law. The following AIE shall be
  furnished to GC prior to the commencement
  of the work. In consideration of the premium
  charged, GC is named as additional insured
  with respect to all liabilities arising out of the
  performance of the work.
           Additional Insured
            Endorsements
• Sub shall, at no expense to GC, maintain in full
  force at all times Commercial General Liability
  Insurance. This insurance shall be written for not
  less than (limits specified) or required by law,
  and this insurance shall be primary to any
  other insurance of the GC. The following AIE
  shall be furnished to GC prior to the
  commencement of the work. In consideration of
  the premium charged, GC is named as
  additional insured with respect to all liabilities
  arising out of the performance of the work.
            Additional Insured
             Endorsements
• . . . . insurance shall be written for not less than
  (limits specified), and this insurance shall be
  primary to any other insurance of the GC. In
  consideration of the premium charged, GC is
  named an additional insured with respect to all
  liabilities arising out of the performance of the
  work. Sub shall waive all rights against GC, its
  agents, and employees for all damages covered
  by insurance pursuant to this contract.
   Flow Through Provisions
• BROAD: Sub is bound to
  Contractor by all terms of the Prime
  Contract and assumes toward
  Contractor all of the obligations and
  responsibilities that Contractor by
  those instruments assumes toward
  Owner.
    Flow Through Provisions
• The Subcontract consists of this Agreement and
  any Exhibits attached hereto, and, to the extent
  applicable to the Subs work, the Prime Contract
  consisting of the Agreement between Owner and
  Contractor . . . . Sub is bound to Contractor by
  all terms of the Prime Contract and assumes
  toward Contractor all of the obligations and
  responsibilities pertaining to the Sub’s work that
  Contractor by those instruments assumes
  toward Owner and Sub shall have the same
  rights and remedies against the Contractor as
  the Contractor has against the Owner.
Where to we go
 from here?
 Buddy’s Recommendations
       Use Conditional Bids
• One way to avoid the unpleasant experience
  of receiving an inequitable subcontract “after
  the fact” is to condition the bid “upon
  acceptable contract language.”
• “This bid is conditioned upon the use of the
  AIA A401 Subcontract (2003 edition).”
• A GC who accepts a bid is therefore not
  only accepting the price but also the level of
  risk found in A401. Can’t force bad contract.
      Use ASA Addendum
• The ASA has prepared a “generic”
  addendum intended to defuse the typical
  proprietary bad contract language.
• While the ASA Addendum is not perfect, it
  will address most of the offensive contract
  provisions typically encountered.
    Educate Your Customer
• GCs want subs not only with low prices
  but also that read and strictly follow the
  details in the plans and specifications.
• Let the GC know your professionalism up
  front but also advise what subcontract
  terms are acceptable and be prepared to
  explain why certain language is one-sided
  and unfair.
Walk Away From Unfair Contracts

• It is hard to lose a job but it is worst to lose
  your company. Look at past losses and
  determine if bad contract language was a
  factor.
• Unfair risk shifting have long-range
  implications on your company’s future.
Questions?
  NFSA Regional
   Operations
On a Path Towards Excellence