Stop, Look, and… READ! Don't Sign That Subcontract Just Yet

You've just been informed that your subcontract bid has been accepted on a public works project and your company will receive a subcontract agreement shortly.  When you receive the draft agreement, you look it over and confirm that the scope of work and exclusions are consistent with your bid.  As to the rest of the "boilerplate" clauses, you do a cursory review and assume that the terms and conditions are customary and consistent with other agreements that you have seen and reviewed in the past.  So you sign it.

This approach to executing subcontract agreements is risky, to say the least.  Not all subcontracts are the same and can vary significantly.  There are often material differences which can be found in clauses ranging from indemnification to attorney's fees provisions.  Subcontractors should closely review and, when warranted, negotiate the terms and conditions in subcontract agreements.

In one case, the failure to review the subcontract terms almost had the unintended consequence of changing the very core of a subcontractor's business from a non-union shop to a union shop.  In this example, the subcontract agreement contained the following provision:

"Subcontractor agrees that it is bound to and shall comply with all the terms and conditions of the Master Labor Agreement including wages, trust fund contributions, working rules, the grievance/arbitration procedure and any other mechanism for the resolution of dispute contained in the Master Labor Agreement, whether or not the work is performed for the contractor.  Subcontractor further agrees to bind all its subcontractors performing job site work of the type covered by the Master Labor Agreement referenced above and to become bound and comply with all of the terms and conditions of the Master Labor Agreement.  Subcontractor acknowledges that the [Unions] are the intended third party beneficiaries of this contractual provision and may enforce the provision directly against Subcontractor."

By signing the agreement, the general contractor and Union contended that the subcontractor was now a full signatory member of the Union for all projects, which of course would have changed the very essence of the company.  As a result of not thoroughly reviewing the subcontract agreement before signing it, even though such provisions may arguably be unenforceable, the subcontractor ended up spending resources fighting the Union's attempt to audit its payroll, assess dues, and make the subcontractor a signatory member simply because it signed the subcontract agreement containing the Union clause.

Don't let this happen to you.  Review your contracts carefully before you sign them or have a qualified attorney do it for you.

Richard Mah, Esq., Contributor to Industry Speaks. Republished with permission from Hunt Ortmann Palffy Nieves Darling & Mah, Inc., a leader in California construction law and one of our many Industry Speaks consultants. If you have any questions about this bulletin or construction contracts, please contact him at mah@huntortmann.com.