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Contractors and subcontractors are constantly entering into contracts. But if they are not paying enough attention to the terms of those agreements, they may end up regretting it. 

There is no such thing as a standard contract; all terms may be negotiable before signing the contract but, once signed, the contractor is generally bound to the terms as written.

Indemnification and Defense Provisions

An Indemnification and defense provision shifts the legal and financial responsibility of a claim from one party to another. Generally speaking, these provisions favor the general contractor when dealing with a subcontractor and a developer when dealing with a general contractor.

The word “defend” means that one party must provide the other party with an attorney and pay that lawyer’s legal bills. The phrase “hold harmless” means that one party must not sue the other. And the word “indemnify” has more of a financial than legal meaning: It means one party must pay for any claim, damages and/or losses. 

Depending on the state law governing the contract, these obligations apply just to the contractor’s acts and/or omissions or will include the acts and/or omissions of the other party. Put simply, if the law allows for it, the contractor will probably be required to pick up the tab in the event he or the other party created the problem.

Insurance Provisions

Most (if not all) contracts have a section that requires a party to have certain amounts/types of insurance. Commonly, the provision will require a party to obtain worker’s compensation, automobile and commercial general liability. As it relates to commercial general liability insurance, there is often a requirement for contractual liability and completed operations coverage. 

The more important thing to know about the fine print is a provision that requires one party to name the other party as an “additional insured” on all relevant policies. Sometimes these provisions will require more, such as being non-contributory, primary and providing equal rights as the named insured.

While these provisions typically vary, its true across the board that an additional insured will pay none of the policy premium while still being covered by the policy. 

Attorneys’ Fees Provisions

Attorneys’ fee provisions are easy to miss. The provisions are more or less self-explanatory; in the event that a party enforces a contract—or a type of claim stemming from the contract—that party is entitled to expect that the legal bills it submits for reimbursement will be paid.

How provisions are enforced

Generally, in a construction project, an owner or developer lodges a construction defect claim against the general contractor. In turn, the general contractor identifies a certain subcontractor as being responsible for the deficient work. The general contractor then invokes one or more provisions in its contract with the subcontractor.

In this example, the general contractor’s attorney sends a letter to the subcontractor that references the provisions for defense and indemnification, essentially demanding a defense against the claim from the owner or developer. The subcontractor believes the general contractor is actually the party at fault and, thus, the subcontractor should not be involved in that claim.

For a number of reasons, the subcontractor’s belief matters very little. The contract language requires defense and indemnification even if the general contractor caused the defective work (and the law of that state allows for it). Therefore, the subcontractor’s argument that the general contractor is responsible falls flat; the subcontractor will likely end up having to defend or indemnify the general contractor against the claims made by the owner or developer.

In the event that the obligations of defense and indemnity are not provided, the general contractor will likely file a lawsuit or add the subcontractor as a defendant to an existing lawsuit in order to put the subcontractor on the hook for legal bills and damages anyway.

The general contractor may also file a claim against the subcontractors’ insurance policy referencing an additional insured provision of the contractor. If the subcontractor had agreed to name the general contractor as an additional insured on the relevant policies, both the subcontractor and its insurer may be obligated to provide the general contractor with a defense against the claims of the owner or developer. Hopefully, the subcontractor read this portion of the contract and complied with the requirement to name the general contractor as an additional insured or alternatively sought to strike that requirement altogether. Otherwise, its headaches will get worse because the contractor can add a breach of the insurance provisions to its list of claims.

After litigating the issue of defense or coverage, it may be that the general contractor emerges victorious against the subcontractor on that issue alone, never reaching the merits of whether the defects are in fact attributable to the subcontractor. Following a win on this one issue, the general contractor will likely make a large demand for reimbursement of its attorney’s fees and costs of both litigating the issue of coverage against the subcontractor, as well as defending the claim of the owner or developer. 

At the end of the day, the subcontractor may be left with a bill that it can’t possibly afford to pay, rendering it vulnerable to other negative consequences on its business.

Don’t be the subcontractor in this example. Read every provision of the agreement, even if they seem boilerplate and non-negotiable. All terms are potentially negotiable, and not asking means the subcontractor is likely bound to the terms as written. Options after executing the contract are limited to compliance, not a rewrite.

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