It has long been the case in the construction industry that unfair and onerous contract clauses have been in wide circulation, due largely to the advantageous bargaining position of the larger contracting firms. Professor Rudi Klein and Jenny Button take a look at the top five killer clauses to look out for in any contract.
Terms are often slipped into contracts without firms fully appreciating the risks involved. The need to ensure a steady stream of work in the current recession is forcing many firms to sign contracts with clauses which amount to an outrageous transfer of risk. The end result is that firms are saddled with unknown costs, limited legal remedies and all kinds of legal liability; however, hope is not entirely lost! We’ve identified the five worst onerous clauses currently doing the rounds: indemnity clauses; no additions to the sub-contract sum; condition precedent to payment; termination at will; and changing the contract price.
‘The subcontractor shall indemnify and hold harmless the contractor against and from all liability, loss, costs or expense in respect of any claim made against the contractor relating to or arising out of the work carried out by the subcontractor.’
This clause is potentially exposing the subcontractor to claims arising from incidents which were not the fault of the subcontractor. For example, the subcontractor could be liable for damage caused to his work by a third party long after he has completed his work. Firms are left with very little protection and the continuous risk of unknown costs. Insurers will not cover these types of clauses.
No additions to the sub-contract sum
‘No failure on the part of the subcontractor to discover or foresee any such condition, risk, contingency or circumstance, whether the same ought reasonably to have been discovered or foreseen or not will entitle the subcontractor to an addition to the sub-contract sum.’
Would you happily accept responsibility for the consequences of every external factor that may affect your work? This clause is stating exactly that. It leaves the subcontractor in a grossly unfair and dangerous position, whereby mounting costs and losses become a genuine
possibility. For example, if it is discovered after you start work that the design needs to be changed, necessitating a variation, this clause could prevent you from seeking payment for the variation.
Condition precedent to payment
‘It is a condition precedent to any payment by the contractor becoming due under this sub-contract, that the subcontractor shall execute as a deed(s) the following document(s): warranty to the employer, fund, purchaser and tenant, a performance bond on demand, and a parent company guarantee.’
This clause is particularly onerous if you have not seen any of these documents prior to pricing the work. There is huge potential for claims from a number of parties under the various warranties. On-demand performance bonds eat into your overdraft facilities and can be called at any time irrespective of any fault on your part.
Worse still is the condition precedent to payment. At worst this could mean that the other party will keep back all payments until you have signed all documents presented to you – whatever may be in them. In this case you could end up doing work for nothing (although a court is unlikely to interpret the clause in this way).
Termination at will
‘The contractor may at will terminate the engagement of the subcontractor at any time and for any reason upon written notice. In that event, the subcontractor’s entitlement shall be limited to the actual cost of the works carried out and a cancellation payment of £2,000 (inclusiveof VAT).’
All firms would be wise to avoid this clause! The basic consequence of this condition is that when a job is signed for, it still is not guaranteed. The absence of financial security and resulting cash flow problems can be deadly for smaller firms. Firms will find that after bulk-buying materials for a job which is terminated, they are left with money tied up in materials which the other party will not reimburse them for. It is also the case that the loss of profit could be far greater than the substitute sum offered.
Changing the contract price
‘The contractor shall be entitled to carry out a benchmarking exercise in respect of the sub-contract services at any time to determine whether in relation to the prices offered by the subcontractor or any element of the prices affecting the relevant sub-contract services are competitive.’
There is another part of this clause which allows the contractor to reduce prices after carrying out the ‘benchmarking exercise’. This clause offers no benefits to the party agreeing to it. There is significant difficulty in planning for the financial future when there is no guarantee what amount of money will have been received by the time a job is finished. This may well harm valuable relationships with other firms if you try to pass this risk further down the supply chain to subsubcontractors. You may not succeed in doing this.