by Ken Robinson
One reality of construction law is that subcontractors frequently face an uphill battle. They often have little or no input into the terms of the construction contract between the general contractor and the owner; and subcontractors are often subject to one-sided contractual provisions that they may be unaware of. They may also lack the economic bargaining power to eliminate objectionable provisions of subcontracts that may limit their claim rights. Hutchinson Black and Cook has extensive experience in maximizing leverage and advocating the rights of subcontractors, whether through contract drafting, claims, mechanic’s liens, business litigation, mediation, arbitration, or jury trial.
Construction Disputes
Subcontractors have special challenges when confronted with contract disputes on construction projects. Typically, a subcontractor enters into a contract with a general contractor and thus its rights are founded in the contract which is more often than not drafted in favor of the general contractor and the owner. However, a subcontractor’s obligations can be based on considerations which transcend its subcontract with the general contractor. The subcontract may include provisions that incorporate other project documents by reference. There are also so-called “flow down” clauses which require that the subcontractor’s obligations to the general contractor are the same as the general contractor owes to the owner, effectively incorporating many provisions of the general contract. Before signing a contract, the subcontractor should request and review the prime contract, and operative project documents, so it understands the full scope of its obligations, and thus its risk.
Construction disputes for subcontractors often involve issues of allegations of untimely and/or defective construction, and resulting non-payment. Hutchinson Black and Cook advises subcontractors to try and negotiate a fair and reasonable subcontract which can prove invaluable if a dispute arises. Of course, this is not always feasible in today’s competitive construction business.
For disputes involving timeliness and completeness of performance, the contract documents will allocate risk and establish standards of performance. Certain statutes may come into play as well such as the Construction Defect Action Reform Act (“CDARA”) which has its own limitations and procedures for disputes involving construction defects. Construction defect claims can also precipitate insurance coverage issues which must be addressed as well.
Payment Issues
If a payment dispute arises, the subcontractor has several remedies available. Most public projects require that the general contractor post a payment bond which provides a source of funds for proven subcontractor claims. Such rights are governed by the Colorado Public Works Statute, or the corresponding federal statute, which establishes parameters for perfecting a bond claim. The subcontract and the bond itself may also have specific requirements such as timely notice of the claim, and competent backup to establish entitlement. A subcontractor on a public works project can also assert a lien against undisbursed project funds by serving a Verified Statement of Claim on the owner. If timely received, the owner must withhold one and a half times the claim amount from disbursement to the general contractor pending resolution of the claim. Subcontractors should be careful in preparing well-documented claims as they could otherwise expose themselves to penalties under the false claims provisions of public works statutes.
Subcontractor Mechanic’s Liens
On private projects, a subcontractor can assert a mechanic’s lien against the property and the construction improvements for non-payment. Liens sometimes provide great leverage because the Colorado Mechanic’s Lien Statute establishes a lien high priority relative to other financial encumbrances on the property such as construction loan deeds of trust. Perfecting a subcontractor’s lien rights is a complex procedure which requires timely notice and recording of lien documents, and also timely foreclosure on the lien after the project is substantially complete. It is best that a subcontractor retain an attorney who is experienced in mechanic’s lien procedures to protect payment rights. The subcontract, and perhaps the prime contract by reference, will have notice provisions requiring that the subcontractor provide timely notice of its payment claims.
Owner backcharges or claims can act as offsets to a right of payment of the subcontractor. For example, broad indemnity clauses in the subcontract can create subcontractor liability to the general contractor as well as to the owner for events over which the subcontractor may have little or no control. In addition, a subcontractor’s attempts to get paid can be frustrated by a so-called “pay-if-paid” clause which provides that the general contractor may not be obligated to pay the subcontractor unless and until the owner pays the general contractor. This can delay or even preclude a subcontractor’s right to payment.
If we can assist with any matters concerning issues involving subcontracts or subcontractor rights, please contact Ken Robinson or anyone on the HBC Construction Team