It is general industry practice for subcontracts to include by reference the terms of the prime contract between the general contractor and the owner. Although it can be fast and convenient for the parties, a haphazard incorporation of prime contract terms may result in uncertainty and additional risk for both the general contractor and the subcontractor, and should be avoided.
How is the Prime Contract Incorporated into Subcontracts?
Subcontractors are not bound by the terms of the prime contract unless they are expressly incorporated into a subcontract. As a result, most standard form subcontracts incorporate the terms of a prime contract into a subcontract. For example, Article 2A of CCA 1 – 2008 Stipulated Price Subcontract incorporates the requirements, terms and conditions of the prime contract “as far as they are applicable to the Subcontract.” Determining which clauses of the prime contract are “applicable” to the subcontract is not an easy task and frequently results in significant confusion and uncertainty for general contractors and subcontractors alike.
Considerations for General Contractors
Since the general contractor remains liable to the owner under the prime contract for the subcontracted work, it is good practice for the general contractor to ensure that its liability to the owner relating to the subcontracted work is co-extensive with its liability to subcontractors under the subcontract. For example, the industry standard CCDC 2 – 2008 expressly requires contractors to “…incorporate the terms and conditions of the Contract Documents into all contracts or written agreements with Subcontractors or Suppliers.”
To achieve this objective, subcontracts should be clear on which aspects of the prime contract are to be incorporated by reference. For instance, does the general contractor intend to include only the scope related portions of the prime contract (i.e. drawings and specifications) or include the contractual terms in the general conditions as well?
If the contractual provisions of the prime contract are to be incorporated by reference, it must also be clear how those provisions will apply to the subcontractor. If provisions of the prime contract do not make sense when applied to the subcontractor, it is unlikely that arbitrators or the courts will enforce them against subcontractors.
Thus, the failure to properly incorporate key terms of the prime contract into the subcontract may leave the general contractor with liability to the owner which it cannot recover from the subcontractor.
Considerations for Subcontractors
Where a subcontract expressly incorporates the terms of a prime contract, the onus is on the subcontractor to obtain a copy of the prime contract and to carefully scrutinize the provisions of the prime contact to determine how they apply to the subcontracted work.
In Online Contractors Ltd. v. Speers Construction Inc. 2012 ABCA 132, the Alberta Court of Appeal found that the subcontractor was bound by the terms of the prime contract, even though it was never provided with a copy of the contract.
Some Problematic Provisions
Many subcontracts do not contain an independent system of relief entitlements for the subcontractor (i.e. unexpected site conditions or force majeure). Commonly, subcontracts impose obligations contained in the prime contract onto the subcontractor, but do not expressly entitle the subcontractor to the benefit of any relief provisions in the prime contract. Subcontractors should ensure they are entitled to the benefit of any relief available to the general contractor under the prime contract.
Frequently the warranty provisions in the prime contract do not align with those in the subcontract, often having longer durations and different start dates. If the prime contractor expects the subcontractor to comply with the more onerous warranty provisions in the prime contract, this should be made clear. Both the subcontractor and general contractor should be clear on which warranty provisions they intend to apply to the subcontract work.
Liquidated damages and limitations of liability:
The application of liquidated damages and limitations of liability provisions in the prime contract to subcontractors is frequently problematic, as the amounts provided for these items are often excessive when compared to the value of subcontracted work. It may be more efficient for subcontracts to include a separate system of liquidated damages and limitations of liability.
Subcontractors should pay particular attention to the insurance program for the project and ensure that it aligns with the risk allocation contemplated by the subcontract and the coverage available to them.
Overall, proper subcontracting is not simply a matter of attaching the prime contract to a standard form subcontract. Careful consideration should be given to the proper alignment between the terms of the prime contract and the subcontract.