Construction Law: Mind the Gap

Owners contract with general contractors. General contractors then subcontract with subcontractors. Subcontractors go on to hire sub-subcontractors. And so on. There is no mystery with how this food chain works. At most levels, the chain links together two (or more) contracts – one (or more) above and one (or more) below.

For projects to succeed the links have to mesh. One would think this is just plain and obvious. For example, if the prime contract specifies a 32 MPa 6” concrete slab reinforced on 10” centers, that’s what the general contractor puts in the subcontracts with the mix supplier, rebar sub, and forming crew. Any gap between the scope of work in the prime contract and the corresponding specifications in the subcontracts would be unthinkable. It would derail the project. It would get people sued. It would put companies out of business.

And yet gaps between contracts and linked subcontracts show up all too often. So often, in fact, that a large percentage of claims either are caused by, or are complicated by, a gap between what the contract above demands and what the corresponding subcontract below allows. The difficulty is that no one sees the gaps until the problems poke through.

Take, for example, payment provisions. Most contracts have detailed terms that say when invoices should be submitted, what they must include, and how long until they are paid. But if the prime contract says, for example, that the owner doesn’t have to pay the general for 60 days but the subcontract says the general pays the subcontractor in 7 days, there is a potentially expensive gap. Even worse, if the prime contract requires the general contractor to submit labour, equipment or material records that the subcontractor doesn’t have to keep. And worse yet if the subcontract allows the unpaid subcontractor to suspend or terminate his work while the similarly unpaid general contractor has to keep on working.

That leads us to the more dangerous gap that arises when the different parties’ have different rights to terminate the different contracts. A prime contract might, for example, allow the owner to validly terminate the job for certain reasons (or even on a whim), but if the general contractor cannot then terminate the subcontracts in the same circumstances, the general might be stuck with a nasty claim. Conversely, unforeseen events or delay might permit a subcontractor to cancel and walk, but without the corresponding right for the general contractor to terminate under the prime contract, the general could be in a bind.

Thinking it through, there can be similarly dangerous, painful, and expensive gaps for things like notice provisions, where one party down the chain might be able to wait longer than another up the chain to give notice of an important event, and thereby inadvertently quash some right or entitlement. Or consider warranties, where the length of the subcontractor’s warranty might not sync with the general contractor’s obligation to the owner. Once we dig deeper, the list of potential gaps grows: gaps in the definitions, where the same words have different meanings, gaps in insurance requirements, where different levels have different coverage; gaps in handling delays, extras and change orders, where the same events lead to different results; gaps in the dispute resolution process, where one party must arbitrate the contract above, but cannot bring in the party below. In each case, the party in the middle can get hurt. Badly.

There is no quick and easy way to close these gaps. One strategy is to drop down wholesale all the terms from one contract to another; but this can create other problems, such as the necessity of disclosing otherwise confidential information and the futility of importing meaningless terms. A more focused strategy is to make specific terms of one contract contingent on those in another. At the other extreme, one might draft a subcontract below in tandem with the contract above, addressing each item point by point. But regardless of the approach, one needs to be mindful of the gap. ∎

This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.