The contract game

20 March 2008

Though the housing market continues to turn downward and real estate investors are scratching their heads and searching for ideas to remedy their property blues, the construction industry continues to thrive. Buildings persist from the ground in urban developments as the idea of condo and loft living becomes significantly more popular among young, ambitious adults and the proverbial empty nesters. Crane booms populate the skylines of America's ever-growing cities, and the smell of diesel fuel permeates the air.

In today's world, it's nearly impossible to drive to work, home or the grocery store without passing a construction site. Dirt, plywood and heavy machinery are all moved from here to there and back again as men in white and yellow hardhats yell and holler, and do their best to maintain schedules and safety records. But the question that most crane and business owners have is this: Who exactly is responsible for it all?

Since handshake agreements have become about as reliable as my old man's 1972 Datsun, contracts spelling out the relationships between the general contractors, subcontractors, and owner/developers have become the key driving force in jobsite responsibility. Construction industry professionals have become increasingly more aware of the direct correlation between their loss history and the cost of insurance: therefore, who signs what contract and when they sign, it has become immeasurably more important.

Historically, general contractors have been seen as the controlling entity on a jobsite. Recognized by the court system in a number a cases, they are known as the party retaining the lion's share of control at the jobsite, presumably because they are present and, therefore, aware.

But general contractors typically did not agree with this allocation of responsibility. Realizing that they were, in fact, putting themselves at the mercy of the subcontractors they worked with, they began to look for ways to force other companies onto the chopping block. By “incorporating” the prime contract between the owner/developer and general contractor with the subcontractor agreement signed by the subcontractor, they could shrink their duty to maintain the site and set the stage for downstream risk transfer.

The term “incorporation,” when used in reference to a subcontract agreement, is referring to the practice of incorporating, or adding, other documents, often citing government regulations, to the prime contract. Though good for companies acting in the general capacity, this poses a litany of problems for companies like crane rental shops. The additional obligations of the prime contract, as well as government regulations that may include responsibility for site conditions, now becomes the responsibility of the smaller company. And to complicate matters even more, often times the contractor to whom the crane company is renting its crane to fails to make the prime contract available for viewing.

This practice, though unfair at best, is far from uncommon and past arguments to this effect have fallen on the deaf ears of the courts. Though the views it has taken have varied according to each specific case, in large part the response has been this: When the subcontractor agreement incorporates these additional documents properly, it is the responsibility of the crane company to understand these obligations and not contract blindly. In fact, the only argument that a company has been able to use successfully in this sort of circumstance is a conscionability defense - a defense available to small time subcontractors as a result of unfair bargaining power in relation to a general contractor.

Playing the game

Liability positioning through contracts is a game of chess, not checkers. The due diligence done when signing a contract is often the difference between positioning yourself for checkmate or unintentionally sacrificing your queen. Carefully crafted subcontract agreements can disguise jobsite responsibility provisions as safety measures. A contract stating that “a subcontractor shall conduct inspections to determine that safe working conditions and equipment exist and accepts full responsibility for providing a safe place to work” puts the entire task of maintaining the jobsite on the sole shoulders of the crane company, a task that, essentially, lacks feasibility. Construction sites change by the minute and a crane company's role at that site is concise and limited: to operate the crane.

How then, when its scope is narrowly defined, can it rightfully be responsible for the conditions of the jobsite and the actions of the other contractors?

The truth is, they can't. But all too often they are. In the case of Benson Paint Co. vs. Williams Construction Co., the subcontractor was denied its motion for summary judgment based on a contractual clause that stated, “subcontractor shall remove from the premises, as often as directed by the contractor, all rubbish, debris and surplus material which may accumulate from the prosecution of the work and should the subcontractor fail to do so upon such notice, then the contractor may, at his option, cause the same to be removed and charge the expense of the removal to the subcontractor.”

When the incident that sparked the lawsuit happened - a plaintiff stepping off a ladder onto a piece of aluminum conduit and subsequently falling onto a glass bottle - the general was able to successfully push the liability onto the subcontractor for not removing the bottle because of its contract. The courts had no choice but to side with the mighty general because of the subs’ negligent act of not removing the bottle. (Although, perhaps, the act of greater negligence was not understanding the contractual implications in the first place.)

Contract law and the task of understanding what you are signing can be a tedious and dreary chore. Contracts seem to favor the run-on sentencethe Dubai skyline favors the tower crane, but at the end of the day, when safety records and loss runs find themselves in jeopardy of becoming flawed, the contract savvy subcontractor will find himself enjoying the protection of the fruits of his labor. The contract is to “contractor” what “construct” is to construction. It's in the name. It's what you do. It's the very backbone of running a successful business.

As a company, you should take a hard look at what measures you've taken to understand and protect yourself. Claims drive insurance rates. Contracts drive claims. And although the Princeton Law Review might reject me as its editor, I'm quite certain I've had enough contract law shoved down my throat to understand its importance.

As an industry, we need to be part of the solution, not part of the problem. We need not breed ignorance and instead begin to do our part in changing this broken system.

For information on having your contracts reviewed as part of the SC&RA Insurance Program, please contact Leslie Parker at the NBIS Baltimore office. She can be reached by calling 410-863-4894.


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