Because construction contracts are important to successful roofing projects, you certainly are aware of their major provisions, such as scope of work, contract amount and terms of payment, all of which are critical factors for determining whether a job is worthwhile. However, other less obvious provisions also can enormously affect a project's success, and you should be on the lookout for these hidden provisions.
Personal guarantee
A personal guarantee easily tops the list of provisions in a contract that can have the greatest effect on a signer. The addition of a personal guarantee to an agreement between two companies dramatically changes the dynamic of the contracting parties. Generally speaking, when two companies enter into an agreement, the obligations and liabilities set forth in the agreement apply only to the corporate entities making the agreement. Therefore, in a typical contractual relationship where your company is installing a new roof system for a general contractor, the general contractor may hold your company responsible for any liabilities incurred while performing the work.
For example, if your company delays a project and incurs liquidated damages or damage to another subcontractor's work on the job site, the general contractor likely will be able to turn to your company's insurance carrier to cover the damages. Absent special circumstances, the general contractor will not be able to turn to your company's executives or employees for payment of any liabilities. This ability to shield employees, board officers and other individuals associated with a company from personal liability is the primary benefit of doing business as a corporate entity.
However, when an individual signs a personal guarantee, that individual takes on the corporate entity's obligations and liabilities and loses the protective benefit a corporate structure would otherwise afford, putting his or her personal finances and personal property at stake. If an executive or project manager of your company signs a personal guarantee, the general contractor can look to the signer's personal bank accounts, residence and any other assets to satisfy the liability. Depending on the personal guarantee's wording, the general contractor may not even be required to deplete all the assets and insurance of the roofing company before looking to the signer for payment.
Therefore, anyone signing a personal guarantee should be well aware of its repercussions and sign such a guarantee only after careful consideration. In many cases, a personal guarantee is an easy-to-spot, stand-alone document. Common uses for personal guarantees include credit applications with suppliers and agreements of indemnity with sureties. Sometimes, bolded text or text written in all caps will alert the signer to the gravity of the responsibility he or she is undertaking.
Unfortunately, personal guarantees also can be buried within the text of a long agreement and hidden by innocuous surrounding language and lack any expected markers, such as bold type, separate headings and separate signature lines.
For example, a general contractor presented an eight-page agreement written in 10-point, single-spaced format to a roofing subcontractor that contained a three-line personal guarantee deep within the agreement's seventh page buried within boilerplate language. The guarantee contained no special typeface or heading nor did the agreement have a special signature line indicating the signer was a personal guarantor. The language read: "By execution of this Agreement, Subcontractor's principal hereby agrees to personally guaranty all of the obligations and liabilities of Subcontractor contained in this Agreement."
Another roofing subcontractor was presented with a personal guarantee in a work release from a general contractor for work totaling less than $1,500. In both situations, the signer would be unwittingly subjected to personal responsibility for the company's liabilities under the agreement unless each line of the contract was read. You should carefully read (and, in many cases, have your attorney read) any agreement you receive before signing it; failure to do so can put your company and personal assets at risk.
Acceptance of all terms
Another potential problem can occur by beginning work too soon. Consider this typical situation: The representatives of a general contractor and a roofing subcontractor have been discussing work the roofing subcontractor will perform on the general contractor's project. The general contractor has sent the roofing subcontractor its standard contract to review, and the parties have been busy focusing on the schedule and specifications of the work to be performed. The general contractor informed the roofing subcontractor the owner's schedule is tight, so it is imperative work begin as soon as possible. The parties have agreed to the scope and price of the work that will be performed but have not negotiated and signed the subcontract agreement.
Not wanting to delay work or the schedule set forth by the owner, the roofing subcontractor begins work intending to review and discuss the terms of the subcontract agreement with the general contractor within the next few weeks. However, the agreement the general contractor provided to the roofing subcontractor contains a sentence stating commencement of work by the roofing subcontractor constitutes acceptance of all terms and conditions contained in the agreement.
The following provision, which was buried on page 11 of a 17-page agreement in a section without a heading, read: "Subcontractor's signature and return of this document as presented, or its commencement of any of the Work covered by this Subcontract, shall constitute acceptance of all of these terms and conditions as though subcontractor's signature had been provided."
The week after the roofing subcontractor begins work, the roofing subcontractor's project manager called the general contractor to discuss and negotiate the subcontract agreement. The agreement contains several unfavorable terms the roofing subcontractor's project manager wants to revise. The general contractor receives the revisions and tells the roofing subcontractor it will not agree to any of them. The general contractor points to the provision noted earlier, stating the roofing subcontractor already accepted all terms and conditions of the agreement when it began work.
At this point, despite the roofing subcontractor's protestations, a general contractor surely will argue the roofing contractor is required to abide by each term and condition contained in the subcontract agreement as drafted if signed. To avoid inadvertently accepting terms and conditions that may turn out to be burdensome, read contracts carefully as soon as possible and before beginning work.
Waivers of lien rights
Additionally, language waiving lien rights can be buried in the text of a contract. In most cases, language that results in the waiver of liens or other claims is found in the waiver forms you are required to sign. These forms may be included as exhibits or addenda to the contract and, in some states, the general form and content of such waivers are prescribed by statute. You are likely familiar with providing these waiver forms with payment applications. Depending on the form's language, the signer may waive its lien rights or other claims effective immediately upon signing a form in the case of unconditional waivers or effective upon receipt of payment in the case of conditional waivers. Waiver forms always should be examined carefully so the signer is aware of the extent to which lien rights or other claims are being waived.
Although signing a separate form is the most common way to waive lien rights, it is important to note waiver language also may be found within the agreement's text. Roofing subcontractors recently have received agreements from general contractors containing waiver language within payment provisions and within provisions setting forth the subcontractor's responsibilities. However, this language might be found anywhere within the agreement. Examples of such language include the following:
When such language is present, the signer has jeopardized its right to a lien or other claims simply by signing the agreement.
In the first example, a general contractor may submit the clause as a defense to any lien claims of the roofing subcontractor regardless of whether the roofing subcontractor has been paid.
In the second example, the roofing subcontractor may have been paid for a portion of the work but may have outstanding claims for retainage or change order work that had not been processed at the time it received payment. This clause could prevent the roofing subcontractor from making any claims pertaining to that retainage or change order work and from filing a claim of lien pursuant to such work.
In the third example, the roofing subcontractor has subjected itself to the general contractor's lien waiver forms regardless of whether they have been provided to the roofing subcontractor with the agreement. These forms may contain broad, burdensome language, but because the contract contained the example clause, the general contractor will argue the roofing subcontractor agreed to use them and will be bound to the language contained in the forms. Therefore, look carefully at lien waiver forms and also be aware language jeopardizing your lien rights may lurk within the agreement's text.
Building code compliance
Many contracts contain language stating a roofing subcontractor will comply with laws and regulations while performing the work. Typical examples of such language include:
This language may seem innocuous, and you may skim over it because agreeing not to break any laws while performing work sounds reasonable enough. However, upon closer examination, this language could prove problematic.
The term "laws" is broad and encompasses, among other categories, statutes, ordinances and building codes. When you obtain plans and specifications from an owner, you generally are required to perform the work in accordance with those plans and specifications. If you did not design or create a roof system, you may not know whether the specifications comply with building codes. And if they don't, you may be held responsible.
When confronted with such language, revise the provision to clarify you are not responsible for design or for ensuring the plans and specifications provided comply with building codes. You should add at the end of either example clause: "provided the Contract Documents, plans, and specifications are in compliance therewith. If Subcontractor discovers that the prescribed Work is not in accordance with codes, Subcontractor will promptly notify Contractor and await direction from Contractor and Design Professional. The Design Professional is responsible to design the Work to be in compliance with applicable codes and regulations and to specify or show the work that is to be performed. Subcontractor is not responsible for design, including design errors or omissions."
This language will help ensure you are not held responsible for design that is not a part of your scope of work.
Scheduling
Schedule and scheduling provisions are not "hidden" contract provisions in the sense the clauses previously discussed have been; indeed, a job's schedule generally is one of the terms that is reviewed and discussed the most carefully by both parties before entering into an agreement. However, failure to pay careful attention to phrasing nuances within scheduling provisions can result in unexpected expensive consequences even when the schedule has been discussed in detail. Common clauses pertaining to scheduling follow:
The parties agreeing to either of these time frames may have spent a considerable amount of time and taken many factors into account when determining work must be completed by Sept. 15, 2014, or that 35 days will be ample time for the roofing subcontractor to complete its work. By the time they have reached an agreement as to a specific date or number of days, both parties likely are confident in the roofing subcontractor's ability to perform the work in such time and the general contractor's ability to stay on schedule taking the roofing contractor's performance into account. However, each of these clauses presents problems that may not be apparent to the parties at the outset of the agreement.
If the parties use these clauses without additional qualifying language, the roofing subcontractor must complete work either by Sept. 15, 2014, or within 35 days, regardless of numerous factors outside the roofing contractor's control that could derail work. When considering scheduling, pay as much attention to the language surrounding and describing the schedule as you do to the time frames of the schedule itself.
Rather than agreeing to complete work by a specific date, such as Sept. 15, 2014, agree to complete work within a specific number of days with conditions suitable for performing roofing work. This is particularly important because roofing work is contingent upon weather. If you were required to reach substantial completion by a specific date or even within a specific number of calendar days, the days the roofing crew was unable to work because of weather would count as a part of this time frame, potentially opening you up to substantial liability for liquidated damages because of delay. In addition, be sure to specify a "day with conditions suitable for performing roofing work" will be determined based on the weather forecast, not on the actual weather that day.
Another subtle but potentially important scheduling issue is determining the date when "days with conditions suitable" begins. Often, you will receive a contract from a general contractor with an "effective date" or "date of the agreement" that reflects the date the general contractor prepared the agreement. This date may be well before you even receive the contract to review. If the date of the agreement is given as the starting point for your time to complete the work, you may have inadvertently lost weeks of time before setting foot on the project site.
As part of your standard practice, you should look at the date of the agreement and change it to reflect the date the contract is executed. However, because a project may not be ready for you to begin work as of the date the parties sign the agreement, be sure to start the clock for performance on the date you are given notice to proceed. Doing this will allow you to account for issues such as delays by other contractors, the general contractor's delays in reviewing and approving submittals, and other issues that are outside your control. An example of a clause that takes all these factors into account is: "Once Subcontractor is given notice to proceed from the Contractor, Subcontractor shall have 35 days with conditions suitable for performing roofing work to reach substantial completion."
A careful review
Hidden, subtle and sometimes overlooked contract provisions have the potential to dramatically affect your rights and obligations. By being aware of the clauses discussed in this article, you will be in a better position to revise agreements to minimize risk and maximize success.
Kathryn Lemmond is an attorney with Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.
For articles related to this topic, see:
"Limit your liability,"
March 2014 issue
"A real risk,"
January
2013 issue
"What's the intention?,"
May 2012 issue
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