Subcontractors Build the Projects and Shoulder Most of the Risk…. What’s Wrong with this Picture?

By Steven B. Kaplan, Esq. 

[This article first appeared in the Winter 2023 edition of CONSTRUCTION Magazine (Vol. 62, No. 4).]

In our world where construction managers and general contractors rarely self- perform work, shifting the risk to the subcontractors for nearly all problems that arise on a construction project has become a fait accompli. This risk shifting is accomplished by the GC/CMs including in their subcontracts an array of standard exculpatory provisions– “slaughter” clauses– such as: “pay if paid,” “no damages for delay,” “48 hour” notice provisions, unconditional lien/claim waivers of all claims for each periodic requisition, converting improper termination for cause into termination for convenience, 6% limit on overhead/profit on change orders, no reimbursement for supervision on cost-plus work, responsibility for subsurface or unknown conditions (absent a differing site conditions clause), no right of action against the architect/engineer for defective plans (economic loss doctrine), sacrificing the project manager’s first born child (ok, I haven’t seen that one in a subcontract— yet). And the Connecticut courts routinely enforce these exculpatory provisions against the subcontractor—unless a statutory provision dictates otherwise.

It is understandable, and broadly accepted, that a GC/CM would include “flow through” clauses to assign to the subcontractor all of the obligations and attendant contract provisions for that portion of the work that the GC/CM owes to the owner. And some of these exculpatory provisions flow directly from the owner’s contract into the subcontract. What truly harms subcontractors, however, is the imposition in the subcontract of additional “slaughter clauses” that eliminate all reasonable remedies to get compensated for real damages the sub has incurred through no fault of its own in building the project.

Over the years, our state legislature has afforded some protection for subcontractors who have dutifully performed their work and simply want to get paid fairly and promptly. But this protection varies greatly between public and private projects, and subcontractors usually will fare better when problems arise on a private job as opposed to a public job.

On private projects, the mechanic’s lien statutes enable subcontractors and vendors to file liens on the owner’s property when payment is overdue for work performed. If the filing of the lien doesn’t light a fire under the responsible parties, then a foreclosure action against the property will turn up the heat appreciably. Note, however, that the mechanic’s lien is viable only to the extent of the amounts owed by the owner to the GC/CM. Also, the subcontractor’s lien rights frequently are subordinated to the project lender’s mortgage/financing—which may defeat the unpaid subcontractor’s recovery under the mechanic’s lien.

The Fairness in Construction Financing Act, Conn. Gen. Stat. 42-158i et seq., applies to all private construction except residential projects of four units or less. The Act provides an array of remedies for the unpaid subcontractor: prompt payment requirements for the owner, GC/CM, and subs of 30 day periods; mandatory escrow accounts for retainage (5%), with enforcement provisions; escrow accounts for disputed sums; award of interest and attorney’s fees for unpaid sums, as well as potential penalties of 10% for sums withheld in bad faith; adjudication of disputes in Connecticut and under Connecticut law; and a direct right of action by an unpaid subcontractor or supplier against the project owner. Similar to the mechanic’s lien statutes, the owner’s liability for payment is limited to its payment obligation to the contractor at the time the claim is made. There actually is less protection for subcontractors on public projects. Mechanic’s liens are not permitted against public property, but statutory payment bonds (Conn. Gen. Stat. ⸹49-41) are required. These payment bonds, however, usually embody the terms of the subcontract, which will almost always include the array of “slaughter” clauses noted above. While the prompt payment provisions of Conn. Gen. Stat. ⸹49-41a and ⸹49-41c can help the unpaid sub if the GC/CM has been paid by the owner, the “pay-if-paid” clause usually will block any relief for the sub if the GC/CM has not been paid for the sub’s work. This becomes particularly troublesome on state projects, where the State’s sovereign immunity has been deemed by the Connecticut courts to bar “pass through claims” by a GC/CM on behalf of its subcontractor. Thus, even where the State, or its agents, have caused delays or extra costs for the subs on a project, if the State refused to afford relief for those claims, the sub cannot sue the State directly. Nor can the GC/CM “pass through” the sub’s meritorious claims against the State absent an admission from the GC/CM that it is liable to the sub. Coupled with a typical “pay-if-paid” clause, this not only shields the GC/CM from liability for anything but its own negligence or malfeasance, but it effectively eliminates any chance of recovery by the sub for damages caused by the State or its agents.

It is cold comfort that Connecticut stands alone– unlike the U.S. government, or every other state in the country—in completely barring “pass through” claims for state construction projects. This explains, in part, why many responsible and proficient subcontractors will not work on a State of Connecticut project.

Nonetheless, subs who perform masonry, electrical, plumbing or HVAC work on state projects must be “listed” in the general contractor’s bid per Conn. Gen. Stat. ⸹4b-93. Absent exigent circumstances, those listed subs must be awarded that work by the successful GC bidder at the listed price. This deters bid shopping and bid chopping of the listed subs. (Fair game, however, for most other subs and vendors.) Moreover, the listed subs enjoy additional, and unique, protection by the mandatory subcontract form that is set forth in Conn. Gen. Stat. ⸹4b-96. By its plain terms, this subcontract form effectively bars the imposition of the typical “slaughter clauses” that GCs otherwise include in their subcontracts. But this protection is not afforded to the non-listed subcontractors, or to any subcontractors who perform work for construction managers, as opposed to “general bidders” (i.e., general contractors) on state projects. Also, the listed subcontractors are granted no special relief from the prohibition against “pass through” claims against the State.

One other singular protection afforded to subcontractors for any project, public or provided, is set forth in Conn. Gen. Stat. ⸹52-572k, which prohibits a party to a contract (such as a GC or CM) from requiring another party (such as a subcontractor) to indemnify or hold the GC/CM harmless for its own negligence. Contractual provisions to the contrary are explicitly void as against public policy.

In sum—Connecticut subcontractors beware. The typical subcontract “slaughter clauses” create a minefield of risk-shifting and elimination of remedies for payment for work performed. And our state laws will help only in very specific circumstances.

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