All companies must enter into contracts with other organizations or individuals as a regular part of doing business. As a subcontractor, however, winning contracts with General Contractors is the key to your organization's livelihood. Well-written contracts can help your organization secure key jobs with General Contractors. However, a poorly drafted contract can harm a subcontractor by either not adequately protecting its interests or failing to properly limit its potential liability.

This article is meant to provide general guidance regarding how to draft effective contracts that limit your liability as a subcontractor and ensure you reap all of the benefits that you intended to receive by winning a contract with a General Contractor.

What Is A Contract?
A contract is an agreement between two or more parties that is legally binding. The agreement will usually require that one party will pay the other in exchange for either goods or services.

All contracts, whether written or oral, must contain the following basic elements:

Offer: One person must propose to do something, refrain from doing something, or pay some amount for goods or services to another person.

Acceptance: One person must agree to all of the terms of the person making an offer.

Consideration: This is the motivation that induces people to enter into a contract. Consideration may be a right, interest, or benefit that a person will receive for agreeing to enter into a contract and perform some service or provide some good. Monetary payment is usually the consideration of most contracts.

In general, it is best to avoid an oral contract. While oral contracts may ultimately be enforceable, written contracts have the advantage of providing a clear record of what the parties intended when they entered into a contract. Oral contracts can be subject to a multitude of interpretations that can be especially troubling in the event one party violates the agreement.

What Basic Provisions Should Be Included In An Effective Contract?
A properly drafted contract should include the following provisions:

The Parties: A contract should list the name and addresses of the parties. If you are entering into a contract with a large General Contractor that has many subdivisions and separate corporate entities, make sure your contract is listing the correct corporate entity you are intending to bind with the contract. Failing to list the correct entity may needlessly complicate enforcement. Conversely, if you are part of a large organization with many separate corporate entities, make sure you are only binding the entity you wish to obligate under the contract.

Subject of the Contract: You should be as inclusive and descriptive as possible regarding the work you intend to do for the General Contractor. What is the job the subcontractor will be performing? Where is the work being done? How do the parties signify that the work is complete? Are there any special requirements regarding what materials may or may not be used to complete the job? What do the parties do in the event that the work performed is flawed or defective in some way? Be as specific as possible.

Terms and Conditions: Do not leave out any terms. In general, courts will only enforce the actual terms set forth in the contract itself. Parties are not allowed to vary or contradict their written contract with evidence of oral agreements. Only in very limited circumstances (such as fraud, duress or mutual mistake) will courts consider evidence outside the actual contract. Given that all terms should be included in the contract, it is crucial to identify all the key issues that could arise during the agreement that should be addressed.

To ensure that neither party can later claim that there was some other understanding between the party that was not identified in the written contract, any contract should have a provision that specifically states: (1) the contract is the entire agreement between the parties; (2) all prior agreements between the parties are revoked and superseded by the contract; (3) the contract may not be modified or amended except in writing signed by the parties; and (4) in the event the contract conflicts with any other document, the contract shall control.

Applicable Law: In general, you should have the law of the state you are located in be the law that applies to your contract. However, you should specifically state that your state's "conflict of laws" provisions will not be given effect (i.e., enforced). In general, state laws include "conflict of laws" provisions that dictate when the laws of the state or the laws of another state or country will or will not apply. Unless you specifically state that your state's "conflict of laws" provision will not be given effect, it is possible that the law of another state could apply to your contract despite a contract provision that specifies that your state law applies.

You should also agree to the jurisdiction of state and federal courts in the state county in which your organization is located. Then, in the unfortunate event that your organization becomes involved in litigation over the contract, you will at least have the convenience and possibly the advantage of litigating the case in courts that are nearby and familiar to you.

Severability Clause: A severability clause is a provision that states that if a contract provision or a portion of a provision is found by a court to be unenforceable, then the remainder of the contract or the offending provision will still be enforceable. If you do not include a severability clause, you risk having the entire contract invalidated by a court due to a single offending provision.

What is an Indemnification Agreement?
General Contractors will typically require subcontractors to enter into "indemnification agreements" (also known as "hold harmless agreements") as a condition of any contract. In an indemnification agreement, the indemnitor (the subcontractor) agrees to pay the indemnitee (the General Contractor) for any loss or liability that the indemnitee suffers.

There are three types of indemnification agreements:

1. No Fault: The subcontractor agrees to pay the general contractor for all losses regardless of who caused the loss.
2. Limited: The subcontractor only pays for losses caused by its own negligence.
3. Partial: The subcontractor will pay for losses caused "in whole or in part" by the General Contractor. Under such an agreement, the subcontractor can be held liable for an entire claim even if it was the General Contractor who was mostly at fault. The only way a subcontractor may avoid liability under such an agreement is if the General Contractor is the sole cause of the loss.

When enforcing a contract and/or indemnification provision within a contract, courts will apply the following legal standards:

• Any ambiguity in the language of any contract provision, including any indemnification provision, that creates multiple possible meanings will be construed against the party who drafted the contract.
• The contract will be assessed as a whole, including any indemnity agreement, to determine the meaning of all provisions.
• The contract's language will be given its ordinary, every day plain meaning. Therefore, the parties must clearly define and explain any terms that they consider to have special meaning.

Because it is in a subcontractor's best interest to limit its potential liability, it is best to try to have a General Contractor agree to a Limited indemnification agreement and avoid agreeing to a Partial or No-Fault indemnification agreement if possible.

Do States Place Any Limits On Indemnification Agreements?
Some states limit or completely prohibit No Fault and Partial Indemnification Agreements. For example, Florida law provides that unless an indemnification agreement contains a monetary limit that "bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents" it will be void and unenforceable. (See Fla. Stat. § 725.06).

When negotiating a contract, you should consult an attorney in your state to determine what, if any, state law limitations may apply.

How Can Insurance Affect Subcontractor Contracts?
As a subcontractor, you need to make sure that your insurance coverage adequately covers any risk your organization assumes when it enters into a contract. If you are unable to obtain sufficient insurance or if insurance for the type of risk you are assuming is unavailable, your organization will have to cover the risk itself with its own monies.

You can purchase standard general liability insurance policies to cover your contracts. While the exact type of contracts covered may vary depending upon the definition of what is an insured contract, standard general liability policies may cover a wide variety of contracts, including: lease agreements, easements, elevator maintenance agreements, permits issued by municipalities, and other contracts where a subcontractor assumes liability for a General Contractor through an indemnification clause.

Conclusion
There's an old saying in New England that good fences make good neighbors. The theory behind this old adage is that because the fences clearly define who owns what property, the neighbors do not become involved in useless controversies regarding their property lines. The same thing can be said about properly drafted contracts. By carefully drafting your contracts and not accepting overly broad indemnification agreements, you can limit your organization's potential liability by not assuming an inordinate amount of a General Contractor's risk. Further, by properly identifying the parties and specifics of the job, you can avoid unnecessary controversies should unforeseen events begin to affect the job. Thus, a properly drafted contract is not a minor detail in your relations with General Contractors. Rather a properly drafted contract may very well be the key to successful General Contractor relations. Like a good fence, a carefully drafted contract can enhance your relations with General Contractors by clearly defining your relationships.