Bastardized Contracts in Widespread Use
December 2006In Canada there are industry standard construction contracts that aim to provide balance, uniformity and standardization for bidding and contracting procedures. Known as CCDC (Canadian Construction Documents Committee) contracts, they do a good job of protecting all parties by limiting undue risk.
But increasingly general and prime contractors are reworking CCDC contracts to their own benefit at the expense of their subcontractors. At the crux of the issue is a common alteration called a "condition precedent” clause, known on the street simply as the "paid when and if” clause. It means that the subs don’t get paid until the GC does.
Since GCs have added the clause, subcontractors have seen payment delays stretch to 120 days or longer after contract completion. Contract payment under an unaltered CCDC contract is 30 to 45 days after contract completion. What’s worse, some contractors aren’t even getting paid for their work.
"We have an industry document that is consensus built and is publicly endorsed by the general contracting community, and yet it often isn’t used,” says John Blair of the National Trade Contractors Coalition of Canada, a group set up in part to address the inequity.
Hugh Laird, executive director of the Interior Systems Contractors Association of Ontario, says such bastardized contracts are "quite prevalent” in the wall and ceiling industry. Typically, what happens is after one of his members negotiates a price, the general provides a letter of intent tendered into the contract. Once the sub starts the job, the general then adds the "paid when paid clause.”
While Laird advises his members to walk away from the job at that point, he knows that that is asking a lot. "The problem is that there is always someone who will take the job,” he says.
While his members have faced 120-day payment delays, he is sure that some also haven’t been paid as a result of the clause. "I can’t get any contractor to go on record though, for obvious reasons,” Laird says. Applauding the efforts of the NTCCC to halt the use of the clause, Laird fears that the problem will get worse if the economy turns down.
John Galt, also of the NTCCC, states the problem simply: "There is a culture of general contractors that see this clause as a way of making more money and shifting down risk (to their subcontractors).”
Blair says what’s worse is case law has made clear that the "paid when and if” clause is binding. "You won’t get paid if you sign one of these clauses if the general, for whatever reason, doesn’t get paid,” he says.
The NTCCC says the problem is huge and while there are no easy solutions, there are a number of things subs should do to protect themselves. For starters, says Michael Atkinson, president of the Canadian Construction Association, just because a contract says it is a CCDC contract at the top, doesn’t mean it is. If it doesn’t have a seal on the bottom of the front page, it is not a CCDC contract.
Atkinson recommends that contractors get a copy of a CCA document called, "A Trade Contractor’s Guide and Checklist to Construction Documents.” "For my money this is the most useful tool for any contractor in the assessment of a non-standard or even a standard industry contract,” Atkinson says.
Brian Edmunds, vice president of surety for Morris Mackenzie Inc., advises subcontractors that they should know who their prime contractors are and who their bonding agent is. Moreover, be wary of a GC with default insurance because it may well carry a high default that won’t provide enough insurance to protect the sub trade if the contract sours.
About the Author
Don Procter is free-lance writer in Ontario, Canada.