One thing that a construction subcontractor may want to look at more closely in written subcontract agreements is the “assignment” clause. Why? Depending on the wording of an assignment clause, it could put payments for properly performed work in jeopardy.
A white paper published by the American Subcontractors Association Inc. (ASA), “Assignment of Subcontracts,” explained the effects of common assignment clauses and provides tips for subcontractors to reduce their risks of losing payment disputes.
ASA’s white paper explained that, typically, a construction owner requires an assignment clause in the subcontract agreement to secure its right to a subcontractor’s performance in case the owner terminates its agreement with the general contractor (GC) or construction manager (CM). The clause “assigns” the subcontract agreement to the owner when the conditions specified in the assignment clause are met, explicitly transferring the rights of the GC or CM to the owner.
For the subcontractor, the timing of an assignment usually presents a problem. ASA’s white paper noted that, nearly always, an assignment occurs following severe problems on a project, meaning that subcontractors likely have not received payments for some or all of their work. Payments to the subcontractor for completed work then are at risk if the assignment clause is silent on the question of the owner’s payment obligations.
It may seem odd that an assignment could transfer all the rights but not all the obligations under a subcontract agreement. ASA’s white paper pointed out that an attorney could make a strong argument in court that a subcontractor would have the right to suspend work for nonpayment if a defaulting prime contractor or the owner to which the subcontract was assigned never paid for the subcontractor’s completed work, thus breaching the contract.
From a practical point of view, however, it’s much less expensive to avoid court and instead ensure that an assignment clause explicitly addresses the transfer of obligations if the subcontract is assigned to the owner.
“Ultimately,” ASA’s white paper stated, “the subcontractor’s ability to avoid or resolve any payment controversy without significant legal expense, or excessive compromising, may hinge on the clarity of the subcontract agreement itself.”
ASA’s white paper provides the assignment clauses in the American Institute of Architects’ (AIA) A401-1997 and Associated General Contractors of America’s (AGC) 650 (1998) form as examples of clauses that explicitly address not just the rights but also the obligations of the owner in case of subcontract assignment.
The AIA form stated, “In such event, the owner shall assume the contractor’s rights and obligations under the Subcontract Documents” at paragraph 7.4.1. The AGC form stated, “Subcontractor consents to such assignment and agrees to be bound to the assignee by the terms of this Agreement, provided that the assignee fulfills the obligations of the Contractor” at paragraph 10.5.
Another option for subcontractors is to modify an assignment clause so that the subcontractor has veto power over the assignment. Since many prime contracts require assignment clauses in subcontract agreements, that option may be impractical.
The ASA Subcontractor Bid Proposal (2005) provides model language in case that option is available, “Neither party shall assign the subcontract, in whole or in part, without the written consent of the other.”
For more information, call 703/684-3450 or visit www.asaonline.com.
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