Problem:

A contractor was hired by a large retailer to perform work in one of its stores. The contractor hired a subcontractor to perform a portion of the work: cutting a concrete floor to expose supply lines to be removed and replaced by the contractor. The contractor did not ask the subcontractor to sign a written subcontract, primarily due to its familiarity with the subcontractor. Shortly before the work was scheduled to start, the subcontractor notified the contractor that it was unable to do the work. The contractor asked the owner/retailer to delay the work. The owner refused, instead referring the contractor to another subcontractor that had recently performed work at another, nearby store but was unknown to the contractor. Again, the contractor did not ask the subcontractor to agree to a written contract, primarily due to the looming start date.

Due to business pressures and other factors – the retailer was a significant customer of the contractor – the contractor had relatively little bargaining power and signed the retailer’s contract for the work without negotiating any of its terms. The prime contract contained a broad indemnification clause, which, together with other terms in the contract, essentially made the contractor entirely responsible for all aspects of workplace safety and required the contractor to hold the owner harmless for any and all injuries to all persons present on the job.

The owner/retailer gave the wrong store blueprints to the contractor. As a result, the location of the supply lines was misidentified. The subcontractor had not properly maintained the gas powered concrete saws used to cut the floor had not to cut the floor, causing them to emit excessive amounts of carbon monoxide. Due to the length of time the saws were used as a result of the wrong blueprints and the poor condition of the saws, a group of store employees suffered significant injures due to carbon monoxide poisoning. The contractor later learned that the retailer’s employees at the nearby store, where the subcontractor had recently performed the prior work, also suffered carbon monoxide poisoning due to the poor condition of the subcontractor’s saws, a fact that was known to the retailer. Also, the contractor’s site supervisor asked store employees to open loading dock doors to increase ventilation during the cutting, but the employees refused to do so.

The employees received substantial workers compensation awards, and also sued the contractor and subcontractor based on negligence in creating an unsafe work environment. The retailer invoked its right to indemnification under the prime contract for the workers compensation payments. Because the contractor had not required the subcontractor to sign a written contract that passed through the same obligations that were contained in the prime contract, the contractor was unable to in turn seek indemnification from the subcontractor. The subcontractor had relatively little insurance and tendered its coverage limits to the plaintiffs in exchange for being dismissed from the lawsuit, leaving the contractor entirely responsible for the workers compensation payments and potentially liable for virtually all of the damages claimed in the lawsuit, which exceeded $10 million.

Result:

The contractor settled with the plaintiffs and the owner/retailer. The terms of each settlement agreement are confidential, but it can be said that the contractor was not overjoyed by the result. The contributing actions of the owner – providing the wrong blueprints, its knowledge of prior carbon monoxide related injuries caused by the subcontractor, and its employees’ refusal to open loading dock doors for ventilation – did not reduce the contractor’s liability under the terms of the prime contract.

Lessons Learned:

Always execute a written subcontract with any subcontractor, even with one that has previously performed work for you. If the original subcontractor had signed a written agreement to perform the work, it may have been much less likely to back out of the deal at the last moment. Before retaining a new subcontractor, perform a reasonable amount of due diligence to determine its financial capabilities and its ability to perform the work at least consistent with industry standards for quality, timeliness and safety. Ask the subcontractor to provide proof of its insurance coverage (the subcontract should include provisions regarding minimum coverage levels and the requirement to provide a certificate of insurance).

Due to practical business needs and conditions, a contractor may be forced to assume burdensome obligations and risks imposed by the owner’s contract. In such instances, be sure to thoroughly understand the extent of the risks. Are they reflected in the contract price? (On a related note, bid proposals should include a statement that the proposal is contingent upon the parties signing a mutually agreeable contract. A contractor may want to create its own prime contract form and submit that with the proposal, citing it as the basis of the proposal.) The subcontract should pass through the obligations and risks in the prime contract to any subcontractors for their portion of the work. (Note that this is likely to result in the subcontractor asking for a copy of the prime contract. In the subcontract, the contractor should retain the right to redact any confidential information in the prime contract before giving a copy to the subcontractor.)

Also consider any practical steps that can be taken to reduce risk, such as having written safety rules that subcontractors must follow (which should be incorporated into the subcontract), safety equipment (including, if appropriate, CO and other detection devices) and on-site safety reviews. Talking with an experienced, business-minded attorney who can appreciate your business needs and provide sound legal advice can help you to manage your risks and increase your bottom line.