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What Are Common Issues in Subcontractor Agreements?

Subcontractor agreements are the cornerstone of relationships between contractors and subcontractors, outlining both parties’ terms, expectations, and responsibilities.  These agreements are popular in the construction and building industry, providing a framework to navigate complex projects.  However, if these agreements are unclear, they can lead to disputes, project delays and higher costs.  This article will explain the common issues in subcontractor agreements within New Zealand law and explore strategies to address and prevent these issues.

What Are Subcontractor Agreements?

Subcontractor agreements are legally binding contracts defining the terms, responsibilities, and expectations between contractors and subcontractors.  These agreements are vital in various industries, especially in construction and building projects, where subcontractors are engaged to perform specific tasks or services on behalf of the primary contractor. 

For example, your construction company hired a subcontractor to handle specialised electrical tasks for your ongoing residential property project.  This prompts you to send through a subcontractor agreement tailored for that purpose. 

This article will explore some common issues with Subcontractor Agreements below.

1. Vague Scope of Work

Insufficient details in subcontractor agreements often lead to confusion regarding the scope of work.  This can include the deliverables they are responsible for, tasks that need performing and the timeline they need to adhere to to prevent confusion and disagreements. 

To address this issue, you should outline a clear and specific scope of work within the subcontractor agreement to prevent misunderstandings and ensure both parties understand their responsibilities. 

2. Contract Variation

This issue arises when a subcontractor agreement fails to include provisions for contract variations.  A contract variation allows changes to the agreement’s original scope, work method, or other terms.  Failure to include these provisions can lead to disputes over additional work or unexpected costs.

To mitigate this issue, you should ensure that your subcontractor agreements detail procedures that handle variations or changes to your project to be more equipped for future contractual variations and minimise disputes.

3. Unclear Payment Terms

Another issue that arises with subcontractor agreements is unclear payment terms, which can sometimes result in the subcontractor not getting paid

To address this issue, you should clearly define the payment terms, including the following: 

  • the specific amount requiring payment;
  • the payment schedule; and 
  • any other conditions for payment. 

This is essential to include as it complies with New Zealand law.  In particular, the legislation governing the construction and building sector enforces prompt subcontractor payment. 

4. Unclear Communication Terms

Lacking clear communication terms between the contractor and subcontractor regarding how the subcontractors will communicate can lead to risks like delays, increased costs and operational issues.  

You can resolve this by including provisions for regular status updates, meetings, or reporting requirements to maintain clear and consistent communication.  These measures will foster transparency between the parties and minimise misunderstandings, ultimately contributing to a smoother project execution.

5. Lack of Terms Protecting Against Unforeseen Circumstances

Subcontractor agreements often fail to include provisions to prepare for unforeseen events. In turn, you risk project timelines and costs due to unpredictable occurrences like weather, equipment issues, or force majeure events.

You can solve this by integrating terms that plan for unforeseen circumstances, such as delegating responsibilities and resolution timelines to help avoid significant delays and costs.  This can ensure a structured approach to handling unexpected events.

6. Indemnification and Liability

Subcontractor agreements often lack robust indemnification provisions, leading to unclear obligations regarding damages or costs arising from actions.  Indemnification provisions outline each party’s obligations to cover damages or costs resulting from their actions. 

To address this issue, you should incorporate explicit indemnification and liability provisions that clearly state the responsibilities for any property damage, injuries or project-related issues.  This will help protect parties, mitigate disputes and allow clarity in terms of obligations for both parties. 

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7. Lack of Consideration for Intellectual Property

In recent years, many subcontractor agreements have failed to account for the increasing importance of Intellectual Property (IP) considerations. 

The solution is for the parties to the agreement to first decide on who has ownership over the IP created during the project, which includes: 

  • patents; 
  • trademarks; 
  • copyrights; and 
  • designs. 

Then, the parties should include provisions within the agreement on IP ownership and use, alongside any restrictions on use or disclosure.  Clear delineation of intellectual property rights helps prevent disputes and ensures both parties understand their rights and obligations.

8. Non-Disclosure and Confidentiality 

Another common issue is forgetting to include non-disclosure and confidentiality provisions.  These provisions are critical to protecting confidential information exchanged. 

To address this, you should incorporate robust non-disclosure and confidentiality provisions to safeguard sensitive information, fostering trust between the parties.  These provisions should clearly define what information is confidential and establish protection measures.  These provisions may also contain penalties for breaches.

9. Termination Provisions

Subcontractor agreements often lack explicit termination provisions, leaving circumstances and consequences ambiguous.

The solution is to ensure the agreement specifies termination conditions, including causes and penalties.  Clearly outline associated consequences like settling outstanding fees, resolving pending obligations, minimising potential disputes, and fostering clarity during termination.

Key Takeaways 

Subcontractor agreements are crucial for outlining the roles of subcontractors and establishing the working terms.  However, due to the level of complexity and potential for errors that can arise during drafting, you may face disputes and even legal issues if they are not properly drafted. 

If you need help drafting or understanding your subcontractor agreement, LegalVision’s experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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