Lamson, Dugan and Murray, LLP, Attorneys at Law

Know Your Obligations Under Both the Prime Contract and Subcontract

Posted in Construction Contracts, Uncategorized

A recent case out of New Mexico highlights the importance for subcontractors to review iStock_000003390628XSmall[1]their contract with the general and the contract between the general and the owner.  In Centex/Worthgroup, LLC v. Worthgroup Architects, L.P, the architect claimed that the limitation of liability clause in the prime contract trumped the provisions of the subcontract.  The court disagreed and ruled that the specific provision in the subcontract controlled.

In the case, a general contractor was hired to expand and renovate a resort.  The general contractor subcontracted with an architect to design a mechanically stabilized earth wall.  The prime contract contained a limitation of liability clause that states:

general contractor shall require its design professional Subcontractor(s) to obtain insurance in an amount not less than $3,000,000. Owner agrees that it will limit general contractor’s liability to Owner for any errors or omissions in the design of the Project to whatever sums Owner is able to collect from the above described professional errors and omissions insurance carrier.

The subcontract with the architect included two important provisions, an order of precedence clause and a flow down clause.

The order of precedence of the documents, … shall be: (1) the most current approved edition of the construction documents; (2) modifications to the subcontract; (3) the subcontract, unless the prime contract imposes a higher standard or greater requirement on the parties, in which case the prime contract; (4) the prime contract, unless the provisions of (3) apply.

In respect of the design work, Architect shall . . . have all rights toward general contractor which general contractor has under the prime contract towards the Owner and Architect shall, to the extent permitted by applicable laws and except as provided herein, assume all obligations, risks and responsibilities toward general contractor which general contractor has assumed towards the Owner in the prime contract with respect to the design work.

The wall the architect designed failed causing $6 million in damages.  The architect’s insurer paid its $3 million policy limits. The general contractor then sued the architect to recover the remaining $3 million in damages.  In an interesting twist, the architect claimed that the limitation of liability clause contained in the prime contract limited the architect’s liability to $3 million.

The court reviewed both contracts and found that the subcontract controlled the extent of the architect’s liability.  The court reached this conclusion by applying the contractual interpretation rule:

if the specific provisions of the subcontract conflicts with the prime contract, the terms of the subcontract prevail.

Here the subcontract required the architect to shoulder specific liability for redesign work and damages, while the prime contract generally limited the architect’s liability to the limits of insurance.  So, the subcontract with specific language controlled, not the prime contract.

Take Away: Contractors are well advised to review both the subcontract and prime contract to determine whether conflicts exist and the extent of potential liability.

 

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