by Michael M. Suga, Associate
With the popularity of multi-prime projects increasing, specialized contract provisions have been developed to protect the interests of those involved. One such provision is the so-called "trade-to-trade" clause; the contractual equivalent of the owner or construction manager declaring, "leave me out of it!" Under the trade-to-trade clause, all of the various trade contractors mutually agree that, to the extent one trade causes damage to another, resulting claims will be brought directly against the offending trade (i.e., "trade-to-trade"), rather than through the owner or construction manager. This basic concept is intended to make dispute resolution more simple and equitable. Unfortunately, a poorly written, poorly implemented trade-to-trade clause has the potential to do the exact opposite. This article will briefly explore the legal basis of the trade-to-trade clause and provide practical guidance for owners, CM’s and contractors contemplating or encountering of such provisions.
The Trade-to-Trade Clause
On a "multi-prime" project, the owner contracts directly with the various trade contractors, design professionals, consultants, and even major suppliers to perform all of the project work. In some cases, the owner does so directly, and in other cases, a construction manager is hired as an intermediary. Just like subcontractors to a general contractor, the trade contractors on a multi-prime project only contract with the owner and therefore have no express contractual duties to each other. As a result, if one trade contractor causes injury to another, the injured party’s only sure recourse is to bring a claim against the owner, who will likely bring in the offending trade to defend the claim and indemnify the owner.
The primary reason for this somewhat circuitous procedure is that, the only party with whom the trades have a contract is the owner. Thus, from a legal standpoint, they lack contractual "privity" with other trade contractors, which makes a direct action against other trade contractors difficult, if not impossible to maintain. The trade-to-trade clause seeks to cure this legal deficiency and take the owner out of the litigation loop.
In general terms, a trade-to-trade clause requires a trade contractor who has been injured by the actions of another trade to proceed directly against that trade contractor, and not against the owner. In turn, each trade contractor agrees to be responsible to other trade contractors in the event it causes them damage. By including such a provision in all trade contracts on the project, the owner seeks to create a web of quasi-privity in which each trade contractor agrees to be liable directly to other trade contractors. Because this direct action is mandatory under the trades’ contracts, the owner hopes to avoid becoming embroiled in disputes in which it has no stake.
It should be noted that the trade-to-trade clause is not an exculpatory clause. In other words, it does not prevent trades from bringing actions directly against the owner for the owner’s breaches of contract. It merely seeks to prevent a trade from bringing an action against the owner based solely on the actions of one of the other trade contractors.
Practical Considerations – The Owner
While the trade-to-trade clause does not, and should not, replace the time-honored protection offered by an indemnification provision, it does offer a sort of "first line of defense" for the owner. In order for the clause to be an effective defense, however, it should be carefully drafted. Remember that a trade contractor unsure of its trade-to-trade rights is likely to bring the owner into any resulting litigation just to be sure of a recovery from someone. Accordingly, the following are some basic issues that owners should consider when drafting and administering trade-to-trade provisions:
• 3rd Party Beneficiary Rights - When drafting a trade-to-trade clause, an owner should familiarize itself with the requirements for creating third party beneficiary rights in the controlling jurisdiction. This should include the requirements for creating such rights (some jurisdictions require express terms to create third party beneficiary rights), the extent of such rights, and the ability of the third party beneficiary to enforce such rights.
• Who To Include - Remember that any contractor, supplier, design professional, or consultant that does not have a trade-to-trade provision in its contract is not subject to trade-to-trade liability. Therefore, it is important for the owner to identify all parties, including suppliers and even design professionals, who should be included in the trade-to-trade structure. For example, there is no reason why a purchase order for a major building component cannot include a trade-to-trade clause. That way, in the event the supplier impacts one of the trade contractors on the project, the trade-to-trade clause covers any resulting claims.
• Coordination Obligations – To the extent an owner (or construction manager) retains coordination and/or scheduling obligations for the project, such obligations should be carefully set forth in the contract. Frequently on multi-prime projects, the trade contractors each have parallel obligations to coordinate with each other. This can create confusion as to which party, the trade contractor or the owner/construction manager, is ultimately responsible for coordination failures. Obviously, any ambiguity with respect to these duties opens to door to claims of multiple liability.
• Settlement –An owner must take care not to extinguish inadvertently the claim rights one trade contractor may have against another trade contractor. This could occur when the owner is closing out a particular trade contract or releasing a particular trade contractor from claims in connection with a settlement agreement. The owner should be mindful of the possibility that some parties will be unaware of potential claims at the time of the settlement. In many jurisdictions, the rights of a third party beneficiary (the injured trade) are linked to the rights of the primary beneficiary (the owner). As a result, it is possible for a release by the owner to effect a release of all rights, including trade-to-trade rights. This situation can be managed in a variety of ways including the creation of express exceptions in the settlement and release agreements or, if possible, a global settlement including all potential claimants. Any settlement that extinguishes trade-to-trade rights might subject the owner to liability for those extinguished claims.
Practical Considerations – The Trade Contractor
A trade contractor’s primary concern is compensation for a loss. As with any dispute resolution mechanism, the best way for the trade contractor to ensure a loss recovery is to follow the claim procedures set forth in its contract. This is particularly important in the trade-to-trade setting, however, because the failure to pursue claims trade-to-trade can leave a trade contractor with no ability to recover from the owner or construction manager. The following are some issues that trade contractors should consider in connection with a trade-to-trade clause:
• Your Rights and Obligations – First and foremost, a trade contractor must understand its rights under a trade-to-trade provision. In addition to the third party beneficiary issues noted above, the trade contractor must have a detailed understanding of its obligations toward the other trade contractors. Each trade should understand where the owner’s coordination responsibilities end and where its coordination responsibilities begin. Obviously, problems that the trade believes to be the result of poor coordination or scheduling on the part of the owner should be well documented.
• Notice - Traditional claim provisions require a trade contractor to provide notice of a claim to the owner, construction manager, or general contractor with whom they have contracted. For trade-to-trade claims, however, the notice requirements are often less clear. Thus, the trade contractor and owner both must ensure that there is a procedure in place for notifying the offending trade and, where necessary, ensuring that all potentially liable trades are provided the notice required to preserve the claim. This may involve notice coordination by the owner (who is often in the best position to identify the trade that was ultimately responsible for the problem), or a sort of domino notice in which one trade provides notice to another trade, who will then provide notice to any parties that it believes are a cause of the problem. Whichever method is utilized, it is important that these procedures be established before any problems arise.
• Document Your Deals – Under a trade-to-trade dispute resolution scheme, it is likely that over the course of a project, deals will be worked out between the trades in the field. This can take the form of traditional monetary settlements, or less-traditional bartering with resources such as labor time, equipment time, or materials. It is important that these deals be documented so that there will be no question, in the event of litigation, what trade-to-trade agreements were finalized and what issues have already been resolved. Particular care should be given where a trade-to-trade agreement is made concerning issues (such as schedule impacts) that could impact other trade contractors down the line.
The trade-to-trade clause harbors potential pitfalls for both owners and trade contractors. The first step in avoiding these pitfalls is making sure that all parties have a mutual understanding of the trade-to-trade clause, how it fits within the overall procedures for resolving disputes provision, and the parties’ respective coordination obligations. An owner that fails to preserve its trade contractors’ rights under the trade-to-trade provision will likely find itself the primary target of the very litigation it sought to avoid. Conversely, a trade contractor that fails to follow the requirements of a well-written trade-to-trade clause may find itself the only one standing when the music stops.
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The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.