You likely see them in every contract. The Subcontract encompasses both the agreement itself and the underlying prime contract. But how often do you actually look at the prime contract? And, what kind of liability are you assuming under the prime contract? A small Kansas supplier learned the hard way that language in the prime contract can create substantial liability.
Arch Environmental Equipment is a small bulk materials conveying equipment supplier with 25 employees. Arch received a request from Dearborn, a major player in the bulk conveying industry, to supply equipment for a conveyor belt system that would be incorporated into a government project. The contract between Dearborn and Arch consisted of a purchase order that contained an indemnification clause requiring Arch to indemnify Dearborn for damages to Dearborn, except those damages caused by the sole negligence of Dearborn.
Dearborn in turn signed a subcontract with an upstream contractor that provided that the subcontractor (Dearborn) shall assume toward the Contractor all obligations which the Contractor assumes toward the Owner. The prime contract required the contractor to pay the owner liquidated damages.
So, when the project was delayed because the equipment Arch Environmental delivered to the project did not work, the owner enforced the liquidated damages clause against the general contractor. The general contractor then enforced it against a subcontractor, which enforced liquidated damages against Dearborn, which enforced liquidated damages against Arch. Arch then had to pay over $300,000.00 in liquidated damages.
Chances are very good that Arch did not even know there was a liquidated damages clause in the prime contract, let alone that liquidated damages could be enforced against Arch. Are you looking at the prime contracts on your projects to see what kinds of damages you could be agreeing to when you sign a subcontract?