A Poorly Worded Assignment Clause
Can Put Payments at Risk
by David Mendes

One thing that you, as a construction subcontractor, may want to look at more closely in your written subcontract agreements is the "assignment" clause. Why? Depending on the wording of an assignment clause, it could put your payments for properly performed work in jeopardy. A white paper published by the American Subcontractors Association, Inc. (ASA), "Assignment of Subcontracts," explains the effects of common assignment clauses and provides tips for subcontractors to reduce their risks of losing payment disputes.

ASA's white paper explains that, typically, a construction owner requires an assignment clause in the subcontract agreement to secure its right to a subcontractor's performance in case the owner terminates its agreement with the general contractor or construction manager. The clause "assigns" the subcontract agreement to the owner when the conditions specified in the assignment clause are met, explicitly transferring the rights of the GC or CM to the owner.

For the subcontractor, the timing of an assignment usually presents a problem. ASA's white paper notes that, nearly always, an assignment occurs following severe problems on a project, meaning that subcontractors likely have not received payments for some or all of their work. Payments to the subcontractor for completed work then are at risk if the assignment clause is silent on the question of the owner's payment obligations.

If you find it odd that an assignment could transfer all the rights but not all the obligations under a subcontract agreement, you're not alone. Indeed, ASA's white paper points out that an attorney could make a strong argument in court that a subcontractor would have the right to suspend work for nonpayment if a defaulting prime contractor or the owner to which the subcontract was assigned never paid for the subcontractor's completed work, thus breaching the contract. From a practical point of view, however, it's much less expensive to avoid court and instead ensure that an assignment clause explicitly addresses the transfer of obligations if the subcontract is assigned to the owner. "Ultimately," ASA's white paper states, "the subcontractor's ability to avoid or resolve any payment controversy without significant legal expense, or excessive compromising, may hinge on the clarity of the subcontract agreement itself."

ASA's white paper provides the assignment clauses in the American Institute of Architects' (AIA) A401-1997 and Associated General Contractors of America's (AGC) 650 (1998) form as examples of clauses that explicitly address not just the rights but also the obligations of the owner in case of subcontract assignment. The AIA form states, "In such event, the Owner shall assume the Contractor's rights and obligations under the Subcontract Documents" at paragraph 7.4.1. The AGC form states, "Subcontractor consents to such assignment and agrees to be bound to the assignee by the terms of this Agreement, provided that the assignee fulfills the obligations of the Contractor" at paragraph 10.5.

Another option for subcontractors is to modify an assignment clause so that the subcontractor has veto power over the assignment. Since many prime contracts require assignment clauses in subcontract agreements, that option may be impractical. The ASA Subcontractor Bid Proposal (2005) provides model language in case that option is available: "Neither party shall assign the subcontract, in whole or in part, without the written consent of the other."

Learn more about assignment of subcontracts. Visit ASA's Web site at www.asaonline.com and click on "Stand Up! for Subcontractors," or call ASA at (703) 684-3450.

Visit ASA's Web site at www.asaonline.com

Contact: David Mendes
(703) 684-3450, Ext. 1335
dmendes@asa-hq.com