Maryland Legislature Caps Retainage

At the end of the 2008 General Session in Annapolis, the General Assembly passed Senate Bill 313, which places a 5% retainage cap on construction contracts in excess of $250,000.00, when a performance and payment bond is furnished. The bill requires the contractor to furnish 100% security to guarantee performance of the contract and 100% security to guarantee payment for labor and materials. Further, the retention proceeds of any payment due from a contractor to a subcontractor may not exceed the percentage of retainage from the owner to the contractor. This also applies to subcontractors and lower-tiered subcontractors.

This new law will not prohibit withholding of any amount due from the owner to the contractor, contractor to subcontractor, or subcontractor to lower-tiered subcontractor if the non-paying party reasonably determines that the contractor or subcontractor’s performance under the contract provides reasonable grounds for withholding the additional amount. Upon approval by the Governor, this new law will take effect on October 1, 2008.

Incorporation of the Prime Contract: A Hidden Benefit

Virtually every subcontract agreement incorporates by reference the prime contract between the general contractor and the owner. Too often subcontractors do not obtain a copy of the prime contract and consequently become bound to terms and conditions they have not seen much less read. Moreover, the contractual provision incorporating the prime contract may state that if a conflict exists the contract language must be interpreted in a way that favors the general contractor. For example it may state:

"In the event of variations, conflicts, or inconsistencies between or among the terms, provisions or conditions of this Subcontract and any other Contract Documents, the terms, provisions and conditions which grant greater rights or remedies to Contractor or impose higher standards with regard to the obligations, responsibilities and scope of work of the Subcontractor shall control."

This provision, while seemingly favorable to the general contractor, does provide a benefit to a subcontractor because it fails to address the "rights" of a subcontractor. Consequently, if the subcontract allows for a larger overhead and profit markup than the prime contract, the allowable overhead and profit markup is a "right" of the subcontractor, not an obligation, responsibility or part of the scope of the work; nor is a right or remedy of the Contractor. Thus, the stated overhead and profit of the subcontract will control.

These "precedence clauses" as they are called must be carefully drafted and reviewed. Moreover, as always, a subcontractor should obtain copies of all contract documents incorporated into the subcontract.

Contractual Indemnity Provisions

The Maryland Court of Appeals recently reiterated the various legal principles that trigger indemnification rights. In the context of contractual indemnity provisions, the Court recognized three basic types of indemnity provisions: (1) indemnity against loss or damage, under which the indemnitee may not recover until it has made payment or otherwise suffered an actual loss or damage within the scope of the indemnity; (2) indemnity against liability, under which an action may be brought as soon as the liability is legally imposed, as when judgment is entered, even though no actual loss has yet been sustained (the judgment has not been paid); or (3) a promise by the indemnitor “to perform a certain act or make specified payments for the benefit of the indemnitee,” under which an immediate right
of action accrues upon the failure of the indemnitor to perform, regardless of whether any actual damage has been sustained.

As evidenced by these three types of contractual provisions, the risk and exposure for the party providing indemnification in a contact can vary greatly depending upon the type of indemnification provision. Consequently, the indemnification provisions in construction contracts warrant careful scrutiny before execution.