4.3 Key Contract Provisions, Changes, Delays, and Breach Remedies
Key Takeaways
Under Tennessee's Anti-Indemnity Statute (T.C.A. § 62-6-123), any construction contract clause purporting to indemnify or hold harmless a promisee against liability for bodily injury or property damage caused by the sole negligence of the promisee is against public policy and wholly void and unenforceable.
Type I Differing Site Conditions involve subsurface or latent conditions differing materially from those indicated in the contract documents, whereas Type II conditions involve unknown, unusual conditions differing materially from those ordinarily encountered in work of that character; both require prompt written notice before disturbing the condition.
Severe-weather delays are often excusable without compensation, while owner-caused delays may support time and money; contractual conditions, notice, causation, and concurrent delay matter.
Liquidated damages require a reasonable forecast of difficult-to-estimate loss at contracting; their cutoff follows the contract’s designated completion milestone.
Beyond basic formation and pricing, construction contracts contain specialized clauses governing risk transfer between prime contractors and subcontractors, scope changes, concealed subsurface conditions, schedule delays, liquidated damages, termination, and dispute resolution. Several of these provisions are directly regulated by Tennessee statutes that invalidate abusive contract language as against public policy.
Critical Risk-Transfer Clauses in Prime and Subcontracts
1. Flow-Down (Conduit / Pass-Through) Clauses
A Flow-Down Clause (also called a Conduit Clause) in a subcontract incorporates the Prime Contract Documents by reference and binds the Subcontractor to the Prime Contractor to the exact same extent that the Prime Contractor is bound to the Owner. Under a properly drafted flow-down clause, the Subcontractor assumes toward the Prime Contractor all administrative duties, submittal schedules, quality standards, insurance requirements, notice deadlines, and dispute-resolution procedures that the Prime Contractor owes the Owner regarding the subcontracted scope of work.
2. Indemnification Clauses and the Tennessee Anti-Indemnity Statute (T.C.A. § 62-6-123)
An indemnification (hold-harmless) clause requires one party (the indemnitor, typically a contractor or subcontractor) to defend, reimburse, and hold harmless another party (the indemnitee, typically the Owner, Architect, or Prime Contractor) against third-party claims for bodily injury or property damage. Indemnity clauses are classified into three tiers:
- Limited-Form (Comparative) Indemnity: The indemnitor is obligated to indemnify the indemnitee only to the percentage extent of the indemnitor's own negligence (or that of its subcontractors/employees). Fully enforceable in Tennessee.
- Intermediate-Form Indemnity: The indemnitor is obligated to pay for the claim if the indemnitor was partially negligent, even if the indemnitee was also partially negligent.
- Broad-Form (Sole-Negligence) Indemnity: Attempts to force the contractor or subcontractor to indemnify the Owner or Prime Contractor for 100% of a loss even when the injury or damage was caused solely (100%) by the negligence of the indemnitee (the Owner or Prime Contractor).
Warning
Tennessee Construction Anti-Indemnity Statute (T.C.A. § 62-6-123): Under T.C.A. § 62-6-123, any covenant, promise, agreement, or understanding in or in connection with or collateral to a contract relative to the construction, alteration, repair, or maintenance of a building, structure, highway, or appliance purporting to indemnify or hold harmless the promisee against liability for damages arising out of bodily injury to persons or damage to property caused by or resulting from the sole negligence of the promisee, the promisee's agents or employees, or indemnitee, is against public policy and is void and unenforceable.
3. Contingent Payment Clauses: Pay-When-Paid vs. Pay-if-Paid
Subcontracts frequently tie subcontractor progress payments to the Prime Contractor's receipt of funds from the Owner:
- Pay-When-Paid Clause: A timing mechanism (e.g., "Prime Contractor shall pay Subcontractor within ten (10) days after Prime Contractor receives payment from Owner"). Tennessee courts interpret standard pay-when-paid clauses as regulating when payment is ordinarily processed, not whether the debt is owed. If the Owner fails to pay due to insolvency, the Prime Contractor remains legally obligated to pay the Subcontractor within a reasonable time.
- Pay-if-Paid Clause: Attempts to shift the credit risk of Owner default/bankruptcy onto the Subcontractor by stating in unmistakable terms that receipt of payment from the Owner is an express condition precedent to any legal obligation of the Prime Contractor to pay the Subcontractor. Courts strictly construe ambiguous clauses against a pay-if-paid interpretation, and in Tennessee a contingent payment clause cannot waive a remote contractor's statutory mechanics' lien rights (
T.C.A. § 66-11-124) or Prompt Pay Act rights (T.C.A. § 66-34-701).
Changes in the Work and Differing Site Conditions
Change Orders, CCDs, Constructive Changes, and Cardinal Changes
- Formal Change Order (CO): A written, bilateral modification to the contract signed by the Owner, Architect, and Contractor after execution of the original agreement. A Change Order authorizes an addition, deletion, or revision in the work and states the mutually agreed adjustment to the Contract Sum and/or the Contract Time.
- Construction Change Directive (CCD): A written, unilateral directive prepared by the Architect and signed by the Owner and Architect (without requiring the Contractor's prior agreement on price) ordering the Contractor to proceed immediately with a change in the work within the general scope of the contract while the price and time adjustments are determined later (via unit prices, mutual lump sum, or itemized Time & Materials).
- Constructive Change: Occurs when informal conduct, action, or inaction by the Owner or Architect—such as issuing defective plans, demanding work quality higher than required by the specifications, improperly rejecting compliant work, or ordering schedule acceleration without granting a valid excusable time extension—forces the contractor to perform extra work without a formal written Change Order. Provided the contractor gives timely written notice before incurring the extra cost, the contractor is entitled to an equitable adjustment.
- Cardinal Change: A drastic modification—either through a single massive directive or the cumulative effect of scores of revisions—that alters the fundamental nature, purpose, or magnitude of the work beyond the general scope of the contract contemplated by the parties at bidding (for example, ordering a contractor hired to build a two-story suburban office to instead construct an eight-story hospital tower). A Cardinal Change constitutes a material breach of contract by the Owner, excusing the contractor from performing the outside-of-scope work.
Differing Site Conditions (DSC): Type I vs. Type II
Standard construction contracts include a Differing Site Conditions (Concealed or Unknown Conditions) clause so bidders do not have to pad their bids with massive contingencies for unknown underground hazards:
| DSC Category | Legal Definition | Classic Construction Example |
|---|---|---|
| Type I Differing Site Condition | Subsurface or otherwise concealed physical conditions at the site that differ materially from those indicated in the Contract Documents | Geotechnical soil boring logs in the bid package show dry sandy clay to a depth of 20 feet, but the contractor encounters solid granite ledge rock and a high artesian water table at 6 feet |
| Type II Differing Site Condition | Unknown physical conditions of an unusual nature that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the contract | While renovating an old warehouse, the contractor uncovers an unrecorded, leaking 1920s underground chemical vats complex or an uncharted archaeological burial site |
Important
Mandatory DSC Notice Rule: When a contractor encounters a Type I or Type II Differing Site Condition, the contractor MUST immediately stop work in the affected area and provide prompt written notice to the Owner and Architect BEFORE the physical condition is disturbed (typically within 14 or 21 days under standard contract forms). If the contractor excavates, blasts, or covers up the condition before the Owner/Architect can inspect and verify it, the contractor waives its right to a Change Order.
Construction Delays and Liquidated Damages
Delay Classifications and Remedies
Only delays that impact activities on the project's Critical Path delay the overall project completion date. Critical-path delays fall into four legal categories:
| Delay Classification | Typical Causes | Time Extension? | Monetary Delay Damages? |
|---|---|---|---|
| Non-Excusable Delay | Contractor's own poor scheduling, understaffing, defective rework, late material ordering, or subcontractor default | No (Contractor is liable for Owner's Liquidated Damages) | No |
| Excusable Non-Compensable Delay | Unforeseeable causes beyond either party's control or fault (force majeure, acts of God, abnormal severe weather beyond historical averages, industry-wide strikes, pandemics/epidemics) | Yes (extends Contract Time; relieves Contractor of Liquidated Damages) | No (each party absorbs its own delay costs) |
| Excusable Compensable Delay | Owner-caused delays: late site access, late owner-furnished equipment, defective plans/specs, or unreasonable delay by A/E in approving submittals | Yes (extends Contract Time) | Yes (Contractor recovers extended field & home-office overhead / idle equipment) |
| Concurrent Delay | Independent critical-path delays caused simultaneously by both the Owner and the Contractor | Yes (time extension granted; Owner cannot assess LDs) | No (neither party recovers delay money unless apportioned) |
- No-Damage-for-Delay Clauses: Many owners insert a clause stating that an extension of Contract Time shall be the contractor's sole and exclusive remedy for any delay, barring monetary delay damages. While generally enforceable for ordinary coordination delays, Tennessee and general construction law hold that a No-Damage-for-Delay clause is unenforceable if the delay was caused by the Owner's fraud, bad faith, willful misconduct, or active interference with the contractor's work.
Liquidated Damages vs. Unenforceable Penalties
Liquidated Damages (LDs) are a pre-agreed dollar amount (e.g., $1,000 per calendar day) stipulated in the contract that the Owner may deduct from the Contractor for each day completion extends beyond the adjusted completion milestone specified in the contract. Courts enforce a Liquidated Damages clause ONLY IF two requirements were satisfied at the time the contract was signed:
- The actual financial damages the Owner would suffer from late completion (lost rental income, extended construction loan interest, temporary facility leases, extra inspection fees) were uncertain or difficult to accurately estimate in advance; AND
- The daily dollar amount chosen was a reasonable forecast of the Owner's anticipated actual loss—not a disproportionate figure designed to coerce or punish.
If a contract sets a daily charge that bears no reasonable relationship to anticipated actual loss and is inserted purely as a threat or punishment to force on-time performance, courts strike the clause down as an unenforceable penalty.
Substantial Completion, Termination, Warranties, and ADR
- Substantial Completion: This is the contractual milestone when the work or designated portion is sufficiently complete for its intended use. It does not eliminate liability for other breaches. The certificate should allocate utilities, security, maintenance, insurance, remaining work, and punch-list deadlines.
- Damages and Correction Period: Liquidated damages stop at the milestone specified by the contract; substantial completion and final completion can have different consequences. A one-year correction period is common in standard forms, but warranty duration, limitations periods, and other obligations must be read separately.
- Retainage: T.C.A. § 66-34-103(b) requires release for work completed within 90 days of completion of the work or 90 days of substantial completion of the project for that work, whichever is first. Owner occupancy alone is not the statutory alternative trigger.
- Termination for Cause: Follow the contract’s default, notice, cure, and completion procedures. An owner cannot skip required notice merely because a breach is alleged. The surety’s rights and bond conditions are separate.
- Termination for Convenience: Payment for completed work, demobilization, cancellation charges, and any termination fee follows the agreement. Unperformed-work profit is not automatically available, but neither is it universally excluded if the parties expressly provide a fee.
- Dispute Resolution: Mediation facilitates voluntary settlement. Arbitration generally produces a binding award with narrow judicial review. Tennessee’s construction venue statute is subject to its stated exceptions and any controlling federal law; review the contract and T.C.A. § 66-11-208 before assuming every out-of-state clause is invalid.
A Prime Contractor in Memphis drafts a subcontract requiring a framing subcontractor to indemnify, defend, and hold harmless the Prime Contractor against all jobsite injury claims, "including claims caused solely and exclusively by the negligence of the Prime Contractor or its own superintendents." Under Tennessee Code Annotated § 62-6-123, what is the legal status of this sole-negligence indemnification provision?
It is fully enforceable so long as the Prime Contractor pays the subcontractor an extra 1% insurance fee
It is enforceable on commercial projects over $500,000, but void on residential projects
It is against the public policy of Tennessee and is wholly void and unenforceable
It is enforceable if both parties initial the paragraph in bold capital letters
While excavating for a commercial building foundation in Chattanooga, a contractor hits a dense layer of blue limestone at a depth of 5 feet. The geotechnical soil boring logs included in the Owner's bidding documents explicitly indicated loose alluvial sand and gravel down to 18 feet with no rock present. What type of condition has the contractor encountered, and what action must the contractor take to preserve a claim for additional compensation?
A Cardinal Change; the contractor must immediately abandon the project and sue for breach of contract
A Type II Differing Site Condition; the contractor should blast and remove the rock first and submit rock disposal receipts at Substantial Completion
A Non-Excusable Delay; the contractor must absorb 100% of the rock excavation cost under the Parol Evidence Rule
A Type I Differing Site Condition; the contractor must stop excavation in the affected area and provide prompt written notice to the Owner and Architect before disturbing the condition
A school contract expressly allows time but no compensation for unusually severe weather, subject to timely notice. Historic flooding delays the critical path seven workdays, and the contractor satisfies the clause. What relief follows that clause?
Excusable Non-Compensable Delay; the contractor is entitled to a 7-day extension of Contract Time only (relieving it of Liquidated Damages), with no monetary delay damages
Excusable Compensable Delay; the contractor is entitled to both a 7-day time extension and reimbursement for 7 days of idle crane rental and field supervision
Non-Excusable Delay; the contractor receives neither a time extension nor additional compensation
Constructive Acceleration; the Owner must pay the contractor overtime wages to make up the 7 lost days
A commercial construction contract stipulates "Liquidated Damages of $25,000 per calendar day" for late completion of a small warehouse whose fair market rental value is only $4,500 per month. In deposition testimony, the Owner admits that it chose the $25,000/day figure "to terrify the contractor so they wouldn't dare finish late." If the contractor finishes 10 days late and challenges the $250,000 deduction in court, how will a Tennessee court rule?
The court will enforce the full $250,000 deduction because courts never review liquidated damages clauses agreed to by commercial contractors
The court will strike down the $25,000/day provision as an unenforceable punitive penalty because it was not a reasonable forecast of actual anticipated delay damages at the time of contracting
The court will automatically convert the contract into a Cost-Plus Percentage of Cost agreement
The court will award the $250,000 to the Tennessee Board for Licensing Contractors as a civil penalty
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