Contractors commonly enter into subcontracts with the same party concerning numerous, separate projects. These subcontracts sometimes contain “cross-default” provisions, which have significant implications on all outstanding subcontracts. You should know what a cross-default provision is, how to spot one, and how to use one for the benefit of your own business.
What is a cross-default provision?
A cross-default provision is a provision in an agreement that puts a party in default of one agreement if that party defaults on a separate agreement between the same parties. Below is an example of a cross-default provision:
- If [Party A] has another agreement with [Party B] and [Party B] defaults under that agreement in any manner and [Party A] declares [Party B] in default under it, it is a default under this agreement also and [Party A] may terminate this agreement.
The provision allows Party A to escape liability on a subcontract containing this language following the default of Party B on a separate contract with Party A. Assuming there are numerous contracts between the parties with cross-default provisions, Party A could terminate all such contracts due to a single default on a separate agreement.
How can a cross-default provision affect your business?
It is common for a contractor to enter agreements with a single business to provide the same type of labor and services on numerous jobs. There may be an understanding in which one party is offering its services at a discounted price to secure numerous contracts from the other party. While this is an important cost-savings strategy, the reliance on this single party could open you up to immense liability if the relationship turns sour. A cross-default provision could be the difference between being stuck dealing with such a party across multiple jobs, or having the ability to get out of all other contracts with that party.
Conversely, you may have multiple contracts with another party but are unaware the contracts all contain cross-default provisions. While you may expect to be securely a party to these contracts, the addition of the cross-default provisions will always keep you at a risk of losing a significant number of contracts following even the smallest default on one agreement. You should be able to spot such provisions and either have them removed from the contracts, or ask for clarity on what constitutes a “default” in each contract.
The law in the State of Florida has consistently found that cross-default provisions are enforceable. Understand the implications of such a provision on one agreement and numerous separate agreements. Finally, with the impact of a cross-default provision in mind, consider adding one to certain agreements to protect yourself from extensive liability.
Bruce Loren and Saad Farooqi of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Farooqi focuses his practice in high-stakes business disputes. Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers, and design professionals. Mr. Loren and Mr. Farooqi can be reached at [email protected] or [email protected] or 561-615-5701.