Cross Default – an absolute critical contract term you need
- As an owner, you need to include a cross default provision in your contract
- The provision pulls money from other contracts you may have with the same contractor to satisfy any loss you suffer
Sophisticated owners that hire contractors over and over again need a provision in their contracts called a cross default provision. The provision says that if you have a breach of contract on one contract with your contractor, then that constitutes a breach on every other contract you may have with that same contractor, even if the contractor is not in technical default or breach on those other contracts. For instance, we represent a contractor who has three contracts with an owner. The three contracts were going well until the owner made a claim that one of these contracts was in default. The owner claimed that the damages resulting on the defaulting contract exceeded the value of the remaining amount of the contract. So, the owner held the contractor in default on that contract and was able to keep the money on the other two contracts.
If you are an owner and you hire contractors on a regular basis, you need to make sure that you include a cross default provision in your contract, so that you will have multiple pools of money to pull from when you have a default. It would be a shame if you have a significant loss on one contract, let’s say its $500,000, and the contractor can’t pay it, but on the second and third contract you have to pay the contractor $200,000 and $300,000. You should make a provision in your contract to pull them all together so that you can use all of the money that belongs to the contractor to satisfy the loss that you may suffer.