Construction Contracts: Some Basics

Not all construction contracts are created equal. That’s because every construction project is different. There are however two underlying themes (which arguably are necessarily intertwined) from the attorney’s perspective and that is (a) proper risk allocation and of course, (b) getting paid.

However, before allocating risk one must first understand the specific risks in the given project. Risks become apparent when taking into account site conditions, accessibility, safety, scheduling, and other project specifications. These conditions all dictate how the contractor will perform its work which in turn effects the liabilities the contractor has assumed.

There are various provisions in a construction contract which specifically address risk and they include (without being an exhaustive list): (1) scope of work (2) scheduling (3) changes to the scope of work (4) delay and damage provisions (5) insurance (6)  standard of care, (7) storage of materials and risk of loss and (8) express warranties of the work performed.

An effectively negotiated contract protects the contractor, owner or subcontractor (depending on the client) from potentially devastating disputes by consistently ensuring the fairest and legally enforceable provisions when it comes to risk allocation. The same is true whether we are talking about a simple job or a complex project. Simple contracts quite frankly make me nervous. They make me nervous because they don’t address all of the different possible circumstances that may impose risk or liability on the contractor or business owner. As an attorney, simplicity can be frightening, if not frustrating, because  that means when the time comes for a dispute between the owner and contractor, matters of risk allocation are left for interpretation by the Court i.e. expensive litigation.

As mentioned before, attorneys (and their clients) are not only concerned with risk allocation but are (or should be) very concerned with getting the client paid if the client is the contractor or subcontractor. This is where it is important to review and understand (1) any conditions to getting paid, (2) procedures that need to be followed in order to get paid (3) strict procedures for any change orders or extra work and (4) the timelines that limit one’s right to bring a lawsuit to enforce a debt. Each of the foregoing can critically effect your ability to get paid and as such it is imperative that you have a properly drafted contract which sufficiently and fairly addresses the process of getting paid for your services, labor, and materials.  Although conditions to getting paid or enforcing a debt may be strict, that doesn’t necessarily make them enforceable. Therefore, if your attorney cannot assist you in negotiating more favorable terms, your attorney can at the very least assist you in understanding the critical payment-related provisions of the contract and help you structure an effective contract management process.

Construction Claims – Some Powerful Tools

The purpose of this guide is to briefly address some of the legal issues and tools pertaining to a breach of a construction contract. This is not an all-inclusive list but a very good start for any construction company looking to collect or enforce a debt, foreclose on a lien, or assert any other contractual right.

1

Mechanic’s Liens

A mentor once told me “anytime I’m asked to file a lien for a client the first thing I do is break out in a cold sweat”. A little dramatic? Well, not necessarily. There are many nuances to filing a lien.

First, you have to make sure you named all the correct and proper parties in your lien. This always requires some additional research into the proper legal name of the entity or individuals who own the property you are seeking to lien against.  Therefore you certainly want to consider reviewing the New York Department of State website, ACRIS, and you should probably order a title search as well if you are going to be extra prudent.  Failing to name the correct parties in your lien could be devastating to your claim.

Next, you should evaluate whether you have a right to even file the lien against the party in question. For instance, you may not be able to file a lien against a tenant (i.e. a non-owner) unless the owner had actual knowledge of the work you were performing at that property. This is a fact sensitive inquiry and may require review of things such as the lease/commercial lease.

Another important issue pertaining to the filing of the lien is whether your work is the type of work contemplated under the lien law. For instance, the installation of networking capabilities in an office building may not be considered lienable work because it may not be considered the type of “permanent improvement” contemplated under the lien law.

You should also consider in great detail the amount claimed under your proposed lien. Overstating your lien could subject you to a counter claim for a willfully exaggerated lien which could expose you to liability.  Prior to filing a lien you may want to consider an informal accounting.  This would entail creating a functional spread sheet breaking down your claim into dates of service, invoices, dates of invoices, and dates of any claims extra work. You should also gather all signed contracts and correspondence pertaining to completed work, resolved issues, and authorization to perform additional work.

In sum, before filing your lien you should review your claim with a skilled attorney so you can ensure that upon demand (or in response to a demand for a verified statement) you can easily and readily substantiate your position. Finally, remember that timing is everything. Just because you file a lien within the time period under the lien law statute doesn’t mean you’ve necessarily preserved your claim. The contract between you (the contractor) and the owner may impose additional limitations to commencing a lawsuit which in turn might effect the time period to foreclose (enforce) your lien. Again, review of the contract documents by an attorney is always a wise investment.

2

Trust Fund Accounting Claims

As a subcontractor (or a contractor) you are entitled to what’s called a trust fund accounting claim. By way of example, a general contractor receives money from the owner. The general contractor has an obligation by law in New York to pay those monies out to its subcontractors. The general contractor is under the lien law a “trustee” in that it holds in trust for the benefit of its subcontractors the monies received from the owner. The subcontractor in this scenario is the trust beneficiary. You as the subcontractor are entitled to demand from the general contractor a verified accounting of all the monies received and paid out by the contractor as it pertains to the project or work. This is no small demand. It requires the sophistication of a skilled attorney or accountant and it is expensive to produce. As such, it is a powerful tool for the subcontractor. What makes this an even more powerful tool is the fact that under New York Lien Law there may be personal liability where an accounting is not produced under the assumption that failure to produce the accounting is part of a scheme to embezzle or misappropriate trust funds. Do not overlook this weapon in your breach of contract arsenal! Feel free to email me for a free form or demand letter.

3

Account Stated

An account stated cause of action is when you send someone invoices and they do not contest those invoices for a prolonged period of time (generally more than 5 months) the amount stated in the invoices is deemed “admitted”.  This is a powerful claim as well and highlights the importance of having a well developed paper trail especially when it comes to billing. A defense to an account stated claim would essentially be that one either never received the invoices or that one contested the invoiced amount in a timely manner.  Therefore, after you’ve sent several invoices and there has been no response from the other side, the wise thing to do is to send the invoice by certified mail so you have a record of sending the invoice and a record of the other side having received the invoice.  It’s not rocket science but since the overwhelming majority of small business owners do not implement strong debt collection practices, it is worth reiterating here the importance of proper business correspondence and accounts receivables protocol.

4

Professional Negligent Misrepresentation Claim

Sometimes as a subcontractor you are faced with a situation where the architect or engineer gives you certain field directives which you reasonably (or sometimes necessarily) relied upon. The problem arises when those directives were completely negligent and now you’re being denied your change orders or extra work claims because you relied on those directives. You have a possible claim against the architect or engineer who gave you those directives not on a breach of contract theory but on a professional negligent misrepresentation theory. The elements of such a claim are as follows:

“To properly assert a claim on a theory of negligent misrepresentation, a plaintiff must plead:“(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.”

In short, the relationship between an architect and subcontractor can meet this standard of the “functional equivalent of contractual privity” or the “privity-like relationship” described above and form the basis for a subcontractor (or contractor) suing an architect for relying upon the architect’s negligent and incorrect directions.