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.
5. Breach of Contract
On a Breach of Contract cause of action you have to show the following:
- That you had a contract.
- That you performed according to the contract.
- That the defendant breached the contract (usually by not paying the money due)
- And that you have been damaged as a result in the total sum as per the contract
A valid contract exists when:
- There is an offer which contains all of the material and specific terms
- That offer was accepted by the defendant and
- There is valid consideration for the agreement.
A Breach of Contract claim may fail for numerous reasons such as:
- There was not an actual agreement on the price of services rendered.
- There was not an actual agreement on quantity
- There was not an actual agreement on the scope of services
- There was not an actual agreement on the term of the agreement
- You cannot prove your damages or your damages are not directly (proximately) caused by the defendant’s alleged conduct
- You cannot show that a modification to an agreement was in writing.
- You cannot show that the defendant specifically authorized your services
- You don’t have a signed contract
- There was no legal consideration for the contract/agreement
However, all hope isn’t lost if your Breach of Contract claim fails. You have at least two other options:
6. Unjust Enrichment
Unjust Enrichment Claim: This is an equitable claim. It says that even if there wasn’t a formal agreement (say because the price was not agreed to, or some other material term might have been missing that makes a Breach of Contract claim unsuccessful) you should still get paid for the reasonable value of your services because the defendant requested services from you, you relied upon that request, the defendant knew you were performing services and the defendant has retained the benefit of those services without paying you, and as such as been unjustly enriched at your expense. Unlike in a Breach of Contract claim, with Unjust Enrichment you have to show the reasonable value of the services performed. This means showing that your price and time spent were both reasonable under the circumstances. This is a more difficult task than a breach of contract claim but not impossible.
7. Account Stated Claim
An Account Stated Claim: In New York, if you send someone invoices over a period of months, and they do not contest (or event admit) the invoices, you have an account stated claim which means you are entitled to the sum as stated in those invoices.
Conclusion: The key to any successful claim for money owed on a breach of an agreement, is organization. Making sure your claim is organized is critical. Having all the proper documentation including (1) signed contracts (2) invoices (3) written demands for payment (4) written admissions that money is owed or you will get paid (5) supportive email/written correspondence, and (6) any other information showing you properly performed the services agreed upon will help to ensure your success.