In the Summer 2014 edition of The Construction Lawyer (Volume 34, Number 3), noted construction attorney, Adrian L. Bastianelli, III wrote a glowing review of Construction Subcontracting: A Comprehensive Practical and Legal Guide which was published in April.
“Subcontractors are the backbone of the construction industry. For every prime contractor, there are multiple subcontractors. . . The law dealing with the prime/subcontractor relationship generally is well developed and can be unique, complicated, and unpredictable.”
The review continues to laud the editors and confirms that the book met its editors and authors’ goals in that it
“It covers the full landscape of subcontracting issues. The book not only provides a detailed discussion of the legal principles and case law relating to subcontracting, but also offers sound practical advice for both prime contractors and subcontractors on how to dal with problems and avoid disputes.”
Mark Cobb participated in writing the section of the book focusing on payment issues, and the reviewer confirms:
“Payment is always a key topic of concern for subcontractors and an area where there has been considerable litigation. The authors discuss pay-if-paid versus pay-when-paid clauses, prompt payment statutes and laws, setoff, and the impact of flow-down payment clauses. Intertwined with the payment chapter are separate chapters on liens and bonds.”
Mr. Bastianelli concludes his thorough and glowing review of the book with the following statement:
“The editors and authors should be commended for producing an important, comprehensive book on a subject that is of such great importance to the industry. The book will be an important tool on the construction lawyer’s bookshelf and should be a book that prime contractors and subcontractors regularly use.”
We greatly appreciate Mr. Bastianelli’s kind words and the time he took to read and assess the 628-page book. Mark was honored to be a part of this notable project and to work with some of the greatest living construction lawyers in the country.
by Mark A. Cobb
It doesn’t matter whether you are a material supplier delivering products to a subcontractor, a subcontractor performing work directly for a GC, or a GC building a structure for an owner, you expect to be paid for the labor, materials, and equipment which you provided. In fact, without payment, it could send your business plummeting downward if you cannot pay your own bills.
We highly recommend that before entering into any construction contract, you perform proper due diligence and protect yourself as much as possible. No matter how thorough you are, however, as the project continues, one of the parties involved with the project might experience a material change in their business or their cash-flow which can directly impact you and make recovery of the money you are owed more difficult. Thus, you want to keep evaluating each customer’s credit-worthiness.
For over 20 years, clients have shared with us some of the early-warning signs (which they largely ignored) which indicated that their customer might be a payment risk after the initial credit-check, and we thought our readers might like to see this list (and add to it themselves!) The following is a checklist of situations which may indicate that you are working with a potentially distressed party:
1. A change in your customer’s bank account may indicate many things including accounts closed, banking problems, a garnishment, etc.
2. Your customer pays you from different bank accounts (unless its accounts are separated by project, escrow, etc.); this is unprofessional and may indicate spreading out their assets to avoid garnishment or to rely upon the float by the banks.
3. Significant fluctuations in your customer’s inventory may indicate volatile business practices, changes in credit with other vendors, etc.
4. An unusually large order may indicate that the customer has undertaken a project larger than its capabilities.
5. Unexpected / unplanned growth of your customer’s business; great businesses maintain and update business plans; unplanned growth can cripple a business, overextend its employees and assets, and cause the business to fail to meet its new obligations.
6. High debt to equity ratio; customers in this position are a credit risk.
7. When your customer loses a major job or client; if too much business comes from one relationship, then the loss of that business can be devastating.
8. A generally disorganized approach to its business, accounts payable, accounts receivable is scary; likely, that business does not understand the extent of their liabilities, realistic expectations of income, etc. and that could put you in a dangerous position if you need to implement collection procedures.
9. Rumors; my Mother always told me that “where there is smoke, there is fire.”
10. If you hear comments from other construction industry professionals that your customer isn’t charging enough, then it might indicate that your customer is trying to get business on any terms in order to improve its panic for cash-flow; inevitably, they will run out of money and someone (hopefully not you!) will be left holding the bag.
11. Requests to extend payment terms may indicate that your customer needs more time to “shuffle” its assets to pay you.
12. Liens (including state and federal tax liens which are all public record); a 10-second check on-line can indicate the fiscal health of your customers.
13. Slow payments: creditors and debtors typically establish a billing and payment practice over time, when they deviate, it may indicate a potential problem.
14. Employee layoffs; if possible, visit your customer at their office, a reduction in their workforce could hint of problems to come.
15. Key employee changes dramatically alter the bottom-line and the business practices; when changes in management occur, they may use other vendors (forgetting to pay you), may emphasis other payment policies, could indicate that top management was receiving their paychecks or benefits.
16. Family and health issues related to owner or key employee (or their families) such as divorce, death or serious illness can greatly impact a business relationship.
17. Excessive downtime may indicate unexpected reduction in your customer’s revenues.
18. You customer’s business is for sale or sold; there may be ways for a new purchaser to avoid debt incurred prior to the sale; it can also indicate financial or industry-specific problems; also, it may result in a new corporate atmosphere which may make collection more difficult; frequently, the new owners tell you the former owner is responsible for the debt, but the old owner tells you that the new owner assumed the obligations.
19. You receive excessive inquiries for credit references for your customer; this might be a customer who is trying to expand their credit in order to generate funds to pays others (“borrow-from-Peter-to-pay-Paul syndrome).
20. Excuses for nonpayment or slow payment (lost invoices, “check is in the mail”, skipped invoices, unsigned checks, NSF checks, “no one is available to sign the check”, etc.); excuses are never a good sign.
Good credit management means vigilance. Do not agree to extend credit, perform work, or supply materials unequivocally on a long-term project without some follow-up to see if your customer’s financial position has changed. If it changes, and if you react promptly enough, it will make recovery of your money easier and reduce your exposure. Fortunately, you have several options including filing a preliminary lien, obtaining personal guarantees, and requiring stricter terms. In next week’s blog we will explore some of the options you may want to consider when you see indicators that a customer may become a credit-risk to you.
If you have other early-warning signs that alert you to potential payment issues, please leave a comment below.
by Mark A. Cobb
Beginning this summer, there is a new set of supplementary rules for the arbitration of construction cases. The American Arbitration Association (AAA) promulgated these rules in an attempt to lower participants’ costs and to fast-track certain construction matters.
The new rules do not apply to arbitration claims less than $75,000; similarly, they do not apply to arbitration claims more than $5 million. Thus, the intentions are to make the process more efficient for the middle ground claims. Some of the changes include the following:
- there are schedules (based upon the amount of the claim) which cap the AAA Administration fees
- statements of claims and counterclaims are limited to five pages or less
- amendments to the complaint must be completed within 30 days of the counterclaim (unless the arbitrator extends this time)
- within 3 days of the filing of the Demand for Arbitration, the AAA and the parties will participate in an administrative conference
- the AAA has 2 days following the administrative conference to provide a list of at least 10 potential arbitrators to the parties
- the maximum days for an arbitration hearing is limited to 10 days
- the arbitrators’ study hours are capped at 40 hours
- arbitrators’ study hours have a maximum rate of $350 per hour
- an award must be given within360 days of the date the claim is filed
- total arbitrator fees are capped at $52,000 (not including travel, costs & expenses)
- conference call arbitration fees are capped
- post-hearing reviews fees are capped
- site visit fees are capped (for claims over $1 million, for example, site visits are limited to 8 hours of time at a maximum rate of $350 per hour)
- parties are to provide the name of a representative (other than their attorney) to be included in all communications (it may be an officer, in-house counsel, etc.)
How Do I Claim the Benefits of the AAA Supplemental Rules? If you are interested in taking advantage of the new supplemental arbitration rules for your construction claims, then we suggest that you include a specific provision in your construction contract which states that the fee caps of the supplemental rules will apply to matters originating from your contract.
If you are already involved in an arbitration matter, then the parties to the arbitration may choose to proceed under the supplemental rules by a joint submission to the AAA.
This is just a very general overview of some of the changes which contractors involved in arbitration will see in the future, and it will take some time to determine whether the AAA’s goals of shortening the arbitration process and capping the fees on certain construction claims has been met.
If you have any comments regarding arbitrating claims between $75K and $5M with the new rules, please let us know below.
Mark Cobb is excited about speaking to Atlanta architects and engineers at a Construction Law continuing education seminar sponsored by HalfMoon Education. Mark is speaking on IMPROVING THE PROJECT OUTCOME WITH ACCURATE AND EFFECTIVE CONSTRUCTION CONTRACTING in which he will address the basics of general contract law, the unique aspects of construction contracts and how to avoid non-performance.
One aspect Mark will address are non-payment issues including the filing of a Claim of Lien against the project. Here is a sample of the summary of Georgia’s lien laws which he will present:
Who Can File A Lien?
∙ Architects and Engineers, Surveyors, Foresters
∙ Contractors in privity with the Owner
∙ Subcontractors in privity with the GC
∙ Sub-subcontractors and suppliers if they sent an NTO (and an NTO was required)
∙ Remember: if you do not have a required license, then you do not have the right to file a lien
Why File a Lien?
∙ To secure the money you are owed
∙ To make third parties responsible for the money you are owed (even though you didn’t contract with them)
∙ To apply pressure on those upstream who may be delaying payment
When Would you Consider Filing a Lien?
∙ When you are owed money
Important Things to Know About Liens:
∙ Lien Claimant must have substantially complied with the contract
∙ Lien is (generally) enforceable up to the amount of the improvements actually made
∙ Thanks to legislative efforts on behalf of the AGC Georgia, liens may be for full contract amounts
∙ Contractors who abandon project may not be entitled to file a lien (however, they may recover amount for partial performance under theory of quantum meruit)
∙ A Lien Claimant who ceases work after being told they are not going to be paid can file a lien
Filing Deadlines for Liens:
∙ 90 days from Last Day Worked or 60 days from date of Lien Waiver (whichever is shorter)
∙ Last Day Worked is NOT Invoice Date
∙ Lien must be perfected (“suit filed”) before the first anniversary of the filing of the lien
∙ Liens must be perfected within one year of the date on which they are filed, otherwise, they automatically expire
∙ Liens are perfected by (i) filing a lawsuit against the entity with whom you contracted and (ii) filing a Notice of Filing of Action to Perfect Lien with the clerk of court in the county where the project was located
∙ “Foreclosure” of Liens are generally an additional, separate step to perfecting liens. Unless there is jurisdictional alignment, a lien claimant must wait to seek foreclosure against the owner of the real estate until after they have received a judgment against the entity with whom they original contracted
by Mark A. Cobb
I just read a very insightful and accurate description of what it means to be a contractor:
We design and construct buildings but the reality is we are risk managers. Virtually anyone could design or construct a project if it had no risk. The reality is that owners hire and pay “experienced” designers and contractors to manage project risk. We are risk managers and the better we manage, the better our profit and final product. [emphasis in original].
This description of a contractor’s responsibilities comes from BIM and Virtual Construction: Where is the Money by Damon Socka and Jennifer Lanzetti recently published in Constructor: The Magazine of the Associated General Contractors of America (July / August 2014). This definition reminds us of the realities of working in the construction industry in the 21st century.
As a law firm committed solely to issues related to construction law, we have a very diverse client base. Newer clients are frequently caught off-guard when risk stares them squarely in the face–and that’s why they call us for the first time. When we meet these new owners and project managers, they often comment about the volume of paperwork–they thought that entering the field of construction work would let them spend a lot of time outside working with their hands; instead, they find themselves poring over contracts, drafting emails and letters to address problems, delays or weather-related re-scheduling issues.
Although a contractor’s sole role may not be risk manger, it is a significant part of every project manger’s and every contractor’s (or subcontractor’s) business. The finest of these are able to avoid most of the risks or greatly minimize the risks; when this isn’t possible, then owners, contractors and subcontractor’s engage in a dance to transfer risk from themselves to another party. Here is a short list of ideas that help eliminate, reduce or transfer risk:
- work only with responsible owners
- verify owner’s credit worthiness
- require payment bonds and/or performance bonds (it shows the credit worthiness of your subcontractors)
- build relationships (with GC’s, subcontractors, sureties, banks, project developers, construction lawyers)
- make honesty a hallmark of your work
- written construction contracts should spell out the goals, the responsibilities, the payment, and have a dispute resolution plan waiting in the wings in case it is needed
- use the best subcontractors and suppliers (which may not be the lowest bid)
- keep detailed, daily logs
- run efficient but meaningful weekly meetings
- document subcontractor issues in writing, with photos, etc.
- know your construction contract’s deadlines and communication methods for problems
- take responsibility
- stay on top of payment issues and, if necessary, file materialmen’s liens or make payment bond claims
- if materials are difficult to source, make certain that a back-up source is available
- budget properly for time and money
- pay your bills on time (and pay your subcontractors & suppliers promptly)
- don’t sweat the little stuff
There are many different ways to avoid construction risks or eliminate them completely, please share your favorite tips for reducing risks on construction projects with us by leaving a comment below.
by Mark Cobb
It would be wonderful to live in a world where a handshake or a person’s word meant something. The Georgia Court of Appeals just handed down a verdict in First Bank of Georgia v. Robertson Grading which will make you question whether or not you can trust any body when it comes to being paid on a construction project.
The background is a little longer than we normally put on our blog; however, we believe that it is very important for our readers to understand that the subcontractor lost all his right to payment even though he made regular visits with the construction lender and was (allegedly) repeatedly told that payment would be forthcoming.
R & B Construction (“GC”) was the general contractor / developer of a subdivision in the Richmond County / Augusta, Georgia area. The GC contracted with Robertson Grading (the “Subcontractor”) to pave the new streets. Because the Subcontractor had never worked with the GC before, the Subcontractor requested a list of the GC’s creditors in order to determine the GC’s credit worthiness. After signing the paving subcontractor, the Subcontractor visited one of the credit references and the construction lender First Bank of Georgia (the “Bank”) in order, ostensibly, to make sure there was money available to pay the $400,000 paving contract. Although the bank disputes some of the statement, the Subcontractor’s evidence suggested that the bank representative allegedly advised the Subcontractor two things:
1. The Subcontractor “WOULD GET PAID FOR THE PAVING”; and
2. The bank would notify the Subcontractor if any problems arose with the GC’s account.
The Subcontractor began the paving project and submitted it’s first invoice which exceeded $100,000; when the first invoice wasn’t paid, the Subcontractor returned to the bank and learned two more things:
3. The parties wanted to wait until the paving was complete to issue one check; and
4. The bank representative allegedly said that, ”[w]hen you put the last ton of asphalt down . . . I promise you [,] you will get paid.”
Apparently relying upon the bank’s representative’s statement, the Subcontractor continued its work on the subdivision. Due to some delays, some additional work requested by the GC, and an increase in material cost, the project was completed later than the Subcontractor had advised the bank and a second invoice was sent which exceeded $300,000. With the two outstanding invoices totalling $448,600.65, the Subcontractor contacted the bank when payment wasn’t made immediately. At this point, the Bank informed the Subcontractor:
5. The GC missed it’s most recent interest payment due on the construction loan and that the Bank was not disbursing any further funds on the account.
The grading Subcontractor immediately filed a Mechanics and Materialmen’s Lien pursuant to Georgia’s lien statutes; when the GC subsequently filed bankrptucy, however, it was determined that the Subcontractor’s lien was invalid as it had not been properly “perfected”. Thus, the Subcontractor was limited to pursuing collection of its payment as an unsecured creditor.
PRACTICAL TIP–FILE YOUR LIEN BUT DON’T FORGET TO PERFECT IT: If you are owed money on a Georgia construction project and you file a materialman’s lien, your lien will expire 395 days from the date the lien was filed UNLESS you properly perfect the lien. There are several ways to perfect your lien depending upon the circumstances of the claim; if the lien is not properly perfected, then you will lose your lien rights.
Despite the GC’s bankruptcy, the Bank was allowed to foreclosure upon it’s security interest in the project; eventually, the Bank was able to sell all of the lots and, even, admitted the following:
6. It would not have been possible to sell the subdivision lots without paved streets.
THE TRIAL COURT’S DECISION:
Without a valid construction lien, the Subcontractor had limited recourse in the GC’s bankruptcy and/or the Bank; nonetheless, the Subcontractor attempted to recover from the Bank by bringing a lawsuit for claims based upon (i) promissory estoppel, unjust enrichment, (iii) negligent misrepresentation, and (iv) fraud. The trial court awarded the Subcontractor $448,600.65 in damages plus and additional $149,500 in attorneys fees. The Bank appealed to the Georgia Court of Appeals which reversed the trial court’s decision!
Technically, the Bank appealed the trial court’s denial of the Bank’s motion for a directed verdict. Simply stated, a judge may “direct” the jury to give a certain “verdict” is he or she finds that no reasonable jury could reach a decision to the contrary. Since the trial court judge did not grant the Bank’s motion for a directed verdict, the Bank appealed and won.
Let’s look at the Subcontractor’s claims which the Court of Appeals effectively denied:
Claim # 1: Promissory Estoppel:
What is Promissory Estoppel? In the law of contracts, the doctrine of promissory estoppel states that a promise is enforceable by law when the person making the promise makes a promise another who, in turn, relies on the promise to his or her detriment.
Since the Subcontractor was seeking payment from the Bank, it was, for all practical purposes, relying upon the Bank to be a guarantor of the GC’s debt to the Subcontractor. The Statute of Frauds, however, requires that an agreement by one person (or entity) to take on the debt for another must be in writing. The doctrine of promissory estoppel is an equitable doctrine which can be an exception to the written requirement of the Georgia’s Statute of Fraud. Thus, the Subcontractor agued that it relied upon the Bank’s representative’s statements that the Bank would make sure that Subcontractor was paid for its grading and paving services.
In order to invoke a claim for promissory estoppel, four elements would have to be met:
1. The Bank would have to have made promises;
2. The Bank would have expected the Subcontractor to rely upon those promises;
3. The Subcontractor did reasonably rely upon the promises; and
4. An injustice could be avoided only by enforcing the promise.
The Court of Appeals found, however, that the Subcontractor “failed to establish exclusive or reasonable reliance upon any statement by the Bank.” Although there were several points made to substantiate the Court’s holding, the Court specifically pointed out that the Subcontractor had entered into its subcontract with the GC prior to contacting the bank. Thus, it seems evident that the Subcontractor did not rely upon the Bank’s statement to enter the original contract.
PRACTICAL TIP: It doesn’t matter whether you are a prime contractor, a specialty subcontractor, or a material supplier, you should thoroughly investigate the other party’s credit worthiness BEFORE you sign the contract.
Although this is compelling, it does not address the Subcontractor’s alleged reliance upon the Bank’s statements that they wanted to write one check after the project was completed. The Georgia Court of Appeals wrote:
In addressing this aspect of [the Subcontractor]‘s argument, we begin by noting that it was undisputed between the parties that at the time this second conversation between [the Subcontractor] and the Bank occurred in early September 2007, Robertson Grading believed that the paving work would be completed in two to three weeks’ time, putting the completion date somewhere toward the middle or end of September, and [the Subcontractor] made that representation to the Bank. Nevertheless, [the Subcontractor] testified at trial that the project’s completion was delayed by extra work the company took on to complete the public right-of-way/deceleration lane, all at [the Subcontractor]‘s request, pushing the ultimate completion date to one or two days before November 7, 2007. To sum up, then, [the Subcontractor] made two representations to the Bank in seeking the Bank’s assurance that it would be paid for its work on the project: (1) that, “if everything went according to schedule,” the work would be completed within to two to three weeks …….. and (2) that it would be performing paving work. But as it turns out, neither of these representations by [the Subcontractor] ended up being accurate, and [the Subcontractor] admitted at trial that he did not have any additional meetings with the Bank or otherwise advise it about the work delay or agreement between [the Subcontractor] and [the GC] to expand the scope and expense of the work to include grading-and-shoulder work. Suffice it to say, [the Subcontractor] cannot claim that it reasonably relied upon an assurance of payment by the Bank when it unilaterally changed the very terms upon which that assurance was based. [footnotes omitted, emphasis added].
PRACTICAL TIP: Although this is not addressed in the Court’s decision, the Subcontractor should have considered taking different steps when its first invoice was not paid. Option open to the Subcontractor may have including filing a materialman’s lien in Richmond County, Georgia, stopping work for the GC’s breach (failing to pay), or enter into a side-agreement with the bank.
Claim # 2: Negligent Misrepresentation:
The Subcontractor’s claim that the Bank negligently misrepresented information also failed according to the Court of Appeals. The Court enumerated three elements which the Subcontractor would have to have proven. The three elements of negligent misrepresentation are as follows:
1. The Bank would have to negligently supply false information;
2. The Subcontractor would have to had reasonably relied upon that false information; and
3. The Subcontractor would have to prove economic injury proximately resulting from the Subcontractor’s reliance.
Using the logic developed by the court in denying the Subcontractor’s promissory estoppel claim, the court used similar facts to conclude that the Subcontractor did prove these three elements.
Claim # 3: Unjust Enrichment:
Unjust enrichment is another equitable claim that says that an owner who is “enriched” by another may have to pay “just” compensation. In this case, the Court makes the distinction that the Bank was not the owner who hired the Subcontractor for the paving project; instead, the Bank took title to the real estate pursuant to its loan documents, and, a normal part of the foreclosure process included the improvements which had been made to the real estate (including the paving).
WARNING TO SUBCONTRACTORS: The Subcontractor’s proper remedy, the Court pointed out, was via the “Georgia’s materialman’s statute (which it did, although unsuccessfully due to its failure to perfect that lien).” [emphasis in original].
Consequently, the Court of Appeals agreed with the Bank that the Subcontractor did not have a claim under a theory of the Bank’s unjust enrichment.
This lawsuit is another pertinent reminding for every construction professional who work on or supplies materials to Georgia construction projects. In some ways, this decision confirms that it’s “every man for himself” when it comes to collections; before you rely on assurance from another party, get the promises in writing. Also, although this case does not go into the reasons why the Subcontractor’s materialman’s lien was not perfected, but it is a reminder that every Georgia lien claimant must strictly comply with Georgia’s materialmen’s lien statute and that includes meeting every deadline for filing and perfecting your claim of lien.
What do you think about this decision?
by Mark A. Cobb
If you are a Georgia contractor or subcontractor who uses written contracts (and if you are not using written contracts, you should!), then this blog might save you some legal costs and or headaches. To improve your contracts, just follow the eight simple tips below!
What this blog article is not: Previously, we have written about the best contract terms and the vital contract terms that every construction contract should include. This is not a repeat of that material. This article is not full of legal jargon and nuanced technicalities rather, we are providing your with eight simple–but sound–contract improvements which you are able to apply to your contracts today!
Why we are writing this blog article (in other words, The Problem With Your Contracts)? Regardless whether you are a general contractor or a specialty trade subcontractor, you want to have a successful, problem-free project. A properly written contract can provide great strides to clarifying the project scope and the parties expectations. The construction contract lawyers at the Cobb Law Group regularly review, draft, and negotiate various types of Georgia construction contracts on behalf of their clients. Needless to say, our clients have varying personalities and goals, but we have noticed that a significant number use a “boilerplate” contract that they highjacked several years ago from another contractor or subcontractor. To this template, from time-to-time, they have added other terms which they thought useful and borrowed from other contracts they ran across. Through time, an original boilerplate which may have had some practical use has been cobbled into a hodgepodge of redundancies and contradictions, and these problems can make your contract unenforceable. Thus, we are giving you some very basic tips which you can put into use today and improve, at least a little, your contracts without hiring a lawyer.
Disclaimer About the Use of Any Forms: Although there are some very good and very useful form banks created expressly for the construction industry (such as the AIA Contracts, the EJCDC contracts, the DBIA contracts, and ConsensusDOCS), there really isn’t any “form” that can provide for all of the unique complexities of any specific construction project without substantial modification; thus, we strongly recommend that forms should be viewed only as a starting point, and they must be carefully reviewed and amended to meet the unique needs of the project and the parties. In other words, there is no such thing as a “boilerplate” contract which will work in every situation.
A Word on Readability: Your contracts should be easy to read and easy to understand; if they are not, then you probably need to start-over from scratch. You will see that many of the tips covered in this article suggest making your contract easy to read. Something which is easier to read is more likely to be read and understood which encourages better performance. So, make it a goal to make your contracts more readable.
1. Read Your Contract and Check for Redundancies. Redundancies are repetitions; let me repeat that: redundancies are repetitions. A quality contract should not have redundancies as they take up space and time; and, needless to say, they are unprofessional. More importantly, however, redundancies may open the door for ambiguity or even inconsistencies. Saying more than once that “The Subcontractor acknowledges that he has read the General Contract, all plans and specification, and is familiar therewith” more than once does not make the covenant any truer. If you contract also says “The Subcontractor acknowledges that he has has access to review a copy of the General Contract”), then it may cause some confusion which could be detrimental to your goal of passing the risk to the subcontractor.
2. Read Your Contract for Inconsistencies. Inconsistencies in a construction document also show an unprofessionalism, and they, too, can make your contract meaningless. Consider the following example: Parties to a contract may consent to a a method of resolution in the event of a dispute. If one section of the contract refers to “mediation” whereas another section refers to “arbitration”, then if a dispute occurs, it may be unclear in which forum the resolution should be handled–this might land you in court for resolution!
3. Group Similar Provisions Together. Nobody wants to read a contract (much less interpret a contract) where provisions on the same topic are spread throughout the document. For example, do not have provisions regarding “Payment” at the beginning of the contract, the deadlines regarding the due date for payment applications in the middle of the contract, and a paid-when-paid provision at the end of the contract. Move these provisions closer to each other then, it will be easier to read the contract, in general, and it will be easier to spot redundancies or inconsistencies as well.
4. Use Effective Headings for Each Contract Provision. Headings are a terrific and easy way to make your contract easier to read and, perhaps, increase its enforceability:
First, good heading it makes it easier to locate pertinent provisions (deadlines for giving notice, for example) and it make the contract easier to read as headings are usually either bold or underlined which breaks up the monotony of a standard type.
Second, headings may help the enforceability of a provision. In a recent blog post, we wrote about a subcontract which contained a Signature Provision which attempted to make the signatory to the contract personally liable for its performance. The Georgia Court of Appeals, when rationalizing the terms enforceability stated that the contract included the heading “Signing Individual” in boldface type which further enhanced the term’s clarity and the parties’ intention. Thus, the court continued, that the President of the company “must be charged with knowledge of the Signature Provision, even if he did not read it, and he is therefore bound, individually, to the terms of the Agreement.”
Third, in the event that a contract terms because an issue in a trial, your attorney may consider enlarging the term on a large board as a trial exhibit for the judge or jury to read. Without a heading, this exhibit may be nothing more than a large poster with long sentences filled with legal-ease. A pertinent heading (e.g., “Individual Indemnification”) might resonate more easily with the judge or jury and they may be more easily persuaded to interpret the contract as you intended.
5. Spaces! Just like this article, we tend to suggest that contracts use double-spaces between paragraphs. The other day we were asked to review a contract which did not separate the paragraphs. Page-after-page of unending contract terms quickly became very difficult to read much less make sense of. Thus, it took much-longer to read (time is money), and it required greater concentration. If your contracts look like that one, change them today and save yourself some headaches!
6. Check Your References. When someone cobbles together a contract from different sources, it is important to pay close attendtion that you don’t lose your references. Thus, if your contract says, “then parties shall agree to be bound by arbitration as provided in Article 10. . .” please make certain that Article 10 of your hodged-podged contract is the section dealing with arbitration. Otherwise, it may to used against you if the need arises to interpret the provision.
7. Eliminate Useless Provisions. Longer is not always better–don’t have extraneous provisions. If your contract includes a terms which doesn’t make sense to you; then, it probably doesn’t make sense to the other party and it will likely not make sense to a jury or a judge. You may want to ask your construction contracting lawyer to explain it, but if no one understands it, then it should probably be omitted.
8. Grammar and Spelling Count. You run a success business, and you know proper grammar and how to spell. When a contract is created over time, sentences get cut-and-pasted and letters get cuts off or added accidentally. Unfortunately, a substantive mistake can invalidate the terms of your contract so read it carefully often and correct as necessary. One example we see particularly often is a paragraph that is supposed to end with list of items but fails to include the list. Thus, the paragraph ends, “All subcontractors will adhere to the following policy on all jobsites:” and the policy is not expressed (and, at a minimum) not a part of the contract. Those missing policies are certainly not enforceable and may limit your rights including a right to terminate.
As we stated above, using the same template or form for your Georgia construction project is dangerous; instead, use them as a starting point for negotiations. Having a qualified construction attorney help you draft your “master” documents and assist you with specific provisions as each contract is negotiated may be vital to having a clear, understandable contract. In fact, we encourage our clients to review their master contract at least once a year. Laws changes, courts write decisions, and policies need amendment. If you are looking for a construction contracting attorney to help you review and improve your contracts, please feel free to contact us today!
by Mark A. Cobb
The Court of Appeals of Georgia recently issued their holding in Progressive Electrical Services, Inc. v. Task Force Construction, Inc., and this case interprets some construction contract terms which impact Georgia subcontractors. Specifically, this case gives subcontractors a reason to be concerned about every contract into which they enter unless they have taken the time to thoroughly read and understand every contract provision; in addition, this decision gives general contractors the ability to enforce some contract provisions which may, otherwise, seem onerous to others.
Background and Facts: The basic facts of this case present the all-too-common scenario of a subcontractor not paying its supplier, and, then, a general contractor seeking payment from the subcontractor of the amounts it had to spend resolving the supplier’s claim. Specifically, Task Force Construction was hired as a general contractor to build a public works project in Swainsboro, Georgia; Task Force, in turn, subcontracted the electrical portion of the project to Progressive Electrical. Progressive Electrical purchased their electrical supplies from a supply company. Because this was a public works project, the general contractor posted a payment bond which, essentially, promised that subcontractors and suppliers would receive payment. Unfortunately, Progressive Electrical did not pay its supplier; thus, the supplier made a timely claim for payment under the project’s payment bond. The surety which issued the bond settled the supplier’s claim for over $118,000. The surety, then sought indemnification from the general contractor which, the GC paid. After the general contractor reimbursed the surety, it sought to recover the amount which it paid to surety from its subcontractor, Progressive Electrical.
Although the background and facts may be similar to many other cases, specific provisions in the subcontract executed between the GC and subcontractor resulted in some disastrous consequences for the subcontractor and, probably more importantly, its principal.
Important Legal Issues Addressed by the Georgia Court of Appeals: Although much of the Court’s holding is significant for Georgia’s construction lawyer, today’s blog post, however, will discuss two particular contract terms addressed in Progressive v. Task Force; specifically, we’ll look at how the case addresses the difference between a guaranty and an indemnification and we’ll look at some contract language which, according to the court, binds an owner, officer (or perhaps, an employee) of a company to be personally liable for the company’s performance under the construction contract. Taken together, these two provisions make the officer of the subcontractor personally liable for reimbursing the GC.
CONTRACT PROVISION NUMBER 1:
(Making the Signatory of the Contract Jointly and Severally Liable)
Personal Liability Under the Contract: None of the parties denied that Progressive Electrical had executed its subcontract agreement with Task Force; however, Task Force attempted to recover under its indemnification from Progressive Electrical and its owner. Task Force made this attempt based upon a particular term in the contract between Task Force and Progressive Electrical:
Signing Individual. Each and every individual who signs this [agreement] or any Attachment or exhibit thereto on behalf of [Progressive Electrical] hereby warrants and agrees that such individual is duly authorized 1) to act on behalf of [Progressive Electrical]; 2) to enter this [agreement] on behalf of [Progressive Electrical]; and 3) to bind [Progressive Electrical] to the terms of [the Agreement]. Each and every individual signing on behalf of [Progressive Electrical] also further agrees that, notwithstanding anything contained herein or on any signature line to the contrary, each such individual signing on behalf of [Progressive Electrical], in addition to signing in a representative capacity, is also signing [the agreement] in his or her personal and individual capacity and each such individual signing on behalf of [Progressive Electrical], by signing below, hereby individually and personally agrees to be bound by all of the obligations of [Progressive Electrical] in [the agreement] (including, but not limited to, the Attachments hereto). (Emphasis Supplied in Court’s Decision)
Contract Term Enforceable Against Principal of Subcontractor: When the Court of Appeals read the Signature Provision which purported to bind the signatory individually, the Court held that it was a clear and easily understood contract term. Thus, when the President of Progressive Electrical signed the subcontract agreement, he agreed to be bound by this provision; and, consequently, he personally assumed liability for his company’s obligations under the subcontract.
The Court’s Rational: Neither party disputed the established law in Georgia which holds that, “an agent who, acting within the scope of his authority, enters into contractual relations for a disclosed principal does not bind himself, in the absence of an express agreement to do so.” (Citation and punctuation omitted.) Instead, the Court looked at the Signature Provision, and acknowledged that it contains such an express agreement to bind the subcontractor’s principal individually; thus, when the President executed the agreement, he was signing on behalf of Progressive Electrical and also “individually and personally” he agreed “to be bound by all of the obligations of [Progressive Electrical]” under the parties’ contract, “notwithstanding anything contained [in the agreement] or any signature line to the contrary.” Accordingly, the Court found the language of the Signature Provision to be unambiguous language, and, therefore, the president’s single signature bound him in his individual capacity, along with Progressive Electrical, under the Agreement.
Isn’t This Too Extreme? Both Progressive Electrical and its president argued to the Court that enforcement of this contract term was too extreme. They argued that such a Signature Provision created a trap which allows “unbridled liability to be unleashed on unsuspecting victims.” Unfortunately for the subcontractor and its officer, the Court disagreed with this argument, pointing out the following:
a party to a contract has the duty to read a contract before signing it and by signing, the party is bound by its terms “unless [he] can show that an emergency existed at the time of signing that would excuse [his] failure to read it, or that the opposite party misled [him] by an artifice or device which prevented [him] from reading it, or that a fiduciary or confidential relationship existed between the parties upon which [he] relied in not reading the contract.
Furthermore, the Court pointed out that the Signature Provision included the heading “Signing Individual” in boldface type which further enhanced the term’s clarity and the parties’ intention. Thus, the court continued, that the President of the company “must be charged with knowledge of the Signature Provision, even if he did not read it, and he is therefore bound, individually, to the terms of the Agreement.” (Emphasis supplied.)
CONTRACT PROVISION NUMBER 2:
(Personal Guaranty v. Indemnification)
Indemnification Under the Subcontract: Since the general contractor paid out money to settle the dispute with the unpaid material supplier, the GC sought reimbursement from its subcontractor. The subcontract agreement which Progressive Electrical entered into with Task Force contained the following indemnification provision which was the subject to the court’s interpretation:
[Progressive Electrical agrees in indemnify Task Force] from all claims, losses, fines, penalties, assessments and damages (including but not limited to reasonable attorney’s fees) arising out of [inter alia, Progressive Electrical's] breach of any term [of the agreement], including costs, investigation expenses, expert expenses and attorney’s fees incurred by [Task Force] in the investigation and defense of such claims or allegations.
Georgia Statutes: An “Indemnity Contract” is defined as an agreement between two parties, whereby the one party, the indemnitor, either agrees to indemnify and save harmless the other party, the indemnitee, from loss or damage, or binds the indemnitor to do some particular act or thing, or to protect the indemnitee against liability to, or the claim of, a third party. “Indemnity” means reimbursement, restitution, or compensation. National Bank v. Wright, 77 Ga. App. 272, 48 S.E.2d 306 (1948); in Progressive v. Task Force, the Court of Appeals reminds us that O.C.G.A.§ 10-7-1 states the following:
The contract of suretyship or guaranty is one whereby a person obligates himself to pay the debt of another in consideration of a benefit flowing to the surety or in consideration of credit or indulgence or other benefit given to his principal, the principal in either instance remaining bound therefore. Sureties, including those formerly called guarantors, are jointly and severally liable with their principal unless the contract provides otherwise. There shall be no distinction between contracts of suretyship and guaranty.
Consequently, the Court affirmed that, “An indemnity contract differs from a guaranty in that the former is an original rather than a collateral undertaking and generally undertakes to make good the promisee’s loss resulting from his liability to another rather than from another’s liability to him.” (Citations and punctuation omitted.) Thus, the court held that the subcontract agreement’s indemnity provision was enforceable.
Since this ruling just came down, the parties may be able to appeal the decision; if they do, we will do our best to update this blog article; in the meantime, the holding in Progressive v. Task Force is a stern reminder that before signing any contract, and in particular any construction contract, (i) read the contract thoroughly and (ii) understand the terms–and the potential consequences–of the contract. Otherwise, you might find yourself individually liable for a debt you are not willing to undertake.
In the big, legal field of “commercial collections” there is seldom good news. Even rarer, there is seldom a big benefit to help you get paid. Commercial collections for the construction industry, however, is different–there is some good news and there are some BIG, effective strategies to help you get paid . . . .
Introducing the Materialmen’s Lien (sometimes referred to as construction, subcontractor, contractor or mechanics lien) and/or the Payment Bond Claim!
What are the benefits to filing a Materialmen’s Lien in Georgia and/or making a claim against a Payment Bond? Although liens and payment bonds are completely separate animals with their own advantages and disadvantages, they share a BIG ADVANTAGE: for the subcontractor or the material supplier it is like getting a free GUARANTOR to promise to pay you the money you are owed after the money is owed! This is unthinkable in almost any other collection area. Look at this example:
OWNER hires ABC CONTRACTOR to build something; ABC CONTRACTOR, in turn, hires XYZ SUBCONTRACTOR to perform all of the electrical work on the project. Assuming that XYZ SUBCONTRACTOR fully performed under its contract, but ABC CONTRACTOR breaches its contract with XYZ SUBCONTRACTOR by failing to pay XYZ SUBCONTRACTOR, then, pursuant to standard contract theory (i.e., commercial collections), SYZ SUBCONTRACTOR may pursue collection of the debt from ABC CONTRACTOR (and only from ABC CONTRACTOR). But in the niche area of construction collection, in addition to seeking payment from the contractor, XYZ SUBCONTRACTOR may be able to file either a lien or make a payment bond claim in which case, XYZ SUBCONTRACTOR can look to either OWNER (in the case of a lien) and/or SURETY (in the case of a payment bond). Imagine someone owes you some money, and then after the debt becomes due, you find that a third-party may also be responsible for paying you.
Practical Tip: If you are a supplier or subcontractor who wants to improve your recovery of accounts receivables (AR), then, before you begin work or begin providing materials to the jobsite, try to obtain a personal guarantee from your customer’s owner. That way, if you are not paid, you may be able to seek recovery from (i) your customer such as ABC CONTRACTOR, (ii) your customer’s individual owner, (iii) by using a mechanics liens, the OWNER, and (iv) if there is a payment bond covering the project, then the SURETY. Four potential debtors/guarantors will significantly increase your likelihood of recovery.
Is It as Simple as It Seems? Unfortunately, nothing is entirely simple, but filing a claim of lien in Georgia and making payment bond claims are typically not too difficult nor too expensive. Of course, the lien claimant or the bond claimant must meet several obligations and deadlines in order to pursue their lien rights but most “good” subcontractors and suppliers do this automatically, and less “professional” subcontractors and suppliers, admittedly, seem to have more difficulties. We hope to address some of these issues in future blog posts as well.
What is the Difference Between a Claim of Lien and a Payment Bond Claim? On all privately-owned construction projects in Georgia, those who supply labor, services or materials have basic rights if they do not receive timely payment. On all public works projects (government-owned construction projects) of a certain size in Georgia, those who supply labor, services or materials have rights against the payment bonds. In addition, some private projects are also covered by Payment Bonds in which case, an unpaid subcontractor or supplier may file a construction lien and, concurrently, file a claim against the payment bond (which really increases the ability to recover your AR).
How Do I File a Construction Lien in Georgia? As mentioned briefly above, lien and bond claimants must meet various requirements in order to file a lien. Thus, it is vital to select a Georgia construction lawyer to help you analyze your specific matter and advise you on your collection options. It is important to know that lien and bond claims must be made within 90 days of the last day in which you worked or supplied materials on the project. (It could be a shorter period if you signed a statutorily authorized lien waiver).
It’s Up to You if you Want to Collect Your Money: If you are looking for a construction lawyer to help you file a materialmen’s lien (or make a claim against a payment bond) anywhere within the State of Georgia, please click here to contact us today.
We always enjoy blogging about the good things going on within the construction industry, and this past weekend, we were fortunate enough to have the opportunity to participate in the annual meeting of the Associated General Contractors of Georgia (AGC Georgia). As always, the AGC Georgia staff planed a wonderful family-oriented weekend in Sandestin, Florida, and there were many opportunities to see friends and colleagues, network and meet with other construction professionals, and celebrate the construction industry in Georgia.
The program began with a wonderful dinner opened to attendees, spouses, and children. In addition to delicious food, there were activities for children of all ages. The next morning, AGC Georgia got down to business (literally) with the annual meeting and recognition of participants, sponsors and Georgia’s construction safety awards. The next day included presentation of the AGC Build Georgia Awards. Congratulations to all of the winners!
In addition to the award ceremonies, the speakers throughout the weekend were educational and interesting and included Alan Landes, President and COO of Herzog Contracting Corp who is also the sitting president of the national AGC, a wonderful presentation from the “Chief Impossibility Officer” Joe Turner who combined magic and illusion to introduce useful business skills, and Rick W. Allen a candidate for the US Congress, who, if he wins, will be the only contractor in Congress! It truly was the a great combination of construction, business, awards, networking and relationship building!
Although there were plenty of informal gatherings before and after the official meetings, the final official event was a formal dinner which included one of the highlights of the weekend: the presentation of the “Oscar” of the Georgia construction industry. The SIR Awards recognizes skill, integrity and responsibility in the industry. According to AGC Georgia, this award honor those who consistently demonstrate the following:
Skill: The possession and application of the necessary technical knowledge and practical experience to execute projects in a professional and efficient manner.
Integrity: The character to comply with the spirit and letter of contracts and to handle every transaction with fairness and honor.
Responsibility: The possession and application of the necessary finances, cash or credit, together with the needed equipment and organization to fulfill all commitments promptly and completely.
This year’s recipient was the deserving Gary Young of Young Contracting in Atlanta. Congratulations to Gary for his commitment to the AGC, personal values, and the industry!
Since 1918, AGC has been an advocate for contractors, subcontractors and materialmen, and if you are not involved with your local chapter, we encourage you to consider joining. Next year’s AGC Georgia Annual Meeting is slated for Amelia Island, and the Cobb Law Group is already looking forward to attending!