Subcontractors Only Have Very Limited Rights Against Public Owners

On private construction projects, subcontractors and/or suppliers that furnish labor, material, or services but are not paid by the project’s general contractor have a variety of claims that they may assert against a private owner.  For example, such subcontractors and/or suppliers may assert claims for unjust enrichment or file a mechanic’s lien.  No such rights exist, however, where the project owner is the State of Connecticut or one of its cities or towns.

As an alternative to the typical claims a subcontractor or supplier has against a private owner, Conn. Gen. Stat. § 49-41 requires general contractors that enter contracts for public projects over a certain dollar amount to post surety bonds that guarantee payment to their subcontractors and suppliers.  The exact language of Conn. Gen. Stat. § 49-41 states that “[e]ach contract . . . [for] any public building or public work of the state or a municipality shall include a provision that the person to perform the contract shall furnish . . . a bond . . . for the protection of persons supplying labor or materials . . .”  By the plain language of the statute, the onus is put on the general contractor to supply the bond;

Public Owners Cannot Arbitrarily Award Contracts

Successfully protesting the award of a public construction contract is a very difficult.  Under the public bidding laws, an unsuccessful bidder cannot obtain a monetary award against a public owner and its only recourse is to seek stop the public owner from awarding the contract to another bidder.  The courts, however, will not stop a public owner from rejecting an apparent low bid and awarding the contract to another bidder unless the public owner engaged in fraud, favoritism or corruption.

For years, the public bidding laws protected the public owner’s ability to make any decision it deemed to be in its best interest provided it acted in good faith.  As indicated in another post, that protection ended when the Connecticut Supreme Court held that it was possible for an unsuccessful bidder to obtain a monetary judgment against a public owner if the claim was based upon a cause of action that did not rely upon the public bidding laws. 

More recently, a Connecticut Superior Court determined that a public owner can be held liable for money damages if it completely circumvents the public bidding laws.  In CTTFB, Inc. v. City of Bridgeport, the court refused to overturn a jury verdict that awarded the plaintiff damages after determining that the City violated the Connecticut Unfair Trade Practices Act. 

Payment Bond Claimants Should Consider Additional Causes Of Action

It is not uncommon for sureties that issue payment bonds to deny claims brought by subcontractors and suppliers.  After an “investigation”, a surety’s typical response is that the claim is denied because the debt is the subject of a good faith dispute between the bond claimant and the surety’s principal.  Of course, questions often arise regarding the thoroughness and completeness of the surety’s investigation. For example, no one expects the surety’s bond principal to state that there was no legitimate reason for its nonpayment and that the surety should pay the subcontractor or supplier whatever amount it claims due, which raises the question of whether the surety should have to do more than ask its principal why the bill was not paid.  Moreover, sureties – like everyone else – do not want to part with money unless they are forced to do so.

I recently handled a matter where a general contractor did not pay a subcontractor more than half a million dollars.  There was no justification for the nonpayment.  The surety, however, still failed to pay or deny the claim within 90 days as required by Conn. Gen. Stat. Sec. 49-42.  Instead, the surety took no action. 

Don’t Get Creative When Attempting To Enforce Mechanic’s Lien Rights

In Connecticut, the law pertaining to mechanic’s liens is well settled.  You will not come across many issues of first impression while trying to enforce a mechanic’s lien and, therefore, practitioners should not attempt to drive the proverbial square peg into a round hole.  Such an attempt was made (and failed) in a matter recently decided by the Connecticut Superior Court.

In that case, an assignee of a mortgage brought a foreclosure action and named a contractor as a defendant because the contractor’s mechanic’s lien was subsequent in right to the interest being foreclosed.  Normally, if the property proceeds all the way through the foreclosure process, a contractor holding a subordinate lien allows his interest in the property to expire because the only way to maintain the lien is to pay off the foreclosing mortgage but , in this case, the contractor did not give up that easily.

Here, the contractor alleged that the assignee became the “owner” of the property by virtue of the construction mortgage and, as such, was responsible to pay for the work that the contractor performed.  The court identified 2 issues that allowed the court to dispose of the contractor’s claim on summary judgment. 

Notice Requirements For Construction Claims Against The State Of Connecticut

General speaking, you cannot sue the state unless the state gives you permission. The legal concept that prevents you from being able to sue the state is known as “sovereign immunity,” and comes from the English common law where the commoners were not allowed to sue the King without his permission. The State of Connecticut has decided; however, that it is in its interest to allow itself to be sued when it enters contracts pertaining to the construction of public works projects. Conn. Gen. Stat. § 4-61 expressly provides that anyone that enters a contract with the state for the construction of a highway, bridge, building or other public work may bring an action against the state as long as it complies with the statutory requirements. One such requirement is that the contractor gives notice of its claim to the agency head within 2 years of the project’s acceptance. On December 7, 2010, the Connecticut Supreme Court released a decision that clarifies the § 4-61 notice requirements.

In C. R. Klewin Northeast, LLC v. State of Connecticut, the Supreme Court overturned a trial court decision that dismissed the contractor’s complaint because the contractor’s notice purportedly did not comply with § 4-61.

Act Promoting Fairness In Private Construction Contracts? Hardly.

A new law has recently gone into effect in Massachusetts that drastically changes the relationships between private owners, contractors and subcontractors; and some people are going to suffer severe financial hardship as a result. For some inexplicable reason, the Commonwealth of Massachusetts has decided to interfere in what has been traditionally been the private right to contract. The new law has three main points; each more insidious than the next.

First, “pay when paid” and/or “pay if paid” provisions commonly found in subcontracts are now prohibited by statute in the Commonwealth of Massachusetts. Many general contractors simply are unable to pay their subcontractors until they receive payment from the owner. Thus, they write their subcontracts to make the subcontractor’s payment due a reasonable time after the contractor receives payment from the owner. Now, “every contract for construction shall provide reasonable time periods within which” an application for payment shall be submitted, approved and paid. Contract provisions that first require that the contractor to receive payment from the owner are void except in cases where the subcontractor has performed defective work or is insolvent.

Second, general contractors must abide by the time requirements for the review and approval of pay applications or suffer an extremely harsh result.

“Pay when Paid” versus “Pay if Paid”

Most subcontracts contain language, which state that the contractor shall pay the subcontractor within so many days after the contractor’s receipt of payment from the owner.  The question then becomes, “what happens if the owner never pays the contractor?”  It is a complicated question that has been the subject of much litigation.  The general rule is that – provided the owner is not withholding payment due to a failure by the subcontractor – the subcontract will be interpreted as requiring payment within a reasonable time. In other words, even if the owner does not pay the contractor for the subcontractor’s work, the contractor will still be expected to pay the subcontractor despite the fact that the subcontract requires the owner to first pay the contractor.

Of course, as with almost every legal issue, there are exceptions to the general rule.  For example, there are “magic words” that will make it more likely that the court will find that the subcontractor has given up its right to payment should the owner not pay the contractor.  Examples of such “magic words” are as follows:

• Contractor’s receipt of payment from owner is a “condition precedent” to the subcontractor’s right to payment;

The Connecticut Home Improvement Act Has Harsh Penalties With Limited Exceptions

According to the Home Improvement Act (the “Act”), a home improvement contractor has no legal right to payment if his contract is not entered into by a registered salesman or contractor and does not contain:

  • the signatures of both the homeowner and contractor;
  • notice of the homeowner’s cancellation rights; and
  • a start date and a completion date.

Even if the homeowner testifies, under oath, that he requested the work, that the work was performed in a workmanlike manner, and he didn’t pay the amount he had agreed to pay, the contractor will still lose the lawsuit if the contract does not comply with the Act.  Like most laws, however, there are exceptions to this rule.

A contractor may be able to get paid if a court finds that the homeowner was acting in “bad faith.”  The Connecticut Appellate Court recently issued a decision that explains the limits of that exception.

In Lucien v. McCormick Construction, LLC, 122 Conn.App. 295 (Conn.App. 2010), the Connecticut Appellate Court refused to invoke the bad faith exception.  The facts were that the homeowner:

  • was represented by counsel; 

What to Do When You Don’t Have Time to Wait for a Written Change Order

One of the most litigated construction law issues is whether a contractor is entitled to payment for additional work performed without a fully executed written change order.  Most construction contracts state that the contractor is not entitled to payment for any additional work, unless the additional work is performed pursuant to a written change order that has been sign by the owner, contractor and the architect.  The problem is that — because time is money — waiting for a signed change order is often costly so most contractors move forward with additional work based upon verbal agreements with the intention of executing a written change order at a later date.

Most of the time, no problems arise from having performed additional work without first having a written change order.  The parties abide by their verbal commitments, which are then incorporated into the written change order required by the contract.  Once in a while, however, an owner will refuse to issue payment for work that was performed without a written change order despite an oral agreement being reached during the project.  In these situations, some courts have enforced the contract provision requiring written change orders and have denied the contractor the right to recover payment for his work.