The Importance of Reading and Understanding Your Construction Contract

Everyone knows that they ought to eat right and exercise; yet, far too few of us do it. Similarly, proper construction contract management requires a contractor to thoroughly understand their contracts but many fail to do so. Of course, the reason that contractors are often largely ignored are understandable. Most construction contracts have the same substantive provisions with which contractors are already familiar; the specific requirements for any given project will be discussed at the preconstruction meeting; and the more specific details of any contract tend to only really matter in the rare occasions that the parties end up in a dispute they cannot resolve on their own. However, the few instances that result in litigation may make having proper practices in place for every project worthwhile.

On a positive note, most contractors that I encounter are now reading their contracts before signing them, as opposed to only reading them after a problem develops. As obvious as this may sound, actually taking the time to thoroughly read a contract before a project begins is the only way to be certain that you will fully comply with all your obligations. In addition, reading a contract before signing can prevent a contractor from experiencing an unfortunate surprise.

WHAT TO DO WHEN YOU ARE NOT BEING PAID

The most common issue I confront as a construction attorney is what to do when my client is not being paid. The standard approaches include sending a demand letter, making a demand for disputed funds to be placed in escrow in accordance with the prompt payment statute, and, of course, filing mechanic’s liens and/or bond claims. The larger issue becomes what to do when my client can no longer to perform its work without payment.

As a general rule, a contractor is better off completing its work, and then fighting about the monies due, as opposed to walking off the job. While it is true that there are Connecticut cases which hold that a contractor is excused from finishing its work if progress payments are not made when due, but reliance on such cases is fraught with potential problems.

If you ever forced to litigate, you want to be viewed as the one wearing the white hat. You want to be the injured party that is as pure as the driven snow. If at all possible, you do not want to give the other side any arguments to raise. Thus, if you walk off the job for nonpayment,

Recent Decision Demonstrates the Importance of Complying with Contract Notice Provisions

A common provision in construction contracts requires a contractor to give notice to the owner within a certain number of days of an event giving rise to a claim. Such provisions have a reasonable basis insofar as they ensure an owner will have a reasonable opportunity to investigate the conditions for which a claim for additional compensation is being made. Traditionally, such notice provisions were not strictly enforced. The general approach seemed to be that — provided the owner was not prejudiced by any delay in giving notice of claim — a claim that was not submitted within the specified time limit would not be barred. The more recent trend, however, has been to more strictly construe such provisions.

In J. Wm. Foley, Inc. v. United Illuminating, the Appellate Court held that the contractor’s failure to submit its delay claim within the ten-day time limit specified by the contract was a bar to the claim. This decision is potentially troublesome for a couple of reasons: First, there is no reference to the owner suffering any prejudice as a result of the delay. Second, the decision indicated that the submission of the delay claim required a critical path analysis of the delay.

Design Professional Liability Raises Interesting Questions

Today, in many instances, the design/bid/build project delivery system has been modified through the use of construction managers (either at-risk or advisors) and owner’s representatives, or has been entirely usurped by a design-build arrangement. However, there are still many projects constructed using the traditional approach, where an owner first contracts with a design professional (either an engineer or an architect); the design professional then prepares a complete set of construction documents that the prospective general contractors rely upon to submit their bids; and the owner awards the contract for the project’s construction to the successful general contractor. The general contractor, in turn, hires various subcontractors and suppliers who then hire their sub-subcontractors and suppliers. As a result, there are a great number of individuals and entities relying upon the design professional’s work. The question is whether all these individuals and entities may hold the design professional liable for its negligence.

This blog post will focus on the traditional design/bid/build approach, but the principles stated herein can be applied to other delivery methods.

Under the traditional approach, one may expect that the owner could hold the design professional liable for any damages it incurs arising from defective plans and specifications by virtue of their contractual relationship but that is not the case.

A Recent Supreme Court Decision Found an Owner of a Construction Company Personally Liable to the Owners of a Project

As most people are aware, one of the benefits of doing business as a corporation or limited liability company is that, generally speaking, the owners of the company cannot be held personally liable for the company’s debts. The exception to that general rule is that a court may pierce the corporate veil and hold the company owners personally liable if the company owners are found to have improperly used the corporate form, or have used the corporate form to commit wrongful acts. Nonetheless, even a cursory of the caselaw indicates that plaintiffs do not often prevail when they are attempting to pierce the corporate veil.

The statement of the law with regard to piercing the corporate view is quite simple. In All Phase Builders, LLC v. New City Rests., 2011 Conn. Super. LEXIS 1793, *20-21, 2011 WL 3483368 (Conn. Super. Ct. July 12, 2011), the court ruled:

“In order to pierce the corporate veil, a plaintiff must plead and prove that the corporate shield can be pierced under either the instrumentality rule or the identity rule. The instrumentality rule requires… proof of three elements: (1) Control …; (2) that such control must have been used by the defendant to commit fraud or wrong …;

Mechanic’s Liens – Legislative Update

Every year, state legislatures across the country pass new laws and revise old ones.  In fact, these state legislatures often tinker with existing statutes that have been in place for many years and are working as intended.  This year, the Connecticut legislature has raised a bill, Raised Bill No. 887, “An Act Concerning the Requirements for the Filing of a Mechanic’s Lien” (the “Act”), that may have an adverse effect on the construction industry through unintended consequences.

The Act would add a new requirement for a mechanic’s lien to be valid.  Specifically, the Act states that the contractor performing the work must hold “the appropriate registration or license to perform the services.”  On one hand, the Act has the valid purpose of discouraging unlicensed individuals from performing construction services.  On the other hand, this revision to the mechanic’s lien laws would be duplicative of the laws and regulations pertaining to licensure already in place insofar as the existing laws and regulations prohibit certain work from being performed without a license.  In addition, the mechanic’s lien statutes are not the best place to address this issue.

The mechanic’s lien laws were established in all fifty states to provide contractors and suppliers with recourse in the event of nonpayment for their labor,

An Explanation of The Home Improvement Act’s Licensed Contractor Exception

Chapter 400 of the Connecticut General Statutes is known as the Home Improvement Act.  “The purpose of the Home Improvement Act is to ensure that home improvements are performed by qualified people.”  Santa Fuel, Inc. v. Varga, 77 Conn.App. 474, 495 (Conn.App.,2003).  A “[h]ome improvement contract” means an agreement between a contractor and an owner for the performance of a home improvement.”  Conn. Gen. Stat. § 20-419.  As a general rule, a home improvement contract is not enforceable against a homeowner unless the contract complies with the writing requirements of the Home Improvement Act.  Laser Contracting, LLC v. Torrance Family Ltd. Partnership, 108 Conn.App. 222, 226, (Conn.App.,2008).

The Home Improvement Act serves a valid purpose but may be heavy handed in its application.  In holding that the failure to comply with the statutory requirements for a home improvement contract bars all recovery, including claims sounding in implied contract and unjust enrichment, the Connecticut Supreme Court said the following:

We recognize that our decision may lead to a harsh result where a contractor in good faith but in ignorance of the law performs valuable home improvements without complying with § 20-429. 

Construction Claims May Come From A Variety of Sources

Most construction claims arise out of the contractual relationship between the parties.  Some arise out of claims of negligence.  There are other situations where a contractor may be held liable for damages that stem from nothing more than having engaged in certain activities.  Such claims are based upon the idea that “strict liability” applies to “ultra-hazardous activities.”  In both situations, i.e. claims based upon negligence and claims based upon strict liability, the first party performs an act or omission that results in damage to the life or property of the second party.  With a negligence claim, in order to be held liable, the first party must owe the second party a duty that is breached by the first party’s act or omission.  For example, if a contractor is working on scaffolding above a sidewalk, the contractor must use reasonable care to make sure that nothing falls on the people below and, in that situation, the contractor would only be held liable if something fell due to the failure to exercise reasonable care and not solely because something fell.  With a strict liability claim, however, all that is required is for the contractor to be held liable is for the contractor to be engaged in the activity that caused the harm.

Contractors Have Statutory Rights That They May Assert During Payment Disputes

A recurring problem in the construction industry is the failure of owners to issue timely payments.  The problem not only affects contractors but also the subcontractors and/or suppliers who have to wait for the money to pass through the project’s general contractor and/or a higher tier subcontractor.  Most contractors are aware of their right to secure payment of the monies owed through a mechanic’s lien (private work) or by filing a payment bond claim (public work or private work if applicable) but there are statutory rights of which contractors should be aware.

Connecticut General States § 42-158i defines a “construction contract” as “any contract for the construction, renovation or rehabilitation in this state on or after October 1, 1999, including any improvements to real property that are associated with such construction, renovation or rehabilitation, or any subcontract for construction, renovation or rehabilitation between an owner and a contractor, or between a contractor and a subcontractor or subcontractors, or between a subcontractor and any other subcontractor” but excludes contracts between a contractor and any local, state, or federal government, and it excludes contracts for building residential structures with less than 4 units.  Id.

According to § 42-158i,

Another Step Closer to Understanding Pay-When-Paid Clauses

No provision in a standard construction contract has been more debated than the requirement for the general contractor to pay its subcontractors after its receipt of payment from the owner.  In situations where the owner does not pay the general contractor, the general contractor typically argues that it has no obligation to pay the subcontractor even if the reason for the owner’s nonpayment had nothing to do with the subcontractor.  Conversely, the subcontractor argues that – when the reason for the owner’s nonpayment is not the subcontractor’s fault – the general contractor must pay the monies the subcontractor is due.  Generally, the courts have said that contract language which states that the subcontractor shall not be paid until after the general contractor’s receipt of payment from the owner merely sets forth the time for payment and does not transfer the risk of the owner’s insolvency from the general contractor to the subcontractor.  “Normally and legally, the insolvency of the owner will not defeat the claim of the subcontractor against the general contractor.”  Sil/Carr Corp. v. Bartlett, 2012 Conn. Super. LEXIS 1665 (Conn. Super. Ct. June 26, 2012).  It is, however, possible for the contractor to transfer the risk of the owner’s nonpayment to the subcontractor.