Are Contractors and Subcontractors Allowed to Rob Peter to Pay Paul When it Comes to Paying Subcontractors and Suppliers?

One of the main problems most contractors (and subcontractors) face is cashflow. When the economy is going well, most contractors still find their payments lagging 60 to 90 days behind the 30 days required by most construction contracts. Because of an owner’s failure to make timely payment, general contractors end up in arrears with its subcontractors, who end up in the arrears with their subcontractors (i.e. sub-subcontractors) and suppliers. Often well intended contractors (and subcontractors) may end up using monies received from one project to pay subcontractors (and/or sub-subcontractors) on another. The reasons for paying subcontractors from one projects with funds received from another may be because the subcontractors on the second job have gone longer without payment and/or are more in need. The question is whether that is legal.

In Connecticut, it has recently become riskier for contractors pay their subcontractors (and for their subcontractors to pay their sub-subcontractors and suppliers) with funds received from another project. Connecticut has long had prompt payment statutes which require contractors to pay subcontractors “not later than twenty-five days after the date the contractor receives payment from the owner” on private projects and “within thirty days after payment to the contractor by the state or a municipality” on public projects.

HERE’S AN UPDATE ON THE EFFECT OF PRIOR RULINGS ON SUBSEQUENT LITIGATION

In a prior post, this blog explained how the Supreme Court held that an owner’s claims against subcontractors were barred because they were either brought or could have been brought in the owner’s prior arbitration against the general contractor. Girolametti v. Michael Horton Assocs., Inc., 332 Conn. 67, 71 (2019). The court ultimately determined that the contractual relationship between a general contractor and its subcontractors was sufficient to determine that they were “sharing the same legal right.” Therefore, “the rule of claim preclusion,” which prevents the re-litigation of a claim once the claim has had a full and fair hearing “regardless of what additional or different evidence or legal theories might be advanced in support of it,” applied in this case even though the subcontractors did not participate in the arbitration. Id. at 75.

Girolametti involved a situation where the dispute between the owner and general contractor included claims that the work performed by subcontractors was defective. Although the subcontractors were not parties to the arbitration, they were no doubt happy with the result and more than willing to have that decision applied to the owner’s subsequent lawsuit against them.

In my prior post,

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.

Contractual Time Limits for Providing Notice of Claim Must be Taken Seriously

The Connecticut Appellate Court recently issued a decision that should cause every contractor some concern.  In J. WM. Foley Inc. v. United Illuminating Co., 158 Conn. App. 27 (Conn.App. 2015), the Appellate Court upheld a decision that denied a contractor’s $4.7 million delay claim because the contractor did not provide proper notice of the claim within the 10 days required by the contract.  The case is disconcerting because the court’s decision appears to be based upon the contractor’s failure to strictly comply with the contract’s notice provision.  There is no discussion indicating that the owner was harmed or prejudiced by the delay in receiving notice of the claim.  Moreover, the decision acknowledges that the contractor had provided the owner with notice of events giving rise to the claim.  In fact, despite denying the delay claim, the trial court awarded the plaintiff over one million dollars for its direct costs, which arose out of the same facts as the delay claim.

 

The project underlying the dispute in J. WM. Foley Inc. was the construction of a utility pipeline.  The parties’ agreement stated that the contractor was expected to encounter subsurface obstructions and that the contractor would be entitled to additional compensation associated with same. 

A Connecticut Court Grants Defendant’s Motion To Stay An Application To Discharge Mechanic’s Lien Pending Arbitration

As regular readers of this blog know, a mechanic’s lien provides a contractor with a security interest in the real property where its work was performed.  Because, however, it is not the intent of the mechanic’s lien laws to restrict the free transfer of title of real property, there are two statutory procedures by which an owner may obtain a release of a mechanic’s lien.  Specifically, the property owner may seek to substitute a surety bond for the lien or the property owner may seek an order discharging or reducing the lien.  In CDO Properties, LLC v. Bogaert Construction Co., Inc., Docket No. CV 13-6018411 (JD of New London), the Court issued a decision staying the property owner’s application for discharge of a mechanic’s lien.  Based upon this decision, an owner’s attempt to promptly discharge a lien may be thwarted or delayed by a court and an owner may be forced to live with a lien until after arbitration.

The decision was based upon the Connecticut General Statutes, which require the court to stay any legal proceeding if the dispute is subject to an agreement to arbitrate.  Conn. Gen. Stat. § 52-409 states:

If any action for legal or equitable relief or other proceeding is brought by any party to a written agreement to arbitrate,

The Appeal of A Decision Discharging a Mechanic’s Lien Can Potentially Be Rendered Moot

As previously discussed in this blog, anyone that has furnished labor, materials, or services for the improvement of real property and has not been paid for its work may file a mechanic’s lien against the subject property.  The owner of said property may then make application to the court to obtain a discharge of said mechanic’s lien.  If the property owner prevails, the contractor that filed the mechanic’s lien has a statutory right to file an appeal.

As the Connecticut Supreme Court explained in Lichtman v. Beni, “an order entered pursuant to § 49–35b is a final judgment for the purposes of appeal.”  Lichtman v. Beni, 280 Conn. 25, 32 (2006).  Conn. Gen. Stat. §49–35c “requires that an appeal be taken within seven days of the court’s judgment, but provides an automatic stay during that period.”  Id.  However, a contractor seeking to appeal an order discharging its mechanic’s lien must also use to seven stay period to obtain an order preventing the owner from recording the court order discharging its mechanic’s lien.

If the contractor does not file an additional motion requesting that the court stay the order discharging the mechanic’s lien,

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.

After Nine Years, There is Still Ambiguity in The State’s Prequalification Program

On October 1, 2004, acting through its Department of Administrative Services (“DAS”), the State of Connecticut implemented a prequalification program for all contractors bidding on certain public projects.  2003 Ct. ALS 215, 1.  Specifically, “[t]he DAS Contractor Prequalification Program (C.G.S §4a-100) [(the “Program”)] requires all contractors to prequalify before they can bid on a contract or perform work pursuant to a contract for the construction, reconstruction, alteration, remodeling, repair or demolition of any public building or any other public work by the state or a municipality, estimated to cost more than $500,000 and which is funded in whole or in part with state funds, except a public highway or bridge project or any other construction project administered by the Department of Transportation.”  DAS website, http://www.das.state.ct.us/cr1.aspx?page=10.  On October 1, 2007, the Program was expanded to apply to subcontractors whose contract exceeded $500,000.  http://www.das.state.ct.us/fp1.aspx?page=111.  Still, questions remain as to whether an apparent low bid submitted by a DAS prequalified contractor may be rejected by a public owner and/or its construction manager and the information that a bidder may have to submit to be awarded a project can be unduly burdensome and repetitive.

According to DAS,

You Should (Almost) Never Request a Jury for a Construction Case

Construction Contract disputes are complicated legal matters.  Both sides usually have valid points to make.  The winner is determined by the application of relatively complex facts to the law.  Such cases often involve information beyond the knowledge and understanding of the average juror.  Although it is true that most judges do not have a construction background either, judges have likely heard a prior construction case; and, as trained jurists, have a good understanding of the legal arguments that are being raised.  In addition, judges are being paid to pay attention to your case.  Conversely, the average juror has no understanding of construction or the law; typically does not want to be serving as a juror; and is missing out on a day’s pay. In light of the foregoing, I almost never recommend that my clients request a jury.

There is one area, however, where choosing a jury may be the right choice.  Until relatively recently, it was understood that a contractor had no claim for damages arising out of a bid protest.  See Lawrence Brunoli, Inc. v. Town of Branford, 247 Conn. 407, 412 (1999) (holding that the only remedy to be afforded unsuccessful bidders under the municipal bidding statutes is injunctive relief);

Court Upholds A Mechanic’s Lien Served More Than A Year After It Was Filed

Under Connecticut Law, “a mechanic’s lien shall not continue in force for a longer period than one year after the lien has been perfected unless the party claiming the lien commences an action to foreclose it.”  Conn. Gen. Stat. § 49-37.  Similarly, “[w]henver a bond has been substituted for any [mechanic’s] lien . . . , unless an action is brought to recover upon the bond within one year from the date of recording the certificate of lien, the bond shall be void.”  Thus, in both instances, the law requires a lawsuit to be commenced within one year of the mechanic’s lien having been recorded or the right to make a claim on the lien or a bond substitute therefor is gone.  In Connecticut, a lawsuit is commenced when the Writ, Summons and Complaint is served upon the defendant by a marshal.  Yet, recently, a Superior Court Judge refused to dismiss an action on a bond substituted for a lien that was not served until after the one year time limit had expired.  See Frank Lill & Son, Inc. v. O&G Indus., 2012 Conn. Super. LEXIS 2844 (Conn. Super. Ct. Nov. 26, 2012)

The Lill decision is surprising because it is often said that,