Four ‘Legal Mythbusters’ for Sweeping Contractors

Four ‘Legal Mythbusters’ for Sweeping Contractors

by Joseph Katz, construction law attorney In my practice, I regularly encounter clients – both newcomers to the construction industry as well as veteran, second or third-generation players – who have a firmly-held belief which is not always soundly based in the law. The reasons for this abound; often, however, it is because a similar situation happened to a colleague, friend, or even competitor and that outcome has entrenched itself as “The Law” in my client’s mind. The fact is there can be a myriad of factors that contribute to any specific outcome, and a one-size-fits-all approach simply does not work in the construction industry. Often, a legal ruling will turn on nuanced subcontract language, the placement of a comma versus a period in the spec book, or the contents of a one line email sent sometime during the project. There are, however, certain common misconceptions which I believe hold subcontractors back from fully asserting and protecting their legal rights during and after a project. Worse, some of these missteps can significantly prejudice their case by the time they come to me for help. I would like to take this opportunity to explore – and debunk! – the four most common legal myths I have encountered in ten years of representing subcontractors.

Myth #1 – Email communications are not legally binding

Today, email has virtually replaced the old-fashioned letter, or even fax, for all but the most important of communications. It is instantaneous, effective, efficient, and easily accessed from anywhere in the world. Yet, many still believe that email cannot suffice to provide notice, make or accept change orders, or otherwise have much legal effect. This cannot be further from the truth. In my practice, I advise my clients to make use of email specifically to memorialize oral conversations or agreements they have reached with the project manager or superintendent, to provide notice of any condition delaying or impacting their work, and to follow-up on unmet commitments or missed deadlines. When a critical email is ignored, I urge my clients to resend it in its identical format, but with a bold “SECOND REQUEST” header, and to continue day after day until answered. I don’t think anyone reached a “FOURTH REQUEST” without having received a reply. I also caution my clients not to ever write anything they would not want read aloud in a courtroom because that is a virtual certainty to occur if the email is relevant – and damaging – to their trial position. Be aware that published cases have held an electronic signature – which can be as simple as your name appearing at the end of your message – meets a contractual requirement for a signed change order. Note, I do not advise email as a complete replacement to the traditional signed change order, notice of delay, etc. Rather, email should be used routinely to follow-up and confirm your understanding of the situation, and in this way it can serve as a stop-gap measure in the event of any future disputes. Definitely do not delete emails once litigation becomes a reasonable possibility, which is essentially any dispute-related item, as that can be deemed by the court as destruction of evidence and sanctionable. In fact, when I collect the relevant documents I will need to review and pursue a case, one of the first things I ask for are all the emails on the job, both to develop the case strategy and/or defense, and to ensure their preservation throughout the length of the case. In short, email has become perhaps the most widely utilized tool in construction litigation cases and can single-handedly win, or lose, cases. Use it wisely.

Myth #2  – As long as the owner has not paid there is nothing I can do

Thanks in large part to the American Subcontractor Association’s advocacy on both a national level and grassroots, state-by-state lobbying efforts, more and more is being done about draconian “pay-if-paid” and “pay-when-paid” provisions. California, Delaware, Nevada, New York, North Carolina and South Carolina ban the provision outright. Other jurisdictions, including Maryland and now the District of Columbia, have passed a law that while a pay-if-paid provision can be enforced by a general contractor, it cannot be used by an owner or surety in defending a mechanic’s lien or payment bond claim. Illinois and Indiana have similar statutes, as does Ohio (as to a mechanic’s lien only). In all jurisdictions, timely preservation of those rights is critical to ensuring a successful outcome and ultimately, payment of your claim regardless of whether the Owner has paid the GC. Many owners – and even more so their lenders – become loathe at the idea of a mechanic’s lien against the property, and a lien notice can often speed up the owner’s payment. Options remain, however, even in those jurisdictions which have not (yet!) legislated against the pay-if-paid clause. One avenue used successfully around the pay-if-paid clause is the prevention doctrine, which provides that if a party to a contract is itself preventing the fulfillment of the contract, that party becomes liable for that which it “prevented.” Applied in a pay-if-paid situation, depending on the particular facts, a subcontractor may successfully argue that it is the general contractor itself who is preventing payment from the Owner and as such, cannot shelter behind the pay-if-paid clause to avoid paying its subcontractors. Stopping work may be another option, if permitted by your subcontract and/or other applicable law. Of course, negotiating a pay contingency out of your contract – or at the very least, inserting a stop work provision in the event payment is not effected within 30 to 45 days of your invoice – is the best way to avoid payment failures, which leads to myth #3…..

Myth #3 – I must sign the GC’s boilerplate contract if I want the work

It is often difficult to successfully negotiate or redline a subcontract yourself and, indeed, my clients are often told, initially, that no changes will be accepted. However, I am usually able to obtain the most critical changes, or at the very least, insert enough “workaround” clauses to significantly even the playing field. For example, broadening an attorney fee provision to apply to the prevailing party, and not just the GC, dramatically shifts the home-court advantage previously in favor of the GC. Coupled with a few other modifications and other insertions, specifically concerning payment, the ability to stop work if invoices are not paid by a date certain and that a subcontractor’s tort liability is limited to the extent of its negligence only, a somewhat fair balance is ordinarily achievable. If you cannot obtain these crucial changes yourself, consider hiring an experienced construction lawyer in your area for the limited purpose of negotiating more favorable terms. As the old medical proverb goes, “an ounce of prevention is worth more than a pound of cure.”

Myth #4 – A partial or conditional lien release only releases the funds previously invoiced

I have seen subcontractors get burned on this one over and over again. Something about the words “partial” and “conditional” seem to send a message to the brain to ignore the rest of the words on the page because, after all, it says partial right up top, doesn’t it? Wrong.  Here more than ever, the devil is in the details.  Most payment releases being used by GC’s today – while being labeled a “partial lien release” – contain language that is much broader than a simple lien release for invoiced work only. Often they will release the GC and Owner from payment for all work performed on the project through the date of the applicable payment application, or even worse, through the date the lien release is signed.  And, yes, this can readily become a legal obstacle to receipt of future payment for unpaid change work that has already been performed but not yet billed, and/or accepted. Many “partial lien releases” don’t even contain an exception for retainage, and by executing the “partial release” you have just signed away your legal entitlement to your retention. Of course, if you have asserted a claim in writing, be it for extra work, a changed condition or any other matter on which you are claiming a right to payment and do not specifically reserve that claim within every “partial lien release” thereafter, you have waived and released that claim as well. For this reason, it is best to modify the language of any payment release – be it for lien claims or any claims – to indicate the release is being provided “only to the extent of payment received” for the work performed. Better yet, the ASA has a great sticker entitled “lien waiver reservation of rights” which you can easily slap on to every “partial” lien release. The sticker specifically carves out retention, unbilled changes and claims which are either unknown or not yet asserted in writing. It also makes clear that the release is effective only through the date of the subcontractor’s last pay application. Make it a habit to know, preserve and — most importantly — to assert your rights, and you will reap the success that savvy subcontractors are accustomed to. Joseph L. Katz is a senior associate at the construction litigation firm Huddles Jones Sorteberg & Dachille, P.C. in Columbia, Maryland. Joe regularly represents subcontractors and suppliers on federal, state and municipal construction projects and has specialized expertise in guiding his clients through the various regulatory requirements unique to government contracting. He also frequently represents clients involved in private sector construction, including housing, commercial, retail and industrial projects. He is experienced in all facets of construction litigation, including mechanic’s liens, Miller Act payment bond claims, arbitration, and civil actions in both state and federal court. He can be reached at katz@constructionlaw.com, or (410) 720-0072.