LEGALLY SPEAKING: A Difficult Meeting

LEGALLY SPEAKING

A Difficult Meeting by Bruce E. Kauffman, Esq. and Brad E. Kauffman, Esq.

It was a very difficult and upsetting ride home for me from a recent meeting with a subcontractor client, his wife, and their certified public accountant. The company, a specialty subcontractor, is involved in two separate lawsuits in which it is owed two hundred thousand and six hundred thousand dollars. The projects are both out of town and it was my client’s first time working for these two general contractors. Unfortunately, my client did not inquire as to their reputations in the industry before signing the subcontracts.

The certified public accountant had requested the meeting as he was informed by my client’s bank that it was concerned about my client’s financial condition and it was anticipated that the bank would make demand for payment on my client’s loan. The certified public accountant also feared from conversations with my client’s surety, that its surety would not issue future

payment and performance bonds or severely restrict its bonding capacity.

The company has been in business for many years. From my recent conversations with its sole stockholder, it is very apparent that he is a very hardworking and good person. At the meeting he expressed that he was worn out and tired. Over the years, my client advised me that on occasion the company had issues with general contractors recovering payment, including for change orders and retention. However, certainly nothing like he is now encountering. His wife shared that he could not sleep due to the stress and constantly worrying about the future of his company, his long-term employees, and his family. She also shared with me his prior heart condition and that she was anxious about his health.

We discussed a number of our options at the meeting, the two least desirable ones: to sell the company or liquidate its assets to pay off the loan. Of course, those options were not very appealing as my client stated that his company was such an important part of his life and it was always his intention and desire to transfer his ownership in the company to his son who has been working there for the past five years. In addition, he would lose in excess of seven hundred thousand dollars which he had loaned the company in his attempt to keep it operating.

He said it was so unfair that he was placed in this position as the company had properly and timely performed its work. He recognized that by the time these cases would be heard in court and the substantial legal fees necessary to prosecute the cases had been paid, it might be too late to save his company even if the company was able to prevail. Of course, he was correct on both counts.

In the two hundred thousand dollar case, the company was required to perform additional work due to both unforeseen conditions and a change in the scope of work. The general contractor refused to pay the company for the additional work. The primary defense to non-payment by the general contractor, among others, was the company’s failure to provide sufficient notice of its claim in order for the general contractor to provide same to the owner as required by the prime contract. The company agreed to be subject to the terms of the prime contract even though it never received or reviewed same. The general contractor also maintained that its responsibility for payment of the extra work was limited to the amount of payment which it received from the owner and the owner denied the claim.

In the six hundred thousand dollar case, the company estimated the completion of its work within thirty days. Unfortunately, the project was grossly mismanaged and the general contractor’s failure to timely coordinate the work of its subcontractors and suppliers resulted in months of delay. In fact, it took over seven months for the company to complete its work during which time it sustained substantial additional costs and delay damages in the amount of six hundred thousand dollars. There was no continuity in the course of the company’s work and the general contractor would repeatedly change the sequence of the work and literally direct the company like a ping pong ball to perform its work all over the site. The general contractor denied any responsibility for the company’s claim on the basis that the company agreed in its subcontract to comply with the general contractor’s schedule as amended and to perform its work as directed by the general contractor. It further maintains that the construction schedule did not represent a guaranty by the general contractor with respect to the timing of the work, but rather it was a planning device to establish goals for the project. The Company further agreed to provide a sufficient number of workmen to comply with the schedule, including acceleration of its work, without cost to the general contractor. The subcontract stated that in the event that the company was delayed in the performance of its work which was not the fault of the subcontractor, it was only entitled to an extension of time to the extent that the general contractor received such extension from the owner. Moreover, the company was not entitled to recover delay damages. Yet, the general contractor was entitled to recover delay damages, among other costs, if the company failed to adhere to the general contractor’s construction schedule.

In reviewing the subcontracts in preparation for the litigations, the company made very minimal revisions to its subcontracts. Among other things, it failed to delete or modify several dangerous provisions, which were similar in both subcontracts, including but not limited to: (i) the condition precedent payment provision; (ii)the catch-all provision that the subcontractor is required to perform “all other things necessary or required for the completion of the work for its intended purpose (regardless if set forth in the plans and specifications or reasonably inferable therefrom)”; (iii)the affirmative duty to disclose discrepancies in the plans and specifications’ (iv) the requirement to perform an independent investigation of the site conditions; (v) the requirement to protect its work until the completion of the project; (vi) the indemnification of the general contractor, owner, and others required in the contract documents even if same are partially negligent; and (vii) the payment of consequential damages.

When I inquired of the individual who reviews subcontracts for the company why there were only such minimal revisions, his response was “I was afraid we would lose the work; I got what I could.” In retrospect, I am confident that the company wished it had in fact lost this work.

The purpose of this article is to emphasize the importance of a subcontractor having the right attitude and philosophy when negotiating its subcontracts. Construction is primarily accomplished by the sweat and toil of the subcontractor. The general contractor and owner are certainly entitled to be assured that the subcontractor’s work is properly performed. However, the subcontractor is entitled to be treated fairly and with respect. Inexplicably, over the years, subcontractors have allowed the general contractor to shift unreasonable risk in the performance of the project to the subcontractor. The subcontractor needs to stand up for its rights. It is all about attitude. A subcontractor can get the respect it deserves and protect its company, employees, and family, or, as I have often said, a subcontractor can have the mentality of Rodney Dangerfield who gets no respect. A subcontractor should not be at the mercy of the general contractor by agreeing to an unreasonable subcontract which jeopardizes the future of its company as regrettably my client has done.

About the Authors

This article has been written by Bruce E. Kauffman, Esquire, Senior Partner and Brad E. Kauffman, Esquire, Associate Attorney with Kauffman and Forman, P.A. who specialize in the representation and protection of subcontractors and suppliers. Bruce and Brad can be contacted at 406 W.Pennsylvania Avenue, Towson, Maryland 21204, 410-823-5700.