Getting In - Getting Out - Getting Paid

By M. Colleen Weule, APC
Weule & Ballard, APC
A Professional Corporation

As attorneys who represent contractors and companies involved in the construction field, we have seen just about every kind of legal problem you can imagine arising out of a construction project. They include disputes involving contract formation and interpretation, payment disputes over contract work, extra work claims, delay and impact claims, construction-related injuries, and insurance and bonding claims, just to mention a few. Anyone who has ever been involved in such a dispute knows first-hand that they are costly and damaging to a company's overall profitability, regardless of the outcome.

However, there are steps that everyone involved in the construction industry can take to minimize the likelihood of such disputes, and to increase the chances of a favorable outcome. These steps may sound simple, but we can assure you that they are often overlooked and account for a tremendous amount of litigation. Accordingly, we offer the following tips for getting in, getting out, and getting paid on your next construction project.

Before the Job - Getting In

1. Know who you're dealing with. If you're going to perform work or supply materials on a private works project, check with the county recorder to determine who actually owns the property. You may be surprised to discover that the party you are dealing with is not the actual owner of record, which could significantly affect your lien rights. In addition, you may discover that there are other pre-existing liens against the property that might affect your lien rights, or which may suggest the owner is overextended financially.

If you are dealing with a party that you don't know personally, do a background investigation to determine whether they are financially solvent and properly funded for the project. A simple credit check may suffice for most projects, but a more detailed investigation may be appropriate for larger projects. If you have concerns about the owner's ability to fund the project, you can take appropriate protective measures, including asking for a payment bond or other evidence of financial ability to pay for the project.

If you are dealing with a large organization or bureaucracy, find out who has the actual authority to make decisions, and find out whether that person is likely to stick with the project from the beginning to the end. The success of any construction project is dependent to a large extent on the competence and personality of the individuals who manage and supervise the work. Where continuity is critical, you might be able to negotiate the right to approve any substitution of key personnel.

The above tips are equally applicable to general contractors or higher-tiered subcontractors, if you are a supplier or lower-tier subcontractor.

2. Know the project. Find out who the significant players are. You need to know something about all of the key participants in the project, even those with whom you will not have a direct contractual relationship. Certain types of projects are more susceptible to coordination problems than others. For example, if you are working on a design-build project, it is critical to know how your work will be integrated with the overall design and the work of other related trades. Coordination and timing of work can also be particularly problematical on projects involving sites with extensive underground utilities. Once you identify any special problems that might impact your work, you can then take the next step of negotiating contract provisions to protect your interests and avoid anticipated problems that are likely to affect your work.

3. Negotiating and understanding your contracts. This is perhaps the single most important thing you can do from a legal standpoint to ensure the success of your project. It is impossible to overestimate the importance of a good contract. It is the bible for the job. It should be negotiated with care, reviewed carefully by everyone who will be responsible for carrying out the job, and should be referred to often throughout the course of the project.

No matter how large or small a part you will be playing in the project, always use a written contract. Verbal contracts may be enforceable, but it is often difficult to prove their terms. Make sure that all important terms that you negotiated are actually incorporated into the final written contract, or they will not become a part of it. Do not be afraid to negotiate. With the exception of certain large public works projects, most owners and general contractors are willing to negotiate the terms of their contracts.

It is impossible in an article of this sort to cover this topic in any detail, but the following are some of the more common issues and clauses that come up frequently:

(a) Basic core provisions dealing with scope of work, compensation, and scheduling are often not drafted clearly, and can lead to serious problems. For example, is scope of work described with sufficient particularity that all parties can easily identify whether particular work is within the scope as opposed to extra work? If the contract is ambiguous, you may well find yourself performing extra work under protest and attempting to recover for it by way of a claim after completion.

(b) Special protective clauses should be considered, especially if there are particular risks (e.g., questionable financing or solvency of the owner or general contractor, design-build contracts, condominium projects, etc.). These would include:

(1) payment and performance bond requirements
(2) attorneys fees provisions (allowing you to recover your legal fees if you prevail)
(3) limitation of liability (e.g., limit your liability for claims to the amount of your contract, or to the proceeds of insurance)
(4) right to stop work for nonpayment

(c) Common problem clauses:

(1) schedules (avoid guarantees and time is of the essence clauses)
(2) guarantees/warranties
(3) indemnity clauses (watch out for unreasonable risks that you can't obtain insurance coverage for; if possible, limit your risk to that portion of any damage or liability attributed to your proportionate share of fault)
(4) insurance (reduce your risk by obtaining written acknowledgment from your broker and the owner or general contractor that your insurance meets the requirements of the contract);
(5) termination provisions (does your contract state how and when you will be compensated if your contract is terminated for convenience prior to completion?)
(6) dispute resolution (mediation should be a condition to filing suit; carefully weigh pros and cons of arbitration before agreeing to it)

During the Job - Getting it Done and Getting Out

1. Communication. Train your key personnel to assume that everything they say and do will someday be presented to a judge or jury. All communications, whether verbal or written, should be professional, clear and to the point, and timely. That nasty letter may be well deserved, but it won't solve your problems, and it will undoubtedly come back to haunt you later. It is especially important to communicate regarding potential problems.

2. Documentation. As a matter of course, you should take extra precautions to document claims and extra costs. Where appropriate, you should require your supervisors to prepare and maintain daily reports or field notes. Take photos and videos where appropriate, particularly if there is a dispute about an existing site condition. Maintain correspondence files, telephone and e-mail logs, memoranda, invoices, time sheets, and accurate payment records. Always give written notice to the other party of any problems that may impact the cost or schedule for completion. If the dispute isn=t resolved quickly and satisfactorily it may be a long time before it is, in which case this documentation may be all you have to support your position.

3. Lien Rights. Preserve your lien rights. Serve the 20-day preliminary notice and make sure it is served on all the right parties. This is a topic that cannot be covered in any detail in an article of this nature, but there are no end of resources that will explain what you need to do to preserve your lien rights. If your work involves a public works project, you won't have mechanics' lien rights, but you still have stop notice remedies and bond remedies that should not be forgotten.

4. Changes. They are a fact of life on construction projects, so you should anticipate them. Carefully negotiate the scope of your contract at the outset so that there will be less room for dispute as to what constitutes extra work beyond the scope. Never perform extra work without a written change order, or at least a written direction from an authorized person. This is a good time to remind you to make sure your field superintendent actually reads the contract and know what it says. Otherwise, he may not be aware that requested work is in fact extra and won't take appropriate efforts to document your right to additional payment. Make sure your contract contains clear provisions indicating the manner and basis for compensation of extra work, whether it is on a time and materials basis, force account, or otherwise.

5. Dealing with problems. At risk of repetition, make sure you provide prompt notice of problems to the other party, and follow up in writing. Where possible, try to resolve disputes informally, if necessary with the assistance of neutral third parties. Suspension of work and termination are measures of last resort, not to be taken without advice of counsel. Don't be afraid to remind the other party of all the contractual and statutory provisions that support your side of the dispute (lien rights, bonds, stop notice rights, attorneys fees clause, interest provisions, limitation of liability provisions, etc.). There is no law that requires you to wait until project completion to resolve all pending disputes. If you can resolve some of them without prejudicing your ability to resolve others later, do it.

6. Releases. Understand and use the statutory release forms prescribed by the California Civil Code. Make sure you know when to use the Conditional versus the Unconditional Releases. If you don't know what they are or what they mean, contact your attorney.

Getting Paid

When all else fails, and you still haven't been paid, enforce your contract and your statutory remedies. It doesn't do much good to negotiate a great contract if you don't use it. The following typical remedies are available, depending on whether the project is a public or private work of construction, and the remedies are cumulative. That is, you may assert all of the available remedies concurrently, even if only one would really be sufficient.

1. Mechanics' Lien Rights. This topic cannot be covered in detail in this article, and you should consult other resources for further information. Assuming you served your 20-day preliminary notice as required, you need to record the lien in a timely fashion (the time limit will differ, depending on whether you are a general or a subcontractor, and whether there is a notice of completion). Once you record the lien with the county recorder, you must bring suit within 90 days or you lose your lien rights. This is true even if you are required to submit the dispute to arbitration.

2. Stop Notice Rights. This is a remedy that allows you to require the owner (if you are a subcontractor) to withhold funds from the general contractor, if the general contractor owes you money. In effect, your stop notice claim creates a lien on those funds, which can ultimately be used to satisfy your claim if you prevail. This remedy is only available if there are still funds being withheld.

3. Payment Bond Claims. If the other party to your contract was required to obtain a payment bond, you can make a formal claim against that bond. The bonding company should have been put on notice of your claim as soon as it arose during the course of your work, and you should have kept the bonding company advised of any facts affecting your claim. If the bonding company doesn't voluntarily pay you what is owed (and they usually don't), you will need to join the bonding company as a party defendant in your action to recover what is owed.

4. Contractor's License Bond Claims. All contractors are required to maintain a license bond as a condition of maintaining their contractors license. The penal sum of these bonds (up to $7,500) can be used to satisfy claims for nonpayment. Although we do not recommend making claims against a contractor's bond in all cases, it may be appropriate where the contractor in question has acted in bad faith or has withheld payment without any legitimate basis for disputing the claim. If such circumstances exist, you may also want to consider filing a formal complaint with the Contractors' State License Board.

5. Dispute Resolution Methods. No matter how good your case is, if you have to go to court you have already lost. It is an unfortunate, but real, fact of life. How can you avoid or mitigate such a possibility? First, as recommended above, require that all disputes be submitted to mediation as a condition for filing a lawsuit. Mediation (as opposed to arbitration) is a non-binding settlement proceeding before a neutral third party who doesn't admit evidence or rule on the merits, but rather attempts to facilitate a settlement between the parties.

6. Pre-judgment Writs. In certain circumstances you may be entitled to a pre-judgment writ of attachment to recover money owed. Generally, you will need to convince a judge that your claim is meritorious and not subject to a good faith dispute, and that it is a liquidated claim (i.e., the amount is certain and not contingent). If the judge agrees, the court has the authority to issue a writ of attachment, which orders the Marshal to physically attach property (including bank accounts) sufficient to satisfy your claim. As you might imagine, this can be a very powerful collection tool.

If mediation doesn't work, your contract may provide that the dispute be submitted to arbitration (usually binding). Although there are a number of advantages of arbitration over litigation, there are also significant disadvantages which should be carefully considered before you sign an agreement calling for mandatory arbitration. If your claim is for less than $50,000, binding arbitration may be a good alternative. If the claim is between $50,000 and $100,000, the choice will be tougher to make. If the claim exceeds $100,000, generally the disadvantages of arbitration will outweigh the advantages and you will want to preserve your right to litigate the dispute.

Where litigation is the appropriate alternative, you may want to consider filing in small claims court for smaller disputes. Although the small claims court can only make awards up to $5,000, it may make sense in some cases to waive amounts over the jurisdictional limit rather than hire a lawyer to file an action in Superior Court. If you do decide to litigate a claim, ask your attorney for a professional evaluation of your claim and a summary of anticipated litigation costs, and don't be afraid to negotiate fees.

M. Colleen Weule, is a partner in the law firm Weule & Ballard, APC. The firm's practice includes, Civil Litigation in the State and Federal Courts and Administrative Boards. Private and Public Works Construction Claims and Disputes, Laws Pertaining to General, Engineering, and Specialty Contractors and Design Professionals, Real Estate, Business, Corporate.