“It depends” – two words clients hate to hear from their lawyers. “It depends” is (regretfully) also the answer to the question posed in the headline: “Can a contractor simply walk off a job?”

While this topic is often covered by others, we run across misconceptions enough that some fundamentals bear repeating.

A frequent misconception is that if the contractor has not been timely paid, the contractor has the right to immediately stop working. That is not necessarily the case. Or, at least, the issue is trickier than it may seem. Although a breach of contract (i.e., unjustified nonpayment) may justify a contractor in walking off a job, contractors should anticipate that an owner may have a very different version of events as to why payment was not timely made (and whether payment was even untimely at all).

An owner may have several reasons justifying nonpayment. For example, the owner may claim that the contractor did not complete certain work or that the work was defective. In such cases, disputes can arise that necessitate the hiring of attorneys and litigation. Such disputes are costly – often far costlier than the amount of nonpayment at issue.

Thus, in addition to the amount of money at issue, a contractor should weigh a number of considerations before walking off the job. Owners should similarly keep these considerations in mind if their contractor threatens to abandon a job.

First, check the written contract. The contract will be one of the first places lawyers and judges will look to see whether a contractor had the right to walk off a project. What does the contract say, if anything, about the contractor suspending or stopping work? Check the payment provisions. Check the scheduling and delay provisions. Check the contract termination provisions. Check the work-through-disputes clause and ask whether the contractor must continue to work despite any disputes over payment. Given the express language of the contract, evaluate the strength of your positions.

Even if the contract contains some language that indicates a contractor has the right to stop work upon untimely payment, consider whether the owner may have a counterclaim. As noted above, an owner may believe that payment was timely or that payment was not necessary because of incomplete or defective work.

Also check to see whether the contract contains a liquidated damages provision. A liquidated damages provision provides that a contractor will pay a certain amount per day that a project is delayed. If the contractor walks off a job, the contractor should anticipate that the project will be delayed. An owner may invoke this provision if it thinks the contractor is not justified in walking off the job. Thus, the contractor will want to ensure that it is justified in leaving a job and that it will not be subject to liquidated damages for doing so.

Before departing an incomplete job, a contractor should also realize that it is relinquishing control over the jobsite and work. Other contractors may be permitted to finish their work. If the work is later found to be defective, the contractor can anticipate that it (along with the new contractor) may be targeted by the owner in a lawsuit for defective work. The contractor will then be put in the unenviable position of trying to show that the new contractor caused the defective work. (Thus, at a minimum, a departing contractor should ensure that it has adequately documented its work and jobsite conditions through as-built drawings or other mechanisms.)

Also, consider whether the written contract has an attorney fees provision that awards attorney fees to the prevailing party in litigation. You may not be the winner in litigation even if you have a great case and you may be the party that ends up owing fees. Further, even if you do win, awards of attorney fees often do not reimburse the entire amount of fees expended.

Finally, consider alternatives to walking off a job. Can an informal resolution be reached without resorting to litigation? Can workforces be supplemented to provide greater workflow and meet schedule? Can deficient or objectionable subcontractors be replaced?

In sum, to make the best business decision, contractors and owners should consider all factors, including the ones identified herein, when evaluating whether contractors have the right to leave ongoing construction projects.

Nicholas Karkazis is an attorney in Stoel Rives LLP’s construction and design practice group. Contact him at 916-319-4677 or nicholas.karkazis@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post OP-ED: Can a contractor simply walk off a job? appeared first on Daily Journal of Commerce.

We’ve written before about contractual provisions that sometimes go unnoticed or unappreciated. Another such provision is a “liquidated damages” provision. Liquidated damages are a way to agree beforehand to the amount of damages that one party will owe the other in the event of a particular type of breach. In construction contracts, liquidated damages provisions are often used to identify the amount of damages that a contractor will owe the owner if there is a delay in completing construction.

For example, the parties might agree that the contractor will owe the owner $500 per day in damages if substantial completion is not achieved by the target date. (Often the amount is greater than $500.) Thus, if substantial completion were delayed for two days, the contractor would owe $1,000 in liquidated damages. That amount isn’t too worrisome perhaps, but the stakes get higher if the delay lasts months or even years, as can sometimes happen with construction projects.

For contractors, another risk is that contracts are often written broadly enough to impose liquidated damages even if the contractors do not cause the delay. The timing provisions of a contract will often read that in the event of a delay not caused by the contractor, it must still provide written notice to the owner (or owner’s agent) within a specified time period to excuse the delay.

Sometimes, due to the normal course of business, this notice is not provided. In such cases, the owner may argue that because it did not receive written notice by the specified time period, the contractor is responsible for the delay. The owner asserts that the liquidated damages provision was triggered and that the contractor owes liquidated damages because of the delay. The success of this argument may depend on the jurisdiction and court.

Although not all construction contracts contain a liquidated damages provision, many do and they are frequently litigated. Certain businesses keep a liquidated damages provision in their standard template construction contract. Form contracts, such as certain AIA contracts, may have placeholders for a liquidated damages provision to be included.

Ideally, contractors would have processes in place to ensure compliance with all contractual terms so that, among other things, any delays are tracked and documented and notice is provided to any necessary parties. At a minimum, however, contractors and in-field personnel should understand that delays – caused or not caused by the contractor – could have negative consequences depending on the terms of the contract. Personnel with knowledge of the potential consequences can help a business “issue spot” and return to the contract provisions to ensure compliance.

On the other side, owners and their agents should also be aware that timing, notice and liquidated damages provisions in the contract may benefit them. Liquidated damages provisions can be waived if they are not enforced in a timely manner. Although many contracts now contain “non-waiver” provisions that state that the parties do not waive any rights under the contract by delaying enforcement of the rights, some courts have found – perhaps paradoxically – that even “non-waiver” provisions also may be waived.

Because of the harsh consequences that can sometimes result from liquidated damages provisions, some requirements must be met for enforceability. These requirements vary by jurisdiction, but generally they are that the actual damages would have to be difficult to prove and the amount of liquidated damages is reasonable in light of the anticipated damages that would stem from a breach. If a court finds that actual damages were easy to calculate or that the amount of liquidated damages was set unreasonably, the liquidated damages provision will not be enforceable. Unsurprisingly, these general requirements are frequent topics of litigation.

Therefore, to avoid potentially harsh consequences, waiver of a potential benefit and unnecessary litigation, contractors and owners should have – at the least – a general knowledge of liquidated damages provisions. Such knowledge can help the parties issue spot and consult any applicable contracts for compliance.

Nicholas Karkazis is an attorney in Stoel Rives LLP’s construction and design practice group. Contact him at 916-319-4677 or nicholas.karkazis@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post OP-ED: Don’t overlook a contract’s liquidated damages provision appeared first on Daily Journal of Commerce.

Construction contracts typically provide for contractors to be paid in installments as certain percentages of the work become complete or as certain milestones are met. Ideally, the contractor performs a portion of the work as provided for in the contract, and the owner pays the contractor an installment payment for that portion of the work. The parties continue in this manner until the work is finished. In reality, when projects span months and years, things don’t always go so smoothly.

Often, a contractor’s scope of work for a project expands to include change orders or extra work, or the owner and contractor may execute an additional contract for a different scope of work than what was covered in their original agreement. As work progresses simultaneously on each piece of the project, the contractor might send multiple invoices for the different scopes. If the invoices are clearly labeled to reference each specific change order or contract under which the work was performed, and if the owner timely disburses specific payments with instructions regarding how each payment should be allocated, the parties may continue to work together amicably.

Disputes may arise, however, if invoices are not clearly labeled, or the owner issues a lump sum payment in response to multiple invoices without instructions regarding how to allocate the funds. Disputes are especially common when lump sum payments are not sufficient to cover all of the outstanding invoices. Owners may claim they already paid for certain work, and contractors may claim they were not paid for certain work. The relationship may sour to the point where litigation ensues.

If a business owner finds it unclear how payments are to be allocated, check the contract first to see if it provides any guidance. If not, the state may have general debtor/creditor laws that govern the situation.

For instance, in California, Civil Code section 1479 generally dictates how payments are to be allocated between a creditor and debtor when there are several debts to be satisfied. If the contractor intends that its “performance should be applied to the extinction of any particular obligation,” and that intention is “manifested to the creditor (owner),” the owner must apply it to that particular obligation. In other words, if the contractor specifies the work to which payment is to be allocated, the owner should issue checks in that manner. However, if the contractor does not specify how payment is to be allocated, the owner may choose how to allocate payment, as long as the payment is made within a reasonable time frame. Finally, if neither the contractor nor the owner specifies how payment is to be allocated, payment should be applied as:

1. interest due;
2. principal due;
3. the obligation earliest in date of maturity;
4. an obligation not secured by a lien or collateral undertaking; or
5. an obligation secured by a lien or collateral undertaking.

Notwithstanding general laws, like the one mentioned above, circumstances surrounding payment allocations can create legal complexities. For example, the rules become more complex when joint checks are issued (i.e., a check to be shared by a subcontractor and its materialmen), when multiple projects are involved, or when the contract exists between the prime contractor and subcontractor (instead of just between the contractor and owner). When neither party has specified how payments are to be allocated, or when payment has been made in a manner in which allocation is unclear, disputes can be riddled with legal pitfalls, necessitating the advice of counsel.

Although it may require extra effort in the short run, keeping an open dialogue with the other party may prevent additional headaches and expense in the long run. A business owner not sure which invoice to pay first, or how to apply a lump sum payment from an owner, should call the other party and confirm the result of the conversation in writing. This process should help avoid extended disputes and will, in cases of unavoidable litigation, help track how money was allocated. For an owner, these practices will help avoid claims by a contractor that it was not paid for certain work. For a contractor, these efforts may prevent potential claims or defenses by an owner that the contractor was already paid for certain work.

Nicholas Karkazis is an attorney in Stoel Rives’ construction and design and litigation practice groups. Contact him at 916-759-9189 or nicholas.karkazis@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post OP-ED: Allocate payments clearly to minimize construction disputes appeared first on Daily Journal of Commerce.