Category Archives: Damages

NC State Construction projects– Privity, Multi-Prime Contracts, and the Ability to Be Sued by Parties You Don’t know (Law note)

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At the recent seminar on construction law in North Carolina, I was asked whether parties could be sued by other parties on state construction projects when there is no contract between those parties.  The answer is yes. In the following series of blog posts, I will address three major cases which address this question in several different permutations.

For today’s post, I will discuss contractual privity, the multi-prime statute, and how the two apply on North Carolina state construction projects.  In later posts, I will discuss the application of that statute to different parties in the construction context.

Multi-prime contracts

In North Carolina, the state entity who is the owner of the construction project must bid the project pursuant to one of several designated ways.  One common method sometimes required of public bidding is the “mulit-prime” contract, in which the State has at least 4 separate contracts, for:

(1) Heating, ventilating, and air conditioning

(2) Plumbing and gas fittings

(3) Electrical wiring and installations

(4) General construction relating to erection, alteration, or repair on public property

N.C. Gen. Stat. §143-128(a). 

The purpose of the multi-prime statute is two-fold:

  1.  It encourages lower bids by preventing pass-through cost mark-ups to the state
  2. It allows smaller specialty contractors to enter bidding directly with state without having to have a working relationship with a general contractor, thereby opening up state jobs to a wider array of potential contractors
Contractual Privity

 In general, contractual privity is required to sue another entity on a construction project—that is, you have to be in a contractual relationship with the party you are suing.  There are exceptions to this rule.  For example, you can be sued in negligence for property and personal damage by a party that you do not have a contract with.  (See my post discussing the architect’s liability for economic loss  resulting from breach of architect’s common-law duty of due care  ).  In addition, the state legislature has provided the ability for contractors to sue one another, or other entities involved in the construction project, without having to sue the owner or deal with the State Construction Office.

 NC statute on liability:

Each separate contractor shall be directly liable to the State of North Carolina, or to the county, municipality, or other public body and to the other separate contractors for the full performance of all duties and obligations due respectively under the terms of the separate contracts and in accordance with the plans and specifications, which shall specifically set forth the duties and obligations of each separate contractor. For the purpose of this section, “separate contractor” means any person, firm or corporation who shall enter into a contract with the State, or with any county, municipality, or other public entity to erect, construct, alter or repair any building or buildings, or parts of any building or buildings.

N.C. Gen. Stat. §143-128(b).   [Emphasis added].

This statute has been interpreted over the past decade to allow essentially any party to sue any other party directly on state construction projects.  In the next blog post, I will discuss the first of three major cases dealing with this issue.

Of Mice and Men: Yes, you need a written construction contract!

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Field mouse

Photo by delphywnd via Flickr*

 

Does a written contract *really* matter?   Yes; yes it does.

While you can get by for years- decades, even- on handshake deals—when something goes wrong you will wish you had a written contract.  Even the best projects, with familiar clients and trusted contractors, can go awry.  (“The best laid plans of mice and men often go awry”).

Many of my clients come to me after having been in business 20, 30 years or more.  They come to me because they have either already been sued, or the handwriting is on the wall and they are about to be brought into litigation.  They tell me they’ve never needed a written contract before now.  That’s well and good.  However, I’d bet dollars to donuts those same folks have fire insurance, and yet very few if any of them have actually experienced a house fire.  What’s different about business contracts?

The goal, of course, is that you will never need to rely on the written provisions in your contract.  But if you ever find yourself facing a lawsuit, you’ll wish you had a written contract.

A written contract spells out expectations, rights, and responsibilities.  It sets standards that may be understood by the parties, but very different from what the common law would allow.  Without a written contract, you are trusting yourself to laws you may not agree with or giving up protections you may otherwise have.  Why chance it?

Get something in writing—a signed proposal, an email which is confirmed—something that spells out basic agreements that might come into dispute later.  A thorough contract written for each project is ideal, though not always practical on smaller, quick-turn deals.  That’s fine.  But get something on paper.  You’ll be glad you did, if and when you ever find yourself on the courthouse steps.

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*Photo: Have you seen the Muffin Mouse by delphwynd via Flickr and made available via Creative Commons license.

Pay When Paid Clauses in the NC Construction Contract

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“Pay when paid” clauses are clauses found in many construction contracts that state that the contractor will pay his subcontractor only if and/or when the contractor receives payment from the owner.   Are these clauses enforceable?  The answer depends on (1) what state you are in and (2) what choice of law provision is contained in your construction contract.

A limited number of states do honor “pay when paid” clauses under the theory that the parties are usually sophisticated parties who negotiated the contract terms and as such they are duty bound to honor those terms.   When such a clause is enforced, it can prove fatal in a case where the owner files bankruptcy or otherwise defaults on its payments to the general contractor.

In North Carolina,  such clauses are unenforceable as against public policy.

Performance by a subcontractor in accordance with the provisions of its contract shall entitle it to payment from the party with whom it contracts. Payment by the owner to a contractor is not a condition precedent for payment to a subcontractor and payment by a contractor to a subcontractor is not a condition precedent for payment to any other subcontractor, and an agreement to the contrary is unenforceable.

N. C. Gen. Stat. Section 22C-2.

Does that mean that, if you are a subcontractor, you don’t need to worry about such “pay when paid” clauses in North Carolina?  Not necessarily.  It depends on what law is the law that will be applied by the court.  If your contract states that the law of another state will apply, you need to know if that state is one in which “pay when paid” clauses are enforceable.  In some states, such as Virginia, the contract is king and whatever the contract says will be enforced.  Such clauses are also generally enforceable in a few other states such as Connecticut and Michigan.

Other states take a more cautious view, and hold that such clauses are only enforceable if unambiguously written, including  Arizona, Ohio, and Massachusetts.

States which concur with North Carolina’s view that such clauses are unenforceable include New York, California, and South Carolina.

Therefore, it is important to know not only what your contract says, but what state’s law will apply to your contract.

Because case law and statutes change the law regularly, consult a licensed attorney in the jurisdiction you are concerned about to learn the latest status of contingent payment clauses in that jurisdiction.

ConsensusDOCS- are they an improvement over AIA construction contracts?

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Have you had occasion to use the (relatively) new ConsensusDOCS? Having just completed my manuscript for the North Carolina Construction Law seminar I’m speaking at in May, I’ve been spending a lot of time comparing the American Institute of Architect’s standard contract general conditions, the AIA A201 (2007) to the ConsensusDOCS 200 (2007) and the Engineering Joint Contracts Document Committee (EJCDC) standard general conditions of the contract, C-700 (2007).

I haven’t yet seen litigation over the ConsensusDOCS, so how courts will interpret its provisions remains to be seen. One major difference: the ConsensusDOCS do diminish some of the architect/design professional’s role on the project.

For example, in the change order process, instead of the architect being involved in the contract price and time adjustment (see AIA A201 Section 7.2.1), the ConsensusDOCS 200 calls for the owner and contractor to negotiate in good faith. No mention is made of the design professional’s role. (See 8.1.2).

If you’ve had occasion to work under the ConsensusDOCS, drop me a line and tell me the advantages and disadvantages over other form contracts.

NC Construction Law Seminar in Greensboro

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Excuse the little self-promotion here, but if you want a quick way to learn more about construction issues in North Carolina, I’m speaking at a seminar on May 7, 2010 in Greensboro, NC.

The seminar topics include:
* Understanding Liens, Bonds, and Payment Issues
* Risk Transfer (including insurance and indemnity issues)
* Making Changes & Resolving Disputes during the Construction Process
* Contracts and Subcontracts on Public Projects
* Recent Bankruptcy Cases Impacting Contractors’ Lien Rights

The seminar qualifies for 6.0 PDHs for NC Engineers, 0.6 CSI CEUs, and NC Attorney CLE credit is pending.

Joining me in speaking are Eric Biesecker, Jennifer Maldonado, and Brian Edlin. For more details or to register, go to Half Moon Seminars.