Personal Assets at Risk Despite Corporate Formalities (Law Note)

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checking the plumb of a trussMany people establish business entities to protect themselves from personal liability.  In a ruling last week, however, the NC Court of Appeals  held that despite such corporate formalities, contractors can be personally liable for their own negligence.

The case, White v. Collins Building, Inc., __ N.C. App. __ (January 4, 2011), involves a new home constructed by developer AEA and purchased by the Whites.  AEA contracted with Collins building, Inc. to build the residence.  Collins Building is a one-member company owned by Edwin Collins, president, sole-shareholder, and qualifier for the company.  When the Whites began to experience alleged construction defects, they sued all involved, including both Collins Building Inc. and Edwin Collins, individually.

Edwin Collins moved to dismiss the lawsuit against him individually, and his motion was granted.  On appeal, the Court held that the dismissal was in error, and that Edwin Collins could be found individually liable to the Whites because the alleged negligence was his own action.   While noting that it was a case of first impression for the construction context, the Court pointed out that “It is well settled that an individual member of a limited liability company or an officer of a corporation may be individually liable for his or her own torts, including negligence.”

The Court stated that a properly formed and maintained business entity may provide a shield or “veil” of protection from personal liability, but that the protection was not absolute.   The Court also contrasted this situation to one in which the parties had contracted with each other; there the claim is usually a contractual one only, so if the Whites had contracted directly with Collins Building, Inc. to build their residence, they likely would not have a cause of action against Edwin Collins individually.

This case shows that, whilecorporate formalities are  important to protecting yourself from individual liability,  they are not a guaranty.

Share your thoughts, questions, or comments below.

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Photo copyright Defense.gov.

 

What Will It Take for You? (Guest Post)

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 Guest Post:  Today we have a very inspirational guest post by Julie Fleming, J.D., A.C.C., on finding success no matter the odds.  A nice piece to help you change your mindset as you start off the new year.

Julie A. Fleming

Julie A. Fleming

 

 Julie is known as the business development expert for client-based businesses.  Julie consults with client service professionals on all aspects of creating a successful, satisfying and sustainable practice, with a special emphasis on business development and executive coaching.  Julie is the author of The Reluctant Rainmaker:  A Guide for Lawyers Who Hate Selling.  Additional information and resources are available at www.juliefleming.com.   Contact Julie by email to julie@juliefleming.com or by telephone to 800.758.6214.

What Will It Take For You?

I saw The King’s Speech on New Year’s Day.  You’ll probably see the movie (about the efforts by King George VI, informally known as Bertie, to overcome a stutter around the time he ascended to the throne following the abdication of his brother, King Edward VIII, who left to marry the American divorcée Wallis Simpson) described as one about stuttering, about royalty, about friendship, about conflicting and social status.  It’s all of that and, to this Anglophile, more besides – a must-see that’s apparently the frontrunner for multiple Oscars.

But beneath all of that, deeper lessons become apparent.  Here are the top three that struck me.

  1. Masks tend to reveal as much as they cover.  In other words, if you pretend to be that which you aren’t, cracks will show.  Perhaps the real you won’t leak through the cracks, but fault lines will reveal that all is not as it appears to be.  Bertie’s speech therapist Lionel Logue opined that no child is born with a stutter and that a left-handed child forced to write with his right hand will never find that motion to be natural.From the business angle… So what?  I’ve had the opportunity to coach professionals who feel they must wear a mask to work with colleagues or to attract clients.  The “lucky” ones are unsuccessful, which prompts them to re-evaluate; lucky and unlucky alike are miserable. Who are you in your business, or in your practice?  As Bob Burg has written, “All things being equal, people will do business with, and refer business to, those people they know, like and trust.”  People are sensitive to hints of inauthenticity and tend not to trust those who wear masks.  So, really, it’s often your choice: would you prefer to lose some business because people sense you are not the person you’re pretending to be, or would you prefer to lose some business because of you are who you are, knowing full well that others will be drawn to you because you are that person? 
  2. Breaking the rules may be precisely the thing that propels you forward.  In The King’s Speech, one of Bertie’s breakthroughs comes with the freedom granted when Logue urges him to curse.  Bertie, a straight-laced royal, soon lets the expletives rip.  I won’t spoil the movie for those who haven’t seen it, but letting loose plays a role later in the movie in an amusing way. Some rules must not be broken – but those who are successful often find certain rules that don’t work for them, and shattering those restrictions also shatters the glass ceiling.  What rules are holding you back?  Are they truly non-negotiable?  If you could break them, how would you do it?  And, most importantly, for the sake of what?  Don’t go breaking rules just to break them. 
  3. Opportunities may arise in the form of problems or defeat.  Take them anyway.  Bertie was never supposed to be king.  His wife (the woman most of us knew as the Queen Mother) never wanted to be queen.  And yet, when King Edward VIII abdicated, Bertie and Queen Elizabeth stepped up at a crucial time in British history.  Bertie found his voice because he had to work for it.  England would likely have come through World War II and the Blitz regardless, but to hear English citizens of those years talk, the leadership shown by the “shouldn’t-have-been-royals” shaped the courage and determination of a generation.  Bertie did what was necessary to stand as a leader; his country modeled what he did.What opportunities are in front of you?  Which have come in the guise of defeat?  Perhaps you made a proposal to a potential client and lost.  What will you do?  One of my clients asked why, received valuable feedback, and proceeded to convert the prospect into a client within a matter of days for a parallel project created solely because the prospect wanted to work with her.  Perhaps you launched a program or a product and no one bought.  What opportunity can you spy when you take your eye off the failure?

Comments on how you can use these ideas in your own business?  Julie and I welcome your thoughts in the comments section, below. 

Pay when Paid & Pay if Paid

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pay here signRecently I was contacted by several readers asking questions about “Pay when Paid” clauses.  For those of you who may have missed it, I’ve previously addressed it here:   Pay When Paid Clauses in the NC Construction Contract.

For a good discussion of the application of N.C. Gen. Stat. 22C-2, the Court of Appeals opinion American Nat. Elec. Corp. v. Poythress Commercial Contractors, Inc., 167 N.C.App. 97, 101, 604 S.E.2d 315, 317 (2004) is worth a read.

In that case, the electrical subcontractor sued the general contractor for delay claims. The contract provided that the contractor would only be liable to the subcontractor for delays if the contractor was compensated for such delays by the owner.  While such a term is clearly a “pay if paid” provision, the Court called the provision a “pay when paid,” and declared it unenforceable in North Carolina.  It seems likely, therefore, that the Court would find that both provisions have the same legal effect in North Carolina– that is, both are unenforceable.

One time when a “pay if/when paid” provision could be enforceable?  Residential construction of fewer than 12 units.

As always, consult your local attorney because such clauses very widely in their enforceability from state to state.

Questions or comments on “pay when paid” or “pay if paid”?  Drop me a line in the comments section, below.

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Photo: “Pay Here” via Freefoto.com / Creative Commons License. 

 

“If you are going through hell, keep going.”

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Winston Churchill

The title of this post is a quote attributed to Winston Churchill.  While he may not have had to deal with running a design or construction firm during an economic shake-up, he did know a thing or two about surviving.  This is one of the men, after all, who had to deal with Nazis.

Take Sir Winston’s advice and plan your attack as you keep moving through the sluggish economy.  Spend a few minutes planning and strategizing for your architecture, engineering, or contracting business.  Times are lean and work is slow.  Use this time to your advantage. I’ll leave you with a few more motivational quotes:

Whether you think you can or think you can’t, you’re right.  Henry Ford
The only man who never makes a mistake is the man who never does anything.  Theodore Roosevelt
Opportunity is missed by most people because it is dressed in overalls and looks like work.  Thomas A. Edison
  
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Photo:  “Sir Winston Churchill, 1874-1965” by JanickG via Flickr/Creative Commons license.

State Construction Project Terms (Guest Post)

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Eileen Youens

Eileen Youens

Today’s Guest Post is from Eileen R. Youens.  Eileen is  Assistant Professor of Public Law and Government at the UNC School of Government, where her areas of interest include public contract law, including purchase contracts, construction contracts, conflicts of interest, and disposal of property.

 The ABCs of IFBs, ITBs, RFPs, RFOs, and RFIs

What’s the difference between an IFB, and RFP, and an RFQ, and what are they anyway?  As I’ll explain in more detail in this post, what name you give a solicitation document—the document you use to solicit bids or proposals—is not as important as the process you use to award the contract.  And the North Carolina General Statutes usually dictate which process you’re required to use.

The Four Types of Documents

There are four main types of solicitation documents: (1) those used for bidding, where price is the primary factor; (2) those used to request proposals focusing on factors other than price; (3) those used to ask for someone’s qualifications; and (4) those used to gather information from potential bidders or proposers before starting the bid or proposal process.  I’ll explain below when local governments can use each of these four types of documents.

The First Type: Bids

Under North Carolina law, local governments are required to bid out purchases of “apparatus, supplies, materials, and equipment” (what I like to refer to as “stuff”) costing $30,000 or more, and contracts for construction or repair costing $30,000 or more.  (Local policies may require bidding on other types of contracts or for contracts costing less than $30,000.)  The bidding statutes, G.S. 143-129 (formal bidding) and G.S. 143-131 (informal bidding), require that these contracts be awarded to the lowest responsive, responsible bidder.  This “award standard” is what distinguishes bidding from other contracting methods.  To solicit bids, public entities usually use Invitations to Bid (ITBs) or Invitations for Bids (IFBs). For informal bids or for purchases or construction costing less than $30,000, local governments may also use a request for quotes (“RFQ” – not to be confused with another RFQ: the request for qualifications, discussed below).

The Second Type: Requests for Proposals

North Carolina local governments have the option of using a request for proposal process for the purchase of information technology goods and services (G.S. 143-129.8).  This process allows local governments to establish their own evaluation criteria (i.e., evaluating vendors based on how well their product meets your entity’s needs, rather than focusing primarily on price), and award the contract to the vendor “that submits the best overall proposal.”  I say that this is an option because if you’re purchasing IT “stuff” that costs $30,000 or more, you can either (1) bid it out (formally or informally, depending on the cost), or (2) use the request for proposal process described in G.S. 143-129.8.  On the other hand, if you’re contracting for IT services, those services don’t fall under the bidding laws, so you can either (1) use the request for proposal process described in G.S. 143-129.8, or (2) use any process you want to use, or no process at all (simply selecting the firm you’d like to work with), unless your local policy requires a specific process for the procurement of services.  Note that if you’re using grant funding, you must comply with the terms of the grant.  (For example, if the grant requires you to bid out IT goods instead of using a request for proposal process, then you have to comply with the grant.)

The North Carolina statutes refer to requests for proposals in two other situations.  First, G.S. 143-64.17A requires that all public entities in North Carolina use a request for proposal process for the procurement of guaranteed energy savings contracts (GESCs).  The statutes governing GESCs (G.S. 143-64.17 through G.S. 143-64.17K [scroll down to “Part 2. Guaranteed Energy Savings Contracts for Governmental Units”]) set out a specific request-for-proposal process and specific evaluation criteria that must be used for these types of contracts.  Second, the statutes allow North Carolina local governments to use a request for proposal process for contracts for the construction, design, operation, and maintenance of solid waste management facilities and sludge management facilities.  The statute governing these contracts is G.S. 143-129.2.

As I mentioned above, local governments are not required to bid out services (aside from design services—discussed below).  In fact, the General Assembly has decided to let local governments choose how to procure services.  Many local governments use requests for proposals to procure services, as a way of seeking competition while considering factors in addition to price.  When a local government uses a request for proposals to procure services, the local government decides how the proposals are evaluated, what the timeline is, whether to advertise or not, and whether to open proposals in public or not.  In other words, when procuring services, it’s up to each government to decide what process will best balance its needs for (1) good quality services, (2) value, (3) transparency, (4) efficiency, and (5) fairness.  (As I mentioned above, if you’re using grant funding, you’ll need to comply with the terms of the grant; if the grant requires a competitive process for awarding contracts for services, you’ll have to comply with those terms.)

So the term “request for proposals” (RFP) covers a range of solicitation documents.

The Third Type: Qualifications-Based Selection

G.S. 143-64.31 (sometimes referred to as the “Mini-Brooks Act” because it’s based on a federal law called the “Brooks Act”) requires local governments to procure architectural, engineering, surveying, or construction-management-at-risk services—regardless of the contract amount—by focusing on qualifications rather than price.  (Note that local governments can exempt themselves from this process.) So when people solicit these services, they often use a “request for qualifications” (RFQ).

You can also use qualifications-based solicitation (or some variation thereof) for other types of services.  Again, since the general statutes don’t require the use of a specific process (or any process) for procuring services, the process you use is up to you (as long as you comply with your local policies or grant terms, if you’re using grant funding).

The Fourth Type: Information Requests

Another acronym you may see is RFI—a “request for information.”  RFIs are not used to procure goods or services directly, but instead are used to solicit information about purchases or projects you’re planning to procure in the future.  For example, if you know you’re going to have to buy some new police cars next year, and it’s been a while since you’ve bid out police cars, you could send out RFIs to several car dealers or manufacturers to find out what new features are available and what models might best meet your needs.

The Bottom Line

William Shakespeare really said it best:

“What’s in a name? That which we call a rose

By any other name would smell as sweet.”

In other words, the substance of the document is more important than what it’s called.  If you’re soliciting firms to perform architectural services, your solicitation document must ask for qualifications instead of price, even if you call it an IFB.  And if you’re bidding out a $1.2 million construction project, you have to award the contract to the lowest responsive, responsible bidder, even if you call your solicitation document a rose an RFP.

Eileen and I welcome your thoughts and questions in the comments section, below.

[hat tip to Mike Purdy, of Mike Purdy’s Public Contracting Blog, for bringing Eileen’s post to my attention]