Owner fails to pay prime contractor. Prime denies payment to a subcontractor, citing subcontract language that the prime contends conditions payment to the subcontractor on prior owner payment to the prime. Result: the subcontract language isn’t clear enough to support the prime’s weight; the prime must pay the subcontractor regardless of whether the owner paid the prime.
The decision: Beal Bank Nevada v. Northshore Center THC (PDF)
Prime contractor subcontracts with a subcontractor to provide excavation, sewer line, and other work. The owner doesn’t pay the prime for that work, and so the prime doesn’t pay downstream to the sub for that work either.
The subcontractor sues the prime contractor for breach of contract (as well as to foreclose a mechanics lien). The prime contractor defends, contending that the subcontract requires the prime to pay the sub only if the owner first pays the prime for the sub’s work (and then only after a certain amount of time after the owner’s payment to the prime). According to the prime contractor, the subcontract imposes owner payment to the prime as a condition precedent on the prime’s duty to pay the sub. Continue Reading
The jurists who believe in natural law seem to me to be in that naive state of mind that accepts what has been familiar and accepted by them and their neighbors as something that must be accepted by all men everywhere.
U.S. Supreme Court Associate Justice Oliver Wendell Holmes, Jr., Natural Law, 32 Harvard Law Review 40, 41 (1918)
Prime contractor and owner exchange drafts of a proposed contract. They never sign. But they proceed with work and payment as if they did. Result: that proposed contract is their contract and binds them both.
Owner doesn’t want to be liable under that contract, claims they were acting merely as agent for someone else, though never announced their agency role to the contractor. Result: the erstwhile agent is the principal, and liable as the owner under the contract.
The decision: Trapani Construction v. The Elliott Group Continue Reading
Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser — in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough.
— Abraham Lincoln
(And if you asked him today, I’d wager the late President wouldn’t limit the peacemaking’s lawyer’s superior opportunity to just being a good man.)
Statutes of limitation find their justification in necessity and convenience rather than logic. They represent expedients, rather than principles. They are practical and pragmatic devices to spare the courts from litigation of stale claims, and the citizen from being put to his defense after memories have faded, witnesses have died or disappeared, and evidence has been lost.
They are by definition arbitrary, and their operation does not discriminate between the just and the unjust claim, or the avoidable and unavoidable delay. They have come into the law not through the judicial process but through legislation. They represent a public policy about the privilege to litigate. Their shelter has never been regarded as what now is called a “fundamental” right.
Robert H. Jackson, Chase Securities Corp. v. Donaldson, 325 U.S. 304, 314 (1945)
Minor Change Background
Following construction change directives, “minor changes” are the final way to make changes. With the limits on how and when minor changes are allowed, “nominal” change is probably a better name. But they’ve been called minor changes for so long, we’ll continue the tradition here.
Like many of our other construction contract phrases and features, the minor change most likely originates in the AIA contracts. Currently, Section 7.4 of the AIA A201 “general conditions” identify minor changes, and how and when they may happen. Based on that model, other published forms and manuscript contracts usually adopt something similar.
Minor Change Features and Limits
Here’s the principal features and limits you need to know about minor changes to the work:
- The change must not affect (1) the price of the work or (2) the time to complete it
- The order mandating the change must be written
- Usually, only the architect (or comparable design professional) may order a minor change. That’s what you’ll find in in the AIA contract forms. But sometimes parties subvert architectural hegemony and change their contracts to allow the owner to order a minor change under a prime contract, a prime contractor to order one under a subcontract, etc.
The law, — a profession whose general principles enlighten and enlarge, but whose minutiae contract and distract the mind.
U.S. Supreme Court Associate Justice Joseph Story, Letter to Samuel P.P Fay, September 6, 1798, from the Life and Letters of Joseph Story 1:71 (William W. Story ed. 1851)
Construction Change Directive
Next on the list of top ten construction contract terms: “construction change directives.” Often in their contracts, the owner and the prime contractor agree that the owner may unilaterally order changes in the work and the prime contractor will change the work as the owner orders. Those orders must usually be written. And subcontracts often have similar terms, if for no other reason than to pass down orders that come from higher up the chain.
For generations, the AIA form contracts have referred to those orders as “construction change directives.” And because of that, so does everyone else.
How price and schedule change along with the changed work? That comes later. Ideally, the owner and prime contractor can later agree on price and schedule changes, then incorporate all changes into a comprehensive change order they each sign that supersedes the construction change directive.
If owner and prime contractor don’t agree, they will fall back on other tools. The original contract may have unit prices for particular materials or parts of the work. Then adjusting price is just addition and multiplication. Unfortunately, unit prices aren’t a common feature in contracts for many types of projects.
Cost-plus priced contracts also lend themselves to easy pricing changes. Though if the prime contractor has a fixed fee, the cost of additional or reduced work won’t automatically adjust the fee. Sometimes lump sum contracts will have a default cost-plus feature for additional work. So, if the owner and prime contractor don’t agree on a different way to adjust price, the cost of the additional work, plus a percentage fee, gets added to the lump sum. And while unit prices and cost-plus can set price changes, they still don’t adjust schedules and deadlines. Continue Reading
After paying a flood damage claim, an insurance company waits too long to get an assignment of the rights to sue a contractor and architect. Result: the insurance company’s lawsuit gets dismissed and the Illinois Appellate Court affirms. The decision: American Family v. Plunkett (PDF).
An owner’s property floods in the summer of 2006. The owner files an insurance claim for the damage. The insurance company denies that claim, prompting the owner to sue the insurance company (Lawsuit 1).
The owner and insurance company settle Lawsuit 1. Because conditions suggest that design and construction defects may have caused the flood, under the settlement agreement the owner promises to assign—to the insurance company—their design and construction defect claims. But that assignment isn’t part of the settlement documents and money exchanged.
Then in 2008 (and still without the owner’s assignment), the insurance company sues the architect and the contractor for defective design and construction (Lawsuit 2). (By paying the owner’s insurance claim under the Lawsuit 1 settlement, the insurance company contends that they now—by subrogation—stand in the owner’s shoes to pursue the defect claims.) The architect and contractor successfully move to dismiss Lawsuit 2. Two courts agree that the insurance company cannot subrogate to the owner’s claims against the architect and contractor—the insurance company must get the owner’s assignment of those claims.
After protracted struggle, the owner finally assigns their design and construction defect claims to the insurance company. The insurance company then files a new lawsuit against the architect and contractor, this time as assignee of—not subrogee to—the owner’s claims (Lawsuit 3).
The architect and contractor recognize that the insurance company filed Lawsuit 3 after the four year limitations period on the design and construction defect claims expired. They move to dismiss (arguing that the claims are time-barred). The trial court agrees, and grants the motion. The insurance company appeals. Continue Reading
A foreclosing construction lender recently tried to wipe out liens securing debt under a shopping center cross-use and easement agreement. The Illinois Appellate Court denied that attempt. The decision: Bank of America v. Cannonball LLC.
It starts with a new shopping center with a Home Depot, a Kohl’s, and a Target. The local village subsidizes part of the developer’s construction cost. To fund that subsidy, the village sells bonds to investors. And to raise money to service the debt owed under those bonds, the village imposes a special service area tax on the businesses that sell goods and services in the shopping center. (The tax obliges those businesses to collect a surcharge on each sale to pay the tax).