Construction Engineering 380

Engineering Law

Payment and Performance

Payment and Performance

• Doctrine of conditions- contracts are problematic in determining “who goes first”- payer or performer.

• Different types of contracts and industries have different conditions, but most require the performer to go first (common law interpretation)

• Some conditions require payment first (athletic tickets, artistic commissions)

Payment and Performance

• In construction the standard is performer goes first (contractor), but that payment is made as progress continues because of the extreme financial hardship a literal application of the doctrine of conditions would impose

• Progress payment schedule is a compromise between doctrine of conditions and financial reasonableness

Payment and Performance

• Progress payments are based on a pre-determined schedule of values

• Contractor’s rep (PM) submits an application for payment at a contractually stipulated time for all work incorporated into the project plus material stored on or off-site (sometimes problematic)

• Owner or his rep (A/E) inspect the job site to warrant that the work billed for is in place

Payment and Performance

• Owner or his rep (A/E or loan rep) certifies that the dollar amounts are in compliance with contract (schedule of values)

• Time of payment- usually 10 or 30 days, depends on contract language. Long pay periods can become financially burdensome

• Title to work-in-place passes as soon as it is incorporated, but frequently there are contract clauses passing title to owner as soon as payment is made

• Owner’s or contractor’s insurance covers losses

Payment and Performance

• Assignment of payments- payments used as collateral must be assigned to the lender. Payments are sent by the owner (obligor) to the assignee (the lender) by right of transfer from the assignor (contractor or subcontractor)

• Lender involvement- not usually a good idea to have lender pay directly to contractor. Confuses the role of “owner”

Payment and Performance

• Joint checks- simple in action, problematic from a bookkeeping and legal standpoint. A check for payment is issued to two firms, requiring co-endorsement to be cashed or deposited. Used when a subcontractor has very bad credit or is in reorganization/bankruptcy

• Surety requests to cease payments can invite a terminal breach claim. The owner has no contract with the surety. Recent legal cases have suggested that surety requests must be “considered”, but not necessarily honored.

Payment and Performance

• Remedy for non-payment- some lateness is reasonable, but after some lapse of time, non-payment becomes a terminal breach.

• Contractor is owed interest for non-payment

• Contractor may suspend work, but termination is much more complicated

Payment and Performance

• Payment as waiver- most payments do not act as a waiver of defects. Final payment and retainage release are exceptions. Sometimes tort settlements act as waiver of future claims

• Divisibility- construction contracts are not considered divisible, even though there is a schedule of values that could lead tot hat interpretation

Payment and Performance

• Payment as preference- more on this in bankruptcy lecture

• Retainage- owner holds back a designated percentage of all payments (usually 10 % until 50% completion, then 5% until final completion) to secure satisfactory completion of the work. In some states, retainage is statutory

Payment and Performance

• Substantial completion- habitable and usable building. Usually a submittal of occupancy permit to architect along with final inspection and punchlist creation.

• Substantial completion is important for insurance and liability reasons

• Completion and final payment- usually when punchlist is done and O/M documents have been turned over

Payment and Performance

• Liquidated damages, no damages for delay, and strict (versus substantial) performance clauses are all difficult to enforce

• If the owner occupies the building but fails to pay because of a strict performance clause, the contractor likely has recourse to restitution under unjust enrichment doctrines

• Sometimes final payment applications are issued with a waiver clause

Payment and Performance

• There are a large number of legal doctrines under which parties to a construction contract can bring forward performance claims:– Fraud,– Concealment– Misrepresentation– Negligence– Strict liability– Breach – Express and/or implied warranty– Consumer protection legislation

Payment and Performance

• The courts have been tolerant of this “shotgun” approach, but have not been willing to extend tort process to contract claims (contort)

• Defense to claims– Contractual risk– Mutual mistake (mutual understanding)– Impossibility/commercial impracticability

Payment and Performance

• Defenses (cont)– Frustration- events change the viability of a

project– Acceptance and occupancy– Passage of time statutes– Release at payment– Sovereign status (only public works)

Payment and Performance

• Restitution- only if unjust enrichment is “material”

• These defenses can be used for– increased cost of performance (hard to obtain

anything more than substitution and a little time)

– Labor disputes- again, can get time but no $– Destruction of the project- take your insurance

claim and start over

Payment and Performance

• Defenses (cont)– Government act– Spearin doctrine- Con E’s should know pp.

449-451– Impossibility– Extreme events (weather)– Financial exigency– hazard