THE ELEVEN ESSENTIAL COMMANDMENTS
FOR CONTRACTOR SURVIVAL
by Attorney Jonathan Sauer
Introduction
I am now in my thirty-fifth year of being a lawyer and I have participated in more bankruptcies than an organized crime family’s leader has attended funerals. This is, actually, a very apt comparison, as a bankruptcy represents the death of a company and of its owners’ dreams and hopes (and of their family’s dreams and hopes.) Frequently, there are tax liens and suits by financing company banks and bonding companies and former partners. Business failure is often accompanied by divorce and certainly by family discord. While life does inexorably go on, for those who have been through this process, happy times seem to be in the distant future, if then.
How can a construction business survive, even prosper, particularly in a time of economic depression? Here are eleven rules to live by. Not only read them: engrave them on your hearts!
1. How you operate as a business
I know of many individuals who have lost their homes because they had not incorporated.
From a legal standpoint, “John Jones” is a different entity and person from “John Jones Construction Corporation”. From a legal perspective, provided the corporation operates as a corporation and separate entity - i.e. bills aren’t paid from the owner’s personal bank account - generally speaking, no individual officer, director or owner of a corporation is liable for the corporation’s ordinary debts absent fraud or the officer’s committing of a tort or other business wrong. Here is what the cases say about corporations:
A corporation is an independent legal entity, separate and distinct from its shareholders, including corporations that hold shares in other corporations. Spaneas v. Travelers Indem. Co., 423 Mass. 352, 354, 668 N.E.2d 325 (1996).
The general principle is that corporations are generally to be regarded as separate from each other and from their respective stockholders. Marsch v. Southern New England R.R., 230 Mass. 483, 498, 120 N.E. 120
Corporations are generally to be regarded as separate from each other and from their respective stockholders where there is no occasion to look beyond corporate form for purpose of defeating fraud or wrong, or for remedying of injuries. My Bread Baking Co. v. Cumberland Farms, Inc., 233 N.E.2d 748 (1968)
The rule in the Commonwealth of Massachusetts is that corporations are to be regarded as separate entities where there is no compelling reason of equity to look beyond corporate form for purpose of defeating fraud or wrong, or for remedying of injuries. Gottlin v. Herzig, 662 N.E.2d 706 Mass.App.Ct.,1996.
As to limited liability companies, which have been available as a business form of organization since 1996, this is provided for by Massachusetts statute:
M.G.L.A. 156C § 22. Debts, obligations and liabilities of limited liability company
“Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company; and no member or manager of a limited liability company shall be personally liable, directly or indirectly, including, without limitation, by way of indemnification, contribution, assessment or otherwise, for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company.”
Here’s a suggestion for you personally. Make sure those debts you personally guarantee - the bonding company (under the general agreement of indemnity) and the financing line (with the bank) - get paid. Be sure you check to see whether or not you may have personally signed any credit applications with material suppliers. Also, certain corporate officers can be personally liable for things like non-payment of withholding taxes under certain circumstances. So, when money is tight or your company is likely to be closing down, these may be the obligations you should consider at the top of your list for payment. Good legal advice at this juncture is critical and should be considered before all of the money is gone.
2. Homestead on your house
Now, we start with the premise that doing business as a corporation or as a limited liability company gives you some protection against personal liability for your business debts. However, as pointed out, claimed fraud is an exception. And, for certain creditors, you are going to have to personally guarantee your company’s credit, such as banks (line of credit), bonding companies (surety bonds) and some material, supply and equipment rental companies (particularly for new businesses) with credit applications. While most of these obligations are probably dischargeable in bankruptcy – not necessarily so with obligations secured by mortgages or by filings under the Uniform Commercial Code - the filing of personal bankruptcy has a lot of negative ramifications for your present and future credit.
So, there is a good chance that someone may find a way to get at your personal assets for something related to your business.
Mostly everyone’s biggest investment is in their home. Massachusetts offers $500,000 of free asset protection for your house. There are limitations and exceptions, however, that you should be aware of. And, much of the current statute - MGL C.188 – was recently substantially rewritten effective March 16, 2011 and should be consulted for both your current rights and to verify if whatever homestead you may have previously filed is effective or as effective as it might be.
3. When you bid a job, make sure you have all of the bidding documents
The most important thing from a legal standpoint is to make sure you have all the bid documents when bidding a job or signing a contract that will incorporate those documents specifically or by reference. By my experience, it is not uncommon for particularly subcontractors to only get their specification section and appropriate plans.
The problem is that, as a matter of law, someone who signs a subcontract or a general contract and has not read all of the documents is bound by them if they are listed in the contract as contract documents. This is known as the ‘incorporation by reference’ doctrine. So, it isn’t a defense that you can’t get all of the documents or the general (or owner) won’t give you all of the documents. If they are listed in the subcontract or general contract and you sign it, then you are bound to them.
Here’s the law on this:
In the absence of fraud, a person who signs a written agreement is bound by its terms regardless of whether person reads and understands those terms. Tiffany v. Sturbridge Camping Club, Inc., 32 Mass.App.Ct. 173, 587 N.E.2d 238 (Mass.App.,1992). In the absence of fraud, one who signs a written agreement is bound by its terms whether he reads and understands it or not, or whether he can read or not. Cohen v. Santoianni, 330 Mass. 187, 112 N.E.2d 267 (Mass.,1953) Where what is given by one to another purports on its face to set forth terms of a contract, one who receives it, whether he reads it or not, by accepting it assents to its terms and is bound by any limitation of liability therein contained, in absence of fraud. Kergald v. Armstrong Transfer Exp. Co., 330 Mass. 254, 113 N.E.2d 53 (Mass.,1953) Ignorance through negligence does not relieve a party from his contractual obligations, unless the negligence is not inexcusable. Century Plastic Corp. v. Tupper Corp., 333 Mass. 531, 131 N.E.2d 740 (Mass.,1956). Where what is given to a person purports on its face to set forth terms of a contract, a person assents to its terms by accepting it, whether he reads it or not, and is bound by any limitation of liability therein contained, in absence of fraud; but where what is received does not purport to be a contract the person receiving it is not bound by limitation of liability unless actually known to him. Polonsky v. Union Federal Sav. & Loan Ass'n, 334 Mass. 697, 60 A.L.R.2d 702, 138 N.E.2d 115 (Mass.,1956).
Not reading your contract or looking at all of the documents creates zero defense for you when, down the road, someone demands performance according to those portions of the contract you have never even seen.
Also, please keep in mind in the public arena that you cannot get out of a bid when you make a mistake in not taking off all of the work required of your trade by the bid documents.
A lead case on this is Lincoln-Sudbury Regional School District v.Brandt-Jordan Corp., 356 Mass 144 (1969). Here the bidder did not have one drawing, made a
note to get it and never did. It then attempted to withdraw the bid on that ground. The Court
said that:
“We are of opinion that in s. 44B the Legislature intended the term “clerical or mechanical error” to be limited to errors of copying, transference or transcription, including mistakes of arithmetical computation, which occur during the final states of bid preparation. This is the “ordinary and approved usage” of the term. In addition, the Legislature did not enact a general “unilateral Mistake” provision, but rather responded to a specific mischief. The “main object to be accomplished’ was to relieve contractors of the financial hardship resulting from the inevitable error which occur during the hurried, last minute calculations and compilations required by competitive bidding.
Brand-Jordan’s mistake was not such an error. It was not an error of copying, transferring or transcribing. It did not involve arithmetical computation. It did not occur during the final states of its bid preparation. Neubert simply forgot to prepare a figure for the work required to be performed as shown on drawing HV-1.”
Brandt-Jordan could not get out of the bid.
Keep in mind that one generally can get out of a public bid when there has been an error in transferring information from subsidiary bid worksheets to the actual bid form.
4. Read (and study) the contracts you sign
This one is a corollary of the previous one. It seems sadly axiomatic in the construction industry that folks tend to only really read the contracts they have signed when a problem appears that will not seem to go away. Particularly smaller subcontractors are interested primarily in scope and price. The more sophisticated subcontractors - and general contractors - additionally are interested in time and schedule issues.
Of particular importance is to make sure that you have read and understood – before changed conditions arise – what notices you have to give to whom, when and in what form when changed conditions or differing site conditions are encountered. The requirements for these are usually particularly more strenuous in custom documents, such as a subcontract a general contractor has uniquely prepared for its subcontractors. Massachusetts law is absolutely brutal
when it comes to requiring fairly strict compliance with the notice provisions for changes in construction contracts. You – or your project manager – really need to understand thoroughly what will have to be done if and when changes and differing site conditions present themselves.
5. Put things in writing. Document changes and differing site conditions, making all efforts to get at least an acknowledgment from your contracting party that there has been a change before doing the work.
Legally speaking, there are two issues with a potential change order: liability for the change order and the amount of the change order. Contractors tend to focus in primarily, if not exclusively, on the amount. However, when things go legal, the first legal issue is whether or not a certain piece of work is, actually, a changed condition or is something required by the contract as base contract work. At bare minimum, before doing any significant piece of change order work, have your contracting party send you an email acknowledging that the work you will be doing is, in fact, a changed condition. You need this admission before you do the work: while you have leverage. After you have done the work, you have no leverage. Put another way, if you can’t get an admission before doing the work that the piece of work is an extra, you will never get such an admission after the work has been done.
And, subcontractors, please be aware of the fact that, legally speaking, having the general’s superintendent keep track of your time and materials by signing slips is not the same thing at all as an admission or acknowledgement that what the time and materials represent is a changed condition. At minimum, all that such record keeping establishes is that, in fact, you expended time and materials. The two things are not equivalent. A record of time and materials does not mean that the time and materials necessarily reflect or constitute an extra. In fact, Massachusetts law states that, generally speaking, a superintendent does not have the authority to actually order extra work from the subcontractor, unless such a right is actually given to the superintendent in the contract.
6. Understand what the local requirements are for filing payment bond claims and mechanic’s liens
This information is available on my website for Massachusetts claims at www.sauerconstructionlaw.com. One can have fairly short durations in terms of bond claims and lien claims, particularly with lien claims. Subcontractors and suppliers to subcontractors have dramatically reduced mechanic’s lien rights if they don’t use the ‘notice of identification’ procedure, which is completely explained with a form on my website. And, such second tier subcontractors and suppliers – those who work for subcontractors – may not have any general contractor payment bond rights if they don’t give certain required notices. There are no enforceable mechanics’ liens without written contracts. When you work on the common areas of a building, you may have no or very reduced mechanic’s lien rights. The owner of a mall may not have lien liabilities for tenant-requested improvements. Condominium projects have a variety of complexities for lien purposes. None of us knows all of the rules. But, know as many of them as you can.