A Contractor's Liability for Negligence
Contractors may be held liable for their negligent performance of a contract. Under the economic loss rule, economic loss alone precludes punitive damages—additional damages to punish for wrongful conduct.
Parties to a contract owe to each other the duty to perform the tasks they agreed upon. Negligence in performing or nonperforming those tasks is both a tort and a breach of contract. One court specified that if the negligence (or even gross negligence) of a contractor only results in economic loss to the subject matter of the contract, punitive damages are not recoverable. Also, lost profit because of negligent performance of the contract did not constitute a tort. So, as James E. Smith and John W. Lynd note in their article Construction Contracts: Liability for Negligent Performance, the application of the economic loss rule is not clear because economic loss beyond the subject matter of a contract may permit punitive damages.
To avoid liability in contract or tort, contractors can include “limitation of liability” clauses in their contracts. Smith & Lynd offer an example: “Notwithstanding anything to the contrary, the contractor shall not be liable for any special, indirect, consequential or incidental damages, including, without limitation, loss of profits or business interruption, even if the damage is to property beyond the subject matter of the agreement, and even if caused by the contractor’s negligence.”
A court will enforce such limitation of liability clauses where the parties have a fair bargaining position and legitimate commercial reasons justify such clauses.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Zoning Considerations: Developers' Reliance on Representations by the County
Plaintiff bought property from the government in reliance on representations by County officers and staff regarding zoning. During that time,
Once plaintiff bought the parcel, he submitted a site plan for approval by the county. The Planning Commission approved the site plan and plaintiff subdivided the parcel and added some manufactured homes. A year later, it turned out the zoning prohibited manufactured homes and the county ordered the developer to stop of further development. By then, five of the twenty lots had already been sold and some purchasers already got permits to install manufactured homes. Plaintiff then sued the County asking for an injunction (stop the County order to cease development). The trial court rendered judgment for the County.
Plaintiff made several allegations that the court of appeals reviewed. Plaintiff alleged converse condemnation against the County, which means the government imposed such affirmative and aggressive limitations on property use that such limitations caused the specified damage to the property. The court of appeals, however, pointed out that all the county did was a mistake, which does not constitute an affirmative an aggressive act.
The purchaser further alleged negligence and negligent misrepresentation against the County. This time the court sided with plaintiff and found that the trial court was wrong in rendering judgment for the County as a matter of law. The court recognized that a government entity is immune from tort claims unless a private party would be liable for breach of that same duty under South Carolina
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
A Lis Pendends, Without More, Will Not Provide Notice of Interest on Property!!!!
In its recent opinion, Horry County v. Ray, the South Carolina Court of Appeals held that a county's lis pendens alone did not give notice to a mortgagee of the county's interest on property. The county filed its lis pendens before the mortgagee recorded its mortgage. The bank, nevertheless claimed priority interest.
S.C. Code Ann. Section 15-11-20 provides: "From the time of filing [the lis pendens] only, the pendency of the action shall be constructive notice to a purchaser or encumbrancer of the property affected thereby, and every person whose conveyance or encumbrance is subsequently executed or subsequently recorded shall be deemed a subsequent purchaser or encumbrancer and shall be bound by all proceedings taken after the filing of such notice to the same extent as if he were made a party to the action. For the purposes of this section, an action shall be deemed to be pending from the time of filing such notice."
The Court of Appeals then cited the South Carolina Supreme Court's decision in South Carolina National Bank v. Cook, 291 S.C. 530, 354 S.E.2d 562 (1987) and stated that a lis pendens cannot be filed earlier than 20 days before a complaint is filed. Therefore, failing to file summons and complaint within 20 days of filing a lis pendens renders the lis pendens ineffective, which also gives no constructive notice to subsequent creditors. As a result, the subsequently recorded mortgage by the bank took priority.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
The New South Carolina Illegal Immigration Reform Act!
Governor Stanford signed the Act on
To hire new employees, all private employers must have a valid employment license by
Public employers must use E-Verify for all new employees and must act in good faith to determine if a private service provider meets the Act requirements. A written statement by the private contractor certifying compliance is sufficient. Also called the Basic Pilot Program, E-Verify is available in all 50 states. The Act has only been extended until
Employers must enter the information on Form I-9 into the E-Verify system and continue checking the employees’ statuses. Most inquiries are resolved immediately; an employer will receive a “tentative non-confirmation notice” otherwise. An employee has 8 federal workdays to clear up his status once a tentative non-confirmation notice is received. Employers must remember they cannot take adverse action (fire, suspend, not pay) against employees meanwhile. Once they receive a final non-confirmation, employers must terminate the employee. For more information about E-Verify, go to www.dhs.gov/e-verify.
Asking an applicant for a driver’s license can violate federal laws on discriminatory practices. The employer may commit document abuse by improperly asking for a document to establish identity or work eligibility. Penalties for violations may range from $110 to $1,100. Employers, therefore, should consider not using this option.
Private employers with more than 100 employees must comply with the Act by
Not verifying work authorization is a separate violation for each new employee. Once notified of a violation, the employer has 72 hours to register with E-Verify and check the work status. If the employer knowingly or intentionally hires an unauthorized alien, the employer loses its business license for 10 to 30 days and must pay a $1,000 fine. Subsequent violations increase the time for suspension to at least five years. An employer can get a probationary license subject to several limitations.
Employees and employers who knowingly make false, fictitiousm, or fraudulent claims can face jail time up to 5 years. The Act only applies to new employees. For old employees, compliance with Form I-9 is sufficient.
Federal law created penalties for employers who hire unauthorized employees through the 1986 Immigration Reform and Control Act (IRCA). IRCA preempts any similar state law. It is uncertain how a
Currently, 10 states require the use of E-Verify. Because of the inaccuracy of the database,
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Rights under the False Claims Act
This appeal involved a claim under the False Claims Act (FCA). The government hired contractor to build Navy destroyers. The contractor entered in agreement with two subcontractors to manufacture and assemble generator sets. The subcontractors had to submit certificates of conformance (
At trial, plantiffs alleged that the subcontractors issued COCs that falsely stated the work was pursuant to the Navy specifications. The district court ruled for the subcontractors, stating that the Government had no proof that false claims were presented. The court of appeals held that the FCA only required proof of intent to get paid by a private entity using Government funds.
The United States Supreme Court disagreed. The Supreme Court concluded that a plaintiff must prove that the defendant intended the false statement to be material to the Government’s decision to pay a false claim. The CFA requires that the defendant intend for the Government to eventually pay the claim, even if it is not submitted directly to the Government. This does not require that the false claim be submitted to the Government directly. It is enough that defendant submits the false statement to the contractor, intending that the contractor use that statement to get payment from the Government. But the FCA does not impose liability on a defendant who makes a false statement without intending for the Government to rely on it as a condition of payment.
Lastly, as related to the two defendants, FCA requires that two conspirators intend to defraud the government. However, they only need to intend that the false statements have a material effect on the Government’s decision to pay, and not that the Government receive the false statements directly.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Trust Fund Statutes
Officers of a closely-held construction company usually first pay debts for which shareholders may be found personally liable such as employment taxes or personally guaranteed debts. Many states have trust fund statutes that require contract income to be held in an express statutory trust for the benefit of subcontractors. Companies who pay other debts out of this trust may face the following consequences: (1) personal liability to unpaid subcontractors; 2) nondischargeable debt in bankruptcy; (3) possible charge of criminal theft.
In his article Nondischargeability of Personal Debts for Violations of Construction Trust Fund Statutes, Stephen A. Hess discusses nondischargeable personal debt. Contractors are trustees of a trust fund, while the owner, the subcontractors, and materialmen are the beneficiaries of the trust. Contractors cannot pay themselves over trust beneficiaries.
Violations of a trust fund can result in personal liability. In addition, in bankruptcy, a debtor will not be relieved of nondischargeable debt: “any debt … for fraud or defalcation while acting in a fiduciary capacity….” 11 U.S.C. § 523(a)(4). The contractor, as trustee, has a fiduciary duty not to defalcate or misappropriate the money. If the contractor does so, the resulting personal liability will be nondischargeable.
In a bankruptcy proceeding, the creditor must show by a preponderance of evidence that the debt is nondischargeable. The contractor has several defenses. The contractor may first challenge the validity of the debt. The contractor may also argue that the trust is an implied trust, because nondischargeability applies to express trusts only. Many times creditors bring actions against debtors in state courts first. Once a state court imposes liability on a debtor for a breach of trust, the creditor can easily obtain a nondischargeability judgment. But if a creditor sues in state court for debt due to a personal guarantee, but chooses to leave out the nondischargeability claim arising out of the same facts, the creditor might later be precluded from claiming nondischargeability. Lastly, most courts require that the debtor be at least negligent to be personally liable.
Attorneys should be aware of these trust fund rules to advise debtors about possible personal liability, and creditors of possible rights, concerning nondischargeability.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
A Contractor Must Pay a Subcontractor All Undisputed Amounts Due
A contractor did not meet the requirements of the Texas Prompt Payment Act when the contractor wrongly withheld undisputed amounts owed to the subcontractor. ARCO Construction Company, Inc. v. Americon Services Company, Inc., 2008 WL 2058214 (Tex. App. 2008). The contractor conditioned paying the undisputed amounts upon the subcontractor’s release of claims to the disputed amounts.
Americon Services Company (Americon), the subcontractor, sued the contractor ARCO Construction Company, Inc. (ARCO) for not paying for work completed on a project. A jury awarded Americon $61,000, finding that ARCO violated the Texas Prompt Payment Act (TPPA). The court also excused Americon for its breach of contract. ARCO appealed.
The first issue on appeal was whether TPPA applied to ARCO where ARCO had unresolved claims against Americon. ARCO argued that TPPA applied to undisputed debts only. The court noted that the purpose of the statute was to accelerate payment to contractors and subcontractors. Also, the language of the TPPA required that a contractor who received payment from an owner pay the subcontractor promptly, unless there was a dispute concerning the amount owed for subcontractor’s work. The court, therefore, rejected ARCO’s argument that the statute did not apply. Instead, TPPA allowed ARCO to withhold funds totaling the unresolved claims against Americon.
ARCO then argued that it fully complied with the TPPA requirements. The court, however, noted that ARCO had to pay to Americon all undisputed funds. ARCO did send Americon a check. Instead, ARCO conditioned the release of funds on Americon admitting that the payment was in full satisfaction of ARCO’s obligation. The court held that a contractor did not meet the TPPA requirements when the contractor would only pay the subcontractor the undisputed amounts if the subcontractor agreed to release all claims to the disputed amounts.
As to the disputed funds, ARCO argued that the sum it withheld was the subject of a good faith dispute. Americon had admitted that it owed attorney’s fees to ARCO under an indemnification provision in the contract. However, the jury found that ARCO withheld more than a good faith dispute would call for. The court concluded that ARCO did not comply with TPPA: ARCO withheld more than 100% of the disputed funds because at the time of the trial ARCO still had not paid any of the undisputed funds.
Next the court considered whether the trial court erred in rejecting the jury’s damages award to ARCO for Americon’s breach. The court pointed out that the jury never awarded damages but just found that Americon failed to comply with the indemnification provisions of the contract. ARCO argued that substantial performance by Americon could not be a defense to a breach of contract action. The court disagreed and held that Americon’s substantial compliance was a total defense to an award for attorney’s fees under the indemnification provision. ARCO, therefore, was not entitled to damages.
Lastly, the court dismissed the other issues raised by ARCO regarding attorney’s fees, finding that ARCO was not entitled to attorney’s fees because it did not prevail on its breach of contract claim.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Residential Property Disclosure Statement
McLaughlin v. Williams, 379 S.C. 451 (Ct. App. 2008).
A purchaser could not bring a claim for fraud and negligent misrepresentation when the purchaser had notice of the defects from the inspection reports. The purchaser entered into an agreement to buy a house and scheduled a closing. The seller gave the buyer the Disclosure Statement. In addition, pursuant to the agreement between the parties, the buyer had an inspection done and obtained a Home Inspection Report. The report indicated moisture damage to the exterior of the house. Also, a termite and moisture inspection (CL-100) stated the house had wood-destroying fungi and wood moisture content of 28% or more below the first level. The purchaser sued the seller, the seller’s agent, and the purchaser’s agent for fraud and negligent misrepresentation. All defendants filed a motion for summary judgment, alleging they were entitled to win as a matter of law. The trial court granted defendants’ motions. The purchaser appealed.
On appeal, the purchaser argued that the Disclosure Statement was a misrepresentation. The court stated, however, that “there can be no reliance on a misstatement if the plaintiff knows the truth.” The Home Inspection Report and CL-100, while not covering all issues represented in the Disclosure Statement, clearly provided information that directly contradicted it. Such contradictory information gave the plaintiff knowledge of the moisture damage. Plaintiff, therefore, could not rely on the Disclosure Statement.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Attorney's Fees in a Mechanic's Lien Action
The South Carolina Court of Appeals affirmed the lower court's ruling of limiting awarded fees and costs to the amount of the mechanic's lien. Mozingo & Wallace Architects, L.L.P. v. Grand, 379 S.C. 478 (Ct. App. 2008). An architect who got a judgment against the owner appealed the amount awarded for attorney’s fees. In the original proceeding, the architect was found entitled to foreclosure and collection of a lien on owner’s property. The trial court limited the attorney’s fees to the debt recited in the notice and certificate of the mechanic’s lien.
The court of appeals affirmed. Section 29-5-10(a) of the South Carolina Code allows the prevailing party to recover reasonable attorney’s fees, not exceeding the amount of the lien however. The mechanic’s lien amount limit applies to defending parties also; it would not be reasonable otherwise.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Subcontractors, Be Prepared to Deal with Your Contractor's Bankruptcy - Know Your Rights, but Also Your Obligations!
As a subcontractor, you should understand the challenges that come with a contractor’s bankruptcy. Authors Jay Clark and Larry Longsdon discussed the many issues to consider when a contractor files bankruptcy in The Contractor's Compass journal. Jay Clark & Larry Logsdon, Customer Bankruptcy! What’s a Subcontractor to Do?, The Contractor’s Compass, First Quarter 2009, at 12-13. Contractors that file bankruptcy are eligible for either a Chapter 7 or Chapter 11 proceeding. Unlike a Chapter 7 case, where a trustee takes possession of the debtor’s assets, Chapter 11 allows the debtor to keep possession throughout the bankruptcy process.
An automatic stay protects a debtor immediately upon filing a bankruptcy petition. The stay prevents commencement or continuance of lawsuits, as well as enforcement of judgments, against the debtor. During the stay, you must stop demanding payments from debtor in any manner. The bankruptcy court may fine you for violations.
During the stay, you may try to collect on a lien or bond. Some states may require that you file a motion with the bankruptcy court to perfect a lien. Both liens and bonds have deadlines and other requirements for filing a claim. You should also remember that the deadline to file a lawsuit, regardless of the stay, is within one year of performing or supplying materials.
File a proof of claim with the bankruptcy court within the specified deadline, if any, or else you will not receive any payment. The proof of claim shows how much the debtor owes you on the day bankruptcy was filed. In a Chapter 11 case, the debtor will show how much it plans to pay creditors. Payment in a Chapter 7 situation depends on whether there are any assets to liquidate and on your proportion of the total creditor claims.
File a motion with the bankruptcy court asking the possessor of assets to either accept or reject a contract that you have not yet completed. If the debtor or trustee chooses to continue the contract, it must first pay all dues. If the contract is rejected, you have a damages claim that is separate from a proof of claim.
Payments made by the debtor within 90 days of filing for bankruptcy may be forfeited if shown to favor the paid creditor. To protect from uncollected debt, ask that the debtor pay with checks written to you and another payee jointly. Also, assess the risk at the bidding stage by comparing the expected profit with the potential of nonpayment. Get a copy of a payment bond, if applicable, to learn how to file a claim if necessary.
So upon a filing of bankruptcy, stop demanding payment. Yet, follow the Bankruptcy Code and statutes to get a chance to receive payment, even if it is a low one.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
