What Steps to Take When You Believe a Job is "Going South"

John Milakovic
May 13, 2009 — 1,260 views  

In Charlie Chaplin's 1931 masterpiece, City Lights, Chaplin's iconic character, The Tramp, is briefly employed as a sanitation worker cleaning streets.  One day on the job, he approaches a team of horses pulling a carriage and quickly wheels about, 180°, so as to avoid cleaning up after them.  He then grimaces.  As the camera shot widens, the audience sees that The Tramp has avoided the path of the horses only to turn straight into a line of oncoming elephants.

Like The Tramp, sometimes a subcontractor might get the feeling on a project that his only choice is "the horses or the elephants."

We recently received a call from a client who was working under a multi-million dollar contract for a national commercial developer, which, in turn, was a wholly-owned subsidiary of an international corporation.  While the client had been paid to date on the project, it had recently learned from the news media that the subsidiary for which it was working was in the process of furloughing much of its workforce and closing some of its offices.  The client still had seven figures worth of work left on its contract and it was uncomfortable in finishing and possibly not being paid the contract balance; on the other hand, the client was uncomfortable in stopping work, and not only possibly failing to collect the contract balance but also possibly being sued for breach of the contract which, after all, the subsidiary itself had not breached-yet.

A sub in the situation described above is not limited to finishing work, without question, or stopping work, without more information.  Rather, here are some other things the sub can do:

1.  Pick up the phone and talk to someone on the other side of the subcontract.  Tell them what you've read and ask whether it's true.  See what they tell you and what they suggest you should do.  If they confirm what you've learned is true, ask them what they'd do in your situation.  Maybe they'll surprise you with their candor and assistance.

2.  Write the other side a letter, after you've spoken with them.  Confirm the oral conversation.  Ask for assurance, in the letter, that the other side intends to complete the job and that it can and will pay you timely and in full, pursuant to the terms of the subcontract.  If you get the "adequate assurance," great, but if you don't, proceed to the next step, which is....

3.  Ask someone else to guarantee the debt as a condition of your finishing the job.  In the case I mentioned involving the "subsidiary in trouble," for example, you might ask that the parent company guarantee the debt in writing.  In other instances, you might obtain a guaranty from a corporation's principals (in such instance, remember to include their spouses on the guaranty, to be able to reach marital property if worst comes to worst).  In yet other instances, you might ask for a guaranty from the institution financing the project. 

4.  Check the terms of your subcontract for your possible rights to suspend or terminate work.  Some form contracts, such as the AIA A201-1997 and 2007, provide the right to suspend or terminate work if adequate assurances, once requested, are not provided.

5.  Obtain a copy of any payment bond.  Provide it to your lawyer, and consult with your lawyer as to the required notices and time lines for asserting claims under the bond.  If there is no bond, then consider contacting the owner to express your concerns and indicate that, if you ultimately aren't paid, you intend to file a mechanic's lien.

6.  Ask for a joint check agreement with the owner and the general contractor.  (Both the owner and the general may be more likely to agree to this procedure if you've already taken Step #5, above.)

Better to take a path which avoids both the horses and the elephants, if possible.

John Milakovic

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JOHN G. MILAKOVIC is an attorney in the Harrisburg law firm of Beckley & Madden, where his areas of practice are focused on commercial litigation and construction law. He earned his B.A. degree, summa cum laude, Phi Beta Kappa, from Dickinson College, and he earned his J.D. degree from the Duke University School of Law. Mr. Milakovic is a member of the American Bar Association and is a member of its Committee on Construction Litigation.