Inside this Issue

A1 - Payment Provision Concerns in Design and Construction Contracts Video
A2 - Managing Risks of Payment Provisions in Design and Construction Contracts
A3 - Plaintiff Failed to Admit Requests for Admissions – and Defendant who won at Trial was entitled to Recover Attorneys’ Fees
A4 - Insufficient Basis to Pierce Corporate Veil

Article 1

Payment Provision Concerns in Design and Construction Contracts Video

Payment Provision Concerns in Design and Construction Contracts (New Video by Construction Risk, LLC)

This 3 minute video by Kent Holland addresses Payment Provisions clauses including pay-if-paid, pay-when-paid, and cost estimates exceeded. These provisions in design professional prime agreements and subcontracts are discussed with detailed written examples provided for consideration for appropriate risk allocation.

This article is published in ConstructionRisk Report, Vol. 24, No. 3 (March 2022).
Copyright 2022, ConstructionRisk, LLC

Article 2

Managing Risks of Payment Provisions in Design and Construction Contracts

This article presents how ConstructionRisk, LLC typically revises and redlines contracts to protect against unreasonable payment provisions, and unreasonable demands to perform redesign in the event that the project pricing comes in over budget. We begin with pay-if-paid clauses, and then move on disclaiming warranties of cost estimates. In addition to this short article that includes sample clauses, we are providing a link to our new YouTube 3 minute video on this subject.

The Prime Consultant wants to make payment to subconsultants contingent on receiving payment from Client. The courts in different states have interpreted the words “pay if paid” and “pay when paid” differently, sometimes deciding they just mean “pay within a reasonable amount of time”. Including the words “payment from the Client is a condition precedent to payment” can add weight to the argument that the subconsultant will not be paid until the Prime has been paid.

What can a subconsultant, or subcontractor, do?

First - When we are advising the subcontractor, we attempt to revise the pay-if-paid clause to turn it into a pay-when-paid clause. We accomplish that by adding a time limit for payment. At the end of a sentence in a subcontract stating payment to the sub is conditioned precedent on payment by the owner, add the following:

- “Notwithstanding the foregoing, in no event shall Designer be paid the uncontested amount of any invoice later than 90 days from submittal.

Second -When there is pay if paid clause it is important that the Sub be able to cease performance of its services in the event of non-payment. Consider adding a clause like this to the end of the pay-if-paid clause.

- “If payment of any undisputed amount due and owing to DP is not made within 60 days of submittal of the invoice for such amount, Engineer shall, upon seven (7) days written notice, be entitled to suspend its services until such payment is made.”

Avoid Having to Redesign without Additional Compensation. When design professional contract states that the designer will perform redesign services needed as a result of the cost estimate being exceeded or construction bids coming in over budget, it often states it is without additional compensation. This may be alright, but the designer should limit when this service will be done for free. If you agree to a clause requiring you to provide redesign services, insert protective wording similar to the following:

“…. and will do so without additional compensation if due to failure to perform services consistent with the Standard of Care.”

Assuming that the contract has a reasonable standard of care clause, this means the redesign will only be done for free if the cost estimate was exceeded due to consultant’s negligence.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 3 (March 2022).

Article 3

Plaintiff Failed to Admit Requests for Admissions – and Defendant who won at Trial was entitled to Recover Attorneys’ Fees

Where a homeowner sued contractor for failing to honor an alleged oral contract to build a house, the contractor submitted Requests for Admissions (RAFs) asking Owner to admit there was no oral contract and to grant other admissions. Owner failed to make the admissions requested. The matter went to trial and the jury found in favor of the contractor - there was no oral contract. The contractor then filed a motion to recover all its attorneys’ fees on the basis that the plaintiffs had no reasonable ground to deny the RFAs because substantial evidence known to the plaintiffs indicated that Contractor never agreed to build their house for a fixed price. Court granted the Motion, and this was affirmed on appeal. Spahn v. Richards, 702 Cal. App.5^th 208 (2021).

In this peculiar case, the homeowner was found to have been negotiating with the contractor to get a fixed price contract to build a house. The homeowner and the contractor signed a written contract to demolish an existing house on the lot, and the contractor fulfilled that contractual obligation sometime in the early part of the month of July. On the date the demolition contract was signed, the homeowner emailed its architect stating that “assuming … we select [Contractor] to the job, fingers crossed, the bank will still take 45 days to vest the loan and begin.” The architect a few days later emailed the contractor stating that the architect and homeowner were “waiting” for the contractor’s bid. On that same date, the homeowner advised the architect that it was “looking into other options to hire contractors we like. [B]udget on this now should be well under $500k.”

During this time period, the homeowners solicited bids from a number of contractors and obtained quotes ranging from $600,000 to $800,000. One contractor told the homeowners that their $500,000 budget was "ridiculous.”

Early August, the homeowner asked the Contractor to come to his office and during a meeting there presented the contractor with a written contract with the $500,000 budget. The contractor stated he was “flabbergasted” over the “fake budget” and refused to sign the contract. When he refused to build the house, the homeowner hired another firm to build the house at a cost exceeding $1 million.

At trial, the contractor asked the court to grant a directed verdict. The court concluded it was a “close call” but allowed the matter to go to the jury which found in favor of the contractor – that there was no contract to build the house. During pre-trial discovery the contractor submitted RFAs. Under an applicable state statute, if “the requesting party proves the truth of an RFA previously denied by the other party, the requesting party may move the court for an order requiring the other party pay the reasonable expense incurred in making that proof, including reasonable attorneys’ fees.”

In determining whether to grant such a motion the court must determine whether “good reason” exists for the party to deny a request to admit. It must hold a “a reasonably entertained good faith belief that the party would prevail on the issue at trial.” And that belief must be ground in the evidence; it cannot be based merely on ‘hope or a roll of the dice.’”

The owner and its architect were in ongoing communication at that time to get a fixed price quote from the contractor to build the new home. When the contractor ultimately refused to build the house for the $515,000 fixed-price they allege that he orally committed to, they hired another contractor who built the house for a far greater amount.

Based on the facts in this particular case, the appellate court concluded “the trial court could reasonably conclude the claimed oral contract lacked essential and sufficiently definite terms that would establish the existence of a meeting of the minds.” The court noted that although the plaintiffs asserted that the contractor entered into an oral contract by mid-June, the plaintiffs were in fact still getting quotes from a number of contractors a month later, and the homeowners had acknowledged in July that they “were not certain whether [Contractor] was a ‘committed contractor.’”

On this record, the appellate court concluded it was reasonable for the trial judge to conclude the plaintiffs didn’t have a reasonable belief they would be able to prove the existence of an oral contract.

Article 4

Insufficient Basis to Pierce Corporate Veil

See similar articles: Corporate Veil | Insufficient Basis to Pierce Corporate Veil

Landowner sued contractor corporation and its principal for intentional trespass, conversion, and unjust enrichment where employees took material from owner’s land and used it on a road project without Owner’s authorization. After numerous trials and appeals, it was held that there was no basis for liability against the individual principal instead of just the corporation. The corporation was not undercapitalized either at time of formation or during its work; it observed corporate formalities and maintained corporate records; the principal didn’t siphon funds from the corporation; and there was no element of injustice, inequity, or fundamental unfairness that would permit piercing the corporate veil. The corporation was not the alter ego of the individual. Taszarek v. Lakeview Excavating, Inc., 968 N.W. 2d 146 (North Dakota 2021).

The plaintiffs argued that the corporation was the alter ego of the individual, and that this allowed them to pierce the corporate veil.

“[F]actors considered significant in determining whether or not to disregard the corporate entity include: insufficient capitalization for the purposes of the corporate undertaking, failure to observe corporate formalities, nonpayment of dividends, insolvency of the debtor corporation at the time of the transaction in question, siphoning of funds by the dominant shareholder, nonfunctioning of other officers and directors, absence of corporate records, and the existence of the corporation as merely a facade for individual dealings.”

Under the “alter ego” approach to piercing the corporate veil, the court explained that “there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist, and there must be an inequitable result if the acts in question are treated as those of the corporation alone.”

The plaintiffs argued that the district court erred in finding Lakeview Excavating was sufficiently capitalized for the purposes of the corporate undertaking. “In tort cases, particular significance is placed on whether a corporation is undercapitalized, which involves an added public policy consideration of whether individuals may transfer a risk of loss to the public in the name of a corporation that is marginally financed.” This capitalization requirement is an ongoing concern. The Court here recognized “there is a continuing obligation to provide adequate risk capital from incorporation throughout the corporation's existence.”

In reviewing the financial condition of the corporation in this case, the trial court attributed its financial downturn to the problems the corporation had when working on the FEMA-sponsored German Township project, which involved raising roads because of ongoing flooding. The court found FEMA's incomplete specifications caused Lakeview Excavating to purchase additional materials and provide additional labor and equipment. “The district court determined the problems with the German Township project led to Lakeview Excavating's financial downturn, and thus it was the company's operating losses, not insufficient capitalization, that caused it to become insolvent.”

Ultimately, the court found Lakeview Excavating was not undercapitalized at the time of formation and was adequately capitalized for its stated corporate undertaking as an excavation contractor, noting its profits from 2010 to 2012.

“Where, as is the case here, a corporation is solvent when it commits a tort and insolvent before judgment is entered against it on the tort, the district court properly focuses on whether siphoning or other improper actions of the individuals controlling the corporation led to insolvency.”

Ways the Corporation Satisfied Corporate Formalities

“The district court found Lakeview Excavating filed articles of incorporation with the North Dakota Secretary of State, held an organizational meeting, installed officers and directors, issued shares of stock, established a principal place of business, held a shareholders’ meeting in which the company elected to be taxed as a Subchapter S corporation, filed annual reports with the Secretary of State from 2011-2015, and held annual meetings from 2011-2015 during which it elected directors and ratified actions taken by the board of directors since the previous annual meeting. The court found Lakeview Excavating kept corporate minutes, documented resignations, and filed separate tax returns from other companies that Welken owned in whole or in part. The court found Lakeview Excavating documented loans from Welken's father and Lakeview Trucking to Lakeview Excavating, and loans from Lakeview Excavating to Lakeview Aviation, Inc., which was a company owned by Welken and his wife.”

It must be noted that the plaintiffs also asserted that the corporation “shared” equipment, employees, jobs, timesheets, credit cards, offices, and a line of credit with Lakeview Trucking. But they cited no authority concluding a corporation fails to observe corporate formalities because it “shared” resources with another legal entity. Further, the record according to the court, “shows that exchanged equipment was documented through loan agreements. Although some employees worked for both Lakeview Excavating and Lakeview Trucking, the record supports a finding they performed work for only one company at any given time.”

The plaintiffs argued that certain loans and distributions of income showed the alter ego arrangement. Specifically, they argued that in 2013 Lakeview Excavating loaned $20,000 to Lakeview Aviation, and Welken took a distribution of $18,117 and received “officer wages” of $35,513.” But they cited no authority holding that a documented loan or relatively modest shareholder distributions and wages are akin to siphoning the company's funds, nor do they identify in the record any evidence showing Lakeview Excavating or Welken took these actions in response to being sued by the [Plaintiffs].

Finally, the plaintiffs argued that there is an element of injustice, inequity, or fundamental unfairness because Welken would escape personal liability for doing business as a corporate entity. The court in response to that argument commented, “We have recognized organizing a corporation to avoid personal liability is a legitimate goal and is one of the primary advantages of doing business in the corporate form.”

For the foregoing reasons, the appellate court concluded that the district court was “not clearly erroneous" in its finding that the [Plaintiffs] had not established an essential element of injustice, inequity, or fundamental unfairness to permit piercing the corporate veil.

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