GET A CLUE!      

ASA’s Regular Legal Column By Michaelbrent Collings Your Friendly Neighborhood Shark Bloodsucker Lawyer
(We will be updating this Column regularly, so be sure to check back here regularly!)

7.                                     Here’s your clue: Be careful what you call yourself.

Okay, you and I both know (because we’re smart and handsome/beautiful/some-weird-combo-of-both) that working without a license is a big no-no. In fact, it’s such a big no-no that the legislature has enacted Business & Professions Code § 7031 in order to keep it from happening. In a nutshell, this nasty little tooth in the shark that is “the law” states that if you do any work of any kind while unlicensed, you lose your standing to sue for damages on that job, or to defend against any lawsuit brought against you. And by “any kind” they mean “any kind.” If you so much as provide submittals – even before your subcontract is signed – and are unlicensed for one day during the period you are preparing and providing those submittals… BAM.

That was the sound of all your legal hopes fading.

Worse, the higher-tier contractor could just let you keep working for him, pay you as the job progresses… then at the very end turn around and sue you for disgorgement (which is not a lawyer word for barfing – it means turning over everything he ever paid you). I kid you not, the law says it. And the courts interpret this law very strictly. So you have to make sure that you are licensed. Always and forever. And make sure that the corporate or other name that holds the license you need for the job is the name you put on every scrap of paper you process. Are you ABC Company? Then do not sign the subcontract as “ABC” – if you do there’s an argument that “ABC” is not properly licensed, so… disgorgement (and even though it doesn’t mean “to barf,” you can bet that’s what you’ll do when you find out you have to pay all that money back).

And here’s another twist: what happens when you switch names? Especially in this economy there are a lot of business that are having to close their doors and start anew. Remember that the license held by ABC Company DISAPPEARS FOREVER when ABC Company winds up and dissolves. So if you are planning to have your new corporation, CBA Company¹, take over ABC Company’s old contracts…

Wait for it… Wait for it…

MAKE SURE THAT CBA COMPANY IS PROPERLY LICENSED BEFORE IT STARTS THE WORK!

Additionally, if you are working on a public works project, changing your name may create even more problems, because in that case you are technically “substituting” one company for another. I know this sounds dumb, but that’s government for you. You will likely have to have the higher-tier/prime contractor request a substitution from the public agency owner. And the owner may or may not approve the substitution, depending on the circumstances (meaning will if it will make a bureaucrat lose his job or look bad, you can forget it, man).

Regardless, you remember how your mom used to tell you not to call other people names?² Well, remember that sticks and stones may break your bones… but using the wrong name in the wrong place will absolutely wipe you out.
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Get A Clue is a regular column brought to you by the fine folks at ASAC. It is written by Michaelbrent Collings, a partner at Kamine Collings & Phelps, P.C., and a member of the LA-Orange County chapter of ASA who focuses his practice on construction contract disputes. If you have any questions about this or any other area of law, feel free to contact him at mcollings@kcpLawyers.com, or by calling 213-972-0119.
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1 See how clever I am with words and whatnot? ABC… CBA… it’s like a magical gift.
2 But then you went out and did it anyway, and made me cry.

6.             Signing Subcontracts on Public Works Jobs         Here’s your clue: You HAVE to sign… unless you don’t.

Generally, subcontractors who submit a bid to a higher-tier contractor (we’ll assume it’s the prime in this case) on a public works job are making a positive affirmation that they are in it for the long haul. In other words, the very act of submitting a bid is basically the same as saying “You getta the contract, I signa the subcontract.”1

The Subletting and Subcontracting Fair Practices Act (Cal. Pub. Contract Code § 4100 et seq.,2 aka the “Listing Law”) says a number of things. I know, surprise, the law says stuff. But specifically to our purposes, it says that bidders on public works jobs have to list their proposed subs.

So, in our example, you’ve submitted your bid. And then the prime turns around and sends you its “form” subcontract.  Which bears as much resemblance to your bid as I do to a supermodel (hint: not much). So what do you do? Do you have to sign the subcontract under the general “signa the contract” rule that we talked about in the first paragraph?

As a general rule, since you “no signa the subcontract,” the prime can request that you be replaced by another sub, and generally the public agency will grant that request, because failure/refusal to sign the subcontract is specifically listed in the Listing Law as a reason for substituting out a sub. If the replacement sub is more expensive than your bid was (and the chances of that are about 110,000% on the yes side), then the prime can turn around and sue you for the difference.

Sound unfair? Then you’re in the wrong business, bub.

Luckily, however, Cal. Pub. Contract Code § 4107[a][1] provides a possible way out of this situation. It says that the subcontractor can be replaced only if the written subcontract is “based
upon the general terms, conditions, plans and specifications for the project involved or the terms of that subcontractor’s written bid…” [emphasis added].

So what’s the upshot? The upshot is, if at all possible, be familiar with the requirements of your scope of work under the prime contract bid documents. That way, if your bid conforms to those
requirements, and then the prime tries to get you to sign a contract that has egregiously different terms and threatens to “boota you fanny” off the project if you don’t sign, you will have a much
greater chance of either a) calling its bluff and staying on the job or b) suing the crud out of that contractor and recovering your lost profits.

Again, this is all an awareness and preparedness thing (as so much in life is). Know what you’re getting into. Know what the bid docs say (if at all possible). And know that if the prime sends you
a subcontract requiring you to carve its name in the moon for all to see as part of your scope of work “or else…” well, you may not have to sign it.

Hope you’ve learned something. If not, it’s notta my fault. Must be a language barrier. Tune in next time, maybe we’ll talk more about substitution issues. Maybe not. I like to keep it mysterious.

¹ I don’t know what that accent is, so please don’t accuse me of racial or ethnic insensitivity. Let’s all just chalk it up to a typo and then everyone’s happy. Except me, because you think I can’t spell. How dare you!
² Et seq. means “and the ones following that one.” Why speak in Latin? Because pig-Latin, as we all know, is a ridiculous language, and therefore only used in argument before Congress.

5.  Here's your clue:  MAKE SURE YOUR CHANGE ORDER IS A CHANGE ORDER!

Changing Horses Midstream

A change order comes when the owner (or higher tier contractor) determines that some kind of work needs to be done
that is outside the scope of the contractor’s work. You’ve read my articles, and so you knew to carefully review the contract scope of work to make sure it said what you wanted it to say. Now you have the GC over a barrel because they desperately need this work to be done.

“Sure, I can do it,” you say, yawning to hide the fact that your pupils have just been replaced by little green “dollar” signs. “It’ll cost a little extra, though.”

The GC’s representative says, “Okay, go ahead.” You do the work. The project ends. You submit invoices for the extra work.

You don’t get paid.

If you hadn’t guessed, you did several things wrong in this case: 1) you failed to comply with notice requirements in the contract, and 2) the person who ordered the work wasn’t authorized to do so.
See, that’s a cute little gotcha that a lot of contracts have in them: they say there is one – and only one person authorized to issue and sign off on change order work, or to order extra work to be done in the field. You must deal with that person, or even timely submitted change order requests may be rejected as nonconforming documents.
Sound fair? No. Sound evil? Yes. Sound like it happens? ALL THE TIME.

Change orders can add significantly to the contractor’s bottom line in a project. They can also be devastating when mishandled. The wily contractor will put a system together for dealing with change orders, one that includes a) assessing beforehand who is entitled to issue them on behalf of the higher-tier contractor, both per the contract and according to any applicable federal, state, or local laws; b) documenting the changes as they are ordered by the GC/higher-tier contractor, including having the proper rep sign off on the order and the sum to be paid (if lump sum); and c) documenting the time and materials used – in detail – to meet the change order requirements, if the change order is to be paid on a time and materials basis.

Generally, this last includes keeping materials invoices and time sheets that document exactly who worked on the extra work for exactly what period of time. Merely providing a sheet of paper that says “This extra work cost me $2 million, just trust me” is usually frowned upon by the GC as being less than trustworthy.  Again, change orders can be great. Especially in today’s economy, they mean more work when work is scarce. But they can also mean a huge headache if mishandled. Figure out a plan for handling them. Talk it over with your lawyer. Make sure your employees know the plan (you’d think this would be obvious, but I could tell you stories…). And then implement that plan. Adjust it if parts don’t work. But don’t just think change orders are something you can handle “on the fly.” Because you’ll fly right into arguments, legal disputes, and disaster.

And next month (I’m like a tick that just won’t go away!) we’ll be talking about signing subcontracts on public works jobs. There are a few things you might want to know.
Tune in, enjoy. Or don’t. I don’t want to pressure you.

4.  Here’s your clue: THE CONTRACT IS MORE THAN JUST THAT DOCUMENT YOU SIGN!… So TAKE NOTICE  (CONTINUED)

Notice is one of those often-overlooked (some times on purpose) areas of the contract. Most contracts require that notice be given whenever a contractor is planning on making a claim for extra money: for work the contractor claims is outside its scope of work and so entitles him to extra money, for delay or acceleration claims, for the prom dress his daughter got ruined when she visited the jobsite, or for anything else. Most contractors, however (or at least most that come through my door) tend to think of these provisions as being “requirements” in the sense that wearing a cat on your head is a “requirement”: it’s nice for those who are into that kind of thing, but not necessarily what the average person has to do each day. 

These contractors are in for nasty surprises. Especially with public agencies, which have teams of lawyers who often jump on notice requirements as the first line of defense when they disagree with a claim by a contractor. Notice provisions are often enforced, and so can result in huge losses for a non-complying contractor. And, of course, if the prime contractor doesn’t get money from an owner because notice wasn’t properly given, you can bet there’s a good chance that very same contractor is going to make a claim against its subs and say they didn’t comply with the notice terms, either. 

If notice isn’t given according to the terms and requirements of the (sub)contract, there is still a ray of hope for the contractor. First of all, even if there is a formal notice requirement (like some letter that is required to be drafted on a form provided by the public entity), the courts will sometimes find that “constructive notice” was given which fulfills this requirement. Constructive notice can be given through informal letters other than those prescribed by the contract, through certain project documents (like change order requests), or through meeting minutes. There is also a legal argument that the public entity waives the notice requirement when it considers the extra claim, even though the notice requirement has not been met. 

However, all these are technical legal arguments. A funny thing about technical legal arguments: they tend to be based on legal information and they tend to be highly technical. Both of these combine to either 1) put a jury to sleep or 2) lose a jury in the Swamps of Confusion and the Mists of Boredom.¹   Whereas the other side (the side arguing lack of notice) just has to put a big blowup of the notice requirement up for the jury, ask the contractor to read it aloud, and then say “Did you do that?” 

Juries tend to buy this sort of thing. 

Moral: it’s better to just fulfill the contract notice requirements than to present late claims and count on your attorney’s skill and ability to get you out of the inevitable loss of revenue. 

Now, this is a short entry in our series. But, like me, “short” doesn’t mean “unimportant.” Sit up straight. Pay attention. Meet your notice requirements. And if you are a sub to a sub to a sub, make sure that flow-down provisions (we’ve talked about those before) don’t require you to meet notice provisions in other people’s contracts. 

Take notice. Make notice. Get paid. 

And, for those of you who have been waiting: next time we’ll finally move away from the contract and talk about some change order “gotchas.”

1 As a lawyer, I get a free timeshare in each of these places.

3.  Here’s your clue: THE CONTRACT IS MORE THAN JUST THAT DOCUMENT YOU SIGN! (CONTINUED)

Last time, we talked about some important parts of contracts: the scope of work and the contract documents enumeration.

Today, we’ll talk a bit about common payment conditions and pay-if-paid clauses.

A. Payment Conditions

This is a fairly big deal, in much the same way that breathing is a fairly big deal.¹

Most contract agreements have a few little details about payment, requiring that the payee do a lot of things before the payor pays. Common things included are: 1) invoicing for the work, 2) providing conditional and/or unconditional releases, 3) providing certified payroll, 4) providing look-ahead schedules, 5) providing approvals and certifications, 6) providing proof of licensure, 7) providing insurance certificates, 8) providing warranties, 9) providing a complete body scan and a detailed description of every cell in the contractor’s body.

Okay, this last is a bit much. But the point is to highlight the fact that there are a lot of things that may be required before the lower-tier contractor gets its money. And failing to do them will often result in the money getting paid late or not getting paid at all, resulting in having to hire me (or someone like me but less handsome) to get your dough. Better to go through the contract with a highlighter, mark down what you need to do ahead of time, and then see that it gets done throughout the course of the project.

B. Pay-if-paid clauses

The “pay-if-paid” clause is a common clause in many construction agreements which specifies that the lowertier contractor will not be due any money (meaning he won’t be paid) by the higher-tier contractor unless and until the higher-tier contractor gets paid by the owner (or whoever is above the higher-tier contractor). Or, in diagrammatical terms:

Owner pays
↓
Contractor,
who then (and only then) pays
↓
Subcontractor

If the owner doesn’t pay, then the diagram looks like this:

Owner doesn’t pay
↓
Contractor,
who then refuses to pay1
↓
Subcontractor,
who is now looking at 5-10 for
justifiable homicide of Contractor

As I said, this is one of the great hallmarks of construction agreements.

It’s also completely unenforceable. This clause can be disregarded, because the courts have said it is “against public policy,” so this contract clause will get ignored if it comes before a court, in much the same way that I will be ignored when I ask my son to clean his room. However, be aware of these clauses nonetheless, because if it’s in there, you’re likely to have to deal with it sooner or later. Better to point out that it’s unenforceable from the beginning, and see if you can just get it taken out of the subcontract, rather than having to argue about it later.

Think that’s it for contract terms? No way. There are still a few important ones left. And next time we’ll focus on (drum roll, please)… NOTICE REQUIREMENTS.

It’s not as boring as it sounds. Or maybe it is. But it’s still important. And you can trust me when I say that.
After all, I’m a lawyer.

¹ If you don’t breathe, you should probably set down this newsletter immediately because you’re dead and God is waiting to talk to you.

(William R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal. 4th 882, 938 P. 2d 372, 64 Cal. Rptr. 2d 578.
Get A Clue is a regular column brought to you by the fine folks at ASAC. It is written by Michaelbrent Collings, a partner at Kamine Collings & Phelps, P.C., and a member of the LA-Orange County chapter of ASA who focuses his practice on construction contract disputes. If you have any questions about this or any other area of law, feel free to contact him at mcollings@kcpLawyers.com, or by calling 213-972-0119.

2.  Here’s your clue: THE CONTRACT IS MORE THAN JUST THAT DOCUMENT YOU SIGN!

When last we met, I promised (or threatened, depending on how you look at it) that we’d be spending some time going over important parts of (sub)contracts. I wasn’t bluffing. So here we go:

A. Scope of work
This is the part of the contract that defines what the subcontractor has agreed to do.

Sometimes it is based on the sub’s bid (at least in part). Regardless, if the sub has provided exclusions or specific terms in its bid, it has to make sure that those exclusions and terms make it to the scope of work, or it could lose about a bigillion dollars. Remember, the agreement generally controls, so if the scope of work in a sub’s bid is completely different from the scope of work in the final agreement, the sub’s signature on the agreement often has the legal effect of saying “Okay, forget my bid, I’ll do this work instead.” Which is often followed by screams of Very Naughty Words when the sub realizes the “agreement” work is a lot more expensive than the “bid” work.

B. Contract Documents
This is one of the most-overlooked parts of the many subcontracts, next to the part about dragon attacks.¹ The “contract documents” are more than just the actual agreement signed between the owner and prime contractor (or the prime contractor and a sub, or contractor and supplier). Often, there is a list of all the “contract documents,” which may (and often do) include project plans, project specs, change orders, the prime contract, the subcontract, permit requirements (that is, provisions that may be required per any permits required for the job), bid documents, bid addenda, local ordinances, federal laws, Union agreements, etc., etc., etc. Reading all of these documents probably sounds tedious, but the look on your face when you find out you’re required by the local ordinances (incorporated into the subcontract documents) to have a fully functioning stealth bomber on site at all times at your own expense is not a “Kodak moment.”

Another big whammie that may be contained in the contract documents is a “flow-down” provision. This is a provision (typically in subcontracts) that says basically the following:

There are a lot of provisions in the prime contract that outline the responsibilities of the owner and the prime contractor to each other. In this subcontract, those same provisions also apply between the prime contractor and the subcontractor, with the prime contractor having the same rights and responsibilities as those held by the owner under the prime contract, and the subcontractor having the same rights and responsibilities as those held by the prime contractor under the prime contract.

In other words, all the notice and claim requirements – and all the other requirements – of the prime contract will apply to the subcontractors as well. If there is such a provision, then the subcontractor must review the prime contract documents as fast as possible, or else it may be tripped up by notice or other requirements it is required to know about by this statement incorporating the prime contract into the subcontract.

Getting nervous yet? Good. Nervous subs are subs who are careful. Or sometimes they’re just subs who drink too much coffee.

We’re not done yet, but that’s all for now. Next time we’ll get into the real gritty stuff: payment, notice, and change order clauses and MUCH, MUCH MORE! Yeehaw!!