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November 2007

Legal Issues

Masonry MagazineTiming Is Everything

It is axiomatic in the construction industry that the timing of a project can have a huge impact on its potential for success, failure or dispute. The impact of the current residential market on mortgage brokers, lenders and the residential construction industry is self-evident. Those economic trends appear to be causing a cascade of effects into other related industries and financial sectors.

These trends highlight the need to understand the timing of business cycles and the timing of remedies. A good grasp of these issues can inform subcontractors in evaluating and reducing risk as well as maximizing the effectiveness of available remedies.

Litigation and business cycles
Having practiced construction law through several economic down cycles in the construction industry, I have noticed a consistent trend during these episodes: When times get bad, the percentage chance of a project going into litigation skyrockets. This trend is partially a function of tight bidding environments translating to parties wanting to play catch-up on change orders. Additionally, in a hot market, the parties let smaller issues slide to facilitate moving on to the next deal. When the next deal comes along more slowly, it is far easier to fight over the details of on-going or past projects.

Tightening of credit and increased financial shakiness can cause more direct triggers into litigation. For example, an owner having trouble with cash flow slows down payments on their jobs. This hurts the cash flow of not only the general contractor, but also all the subcontractors and suppliers. These disruptions in cash flow from one job can infect the viability of other unrelated projects. Cash flow issues with generals and subcontractors can cause similar cascading impacts. Serious breaches in payment obligations because of cash flow problems can obviously lead directly to litigation. Finally, financial pressures can lead to increasingly desperate assertions of less than reasonable positions during the project.

Cash flow problems also cause an indirect increase in the likelihood of litigation on a project. Cash flow disruption can lead to problems keeping quality subcontractors or suppliers on site. Similarly, companies facing cash issues may have difficulty staffing a project or maintaining quality control. These issues can directly impact the performance in the field and, thus, increase the chances of litigation.

Timing of remedies and maximizing leverage
Timing also is a focal component of understanding your remedies and knowing when and how to assert them in a fashion that maximizes your potential leverage. Two excellent examples are mechanic's lien and bond claims. As a masonry subcontractor, you should be intimately familiar with the mechanics and applicability of each of these remedies.

Mechanics' lien claims are particularly powerful as they allow you to claim remedies directly against the underlying project rather than a general contractor who may have financial issues. In particular, the timing of lien claims may permit you to take advantage of an owner's upstream requirements to refinance or face huge balloon payments. This is particularly true in a residential context in which temporary construction financing may be in place that needs to be replaced with permanent financing. I have had several cases from which clients recovered all of their owed funds, plus costs and attorney's fees, due to the timing of liens compared to financing requirements.

Similarly, timing and tone of assertion of bond claims can create a great deal of leverage. Contractors who are in a weakening position may feel particularly threatened by bond claims. Serial claims against bonding companies may result in the bonding company dramatically reducing or even eliminating bonding capacity. Depending on the market involved, a reduced bonding capacity may impact a contractor's ability to bid on and obtain profitable work. Understanding the context of bonding capacity can assist in evaluating, if and when to raise a bond claim against a general contractor as opposed to the more traditional route of claiming a breach of contract. Naturally, the leverage of bond claims can work in both directions if you are bonded.

Inherent balancing act
The ultimate question is how to maximize the leverage created by your potential remedies. You need to ensure that you take the steps necessary to perfect your claims to keep them alive. You also need to ensure as a masonry subcontractor that you are able, if possible, to maintain solid and positive relations with the general contractors with whom you subcontract. This means that you will always be engaged in a balancing act of timing between communication and conciliation on the one hand and self-preservation and maintenance of remedies on the other. A healthy understanding of both the current business climate and the timing and leverage created by assertion of your remedies will help you walk this balance beam more effectively.







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