Thursday, January 21, 2010

Silence may be Golden

At the end of my last post, I mentioned that an owner should be careful about what s/he says to the subcontractor who is not being paid by the general contractor. My warning is based on two cases which the Massachusetts Appeals Court decided, one in September 2007 and one in January 2008. In both instances, the court found that the owner was liable for payments to the subcontractor based on representations and promises that the owner had made to the subcontractor.

In Central Ceilings, Inc. v. National Amusements, Inc., 70 Mass.App.Ct. 172 (2007), a project to build a movie theater had come to a virtual standstill due to lack of funds. At that point, the owner told the plaintiff subcontractor that the owner would pay the subcontractor if the general contractor did not. It further told the subcontractor that it needed the project done prior to Labor Day Weekend so that it could benefit from the higher movie sales that occurred on a holiday weekend. Based on the owner’s representations, the subcontractor continued with the work and completed it in a timely manner. When the subcontractor wasn’t paid, it sued the owner seeking payment; the owner denied liability. The court found that the subcontractor had been promised payment by the owner directly, and that even though the promise was oral, it was binding on the owner.

In Mike Glynn & Company v. Hy-Brasil Restaurants, Inc., 75 Mass.App.Ct. 322 (2009), the Appeals Court made a similar determination. In that case, the subcontractor and the owner of the property had been long-time friends. When the property manager ran out of funds and Glynn threatened to cease work, the owner of the property promised that he or his company would pay if the property manager did not. Like National Amusements, supra, the owner in this case insisted that the restaurant open prior to Thanksgiving. In reliance on the owner’s promise, Glynn worked over-time, incurred extra expenses by hiring additional men to work on the job. When Glynn sought payment from the property manager and was not paid, he sued the owner and the owner’s company directly. In dicta, the Appeals Court found that the facts of this case fell outside the “not ordinarily liable” rule set forth in Evans v. Multicon.
Both Mike Glynn and National Amusements are close to the hypothetical scenario that the Evans case had envisioned and therefore, it is not surprising that the Court allowed the plaintiff subcontractors to collect from the property owner. However, the timing of the promise is critical. In Rosano-Davis, Inc. v. Sastre, 2004 Mass.App.Div. 55 (2004), aff’d 65 Mass.App.Ct. 1110 (2005) (unpublished), the subcontractor argued that the owner of the property had promised to pay the subcontractor if the general contractor did not. The Appeals Court ruled that because the owner made promises to pay after the work was completed, the subcontractor did not rely on those promises to finish the work.

In the case I litigated that I discussed in my previous blog post, there were similar allegations. The subcontractor argued that the owner of the property had made promises to pay, however those promises if they were made at all (a fact my client disputes) they were not made until after the work was complete. Therefore, any argument that there was some reliance did not carry the day.

So what is an owner to do if they learn that the general contractor has not been paying the subcontractors? Do should the owner speak to the subcontractors or do you remain silent? There are several steps that must be taken. First, assess the situation. Compare the progress of the project to the payments made and determine whether the owner has paid more to the contractor than the value of the work. Or perhaps the opposite is true. Or maybe the owner and the contractor are about even when one compares the work performed and the amount paid. Consider the project and its progress. If the property is not weather-tight or exposed to the elements, then you may need to have the contractor continue. Speak to the general contractor and the subcontractors and find out everybody’s story. Don’t make any promises to anyone. Just listen. Then the owner will have to make some decisions.

If the owner and general are approximately equal in work performed and money paid or if the owner owes the general money, then the owner can make an arrangement to pay subcontractors directly. The owner can write joint checks to the general contractor and the subcontractor so that the subcontractor receives payment.
It is more difficult when the general contractor holds more money than the value of the work performed. If the owner pays the subcontractor, s/he runs the risk of paying twice; once to the general and once to the subcontractor. If the general is going to continue with the work, one might want to try to negotiate an arrangement to pay the subcontractors directly as a credit to future payments. As you can see this gets very complicated, not only in terms of determining who you should pay and when but obviously one has to deal with the personalities of the individuals involved.

Whatever the end result, put it in writing and have all the parties sign and/or acknowledge receipt. It is best if the parties can resolve the issue so that the general can continue work. In reality, it is often hard to find a new contractor willing to come in the middle of a job. Consider involving an attorney to negotiate a resolution. While it might cost the owner some out of pocket expense, the cost will be negligible in comparison to litigation costs.

In my final post, I will discuss the actual mechanics of the mechanic’s lien. As I mentioned in my first post on this subject in order to perfect the mechanic’s lien one has to take a number of steps. The last step that must be taken is the filing of a lawsuit. Whether you can actually collect even if you take all those steps and how you collect at the end of the lawsuit will be the subject of my final post on mechanic’s liens.