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To Complete or Not Complete? Understanding the Risks Associated with Completing Another Contractor’s Work.
As is true with many industries, the construction industry has felt the effects of the recession. The credit crunch has been particularly hard on the construction sector, making it difficult for contractors to find work.
Especially in difficult economic times, should a contractor readily accept any and all work opportunities? Not necessarily – especially when it comes to completing another contractor’s work.
As we all know, not all construction projects go according to plan. It is not uncommon for a contractor or subcontractor to start, but be unable to complete, a project. Contractor defaults occur for various reasons, such as improperly bidding a project, falling behind schedule, failing to have enough manpower or the right supervision on a job, or a contractor can simply run into financial difficulties.
Regardless of the reason for the default, the decision of whether to jump into a project midstream should be made cautiously. A replacement contractor does not want to find itself in the unenviable position of being held responsible for the original contractor’s substandard work. In addition, the replacement contractor will often times need to deal with a tense environment as a result of the original contractor’s default. Time is money in the construction industry and defaults almost always result in delays that affect the entire project. It is against this backdrop that a replacement contractor must decide whether it makes sense to accept the job.
Any time a contractor performs work on a project, warranties come into the picture. Warranties (both in contracts and imposed by law) provide protection to the owner that the contractor will stand behind its work on the project. Although warranties come in a variety of forms, the standard warranty is that the contractor performed the work in a good and workmanlike manner and the work is free from defects. See Contracts Bulletin No. 77 (Warranties 101).
Typically, there is at least some existing work in place by the original contractor prior to the default. Thus, one of the chief concerns when deciding whether to act as a replacement contractor is to determine exposure to liability. That is, if an owner finds a latent defect, is the replacement contractor liable for the initial contractor’s mistake? The answer, unfortunately, is that it depends. Regardless of who performed the work, if the replacement contractor does not carefully and thoroughly limit its scope of work and expressly disclaim liability for work already performed on a project, the replacement contractor could be subject to both negligence and warranty claims for any defective work. In this situation, the question becomes who is responsible for the defective work?
If a replacement contractor cannot definitively prove who was responsible for the defective work, it may find itself on the hook under a joint tortfeasor theory1. Even if it is possible to prove the defective work was completed by the original contractor, it may not matter as a court could find that the replacement contractor assumed responsibility for the entirety of the work (or at the very least opposing counsel would make that argument). Accordingly, it is critical that a replacement contractor limit the work scope for which it will be responsible.
Limiting Liability – The Evaluation Process
In real estate, the mantra has always been location location location! For replacement work, the mantra should be document document document! Understanding the status of the work and delineating the “new” work from the original contractor’s work is arguably the single most important task when entering into a completion contract.
It is important to physically inspect the project and document what has been done to date. Do not rely solely on progress reports, but actually walk the project and take pictures or video of the work in place. The benefit of this leg work is twofold – the Contractor will have: (1) concrete evidence of the existing work in place to show to a judge or jury should the need ever arise, and (2) a sense of the quality of the existing work. If the work in place is questionable or patently defective, it may be wise to pass on the project to avoid being roped into a future lawsuit. Unfortunately, we live in a “sue first ask questions later” society.
The reality for replacement contractors is that if there is defective work on a job, there is a good chance that the replacement contractor will be brought into the lawsuit regardless of whether the defective work was the replacement contractor’s or the original contractor’s work. Whether there is any merit to a lawsuit, however, will largely depend on the precautions the replacement contractor has taken on the front end. Again, it is critical to accurately document what has been done and what needs to done to complete the project.
After the due diligence is completed and a contractor is comfortable with the work in place and the scope of the remaining work, it is time to negotiate a contract, making sure to properly exclude any responsibility for defects in the original contractor’s work. Given the nature and possibility of the exposure, it is very appropriate to consult with an attorney before proceeding.
Negotiating a Contract
Whether it is an owner (or a surety2 if the project is bonded), it is likely the owner is going to try to impose liability on the replacement contractor for all work, including the existing work in place. After all, the defaulting contractor is most likely circling the drain and will be in no position to provide warranty work or satisfy a judgment. While there may be times when accepting liability may be beneficial to both parties, the amount of pre-contract investigation and due diligence for such a decision is quite extensive and presents very serious issues. (for a detailed discussion of assumption of liability, see footnote 3).3
Given that an owner or surety is going to attempt to transfer the risk to the replacement contractor, it is critical to carefully read the proposed contract and determine what liabilities and responsibilities the owner or surety is asking the replacement contractor to accept. In order to protect its interest, a replacement contractor should exclude from its completion contract any liability for work performed by the original contractor. To that end, clearly document the existing work in the contract and work scope to complete the project.
For example, a replacement contractor will want to include language similar to the following provisions:
- Owner waives any and all claims against Replacement Contractor arising out of or relating to work performed or materials supplied by Original Contractor (“Work in Place”). Owner agrees to look only to Original Contractor for any warranty or warranty work relating to the Work in Place. The Work in Place includes, but is not limited to, [insert results of initial evaluation and attach pictures of work in place as an exhibit to the Contract].
- Replacement Contractor shall only be responsible for [insert scope of work] (“Replacement Work”). Replacement Contractor does not assume or accept responsibility for any and all Work in Place.
In addition to the above provisions, a replacement contractor should include traditional warranty disclaimer language and specifically disclaim any state statutes that provide warranties to the extent allowed by law. A warranty disclaimer provision may look like the following:
EXCEPT AS SPECIFICALLY SET FORTH IN THIS CONTRACT, REPLACEMENT CONTRACTOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO USE, CONSTRUCTION STANDARDS, WORKMANSHIP, MATERIALS, HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE REPLACEMENT WORK.
Courts typically require warranty disclaimers, especially relating to implied warranties, to be conspicuous and mention specific terms like “merchantability” and “fitness for a particular purpose.” That is why it is a good idea to put the disclaimer in all capital letters. Regardless of the language ultimately agreed upon between the parties, be sure it disclaims responsibility for the original contractor’s work and sets forth the work scope for which the replacement contractor will be responsible.
The decision of whether to take on the role of replacement contractor should not be taken lightly. It is imperative that a replacement contractor thoroughly analyze and document the original contractor’s work. In addition, a replacement contractor would be well served to specify the work scope for which it will be responsible. Without taking these precautions, a replacement contractor might find itself in the unpleasant position of being held responsible for the original contractor’s defective work. Given that warranty law is state specific, it is advisable to consult an attorney prior to entering into a replacement contract to ensure proper disclaimers and warranty limitations are utilized.
1“A joint tortfeasor includes joint, concurrent, and successive tortfeasors whose actions combine to cause the plaintiff's injury.” Newhall Land & Farming Co. v. McCarthy Construction, 88 Cal.App.4th 769, 773 (2001)
2A surety bond is simply a written agreement in which one party, the surety, obligates itself to a second party, the obligee (typically an owner), to answer for the default of a third party, the principal (typically the contractor). The surety is essentially guarantying the performance of the contractor. If the contractor defaults, the surety typically is charged with finding a replacement contractor and guaranteeing that the work is done on time and at the agreed upon price.
3See ROBERT CUSHMAN & CHARLES MEEKER, CONSTRUCTION DEFAULTS: RIGHTS, DUTIES, AND LIABILITIES §§ 13.1-11 (1989) (discussing in detail the issues to consider prior to accepting liability for the original contractor’s work).