Sometimes the best advice is the advice we already know, but a timely reminder makes all the difference. In this first blog post of the series, the advice is exactly that. Get the right entities on the dotted lines.
You’ve spent weeks negotiating the minutiae of change order procedures, hemming and hawing on completion dates, and a guaranteed maximum price. These items are obviously critical. But have you confirmed that you are contracting with the correct entity, or better yet, are you yourself contracting as the correct entity? You may read this post and scoff “duh.” But perhaps because this advice seems so obvious, it is far too frequently overlooked.
Sometimes this might happen because the parent entities regularly do business and forms are recycled, or maybe a proposal was signed before the correct entity’s formation and that prior name was inadvertently transferred onto the final contract. Perhaps an initial placeholder (all too often an entity that does not even exist) was inserted and after weeks of negotiating the “important stuff” the parties simply forgot to go back and put in the formal entity names. Whatever the reason, it happens all the time.
Okay, so it happens. Maybe it’s even happened to you, but does it really matter? The answer is a resounding “yes!”
Contractors spend real money on labor, management, materials, and countless other line items for any given project. Don’t you want an assurance that the contract you’re signing and money you’re spending is backed by a real entity, with real funding and/or assets so that you know they will actually be able to pay you as agreed? General contractors in particular are no strangers to contracting with new or single purpose entities. And even if the initial step of confirming the “right” entity is performed, too often the second step of confirming the finances, property ownership, and funding of this single purpose entity is ignored until the project is nearing completion or hits a funding wall. Then, the contractor is left with unpaid bills and practically finds itself with rights against an entity with no assets or ability to pay and with limited lien rights (if any depending on property ownership) stuck behind a secured lender having a higher lien priority. In Tennessee, for instance, there are some statutory protections to help. But, if contractors are not careful to ensure adequate protections and contract with a single purpose entity or worse an entity that does not exist at all, they can quickly find themselves in a bad situation.
Contractors should double check their own names on the dotted line too – particularly in states that have licensing requirements. If you contract under a name that does not match your license, you may find yourself limited in the damages you can recover, liable for statutory damages, or even put your license at risk.
Owners are not exempt from these concerns either. If, for example, you’ve gone through the time, effort, and expense of setting up a single purpose entity for a particular project, shouldn’t you make sure that’s the entity that enters the contract as opposed to say the parent or holding company? If you make this mistake, you’ll undoubtedly have increased your risk on the project and might even end up with funding complications. And if the contract is entered by a party that does not exist, the actual individual signing the contract may be at risk of personal liability.
Meanwhile, owners double checking the contractor’s name is important for many of the same reasons as it is for contractors looking into the ownership entity. Knowing that you are contracting with a financially healthy contractor is a critical factor for any owner’s risk analysis and keeping your property free from liens. And depending on where the project is, contracting with an unlicensed contractor might even be a crime for the owner.
This month alone I’ve seen three contracts, with sophisticated parties, where an incorrect entity was poised to enter into a contract. Last year, we handled a case where not one, but both parties had entered into the contract under an incorrect name. Before we ever looked at the substance, the incorrect entity issue created exposure on the owner side for corporate veil piercing AND put the individual who had signed at risk of personal liability. At the same time, the mistake put the contractor at risk of consumer protection act violations and in violation of state licensing statutes thereby putting the contractor’s license at risk and greatly reducing the types of damages the contractor could pursue. What should have been a relatively simple defective work/non-payment dispute turned into something with downside risks that neither side could stomach.
So read this and say “duh,” but no matter who you are in the construction world, do yourself a favor and confirm you are contracting with and as the correct entity before you sign.