ConstructionPro Week, Volume: 1 - Issue: 17 - 08/27/2012

Assurance of Payment: When Is It Fraudulent?

By Bruce Jervis

 

Assurances of payment are common on construction projects. Nothing will affect the willingness of a contractor, subcontractor or supplier to perform more than a legitimate fear of nonpayment. An assurance is sought. The other party, eager to avoid disruption to the project, extends an assurance. What happens when that assurance proves to be unfounded?

 

In a recent case out of Arkansas, a prime contractor threatened to take a set-off against a concrete supplier due to delay. The supplier said it would continue delivering material to the site only if it was assured of timely payment in full of all invoices. The contractor provided an unequivocal assurance. The supplier, relying on that assurance, continued deliveries.

 

The contractor subsequently learned that a poured concrete column had failed a strength test. The contractor took a set-off against outstanding invoices. The supplier ceased deliveries and sued the contractor for breach of contract and fraud.

 

Fraud? That’s a serious allegation with serious legal ramifications. Don’t intervening occurrences, such as the failed strength test, render an assurance of payment non-fraudulent? Fortunately for the contractor, the answer in this case was affirmative. But the case raises an unsettling issue. Given the frequency, and sometimes flippancy, with which assurances of payment are bandied about, are construction contractors subjecting themselves to possible liability for fraud?

 

What is your opinion? Are assurances of payment too readily extended without sufficient thought to their ramifications? Should parties refrain from putting these assurances in writing? Can unwritten assurances be reasonably relied upon? I invite your comments.

 

COMMENTS

The best way, I have found, is to handle this in the sub/contract agreement; and bind the supplier via joint check to the terms of the sub/contract--or a purchase order directly to the supplier. I have also included language in sub/contracts, which stipulates that the sub/contractor will continue to perform if there is a dispute.
Posted by: David Miank - Wednesday, August 29, 2012 5:43 PM


Similar to that issue is when Contractor pulls into a lawsuit an attorney who does not understand that that the contractor underestimated quantities, so filed decided that legitimate invoicing by supplier was " overbilling " Was an interesting case which made the expert appear as if they also also did not know how to estimate so tried to solicit non payment to expert for review and estimating of quantities etc . Attorneys should be be aware of all facets of fradulent activities of general contractors . In answer to your last sentence having sat on side of general contractor but looking at what is done in industry the unwritten asurances should not be relied upon by supplier or subcontractor
Posted by: Jerry Sullivan - Wednesday, August 29, 2012 7:36 PM


There appears to be a bit on incongruity in David Miank's suggestion to word the contract / subcontract so as to bind the supplier to (a) expect payment-cuts if the product fails to meet quality norms, and (b) continue supplying even in the presence of a dispute. Such a clause, I suspect, may not be legally tenable.
Posted by: Rohinton Kadva - Thursday, August 30, 2012 2:23 AM


Yes, but, in nearby Harrisburg is a fine example of the non-payment issue, On a government funded building, the prime contractor accepted payments, pocked them and stopped paying sub-contractors, one of which I understand is now bankrupt. The building sets half-completed. As usual this is ending up in court and the taxpayers are the losers as well as a host of subcontractors who proceeded to provide services in good faith and now are losers.

Second example was a large dock, at the end the contractor asked for the retained bid payments. Project manager asked for waiver of mechanics lien for all subs. contractors manager spent all day running around the local and state paying subs with checks. Smart sub contractors ran to bank and cashed them. Seems like he was very much behind and being out of state the subs were taking no chances.
Posted by: John Wesley Shannon - Thursday, August 30, 2012 5:48 AM


I had hoped this was more about assurances of funding and payments from owners to GC's. Our company has had an issue with an owner having funding which was set aside for the amount of Construction, but had understimated their own costs, and spent a large portion of it elsewhere and then failed to pay a substantial sum of money to our company after the projects successful completion. We continued to work on the project in good faith even though the payments were 2 months behind for the entire project. The owner also caused some major delays on this project, and we only finished it approx. 2 to 3 weeks behind our original schedule despite the owners negligence. The building was then sold, and we have yet to be paid and probably never will. No liens were filed prior to the sale of the building because there was another project we had just started for the same owner, and he was keeping up with payments on that one. They also acted as if they were going to get additional funding but after over a year of constant delays they failed to live up to their obligations, sold the property, disolved their partnership, and ran.

GC's get stuck more by incompetant Architects, Engineers, untrustworthy Owners, and incomptetant Subcontractors, than do Subs or Suppliers from Reputable GC's. Maybe the non payments by Suppliers and Subcontractors could get them to give higher prices to those that continue to be unreputable, and give larger price breaks to those that are reputable and pay on time. But it appears they like to fuel there own problems, and don't follow this model.
Posted by: Mark Helman - Thursday, August 30, 2012 8:37 AM


 









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