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.