Construction projects typically involve many parties and multiple tiers of contractual relationships. It is a stark reality that the farther down one is on the contractual chain, the greater the payment risk. Subcontractors and suppliers sometimes look up the chain to seek assurance of payment. Project owners and general contractors, for a variety of practical reasons, sometimes extend this assurance.
A recent federal appellate case involves this situation. A project owner felt the need to assure a key supplier to the owner’s prime contractor. The owner sent the supplier a letter citing the owner’s strong financial rating and its long term bonding and banking relationships. The owner offered to pay the supplier directly or to issue joint checks to the prime contractor and supplier.
The supplier didn’t respond to the letter. But when the prime contractor went out of business without paying the supplier, the supplier looked to the project owner for payment. The question became, did the owner’s letter – in itself – create an enforceable payment guarantee?
How do you feel about seeking, or extending, a payment guarantee up or down the contractual chain? Subcontractors and suppliers have protections in the form of mechanic’s liens and payment bonds. Is it reasonable to expect more and look to parties with whom they have not contracted for payment? As always, I welcome your comments.
Featured in next week's Construction Claims Advisor . . .
- Termination Clause Was Unenforceable Penalty
- Engineer without Written Change Order Denied Recovery for Misrepresentation
- Shortcomings in Contract Documents Leave Design/Build Contractor Exposed
Bruce Jervis, Editor
Construction Claims Advisor