Construction contractors necessarily rely on the creditworthiness of project owners. Construction requires considerable capital. A contractor needs to know the owner will be able to make progress payments. On private projects, much of the construction capital is borrowed. This raises a question: Does a construction lender have an obligation to keep a contractor informed of the project owner’s financial condition?
Unfortunately for contractors, the general answer to this question is negative. This was illustrated in a recent case involving a residential development. The project owner defaulted on a separate construction loan on an unrelated project. This material change in the owner’s financial condition caused the lender to stop advancing funds for the residential project. Neither the owner nor the lender informed the contractor. The contractor continued working for another month, to its considerable financial detriment.
Contractors, to be sure, have an obligation to research the financial capability of the private project owners with whom they do business. But due diligence cannot reveal everything. And it certainly cannot account for events which have not yet occurred. Should a contractor seek assurance from the project owner’s construction lender on a regular basis? Wouldn’t the confidentiality of financial records prevent the lender from sharing much of the information?
What do you consider sound practice in this regard? I welcome your comments.
Featured in Next Week’s Construction Claims Advisor:
- Delay Caused by Contractor’s Late Notice of Site Condition
- Prime Did Not Assume Responsibility for Sub’s Job Site Safety
- Unit Price Arrangement Converted to Fixed-Price Contract