January 02, 2014
Author: , Esq.
By definition, a contract creates rights and obligations between those parties who have signed the contract. If a party has not signed the contract, it may not be entitled to enforce terms of the contract nor be subject to terms of the contract. There are notable exceptions to the typical scenario. In a litigation posture, claims of negligence, strict liability in tort and sometimes warranty obligations may transcend the “privity of contract” requirements. Additionally, there may be obligations and rights which are created under the doctrine of “third party beneficiary” or under an “incorporation by reference” clause in a contract. It is essential for parties entering into construction contracts to have full knowledge of who the contracting parties are, who may have rights against them, against whom they may have rights and where they may stand in the hierarchy of the respective parties to a construction project (prime contractor, first or second tier contractor or supplier, etc.). Public contracting adds its own nuances to this topic, in that proceeding on an unsigned contract may be deemed ultra vires and therefore void or voidable and the law has rejected the prospect of third party beneficiary status in public contracting, unless clearly identified.
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Identifying the parties to a contract may seem too obvious. One looks at the first page and last pages of the contract and that identifies who the parties are and who is signing. It is not always that simple. The parties signing a contract may or may not in reality have the personal ability to fully perform and may not be in a position against which another party can compel performance. Examples of problematic identification of parties to a contract which may create problems during the course of construction include the following:
- Misnaming the true owner of the project (i.e., John Jones identified as the owner on a residential project when the deed is really in Mary Jones’ name).
- Misnaming the corporate status of a party.
- Naming a non-owner construction manager as the “owner” which can affect all lower tiers for lien and bond purposes
- Lack of clear understanding as to whether the owner is a public entity and if so at what level they operate (may affect bond/lien rights and such specific requirements as licensing and prevailing rate obligations).
- “Mixed ownership” where the property may be owned by a public entity, but the project is being developed by a private or even a separate public entity.
In the public bidding area, most public entities will take appropriate steps during the bidding process to assure and confirm who the bidding contractor truly is including identification of the precise nature of the entity (corporate, partnership, etc.), shareholder disclosure requirements, corporate capacity requirements regarding the signatory on the bid, etc. In addition to being statutorily required, each of these inquiries and bid obligations are included for the purpose of assuring that the contractor is “responsible,” maintains appropriate licenses, is authorized to bid on the project, etc.
As the project moves down to the subcontract and lower levels, these safeguards are often skipped. Accordingly, the contractor may not have a full and complete understanding of the legal business capacity of the sub-contractor, its financial viability, of the legal capacity of the individual executing the contract, of whether appropriate licenses are held by the sub-contractor, etc. Due diligence should be exercised by the owner to confirm the corporate/partnership, etc., of the entity, to obtain a Certificate of Good Standing if that is the case, to obtain appropriate corporate documents authorizing this execution of the contract and to search licenses. If the proposed contractor comes up lacking in any of these capacities, there should be reconsideration of whether the contract should be entered and/or whether personal guarantees, letters of credit or other protective devices need to be sought.
Looking upstream, subcontractors, suppliers and the like, need to confirm, prior to entry into the contract, the precise owner. If it is a public owner, they must determine whether they fall under state or local definitions and the extent to which any interceding parties exist between their level and that of the owner. Failure to confirm these points may result in unenforceability of claims, loss of lien and bond claims, or confusion that may result in loss of time opportunities to file the proper claims.
Author: James H. Landgraf, Esq. Dilworth Paxson, LLP
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