Similar to the financial crisis in 2008-2009, we have been regularly contacted by general contractor clients asking the following questions: (i) who is responsible if one of the general contractor’s subcontractors/suppliers goes out of business as a result of this pandemic; (ii) how can a general contractor protect itself against this both in the drafting of the contract and if and when it were to occur when already under contract; and (iii) should a general contractor notify its customer of the potential that COVID-19 might cause a delay or a need for a price increase?
The answer to the first question is….it depends. If a general contractor directly subcontracts with the subcontractor, then (with certain exceptions) the general contractor is most likely responsible if one of its subcontractors/suppliers goes out of business. This is why it is important for a general contractor to know who it is subcontracting with. Suppliers can be different. If the general contractor directly engages the supplier, then the general contractor is again likely responsible. If the subcontractor has engaged the supplier, then presumably it is the subcontractor’s responsibility (however, keep in mind that a general contractor is generally responsible for its subcontractors). If the owner has required that a particular subcontractor or supplier be used then it is possible the general contractor can deflect the liability back to the owner because of this.
The following methods can be included in a good contract to try to help protect a general contractor from a default (including going out of business) by a directly contracted subcontractor/supplier: (i) a payment and performance bond (if possible); (ii) a conditional letter of credit; (iii) a personal guaranty from the owners or principals of the subcontractor/supplier; (iv) collateral provided by the subcontractor supplier (or by any guarantor) such as a mortgage or security agreement, and/or (v) take advantage of careful contract drafting by, among other things, potentially shifting the liability of the above to the owner.
As to the second question, once a default/breach occurs, and if there is no bond, letter of credit, guaranty or collateral as set forth above, a general contractor can consider the following alternatives: (a) using retainage to fund a replacement subcontractor/supplier to the extent available; (b) investigate why the subcontractor/supplier is not able to perform or pay (i.e. did it improperly use payments for its own bills or use money on another project, which can make the subcontractor/supplier and its owner potentially personally liable, potentially have effects on licensing, etc.) and appropriately discuss with subcontractor/supplier; (c) consider a structured “work out” with the subcontractor/supplier to keep funding additional and new work at the project under tight controls (and obtain security to cover), or (d) pursuing recovery for damages against the subcontractor or supplier.
The correct approach will greatly depend upon the facts of each case, and each of these approaches requires careful consideration and discussion with an attorney regarding the pros/cons thereof before implementing.
As to the last question, it appears that many general contractor clients are not (as of yet) seeing delays in their projects caused by COVID-19, while some others are just starting to experience delays with materials. However, these delays may be coming as a result of supply shortages, labor shortages, etc. As such, and dependent on the language included within the general contract, if such a delay occurs, a general contractor may have an argument that any delay is not its responsibility as it is caused by a “force majeure” event or constitutes impossibility of performance of the contract under Florida law (and which could result in additional costs and time to complete the project). It is important that this type of situation is fully addressed through careful contract drafting, but even if the contract is silent on the subject it may still be possible that these concepts can apply. Also, general contractors may want to consider placing existing clients on notice of this potential for delay now (instead of waiting until it is too late). Again, this requires careful consideration and discussion with an attorney regarding the above.
We, at Grant Fridkin Pearson, P.A. have experience in dealing with these issues and are available to assist. Please do not hesitate to contact us at (239) 514-1000.