Earl K. Messer | Taft Stettinius & Hollister LLP | August 14, 2018
After carefully negotiating the precise terms of a construction contract, parties sometimes let down their guard and become much less careful with communications regarding problems as the project proceeds. This can result in costly mistakes and litigation. A recent case illustrates how imprecise wording in a contractor’s attempt to collect outstanding payments resulted in costly litigation and allegations of fraud. Although the fraud claim ultimately was defeated, the parties went through the costly process of document exchanges and review and depositions, detailed motions and an appeal.
In Parmatown South Association v. Atlantis Realty Co., Ltd., a property owner sued a then defunct construction company’s principals for fraud following an incomplete construction project. During construction, the property owner stopped making payments to the contractor who, in turn, stopped making payments to subcontractors.
In a 2009 letter, the contractor requested that the property owner pay $21,000 to satisfy outstanding pay applications and two change orders. The contractor wrote that once the payment was made the contractor would “be willing to return and complete the work.” The contractor noted, “[T]here is no way…to get subs back onsite without ‘cash in hand.’” Additionally, the letter stated that full payment plus consideration for re-mobilization costs, subcontractor replacement costs, and material price changes would also be due upon completion of the project.
The property owner made the $21,000 payment, but the contractor never completed the project. Then, an unpaid subcontractor filed a mechanic’s lien on the property. When a third party filed a foreclosure action on the property, the property owner sued the contractor for breach of contract. Before the lawsuit was resolved, the contractor ceased operations.
Because the general contractor became insolvent, any breach of promise claim against the general contractor would be worthless. The property owner went after the contractor’s principals instead. The property owner claimed that the principals committed fraud by falsely representing that the contractor would complete the project in return for the $21,000 payment when, to the contrary, the principals allegedly had no intention of having the general contractor finish the project. The trial court granted the principals’ motion for summary judgment that there was no basis for a fraud claim. The property owner appealed the decision.
The appellate court found that the communications from the principals of the general contractor did not support a claim for fraud. The proof that is necessary to succeed on a claim for fraud is much higher than it would have been if the claim had been against the general contractor for breach of a promise. To prove fraud, the owner was required to present credible evidence that the principals made promises that they did not intend to keep, that the owner reasonably relied on those promises and paid the $21,000 on that basis. If the claim had just been against the contractor for breach of promise, the proof necessary would have been meaningfully less: that a promise was made and the owner relied up it to its detriment.
The lesson for a contractor from this case is twofold. Inducing an owner to make payment based on representations of what may happen as a result of such a payment may (1) land individuals who actually made the statements in court as defendants facing a fraud claim—which they ultimately may well win because fraud claims are hard to prove, but which costs precious time and money to address; and (2) land the general contractor in court as a defendant in a breach of promise claim—which is easier to prove and which may take a full-blown trial to resolve.
Parmatown could have been decided very differently if the contractor’s letter used only slightly different language, especially if it had not been a fraud claim against the individuals. Imagine that the phrase “would be willing to return and complete the work” was replaced with “will return and complete the work.” With a small language change, no more than a spelling check suggestion or auto-correction, the contractor’s letter would have read like a promise to complete the project. This small difference could have created a large impact on litigation costs and, perhaps, the ultimate liability of the principals in this fraud case, or of the general contractor had it been a breach of promise case.
The importance of precise language in construction disputes is not exclusive to contractors. Property owners and other parties also need to be conscientious and disciplined communicators. For example, a property owner might tell subcontractors that she will “take care” of the subcontractors if they complete work when a general contractor has not paid them. Such a communication could create the complications seen in the Parmatown decision.
Finally, this case is also a reminder of the time and expense of the litigation that can result from dispute communications. Small misstatements or missteps can have long-lasting and expensive effects. In Parmatown, the contractor and its principals had to defend against the property owner’s claims in a trial court. Despite winning in the trial court, the contractor’s principals also had to defend against an appeal. Nearly nine years passed between the contractor sending its letter requesting the $21,000 payment and the appellate court decision. In a claim involving ambiguous or less favorable language, litigation could last as long as the Parmatown case or involve a full trial.