Yes, Virginia, Contract Terms Do Matter: Financing Term Offers Owner an Escape Hatch

For this week’s Guest Post Friday, Musings welcomes Timothy R. Hughes, Esq., LEED AP.  Tim (@vaconstruction on Twitter) is Of Counsel to the Arlington, Virginia firm of Bean, Kinney & Korman, P.C. In his practice as a business, corporate, and construction law attorney, Tim served as the previous Chair of the Construction Law and Public Contracts Section of the Virginia State Bar. He has served in numerous volunteer, board and leadership roles with such organizations as the Arlington Chamber of Commerce, the Northern Virginia Building Industry Association, Vanguard Services Unlimited, Leadership Arlington, Associated Builders & Contractors (Metro DC and Virginia), and numerous other volunteer and construction trade association activities. A regular speaker and writer, Tim is the lead editor of his firm blog, Virginia Real Estate, Land Use and Construction Law.

A recent Virginia case once again demonstrates that contract terms matter. An unusual financing term allowed the owner of a project a complete escape from any liability on a project despite significant work being performed. The opinion from the Circuit Court of Norfolk involved five separate cases consolidated together, four claims by subcontractors and one by the general contractor Turner. All five cases hinged on an unusual financing clause in Turner’s contract with the other. That provision stated:

This Agreement and any liability … of the Owner (other than liability …. for Preconstruction Services) shall be subject to and expressly conditioned upon the closing by the Owner, and the initial funding by its lender, of the construction loan (on terms satisfactory to Owner) and Owner shall have no obligation or liability to [Turner] for any costs for the Construction Phase under this Agreement unless such construction loan closing is completed.

The court found that despite significant efforts, the owner was not able to procure such financing. Substantial construction work started, including excavation for the project, without actual financing in place. Multiple subcontractors filed liens and filed suit to enforce the liens, as did Turner. The court found that the contract clause completed absolved the owner from liability. The court further ruled that the subcontractors could not recover. Virginia statutes provide that a subcontractor cannot lien a job for amounts in excess of what the owner owes to the general contractor. While often described as “the owner only pays once”, the court held that the owner’s total defense to Turner’s claims similarly buried the subcontractors’ lien claims.

Turner’s loss on a case where it essentially performed substantial work for free is not without some irony. Turner recently prevailed in defeating the claims of a subcontractor on a contract to build a steel hangar and technical operations facility for Jet Blue Airways at JFK International Airport in New York. On that project, Turner’s bid documents indicated that until there was a signed subcontract, Turner was not obligated to pay subcontractors anything on the project. Turner allegedly directed a subcontractor to start work on the project, allowed them to being work, and then decided to use a different subcontractor. The New York court ruled that Turner was not liable to the subcontractor based on the exculpatory clause because there was never a signed subcontract.

While this Norfolk case is fairly unusual, it again highlights several important points regarding Virginia law:

* You should read and understand each term of your contracts. Assume in Virginia that terms will be read literally even if the result is harsh

* Do not work without locked financing. This sounds obvious, but I am aware of several cases where financing was not pinned down, work started, and a complete litigation disaster ensued

* Insist as a contractor on the right to documentation of proper financing to cover costs. Exercise those rights. Do not take getting paid for granted.

* If you are a subcontractor, review the prime contract. My practice is strewn with the wreckage of people failing to adhere to this basic rule. As a subcontractor, you are likely to be stuck with bad terms like this financing term even if you have not read it.

* Never assume a Virginia judge will try to be “fair” – you are far more likely to get “justice” which may be very different!

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