Consequences Of Not Confirming Financing Can Be Huge

Virginia Court Allows Owner To Stiff GC And Four Subcontractors For $13,000,000!

Sometimes when we ask contractors to confirm financing we get push back . . . "I know they are good for it" or "We've worked for this owner (or GC) a lot" or "I hate to ask that question - it is kind of an insult". Today it is essential that you get written confirmation of financing before starting work or you may end up like these guys.

According to the Construction Law Group Alert of Hirschler Fleischer (www.hf-law.com), construction began in July, 2007 on the $180 million condo project in Norfolk and was stopped 2 months later after the owner failed to get financing. The GC and subs filed suit for payment and owner said it had no liability to the GC, citing a provision in the contract stating that it had "no obligation or liability to the GC for any costs in the Construction Phase" in the event that the owner could not obtain funding for the project. The GC and subs argued that because the Owner had issued a notice to proceed, directed that work be continued, and approved payment applications they had waived that provision and were estopped from relying on it.

The judge ruled for the owner and directed that all 5 lawsuits be dismissed and ordered the mechanic's liens be released. The judge acknowledged that this decision would "cause serious hardship to some subcontractors and materialmen" on the project but that it was his duty to "construe the contract as written and not to produce a result some might find fair or just."

In making this decision the judge determined that the Owner had never represented that its construction loan had been funded and that the GC knew that the project could not be funded without the loan. Also the GC had failed to exercise its right under the contract to demand evidence of a construction loan to fund the Owner's obligations under the contract.

Moral of the story - Always demand evidence of financing prior to starting work on a project!

TPE3