Does Your Business Need to Hire an Attorney (and if so, when?)

By: Peter J. Lamont, Esq.

For most business owners they would rather go to the dentist than hire an attorney. Attorneys have the dubious reputation as being "blood suckers", deal breakers and opportunists. Additionally, many business owners would rather use the "do it yourself" method when it comes to legal issues in order to cut costs on what they view as non-essential expenses. Unfortunately, many "do it yourselfers" ultimately end up having to hire a lawyer to deal with a lawsuit concerning one of their homemade contracts or other "legal documents" which they created with the help of legal software or the Internet. Typically, businesses wait to retain an attorney until they are in trouble end up paying through the nose for legal services. Additionally, because of time constraints they do not research the attorney but rather rely upon the recommendation of their know-it-all brother-in-law, their favorite bank teller, their priest or landscaper. So, what is a cost conscience business owner to do? Does a business need an attorney and if so, when?

First, we need to determine whether you need an attorney. The short answer is "yes." There are two professionals every business will need early on: an accountant and a lawyer. The reasons for hiring an accountant are obvious. However, the reason for hiring a qualified business attorney may not be so apparent. A good business attorney will provide vital assistance in almost every aspect of your business, from contract creation, review and negotiation, back office support, and litigation prevention to employment issues, licensing compliance, copyright and trademark issues and lawsuits and liability. 

There is no substitute for a good lawyer. No computer software or Internet site can provide you with the knowledge, skill and experience that can be provided by a qualified attorney. After all, you would not want a nurse performing major surgery on you, would you? 

The time to hire a lawyer is when you do not necessarily need one. If you wait until you need one, then something went wrong that a qualified lawyer might have been able to insulate you from. Now you have to deal with litigation expenses which could range from $15,000 to above $50,000. Clearly, when it comes to your business the old adage, an ounce of prevention is worth a pound of cure, is highly applicable. 

When you decide to hire an attorney, make sure that he or she has experience in the design/construction industry. It is critical that you find an attorney who is well versed in your industry. It does no good to hire an attorney for your design business who specializes in insurance law only. A qualified business attorney should be able to provide you with counsel on every aspect of your business. Shop around until you find the right match. It is important to note that many attorneys who specialize in the design/construction industry are with small to mid-size law firms. Their rates will be significantly lower than mega firms. 

Ok, so you decided to hire an attorney - but what do you need him for? It is not necessary for an attorney to be involved with every aspect of your business. In fact, there are a good amount of things that you can do on your own. For example, if you are willing to put in the time, you can register and set up your business with your state without an attorney. Most state website provide you with step-by-step directions concerning starting a business and obtaining a tax identification number. 

You can create store policies, selling guidelines, sales training programs, forms for your employees, office procedures, as well as negotiate with new vendors, suppliers, and partners. However, you should use an attorney to create, review and/or handle the following: your contracts and purchase orders; employee manuals, collection letters and guidelines, leases; subcontracts, state licensing, contractor registration and licensing, litigation prevention plans and procedures, trademark and copyright registration, insurance issues, sexual harassment policies and employee training. This is certainly not an exhaustive list, but it should give you a good idea of what aspects of your business should be handled by an attorney. Of course, all liens, arbitrations, mediations and lawsuits should be handled exclusively by an attorney. 

For example, a qualified attorney can create a set of form contracts and documents for you which could help eliminate contract litigation. You could pay an attorney a reasonable fee to create your contracts and be insulated from lawsuits or you could draft the contract yourself and end up litigating, at high cost both in time and money to you, with numerous customers over unclear, unenforceable, and/or ambiguous contract terms.

Retaining the right attorney for the right tasks can end up saving you thousands in litigation costs.

Are You are "LEEDer"?

How familiar are you with LEED?  LEED is an acronym for Leadership in Energy & Environmental Design.  If you have any questions about LEED, please do not hesitate to contact us.

Also, be on the lookout for our free LEED Basics Webinar which will take place in early February.

2011 Business Goals

Goal Setting - I know, we are all fired up at the beginning of January to take steps to achieve all of our goals for the year. Unfortunately, by the middle of the month most people still have not written their goals down.  Don't let January get away from you.  Write down your business goals for 2011 right now! 

If you have any questions about commercial goal setting or any business or legal matter, please do not hesitate to contact us to speak with one of our attorneys or business professionals at no charge. 

DESIGNING AN EFFECTIVE INTERIOR DESIGN CONTRACT

For many interior designers the contract with their clients are rarely given much thought. That is, until an issue arises with a client over payment terms or scope of responsibility. In order to maximize profits interior designers need to get a little more creative with their own design contracts. With the new year approaching there is no better time to review your old contracts, reflect on any negative customer issues that you may have encountered during the year and craft a new comprehensive contract that fully address your needs and will remedy past negative issues. While there is no magic formula for a good contract, there are a number issues that designers should include in their agreements. Below are some of the critical issues that should be included.

SCOPE OF WORK

It is critical that design contracts clearly spell out the limitations of the designers scope of work. Often designers find themselves practically replacing the general contractor on certain types of jobs. For example, if your scope of work is not clearly stated in your contract, a difficult homeowner may blame you for the failures of an electrical contractor or other trade even though that trade should have been monitored by the general contractor. 

In order to avoid this, a good design contract should state exactly what the designer is responsible for. It should not contain generalities such as "designer will design and oversee the overall transformation of Mr. Smith's home located at . . ." This language was actually contained in a designer's contract. Unfortunately, her client was savvy and litigious and ended up negotiating a much lower final payment than he was originally obligated to pay because he threatened her with a lawsuit over drywall, insulation and lighting issues. 

The designer could have avoided this situation if she had listed those items she was responsible for and included a disclaimer concerning the tasks that were not her responsibility. A general disclaimer could state, "Designer has been retained to provide interior design services only. Designer is not a general contractor and will not act in such capacity. Any issues concerning construction elements must be discussed between owner and his/her contractor."

CONFIDENTIALITY & PROPRIETARY PROPERTY 

One of the designers important tools is their subcontractor contact list. The list contains the names and telephone numbers of the designer's go to painters, electricians, etc. For most designers a good list takes years to develop. The last thing that a designer wants is to have to give up their list to a client and have the client start making direct calls to his or her subcontractors. 

In another real world example, a designer on an large project was challenged by the homeowner concerning delays and the work of her subcontractors. He demanded her contact list. Unfortunately, her contract was poorly worded and the homeowner was able to force her into giving up her list. The homeowner then used it to make side deals with her own subcontractors.

Separately, some designers want their drawing and sketches to remain their proprietary property. The same designer discussed above was also forced to provide the homeowner with all of her drawings and sketches.

In order to protect your contact list and drawings your contract should include confidentiality and proprietary information clauses. The clauses should clearly state that the designer owns all of the drawings and sketches, as well as any other documents or information that the designer wishes to maintain control over. It should also forbid a client from directly contacting the subcontractors without the designers consent. 

PAYMENT TERMS

This is one of the most important clauses in the contract yet is often the most neglected. Most contracts simply state the hourly rate , design fees and commission percentages. In order to fully protect your profit, your contract should be broken down into separate sections for design fees, commissions and hourly rates. Each section should specifically state when payment is due and the manner of payment accepted. It should also specify how often your will bill the client and how your bill will be broken down. The more detailed the payment terms the better. 

REMEDIES FOR BREACH

Finally, a solid design contract should specifically state what happens if the client does not pay the designer in accordance with the payment terms. For example, "an interest charge of x% will be applied to all past due balances." It should also state that "failure to submit payment in accordance with the payment terms will constitute a material breach of the agreement."

SUMMARY

The key to writing a good design contract is to spell out all of the terms and conditions that are important to you in plain language. You would not take shortcuts with your designs and you should not take them with your contracts. It is a good idea to have all of your contacts looked at by an attorney who is familiar with the design industry.

—Peter J. Lamont, Esq., is a commercial litigation attorney with offices in Hawthorne, NJ, as well as Massapequa, NY. His practice focuses on the representation of small- to large-size companies in the building and design industry, as well as individual designers and architects. To contact him with questions and suggestions on topics for future articles, please email him at plamont@peterlamontesq.com or call him at (973) 949-3770.

MAKE A LIST AND MAKE THE CLIENT CHECK IT TWICE

It is that time of year again when Santa is busy checking his list in preparation for the big day.  Design professionals in the kitchen and bath industry can learn a valuable lesson from Santa - when dealing with your clients, make a list and make the client check it twice. Checklists are one of the most important tools that all designers and sales personnel should utilize every time they make a sale, issue a change order or prepare for an installation.  To some extent everyone uses a checklist system to help them remember appointments and client's requests.  But those in the industry need to expand the use of the checklist and make client checklists a functional component of the sales and installation agreements with the client.

Far too often issues arise when customers claim they are entitled to massive refunds because their cabinets were not delivered in accordance with the time frame set forth in the contract.  Even though the contract may say "approximate delivery date" customers always come up with stories of oral promises made by sales staff and designers.  Another area of concern is with installation.  Frequently, clients refuse installation by your company and instead opt for installation by their general contractor. However, many general contractors are not familiar with the installation of your products. This is especially true when dealing with European cabinets which require specialized installation. Most times when these complaints arise you issue refunds or provide other price cuts in order to keep the customer happy. This translates directly into lost profits for your company.   

            You can prevent this type of issue from occurring if you use checklists as part of your contract and have the client sign off on each line item.  Here is a real world example.  Recently a cabinet company sold a large kitchen to a client.  The client signed the contract and declined to purchase installation from the company.  Instead she chose to have her general contractor install the cabinets.  The sales person verbally explained to her that the cabinets were manufactured in Europe and were tricky to install.  She again refused.  The cabinets were manufactured and delivered without issue.  However, during installation her general contractor, who was not familiar with this type of installation, damaged cabinets and improperly installed others.  Of course, the customer blamed the cabinet company for the problems.  She claimed that they measured her kitchen incorrectly and provided her with improper panels. 

 In general, judges and juries are not familiar with the cabinet and design industry. Additionally, lawsuits arising out of cabinet and design contracts lack the flair of personal injury trials and thus, juries are not interested and typically decide to "split the baby" on these type cases.  The bottom line  is that your company losses money even when you did everything right.  So how can a checklist help you avoid this scenario?

Even the most basic contract can be confusing to both the designer/sales person and the client.  They all contain at least some legal jargon which requires at least a glance at Black's Law Dictionary.  You can eliminate any grey contract areas by supplementing your contract with a checklist.  In the scenario above, here is how a checklist could have prevented the loss of profits.  After signing the contract the customer should have been required to review and initial a checklist concerning the installation.  

            The checklist should have stated (at the very least) the following:

            The customer understands that "X" company offers installation services.    _____ (initial)

            The customer understands that "X" specializes in the installation of specialty European       cabinets.                                                                                                          _____ (initial)

            The customer understands that "X" company highly recommends that client utilize the        installation services of "X" company.

            The customer has declined installation services from "X" company.              _____ (initial)

            The customer understands that his/her contractor may not be proficient in the installation   of "X" companies' products.                                                                                _____ (initial)

            The customer agrees that "X" company will not be responsible for any damage to   cabinets during installation or issues arising out of improper installation.             _____ (initial)

Once the client signs off on the checklist you have a written record that you advised the client about the potential dangers of using her general contractor to install the cabinets. You have also cleared up any confusing legalese contained in the contract.  Now if you are sued as a result of installation issues you have clear cut, admissible evidence that should get you out of the case without any loss of profit.

Checklists can be used for more than just installation.  You can prepare a separate checklist for delivery issues, appliances, countertops and for any other issues that you wish to clarify or wish to limit your liability.  So while you might not have Santa's helpers to assist you in the creation of checklists, the benefits to your company are  well worth the time and effort that  you will put into their creation. 

—Peter J. Lamont, Esq., is a commercial litigation attorney with offices in Hawthorne, NJ, as well as Massapequa, NY. His practice focuses on the representation of small- to large-size companies in the building and design industry, as well as individual designers and architects. To contact him with questions and suggestions on topics for future articles, please email him at plamont@peterlamontesq.com or call him at (973) 949-3770.

The ABCs of Subcontractor Agreements

Are you and your business sufficiently protected?

By Peter J. Lamont

October 13, 2010

The importance of an effective contract with your subcontractors cannot be overstated. In the kitchen and bath industry, you utilize the services of subcontractors on a regular basis to assist with numerous tasks, including installation and delivery. An effective contract with your subcontractor can save you and your company a tremendous amount of time, money and frustration. Unfortunately, far too often dealings with subcontractors are handled informally and, as a result, may even end up costing your company your client.

First, understand that when you hire a subcontractor, you are essentially hiring a company or individual who is not employed by you, and over whom you have very little control, to act on your behalf. Thus, it is imperative that you have a written contract with each and every subcontractor you use regardless of how small the services the subcontractor is providing to you.

Next, certain critical elements must be contained in the contract in order to provide your company with maximum protection. The main issues that should be in your subcontractor agreements are licensing, job and payment, timing and defense and indemnification.


LICENSING

Let’s assume that you are going to hire a subcontractor to install kitchen cabinets for your client. You need to make sure that your subcontractor is properly licensed and registered pursuant to state and local laws. The easiest way to do that is to insert a provision into your subcontractor agreement that essentially states that the subcontractor is properly licensed in accordance with all state and local laws and that the subcontractor agrees to defend and indemnify your company for any damages or legal action arising out of licensing issues.

In today’s litigious society it simply is not enough to ask your subcontractor if he’s properly licensed. He must acknowledge that he is in writing in order to protect your company. In the event that he is not properly licensed, a signed contract wherein he states that he is will protect you.


JOB AND PAYMENT

The job you are hiring the subcontractor to perform should be explicitly stated in the contract. For example, you should include the address of the client’s residence and the specific tasks the subcontractor is to perform (for example, “subcontractor is to remove old cabinets, prepare the walls for installation of new cabinets and confirm measurements of the installation area.”) The more specific you are the better.

The same holds true for payment options. The contract should explicitly state when the subcontractor will get paid. For example, “subcontractor will receive payment once all cabinets are installed and the punch list is completed and signed off on by client.” Make certain to include in the contract any prepayments already me to the contractor. If you're payment agreement consists of multiple payments throughout the course of the job you may want to include a payment table in the subcontractor.


TIMING

It is very important that your subcontract set forth all deadlines for the project. Be as explicit as possible. Verify the subcontract contains language stating that the subcontractor understands and acknowledges that time is of the essence. Also include in the subcontract a provision stating that the subcontractor must inform you immediately upon his awareness of any anticipated delay with the project.


DEFENSE AND INDEMNIFICATION

Finally, and most importantly, your subcontract must include a section addressing defense and indemnification of your company by the subcontractor. Essentially, your paragraph should state at the very least, “subcontractor, agrees to defend and indemnify your company against any claims, lawsuits and damages arising out of the subcontractor's negligence or intentional acts.” You should also include language concerning the subcontractors agreement to defend and indemnify you for any misrepresentations, whether made knowingly or unknowingly, including misrepresentations of licensing, corporate status and other relevant issues.

The simple fact is if you do not have a well-thought-out subcontractor agreement, you will eventually get burned. If you choose to use software or a generic form agreement as your subcontract, make certain to review it and conform it, if necessary, to include the provisions addressed in this article. Remember, it is completely appropriate to include an addendum to a form subcontract so long as the form contract states that the addendum is made part of the subcontract. You should also note that while the example in this article involves a subcontractor installation company these recommendations hold true for any subcontractor. Finally, don’t be afraid to tell a subcontractor who refuses to sign your subcontract that you will not be utilizing his services. Your goal is to find a subcontractor who will represent you in a positive light and perform as directed.

—Peter J. Lamont, Esq., is a commercial litigation attorney with offices in Hawthorne, NJ, as well as Massapequa, NY. His practice focuses on the representation of small- to large-size companies in the building and design industry, as well as individual designers and architects. To contact him with questions and suggestions on topics for future articles, please email him at plamont@peterlamontesq.com or call him at (973) 949-3770.

Legal Aid: Understand Force Majeure

Using the force in your contracts

By Peter J. Lamont, Esq.

April 02, 2010
 

One of the prime areas of concern for kitchen and bath companies with respect to the successful performance of a signed contract is focused around manufacturing and shipping delays, which can create liability and are rather commonplace throughout the industry. Manufacturing and shipping delays affect small local companies as well as large national companies, and everyone in between. In particular, this winter’s snowstorms have created numerous shipping and manufacturing delays for a large number of companies. As a matter of fact, Amazon.com recently posted a statement on many of their items indicating that because of inclement weather, many scheduled deliveries were delayed.

The kitchen and bath industry differs vastly from Amazon.com. Customers, including individuals, general contractors or large construction companies, are always concerned about delivery dates and deadlines. Quite often cabinets are ordered with a specific delivery date that will allow other trades, such as plumbers and electricians, to complete their tasks before the cabinets are installed. A fair amount of litigation in the industry stems from manufacturing and delivery delays. So how can you protect your company from such liability? The answer is to use the "Force" in all of your agreements. This is not the mystical "Force" of Star Wars but rather the force majeure clause.

USING THE FORCE

Force majeure is a French word that literally means "superior or greater force." The force majeure clause serves to excuse a party from liability if some unforeseen event beyond the control of that party prevents it from performing its obligations under the contract. In other words, a force majeure clause provides a means by which the parties may anticipate in advance a condition that will make performance impracticable. Such clause conditions a party’s duty to perform upon the non-occurrence of some event beyond its control and serious enough to interfere materially with performance.

Typically, force majeure clauses cover natural disasters or other "Acts of God," war, or the failure of third parties, such as suppliers and subcontractors, to perform their obligations to the contracting party. It is important to remember that force majeure clauses are intended to excuse a party only if the failure to perform could not be avoided by the exercise of due care by that party.

BE SPECIFIC

When creating your force majeure clause, it is beneficial if the clause sets forth some specific examples of acts that will excuse performance under the clause, such as wars, natural disasters, inclement weather and other major events that are clearly outside a party's control. Inclusion of examples will help to make clear the parties' intent that such clauses are not intended to apply to excuse failures to perform for reasons within the control of the parties.

A typical example of a force majeure clause is as follows:

"Neither party shall be liable in damages or have the right to terminate this Agreement for any reasonable delay or default in performing hereunder if such delay or default is caused by conditions beyond its control including, but not limited to Acts of God, Government restrictions (including the denial or cancellation of any export or other necessary license), wars, insurrections and/or any other cause beyond the reasonable control of the party whose performance is affected."

Yet another example is:

"Delivery dates, when given, are approximate. Seller shall not be liable for any reasonable delaying performance or failure to perform which is attributable to any cause beyond its immediate control, including, but not limited to, Acts of God, fire or other catastrophes, strikes, pickets, civil or military authority, fabrications delays, inability to obtain materials, transportation delays or other causes beyond its control."

In general, courts will enforce properly constructed force majeure clauses. When analyzing the enforceability of a force majeure clause, the courts will consider the contractual terms, the surrounding circumstances and the purpose of the contract. Notwithstanding the foregoing, the ultimate key to the enforceability of a force majeure clause is that the supervening event which prevents performance under the contract must be beyond the control of the seller.

Using a force majeure clause in your contracts may help your company avoid liability the next time Mother Nature decides to muddle up your manufacturing or delivery schedules. While it is recommended that you seek the advice of an attorney in preparing your contracts, the sample clauses above can be incorporated into your company’s contracts.

—Peter J. Lamont, Esq., is a commercial litigation attorney with offices in Hawthorne, NJ, as well as Massapequa, NY. His practice focuses on the representation of small- to large-size companies in the building and design industry, as well as individual designers and architects. To contact him with questions and suggestions on topics for future articles, please email him at plamont@peterlamontesq.com or call him at (973) 949-3770.

A Good Start

Eight resolutions for a new and more profitable year

By Peter J. Lamont, Esq.

January 20, 2010

Amazingly, another year has flown by and, for many in the kitchen and bath industry, not a moment too soon. Last year was a very difficult year for many kitchen and bath companies, both large and small. Because of the horrific economy, fewer consumers were willing to put their cash into kitchen and bath renovation projects. On a larger scale, many construction projects lost their financial backing, leaving cabinet companies with hundreds of thousands of dollars in uncollectable receivables.

The good news is that things are looking up for 2010. Many economists are predicting that the economy will continue to pick up while more and more consumers will complete old renovations or begin new home improvement projects. Now is the time to re-evaluate your company's business plan and corporate procedures and to create focused News Year's resolutions, or better yet, goals to set your company up for a profitable and litigation-free year. The following are some suggested resolutions to get you started.


RESOLUTION 1: Review what worked for your company last year.
If your company is still conducting business, you must have done some things right. Perhaps you employed a new marketing or sales strategy that ended up being successful. Just because a new year is upon us does not mean that you should abandon all of last year's practices. You should only abandon those that did not work. You must be willing to spend the necessary time to analyze what you did right last year and work those practices into your new resolutions and goals.


RESOLUTION 2: Create manageable and attainable goals and be willing to adapt to market trends.
One of the biggest mistakes businesses make when setting goals is failing to set small, manageable and attainable goals. While the ultimate goal may be for your company to net $400,000 this year, you need to have daily, weekly and monthly goals to keep you on track. For example, in striving to reach your $400,000 goal, you should set monthly sales goals and review your sales procedures regularly. You must also be willing to acknowledge those strategies that are not working and be flexible enough to change them to meet customers' current needs and desires.


RESOLUTION 3: Revise contracts and sales agreements.
The beginning of the new year is the perfect time to revisit current sales contracts, vendor contracts and employment agreements. One of the biggest mistakes businesses make is that they hire an attorney to create form contracts and agreements when they start up their business, yet fail to update and revise them. This can be problematic because consumer protection and employment laws are constantly changing. Make sure that your contracts are up to date, comply with current laws and serve and protect your interests.


RESOLUTION 4: Review your business structure and compliance with state laws.
Make sure that your business is properly registered with state and local government agencies, many of which may require annual filings. For example, consumer protection laws are constantly changing and may require kitchen and bath companies to obtain new certifications and licenses. Make sure also to prepare and submit your annual filings in a timely manner. Far too many companies fail to keep up with their governmental filings, which can result in heavy fines.


RESOLUTION 5: Reconnect with old leads.
Most kitchen and bath companies keep contact information for customers who may have expressed an interest in their products but did not end up making a purchase. January is the perfect time to go through that information and make cold calls to those potential customers and invite them to come back to the showroom to see new products or explore new designs. You will be surprised at how many may still have an interest in your products and services.


RESOLUTION 6: Meet new successful entrepreneurs for business, mentoring and networking purposes.
Join a business-networking group, find or become a mentor, join the Chamber of Commerce or utilize online business networking services such as Linkedin.com.


RESOLUTION 7: Make business planning and lead development a daily task.
Make a monthly calendar containing daily business and lead development projects. For example, dedicate 30 minutes on Monday to reviewing customers who expressed interest in your products but never made a purchase. On Tuesday, call 10 of those potential customers. On Wednesday, search NKBA events and training seminars. On Thursday, run an advertisement in a local paper, and so on. If you plan out a month at a time and dedicate small amounts of daily time to business and lead development, your business will grow and so will your revenue.


RESOLUTION 8: Seek legal counsel when necessary.
Far too many people shy away from lawyers because they fear high hourly rates. While some law firms do charge exorbitant rates, you will be surprised to find that far more attorneys are easily affordable and are willing to work with clients to make their services affordable. Lawyers can provide a number of important services that can save your company time and money. For example, lawyers can: prepare contracts and agreements and negotiate on your company's behalf; ensure compliance with local and state laws; handle lawsuits and other claims; provide business guidance; set up employment policies and much more.

Take the time now to create you company's own resolutions and goals and stick to them throughout the year. Remember, sow now, reap later.

—Peter J. Lamont, Esq., is a commercial litigation attorney with offices in Hawthorne, NJ, as well as Massapequa, NY. His practice focuses on the representation of small- to large-size companies in the building and design industry, as well as individual designers and architects. To contact him with questions and suggestions on topics for future articles, please email him at plamont@peterlamontesq.com or call him at (973) 949-3770.

Getting Paid

Are conditional payment clauses enforceable?

By Peter J. Lamont, Esq.

November 16, 2009

Nothing can be more exciting or rewarding for a cabinet company than being hired as a subcontractor on a multi-unit project. Generally, multi-unit projects can generate a substantial amount of revenue for cabinet companies. However, all things considered, being hired as a subcontractor on a multi-unit job is not much different from being hired by a general contractor on a single residential house. As a company, you must assist the decision maker with choosing the appropriate cabinets, then place the order, deliver the cabinets and, more often than not, install the completed cabinets in the units. Most companies believe that the hardest part of being a subcontractor on a multi-unit project is coordinating with the general contractor and the other trades, such as plumbers and electricians. Actually, the hardest part, especially in today's economic situation, is ensuring that your company gets paid for your work.

Why are so many subcontractors not getting paid for their work? The answer is simple: They entered into a contract with the general contractor that contained a conditional payment clause. Although historically general contractors assumed the risk of an owner's non-payment, many subcontracts now include conditional payment clauses that attempt to insulate the general contractor from having to pay its subcontractors if the owner fails to pay him. Look at almost any subcontract and you will find a "paid-when-paid" or "pay-if-paid" clause.

Often when a smaller cabinet subcontractor attempts to get paid and the general contractor refuses to pay, they cite the conditional payment clause in the contract. Believe it or not, many subcontractors then adopt the general contractor's position and fail to obtain legal advice to determine if the clause if actually enforceable. When considering entering into a subcontract, you should understand what type of clause it contains so that you can make an informed decision as to whether or not to sign it. It is always recommended to have your attorney review all prospective contracts before signing. The following is a brief explanation of the differences between the two clauses.


PAYMENT CLAUSES

In general, "paid-when-paid" clauses typically mean that the general contractor has to pay the subcontractor when they receive payment from the owner. These clauses do not insulate a general contractor from their obligation to pay their subcontractor even when they have received no payment from the owner. An example of such a clause is as follows:

"All progress payments of the Subcontract Sum shall be made within 10 days after payment is received by the General Contractor from the Owner."

Pursuant to this clause, the general contractor is required to pay a subcontractor within 10 days after payment is received from the owner. These clauses are generally interpreted as permitting a delay in payment by a general contractor for a reasonable period of time. Generally, "paid-when-paid" clauses leave the risk of the owner's nonpayment with the general contractor, meaning that even if the general contractor does not get paid, he still must pay your company.

Conversely, "pay-IF-paid" clauses can be determined to be conditional clauses that provide absolutes, which shift the risk of nonpayment to the subcontractor. This type of clause seeks to avoid payment altogether. Quite often, general contractors use the two clauses interchangeably and interpret both to be a means of avoiding payment.

However, recent court decisions have shed light on the enforceability of the clauses. In considering the enforceability of "paid-when-paid" clauses, various district courts throughout the country have held that "paid-when-paid" clauses do not allow contractors to avoid payment to subcontractors simply because the owner does not pay them. The general rule is that while a "paid-when-paid" clause allows the contractor to delay payment for a reasonable amount of time, the risk of an insolvent owner is still borne by the general contractor.

"Paid-if-paid" clauses are slightly more complicated. These clauses must be examined beyond the use of the word "if", and interpreted as a whole. In other words, by simply using "if" instead of "when", a contractor is not necessary relieved of his obligations to pay a subcontractor. The following is an example of a "paid-if-paid" clause.

"Subcontractor agrees that it is never entitled to receive payment from Contractor unless and until funds are in hand received by the Contractor in full. This is a condition precedent to any obligation of the Contractor."


STATE DIFFERENCES

Many state courts, including New York, have held that "pay-if-paid" clauses violate both state lien law and public policy. In particular, in order for a subcontractor to be able to file a lien many states require that an amount be "due and owing." Under a "pay-if-paid" clause, the money is not "due and owing" until the general contractor receives payment from the owner. The clause essentially acts as an illegal lien waiver and is thus, unenforceable.

However, in many other states such as New Jersey, courts have held that so long as the "paid-if-paid" clause is explicit in its terms, such as in the example above, it will not violate anti-waiver provisions of liens laws.

The bottom line is that cabinet subcontractors must become familiar with their payment rights under their subcontracts. There are no guarantees when it comes to conditional payment clauses and their enforceability will depend upon the language use in the clause as well as your state's law. As always, it is highly recommended that you have any attorney review all subcontracts before signing on the dotted line.


—Peter J. Lamont, Esq., is a commercial litigation attorney with offices in Hawthorne, NJ, as well as Massapequa, NY. His practice focuses on the representation of small- to large-size companies in the building and design industry, as well as individual designers and architects. To contact him with questions and suggestions on topics for future articles, please email him at plamont@peterlamontesq.com or call him at (973) 949-3770.

PROTECTING YOUR COMPANY AGAINST DAMAGING ADMISSIONS

     “The customer is always right.” From the dawn of time those five words have been the mantra of all salespeople. As salespeople nothing is more important than keeping customers happy. For example, how many times have you had to agree with a disgruntled customer that the finish on the cabinets he received is not the finish that he ordered? Frequently, when confronted by an angry customer salespeople say things such as, “I am terribly sorry – my mistake” or “Don’t worry, I will fix this mistake”, even though they believe that the customer is mistaken. Other times it seems more appropriate to blame another employee, not because you really believe that he or she made a mistake, but simply to deflect the customer’s anger away from you. In those situations a salesperson may say something like, “I am sorry that the measurements of your cabinet are off. I apologize for our designer Jimmy. He can’t add without using his fingers and toes.” Generally, these tactics appease the customer. However, as consumers become savvier concerning their legal rights, salespeople are finding themselves in the middle of courtroom dramas where they must attempt to dance around their prior apology to the customer. Often times, at the conclusion of the trial the apologetic salesperson is told by his company, “We’re sorry, you’re fired.”

     To a shrewd consumer and her lawyer, “I’m sorry” and similar appeasements amount to damaging admissions of liability. For example, in a recent jury trial, the plaintiff homeowner sued his cabinet company because his kitchen island was three inches too short. The cabinet company contended that it ordered the size that the customer had requested and relied upon the design plans to support its position. However, the designer had failed to obtain the customer’s signature on the design plans. Additionally, when the customer complained to the showroom manger she decided that although she believed that the designer had done nothing wrong, she would blame him to deflect the customer’s anger away from her so that she could negotiate a solution. Thus, she told the customer, “I know how you feel. This has happened before. Our designer just can’t seem to get it right. Believe me, I will not tolerate this any longer with him. Today will be his last day.” The manger convinced the customer to pay full price for another island. The customer seemed satisfied and of course, the designer was not fired. A few weeks later, the customer sued. At trial, the plaintiff’s attorney asked the showroom manager if she had made those statements. She confirmed that she had made them. As she tried to explain that she did mean what she said, the attorney simply said “no further questions.” The jury found in favor of the plaintiff. After the trial, jurors were questioned by the defense concerning what made them find for the plaintiff. All of the jurors polled said the deciding factor was the manger’s “confession” concerning the designer’s ineptitude.

     The lesson to learn is that while it seems natural to try to appease a customer with apologies and excuses even though you do not believe that your company was at fault, it is dangerous and may result in your statement morphing into a damaging admission. So does this mean you can never apologize to a customer? Obviously, the answer is “no.” There will be times when an apology is appropriate. For example, an apology is acceptable when your notes show that the customer ordered a glass backsplash, but you inadvertently ordered tile. In this situation you know that you actually made a mistake and thus, an apology is acceptable. The key is to only offer an apology when you know that you made a mistake. Do not apologize just to appease a customer especially when you do not believe that you did anything wrong.

     As salespeople or management you must be cognizant of the following rules and issues concerning apologies to customers. 1.) Chose your words carefully, when dealing with upset or disappointed customers; 2.) Remember that even the friendliest customer can turn against you; 3.) Know that anything you say will be used against you at trial; and 4.) Never ever criticize management or co-workers.

Certainly, you can attempt to resolve the costumer’s issue without offering an apology. A far better response than “I’m sorry” is “Let’s agree to disagree. However, I want to make you happy so let’s see what we can do.” Nothing is more damaging to a lawsuit than an adverse statement made by a defendant. These “party admissions” are almost always admissible as evidence against the declarant or his company at trial. Fight off the urge to apologize to an angry customer when your company did nothing wrong, even if it means losing that customer.