Recently, we have noticed an increase in the number of construction contracts that either identify (1) an incorrect entity or (2) a non-existent entity as a party to the contract. No big deal, right…..maybe not.
It should be easy enough for the persons signing the contract to confirm their respective names. It is not as easy for a downstream contractor or material supplier to confirm the correct legal name of upstream contractors or the owner.
Here are a few real life examples of the potential pitfalls you may find if your contract incorrectly identifies either a signatory or a key third party (typically the Owner):
Example 1: Commercial subcontracts commonly require the general contractor and owner be named as additional insured on the subcontractor’s commercial general liability insurance. If the subcontract does not accurately identify the owner, it could be problematic if and when a claim is made on the policy.
Example 2: If the contract and/or subcontract incorrectly identify the Owner, a potential lien holder may have a hard time properly notifying the Owner as required under the private works act.
Example 3: Enforcement of dispute resolution agreements may also be affected if the identity of parties is unclear. Assume the following facts:
1. “Commercial Developer Baton Rouge, LLC” is incorrectly identified on the contract as “CDBR;”
2. The contract contains standard AIA mandatory arbitration provisions; and
3. The contractor incurs substantial delay damages all caused by the Owner.
It can be a costly uphill battle to proceed against a non-existent entity in arbitration. The authority of the arbitrator is jurisdictionally limited to the agreement of the parties, so if the identity in the contract is incorrect, is there an agreement with the missing entity to arbitrate? If there is, will a judge confirm a default arbitration award against an entity whose legal name does not even appear in the underlying contract?
Example 4: A subcontract incorrectly identifies the legal name of one of the parties? If the name identified in the contract is not the name in which the license is held, the Louisiana Licensing Board for Contractors can and has taken the position that it is a violation of the licensing laws and subjects both parties to the contract to administrative penalties, ranging from fines, license probation, license suspensions, or even an order to cease and desist work on the project. In our situation, the contractor’s name was similar to GC of Louisiana, LLC, but the subcontract GC, LLC (omitting the “of Louisiana”). The Licensing Board sent violation notices to both GC of Louisiana, LLC and the subcontractor.
Here is the point: We understand contractors and subcontractors are reluctant to press owners for technicalities such as the legal name, but the importance of minding the details in the beginning should not be undervalued.