It was a weekend all concerned with the Rise of Gru. I adore Gru to the point that when my kids ask me for money, my Gru-like voice will belt into the back of my head: ” Now, I know there have been some rumors going around that the bank is no longer funding us…In terms of money, we have no money.”And that’s exactly what a lot of lenders tell troubled projects after the project owner is unable to make the final payment, and the contractor is forced to turn to the bank for funds: “We have no money for you contractor!”
The case is BCD Associates., LLC In BCD Associates., LLC. Crown Bank, CA No. N15c-11-062 (Super. Ct. Del, May 2, 2022) The trial court ruled that when a lender pays an individual contractor, the bank can establish a legally binding contract according to the conditions of the construction loan agreements that it has with the owner.
The project was a $13 million Construction loan made between the owner and the lender to remodel the hotel. The contractor and owner signed an AIA Contract for project management. During construction, the contractor would submit a payment application at the request of the lending institution, which reads and accepts the invoices for payment. The lender would then pay 90 percent of an accepted payment request and reserve the remainder as a retainage. The contractor was expected to receive the final retainage after its completion, which was not received as per the provisions that were in the AIA Contract.
While the contractor asserted numerous claims against the lender–including breach of contract, unjust enrichment, promissory estoppel, and misrepresentation–ultimately, the Court found that the lender breached contractual obligations owed to the contractor. By applying New Jersey law, the Court ruled:
The documents that govern comprise. The documents that rule are the Loan Commitment as well as the Loan Agreement. The Court acknowledges that the [contractor] isn’t a participant in the agreements. Additionally, the Court recognizes that the Loan Agreement specifically provides that there are no third-party beneficiaries of this Loan Agreement. However, contractually, factually, and in practice, the [contractor] is the third-party beneficiary under the Loan Commitment as well as the third-party beneficiary to the Loan Agreement. Furthermore, both [lender] and [owner] were treated by [contractor] as an uninvolved beneficiary under the relevant agreements.
The Court determined the lender needed to decide to “cut out the middle man” by paying the contractor in full and at all times. The Court also determined that there was sufficient evidence to rule on the contractor’s side regarding its unfair enrichment claims and promissory estoppel claims; however, it was unable to pursue a claim for misrepresentation.
Leçons to be learned. For contractors, the decision made by BCD Associates is an excellent reminder to search beyond the owner’s source of financing. If the bank for the project claims there are no funds available, the bank could still be in the middle for explicit payments directly to the contractor throughout the project. For both lenders and owners, be conscious that the actions you take could result in third-party beneficiaries despite the clearly stated language in loan documents that say otherwise.
So, how can a builder get out of the trap set by Damico’s Court In Damico? It is possible to work around this that the homebuilder adds to every subcontract an arbitration clause that allows the homebuyer to seek arbitration with a subcontractor, as well as to join in an arbitration with the builder. Another possibility is to follow the well-known legal rule known as KISS (Keep It Simple Stupid.) The authors of arbitration clauses might wish for the agreement to remain simple, for instance, in addition to the essential language required to make sure that arbitration is appropriate to any dispute and allow an arbitration agreement’s rules from a nationwide arbitration organization to apply and make sure not to include any procedural obstacles which a court might consider as unfair in any way to the customer. Also, be certain that an arbitrator, and not the Court, decides the validity of a clause or not.
There are more lessons to learn from Damico as well, and homebuilders will definitely confront a new wave of criticisms against their contracts once attorneys and courts begin applying the ruling not only to the homebuilder sector but also to consumer transactions as a whole.