Construction Law Monitor : Construction Lawyer & Attorney : Wolfe Law Group : New Orleans & Seattle Law Firm : Construction Law Monitor Blog

Here’s the situation: During construction, the rise in material costs have impacted your ability to complete the project as originally bid.

Who is responsible for the change in material costs? The contractor or the owner?

Material Prices Are Going Up, Up, Up

While the economy has struggled for two years, material costs have remained quite steady in recent times. In fact, Ken Simonson, chief economist for the Associated General Contractors of America, documents a 2.3% decrease in material costs in the first 9 months of 2009.

Simonson speculates, however, that this drop in prices in materials is bittersweet. Between the months of October and November 2009, material prices rose 0.6%, and Simonson writes that the construction industry should treat this rise as a “warning call.”

Simonson is not alone.

The San Francisco Business Times reports that "Material costs continue to squeeze contractors."   Likewise, New Jersey Biz writes that "Spiking materials costs may puncture project prices."

Prices Increases Creates Danger Zone for Contractors

The current economy presents a dangerous situation for contractors. On the one hand, material costs are on the rise. On the other hand, the lack of construction work makes the bidding process more competitive than ever.

So, how does a general contractor keep its bid low enough to win, without risking that price increases will render the job unprofitable?

This really boils down to the question of who is responsible for increases in material costs. If the owner, the project bid can be as competitive as possible given the current material costs. If the contractor, the project bid must take price increase into account.

Escalation Clauses In Contract

Here is the good news for contractors: there are ways you can protect yourself from being held responsible material price increases.

How? Well, your contract of course.

As every contractor and developer should know, the contract is the law between the parties.  An "Escalation Clause" in your agreement will shift the burden of material price increases from the contractor to the property owner, or another party.

ConstructionExec.com has a great overview article on escalation clauses:   Price Adjustment Clauses:  A Solution for Dealing with Changing Material Costs.  Or check out this equally good discussion at ModernContractorSolutions.com:  Material Price Escalation Clauses:  A Modest Proposal.

Essentially, if a contractor agrees to construct something for a lump sum price, the contractor typically assumes the risk of material costs increases.    An escalation clause shifts this risk to the other contracting party.  

Here is what it may look like:

The Contract Price is based upon construction material prices as of the execution of this Agreement.   Any significant price increases in lumber, drywall, _______________, and/or other construction material that occurs during the period of time between contract execution and substantial completion of the Project, shall cause the contract price to be equitably adjusted by an amount reasonably necessary to cover any increase.    As used herein, a significant price increase shall mean any increase in price exceed ____ percent (____%) experienced by the contractor from the date of signing.

Certainly, a contractor is motivated to have this type of provision in its contract...but why would the Owner agree?  One reason an Owner may be interested in an escalation clause is that it would increase the Owner's bidding pool and make contractors more comfortable to lower their bid amounts.

Responsibility for Price Increases When There Isn't An Escalation Clause

So, price increases have affected your project's bottom line and the contract doesn't have an escalation clause....now what?

If you're working under a lump sum contract, you likely have an uphill legal battle to get compensated for the unexpected price increases.   While not the case law everywhere, most U.S. courts will take the approached expressed by the landmark Louisiana decision in Standard Oil Co. v. Fontenot, 198 La. 644 (1941), where the Louisiana Supreme Court stated that in a lump sum contract "It is possible that the anticipated and expected profit may turn into a loss because of a low bid or advances in the prices of materials or the cost of labor."

So, how can you challenge this general principal?   Here are a few possibilities:

• Mistake:   The contractor must argue that its bid contained certain mistakes relating to the material prices....and that the mistake was both the contractors and the other party's.   This is a very tall order.

• Impossibility / Impracticability:   These are legal theories that a party cannot be required to perform on a contract if it is impossible or impractical.  While the contractor may feel like performance of a contract is impossible or impractical if material prices rise too much, courts will not likely share the feeling.   Material and labor price increases are not a secret, and therefore, it will be difficult to show that the increases were not foreseeable when agreeing to the lump sum.

• Force Majeure:  If prices increase significantly because of some act of God (i.e. New Orleanians can think of Hurricane Katrina's effect on material costs), the the contractor may be on to something.   Most construction contracts have a Force Majeure clause, and the contractor could potentially rely on this clause to escalate the contract price in the event an act of God effected material costs.
   

• Email This
• Print
• Comments
• Trackbacks

Every construction project starts with good intentions and a shared goal:  successfully deliver the project to the owner on time and on budget.   Of course, that's much easier said than done.

A few groups collaborated to publish some guidelines on how to make this happen.  

The Associated General Contractors of America (AGC), the American Subcontractors Association (ASA) and the Associated Specialty Contractors (ASC) published the updated guidelines at http://www.constructionguidelines.org.   Or you can download the PDF directly here.

Contractors of all sizes can benefit from having these guidelines desk side.  Keep them handy, and pick them up whenever you have a question or concern about a certain phase of work.   While it may not answer your problem directly, it may get you thinking in the right direction.

• Email This
• Print
• Comments
• Trackbacks

Happy New Year.  

Did you make it through 2009 alive?  It certainly was a tough year.  Perhaps your legal bills were more than ever before, or maybe you got by without spending much or anything at all on counsel.   In either case, let's make a resolution to avoid expensive legal bills in 2010.  

How do you do it?

Ask an attorney how to avoid legal messes and expensive litigation, and they'll likely start discussing legal precedent, contractual provisions and other technicalities.   Sure, all of that stuff is important when you're knee deep in litigation.  By that point, however, you'll already have an attorney to handle those issues.

What about before you're knee deep in litigation; how do you avoid legal messes?  

The most valuable piece of advice I give clients who ask me how to avoid legal fights and messes is to be organized. 

Organization is your best friend when entering a litigation scenario.   It proves your case when you're right, and it paints a clear picture of your risk and exposure when your wrong or possibly wrong.   And insofar as your contractual and legal duties are concerned, if you're organized and know what they are, you'll have a much better chance of fulfilling them.

Now, you're quite lucky that it's now 2010.   That's because the World Wide Web has been improving for over 20 years now, and it's got a million ways to help you organize your construction business (large or small) in the new year.    

Here are a few of our favorite web applications out there that can help you stay organized, and avoid legal bills and messes.

Keep Your Files Organized

Construction projects can have tons of paper exchanged.   Contract documents, job specs, change orders, correspondence...the list can go on.   And, to top it off, all these documents are being exchanged between you and your employees, and your subcontractors, suppliers, their subs and suppliers, the property owner...the list can go on.

How do you manage all that collaboration, and all that paper?

SugarSync:  This works with PCs, Macs, on iPhones and Blackberrys, on just about anything else...and it's easy as pie.   Add a file to a folder on your computer, and it instantly gets added to that folder on everyone else's computers.  You can share files or folders with other companies, allowing them to just see the docs or edit / trash it.

The possibilities are endless, and the cost is low.  This program can single-handely change the way you exchange documents on your construction project.

Box.Net:  Like Sugar Sync, this is another document management system to help you organize documents to a construction project and collaborate with others on the documents.  Insofar as features and collaboration are concerned, Box.net gets the edge.  You can sign documents electronically, send documents via fax, edit docs, send docs via postal mail, and more...all within the box.net interface.   Box.net is entirely web-based, however, meaning you can't just drag and drop a file into a folder on your PC and let it do its magic.  On the ease of use, SugarSync gets the edge.

Notice and Lien Deadline Management

It doesn't matter if you just work in one state, or if you work in every state.  Notice and lien requirements are confusing, and the effort required to comply with these requirements can feel constant.   How do you keep up?

ExpressLien:  Enter Express Lien.   This company provides two different sets of services. 

First, it helps you manage your lien and notice requirements and deadlines.   You put in your project data, and it calculates your requirements and deadlines and displays it to you all on an easy to read online interface.    How much?  It's free.

Second, if you want, you can order your notice and lien documents directly through Express Lien.   They will take your project data, create the documents, file/send them, and keep track of all the delivery and filing data in your online profile.   Document filing is done for a low flat fee.

• Email This
• Print
• Comments (1)
• Trackbacks

What is contingency fee?

Here is the definition:

A method of paying a lawyer for legal representation by which, instead of an hourly or per job fee, the lawyer receives a percentage of the money her client obtains after settling or winning a case.  Often contingency fee agreements award the successful lawyer between 20% and 50% of the amount recovered [read definition on wikipedia].

In plain english, you attorney works on a "contingent" basis, meaning the attorney's payment is dependent on the outcome of the case.  If you recover money, the attorney gets a percentage of the recovery.  If nothing is recovered, you pay nothing in fees.

What's Good About Contingency Fees?

For the client, contingency fees have many positives.

The cash-flow impact of litigation is substantially lower, you gain leverage over the other party who needs cash flow to fund the case, and a portion of the case’s risk is transferred and borne by your attorney.

The only “negative” of a contingency fee is that the fee can be substantial. When a recovery is made, the attorney fee is usually between 30-45% of the amount recovered. But, as we’re about to explain, this really isn’t as bad as it sounds.

100% of Nothing is Nothing

For the client, contingency fees have many positives.

The cash-flow impact of litigation is substantially lower, you gain leverage over the other party who needs cash flow to fund the case, and a portion of the case’s risk is transferred and borne by your attorney.

The only “negative” of a contingency fee is that the fee can be substantial. When a recovery is made, the attorney fee is usually between 30-45% of the amount recovered. But, as we’re about to explain, this really isn’t as bad as it sounds.

WLG Loves Contingency Fees

We love representing clients on a contingent fee basis for one very important reason: We can more zealously represent our clients.

When clients are billed for fees, it’s inevitable that bills will be challenged and cash crunches will arise. This effects how our firm can represent a client.

If $10,000 in discovery motions are needed, for example, but the client can’t afford it, the client’s claim is weakened.

Contingency fees result in more aggressive litigation…which results in higher settlements and more successful trials.

This blog post was originally posted on our Wolfe Law Rocks blog, and can be read here.

• Email This
• Print
• Comments
• Trackbacks

Wolfe Law Group's blog, Construction Law Monitor provides clients, colleagues and those interested in learning more about the legal and/or construction industries access to well written, informative and up-to-date blog posts.

Annually, the American Bar Association (ABA) publishes a list of 100 best legal blogs.  If you would like to nominate Construction Law Monitor for one of the best legal blogs, please CLICK HERE.

The deadline for submitting your nomination is Friday, October 2, 2009.

We would like to thank you in advance for not only nominating Construction Law Monitor as one of the 100 best legal blogs, but for reading our blog and being interested in the topics we discuss.

 

 

• Email This
• Print
• Comments
• Trackbacks

As Chris Rock stated in his 2008 tour "Kill the Messenger,"  "yeah, I said it." 

Times are tough, and it's important for your company to make smart economic decisions. Legal costs are clearly an area where businesses would like to scale back. 

A legal budget is not like a marketing budget, where a business hopes to get a ROI.   In fact, the terms "legal expense" and "ROI" are rarely uttered together, and for good reason.   Legal expenses are usually a business' "necessary evil."

So in these tough economic times, what can those in the construction industry do to lower legal expenses?   A few solid ideas were published in the Portland Business Journal last week, among them:

• Handling more legal-related activities internally, rather than farming work out to law firms.
   
• Negotiating more cost-effective compensation structures with outside counsel, including contingency and incentive arrangements.
   
• Pursuing less risky and costly means of dispute resolution, such as arbitration and mediation, rather than litigation.

How Do These Apply to Construction Businesses?
When published in the Portland Business Journal last week, these ideas were intended to speak to businesses in general.   But how can these ideas be specifically used by a construction outfit?

It's a cinch.

Get educated about collection practices, and bring your collections department in-house.    Incorporate arbitration and mediation provisions into your contracts, or agree to arbitrate or mediate existing disputes with your adversaries.   Contact your attorney and request alternative billing arrangements, including contingency and mixed-fee agreements.

You can even hire a consultant to help lower your attorneys fees.

In the end, there are proactive and reactive measures that can be taken to lower your attorneys fees, and even avoid the need for an attorney on many matters.  

• Email This
• Print
• Comments
• Trackbacks

 The Seattle Times reported in its Sunday edition that four South King County areas - Auburn, Kent, Renton and Tukwila - are at a high risk for flooding this upcoming fall and winter because of January damage to a flood-control dam on the Green River.

Unfortunately, the Army Corps of Engineers and other authorities concede that there's very little they can do to mitigate the risk, advising residents of these areas to buy flood insurance and be prepared for evacuations.

Having offices in New Orleans, LA, and experiencing the devastation of Hurricane Katrina, Wolfe Law Group brings a unique perspective to the issue.   

Here are some legal considerations:

• Flood Insurance.   The authorities recommend getting it, and there really isn't a reason to procrastinate.  Compared to other insurance products, flood insurance is fairly inexpensive, and in the event of a flood-loss, it will be very necessary.   Your other insurance policies will very likely exclude flood damage, and flood damage - unlike earthquake or wind damage - usually completely ruins everything in its path.
   
• After a flood loss, document your damages and be very through in your insurance claim.   Take pictures and inventories of everything, and offer your insurance adjuster the chance to see the damages first hand.
   
• Contractors:  flooded areas bring a large amount of contracting work.   Be careful of getting ahead of your company financially, however.  While work may be in abundance, the money to pay for that work could get tied up in insurance disputes or just the lenghly claim process.   Be careful about doing too much work without payment.
   
• Property Owners:  Be very aware of post-disaster fraud.  

 

• Email This
• Print
• Comments
• Trackbacks

Yesterday, we wrote an article on the Stimulus Package and what it may mean to the construction industry.   Today, we're focusing on what it may mean to your specific construction business.

While the private contracting business has suffered setbacks in the current economy, one bright spot has remained:  the growth of public and federal construction spending.

The passing of the new stimulus build with large investments into America's infrastructure and other public works promises to put even more money into the public contracting business.  

ConstructionBusinessOwner.com published two very informative articles about how your business can take advantage of the increased public spending. 

The Differences Between Public and Private Projects
The first article, titled Three Key Steps for Shifting To Public Works Projects, explains some the key differences between private works and public works, and identifies common mistakes made by companies when entering the public sector.

The article encourages companies to consider bidding for and taking on more public work, but warns against doing so without proper preparations.  Here is a revealing quote:

Making the shift to prevailing wage jobs takes preparation. Without proper planning, contractors run the risk of underbidding jobs-and, subsequently, losing money-or getting slapped with steep penalties for improper recording keeping. Establishing protocols for certified payroll and AIA progress billings and having solid audit trails for each transaction are vital if you want to succeed in the government-financed construction market.

So what are the 3 Key Steps to shifting from private to public work?

• Get Educated
• Automate Your Accounting Practices
• Bid on Projects Based on your Strengths

How To Get Federal Work
The second article, Claim Your Share Of Rising Federal Construction Spending, was published immediately after passage of the new stimulus package, and really explains how businesses - and especially small businesses - can intervene in the federal works bidding process and claim some work.

In its discussion of why small or minority owned businesses have a dog in the federal contracting fight, the article states as follows:

Unfortunately, far too few small businesses take advantage of federal contract opportunities, even though the federal government is required by Congressional mandate to direct 23 percent of its contracts toward small businesses. Despite this mandate, the latest figures from the Small Business Administration indicate that the federal government fell short of this figure.

Although there are various factors behind this shortfall, two things are pretty clear. First, if more small businesses were competing for these contracts, more would win them. And second, small business owners who are savvy about the process of securing government contracts are the ones most likely to land them.

Summary of the article's tips for preparing to bid on federal projects:

• The government will want basic information and methods of Identification.   Get a DUNS number (free from Dun & Bradstreet), a Federal Tax ID number (EIN), understand your NAICS and SIC classification, and have accurate financial routing information for your business available.
   
• Create a profile on the Central Contractor Registration database. The CCR is where all government agencies and prime contractors turn when they are looking for potential vendors.
   
• The federal government is obligated to award a certain percentage of its contracts to various underrepresented and disadvantaged groups. If you think your business may qualify, you should register with the U.S. Small Business Administration (SBA), whose Small Disadvantaged Business (SDB) and 8(a) programs are designed to help specific groups secure federal contracts and subcontracts.
   
• Consider Subcontract work.  Getting your foot in the door is sometimes the hardest part in landing government contracts. First-time bidders can be at a disadvantage because the government often relies on established relationships when selecting contractors. Fortunately, large construction projects often depend on a host of subcontractors, which could be your ticket in.

See also Industry Week's article, Your Best New Customer May Be Uncle Sam, for other helpful information.

• Email This
• Print
• Comments
• Trackbacks (1)

In the construction industry where litigation is frequent and costly, legal preparations are especially important. And while you can never completely isolate your organization from legal exposure, it will benefit from a conscious effort to place it in the best possible situation in the event of a dispute or injury.

Here are some ways your organization can be legally proactive to avoid costly and unnecessary legal expenses in 2008 and 2009:

1) Have a great written contract. Entering into a construction project of any size without a written contract is a recipe for disaster.

Your organization should have a "form contract" that meets your business' requirements, and addresses certain legal hot topics such as the scope of work, the indemnity requirements, the obligations of each party in the project, dispute resolution mechanics and procedures, etc. Written contracts should be a way of life for your organization, with contracts executed between contractor and owner, contractor and subcontractor, contractor and supplier, owner and architect, etc.

An attorney should be consulted to help make changes and insert provisions as required project-by-project, as each project has different needs. Even AIA or ConsensusDOCS form contracts are frequently edited by the parties to accommodate the needs of a particular project or agreement.

In the event of a dispute, a well-drafted written agreement can save your organizations thousands, and even hundreds of thousands or millions depending on the project's size.

2) Never Sign A Bad Contract. This is particularly a problem with subcontractors who enter into written contracts with subs or GCs who are larger and better funded then themselves. In these situations, it is common for the larger party to present the smaller party with a very one-sided contract.

The larger contractor uses its size and the allure of the project to strong-arm the smaller entity into agreement. Be very weary of this type of practice.

In the event of a dispute under one of these unilateral contracts, your organization can sustain a fatal blow. In our experience, we've unfortunately witnesses companies who have had to file bankruptcy or dissolve themselves not because their work was poor or they were legally wrong, but because they just couldn't afford to fight their position under the contract.

One proactive measure your organization can take to avoid costly litigation is to avoid signing these types of agreements.

While the heavy-handed form contract might seem mandatory, in fact these corporations are usually used to making certain changes to the contract terms. Have an attorney consult with you regarding the consequences of the contract provisions, as well as suggested changes - and propose these changes to the other party.

If you cannot get the contract altered to meet your concerns, you may want to seriously consider whether the project is worth the risk in liability and exposure.

3) Create and Follow In-House Collection Procedures. The importance of your in-house collection procedures will vary depending on the type of construction business you run. Certainly if your organization enters into hundreds or thousands of smaller contracts every year, collection procedures will be very critical to your operation. Conversely, if your organization has just a few big contracts each year, collections are likely more under control.

In any event, your organization should have a clear "plan of attack" in the event of non-payment.

In today's construction market and vulnerable economy, credit applications are often denied and cash flow can be tight. A high accounts receivables number can cause displeasure to your company.

The most effective way to prevent bad collection scenarios is not litigation (which is costly), but consistent collection practices and pre-litigation preparation.

Of course, a non-paying client can warrant litigation - and should, if payment is not tendered after collection procedures are employed. However, by taking in-house or outsourced collection measures prior to litigation your organization can limit the number of lawsuits required, and by preparing for litigation in each non-payment scenario, your organization will decrease the overall amount spent in court.

Collection procedures are most effective when they are structured, consistent, and employed early. By sending prompt demand letters you accomplish two important things: (a) you let the non-paying client know you are serious about collecting the account; and (b) you start the clock to collect attorneys fees, interests, etc. that you may be qualified for under contract or by law.

 

• Email This
• Print
• Comments
• Trackbacks (1)

This begs a very important question for you if you run a construction business: Is your current counsel helping you organization these days, or hurting?

Over the past few weeks, Wolfe Law Group has published articles on its website stressing that the proper and judicious use of competent legal representation can help your business on a number of fronts in tough economic times: collections, risk and liability avoidance, creative contracting, etc.

However, if your firm is worried more about helping its own economically troubled situation, it's not likely they are concerned about the interests of you or the construction industry as a whole.

Wolfe Law Group is fanatically focused on the construction industry and its clients. Read about our firm here - and contact us today to learn how we can be of value to your company.

• Email This
• Print
• Comments
• Trackbacks (1)

Gustav did not have the widespread dramatic effect many had feared but it certainly was not easy on any our wallets. Some large businesses are hit with massive losses in production, utility costs and payroll quandaries. Smaller businesses often are hit the worst due to their general lacking of any retainage of earnings. Regardless of who you are, the immediate impact of the storm likely caused you to think: how do I handle my losses?

Some of the simple solutions just do not seem to make sense. Taking large draws on credit lines, digging deep into equity and racking enormous charges on credit cards only defer the loss and inevitably make it larger down the road.

It seems that someone should assist your business, or at least provide it solid ground to walk, in times of adversity like these. Their simply must be "program" money out there which your elected officials have set aside for disastrous times like these. Well luckily Wolfe Law Group has scoured the internet to find some quick resources that should provide a starting point for you and your company. Here are some resources worth the browse:

Hotel Bills....

CityBusiness magazine is reporting that FEMA will be compensating evacuees for the reasonable costs of hotel bills. The purpose behind the plan is to ensure people's financial safety in hopes of preventing them from returning to New Orleans to soon. You can recover these costs by registering for FEMA assistance at 1 (800) 621-FEMA or www.fema.gov.

Other FEMA assistance.....

FEMA will also be providing additional financial aid for those persons in need of temporary assistance. You may obtain recovery of rent, grants for repairs, and loans for rebuilding or recovering your business. You may read about these services at the FEMA Federal Aid Programs for Louisiana Disaster Recovery.

Parish Organizations....

After Katrina slaughtered area business, many parishes set out to build funding for their neighborhood businesses. One such organization is the St. Tammany Economic Development Foundation, which provides funding upon approval for developing and valuable businesses in the parish. Other parishes have similar programs which can be found through the St. Tammany website.

Business Loans - Low Rates....

The Small Business Administration is providing Economic Injury Disaster Loans and Physical Physical Disaster loans. Each of these programs are geared towards the small businesses that were hit hardest by Gustav. The SBA is generally quick in response to loan applications. Be prepared to be asked to provide documentation of your company's assets and income going back to 2005. However, do not let a lack of documentation stop you for applying for these loans, as it is a quick and simple process online. Please visit the SBA website for more details on how to initiate a claim for assistance. Loans generally carry interest rates at just a fraction of the prime rates that banks charge. Act now before the SBA becomes inundated with claims.

Moratorium on Tax Payments.....

CityBusiness is reporting that the IRS has come forward to tell business owners that deadlines will be extended for qualifying filers. You can check to see if your business qualifies by checking out the website.

Moratorium on Foreclosures....

Banks are being pressured into providing mortgagors with additional time to pay their bills by the US. Department of Housing and Urban Development ("HUD"). In some places, HUD is granting 90 days to consumers to get settled and get up to date on payments. You can see if your home or business property is affected by reviewing Nola.com.

Wolfe Law Group will work to bring you additional assistance as it becomes available. Feel free to leave comments below with additional information that may be helpful for others viewing this site.

• Email This
• Print
• Comments
• Trackbacks

This is part of a three part series about Gustav's legal aftermath, including a discussion on (1) insurance disputes; (2) increased construction demand; and (3) the risk of fraud.

Valuable lessons about post-disaster scams were learned by New Orleans residents post-Katrina. It's with first-hand knowledge and recent memory, therefore, that we echo an alert of the Louisiana Attorney General's office post-Katrina to victims of the Gustav hurricane: Beware of Scams.

If you were affected by the recent storm, it is very important to remain cautious during these trying times. In the aftermath of Hurricane Katrina, thousands of New Orleans' residents were scammed for millions of dollars.

Our New Orleans office has represented many of these individuals in lawsuits against their "contractors." Unfortunately, in nearly every case, the victims of this fraud experienced long delays in repairing their damages, unnecessary legal expenses and serious cash flow concerns as insurance money was spent for construction work not completed. In some cases, even with a judgment, finding and collecting from the illegitimate contractors is trying, slow and expensive.

Why Getting Scammed Can Happen To You and Why You'll Be Faced with Tough Decisions
If the price is too good to be true, it probably is. Victims of disasters are vulnerable to scams because of the attractiveness of low bids and problems with their insurance.

From our experience, the hands-down number 1 reason why some New Orleans residents ended up with an illegitimate contractor, and a bad disaster recovery experience, was because of money. Go figure.

The price quoted by an illegitimate contractor will always be cheaper than the price quoted by a more reputable outfit. After all, without a less expensive bid, it's impossible for a scamming contractor to compete with reputable outfit.

An abnormally low bid, therefore, should be your first red flag that you might be getting scammed. Unfortunately, however, disaster victims are pressured by a number of factors to turn their heads from these "warning signs" and accept the low bidder for their project.

The uninsured or under-insured victim
One reason why low bids might be attractive and tempting to disaster victims is because they could be under-insured or uninsured. In this situation, a nice gentlemen with a low price, who seems to have good intentions, can be convincing.

While financial times might be hard, and the low-bid offer might be tempting, a construction nightmare might be awaiting you if you fail to adequate investigate the contractor and take precautions before hiring.

The insurance problem - Why even those with adequate insurance are vulnerable
Many argue that we have a problem with the insurance industry here in America. Without weighing in on the debate, we will highlight some of the reasons why those with adequate insurance coverage and limits might still find themselves financially pressured to select an abnormally low price:

• Insurance is not immediate. Let's face it, before you get any money from your insurance company, you'll have to make your claim, wait for your adjuster, wait for the adjuster's estimate and then wait for the payment. The entire process can easily take sixty days. Victims find themselves unable to sustain the financial burdens of the wait.
  
  
• The first check from your insurance company is rarely enough. First, in the aftermath of a disaster it is common for construction costs to increase. It is not safe to assume that the insurance company's price lists will increase with the times. Further, many insurance policies will cover you for "Replacement Cost Value," but only pay its insureds the replacement costs after replacement! From our experience, with the inaccurate insurance price list and the payment of only the depreciated value of your losses, your first insurance check might only be 20-40% of your damages! Try paying a contractor $100,000.00 for work performed when you've only received $30,000.00 from insurance.
  

As you can see, the next few months can be very trying to victims of disasters. When a victim has its back against the wall in these financial conundrums, it is difficult for them to even entertain hiring a reputable contractor with its "high" prices. And as a result, unfortunately, illegitimate contractors looking to make a quick dollar have a very large customer base, and a customer base full of victims with broken spirits and few choices.

The sad part, is that these "illegitimate" contractors may not always be con artists or criminals. In some instances, they are even fellow-victims.

With millions or billions of dollars being poured into a disaster area, many consider it a golden opportunity to get into construction and take a share. While these individuals proceed with good intentions, it's their lack of construction knowledge and inexperience that results in the "scam."

For example, an inexperienced and unlicensed contractor with good intentions may have a low bid because they're too inexperienced to properly bid a job. Mid-way through construction they're asking to double the cost, or they're abandoning the project amid embarrassment and cash flow problems.

If you're a victim of a disaster, times will be tough, and you'll be faced with difficult decisions in your quest to rebuild your home, business and/or life. Unfortunately, because of scams and bad situations, its important to move forward with caution.

How to Avoid Scams and Bad Construction Experiences
Your Top 10 Red Flags

From our experience in the construction market post-Katrina, we've compiled a list of the top 10 things to be weary of when hiring a contractor in a post-disaster environment.

1. If the price is good to be true, it probably is.
One of the most common red flags is a low bid. It's important to never over-pay for a project, and its common to hire the lowest bidder in the construction industry, but its critical to ensure that your low bid is a responsible low bid. One of the most tell-tale signs that you might be dealing with an illegitimate or illegal contractor is when you receive an abnormally low bid.

If the price is too good to be true, it probably is, and you may end up paying exponentially more than your highest bid in defective work, legal fees and heartache.

2. Don't let your contractor find you, find your contractor.
It's very common for illegitimate and inexperienced contractors to solicit its customers. Take a deep breath and perform some research on the person who solicited you before allowing them to sell you on their services at your door. Spend time looking for contractors in your area online, and compare different companies.

You're embarking on a large and likely expensive purchase, and the job will go smoothly if you do some homework and select your contractor.

3. A permit is not a license. Insurance is not a license. A license is a license.
Illegitimate contractors looking for work learn very quickly that they'll be asked to provide a license to potential customers. They also learn very quickly that most customers aren't exactly certain as to what a "license" is or looks like.

As a result, many victims of scams find themselves thinking their contractor is licensed because they were showed a work permit or an insurance policy.

Research your contractor's license. It is possible for someone to get insurance or a permit without a construction license, and its even possible for someone to forge a Washington construction license.

Fortunately, there are resources on and offline for you to research your contractor's license.

Check a contractor's registration with Louisiana State Board of Contractors at http://www.lslbc.louisiana.gov/.

Talk to someone if you don't understand the licensing systems and requirements, look into when the contractor was licensed and what type of license they hold. It is possible that they are licensed to fix your toilet, but not rebuild your living room. It's also possible that the person was a science teacher last week and a contractor after the disaster.

If you know someone is unregistered and passing themselves as a contractor, report them to the Louisiana State Board of Contractors at http://www.lslbc.louisiana.gov/.

4. Payment Demands and Problems
Even without the backdrop of a disaster, payment procedures in construction is complex. During a disaster, however, things are even worse as contractors across the region will be busier than ever before and cash flow problems will be omnipresent.

It's difficult to advise you to never pay an upfront deposit (because many legitimate contractors will require a draw before work begins), but it is something to handle very delicately.

You should never pay more than 10-15% of the project costs before work begins, and once work begins you should avoid making payments for portions of work that is not already completed.

Scamming contractors are very skilled in collecting nearly 70-90% of the job's costs when only 0-30% of work is complete, and by the time you're catching onto the problems, they're already left town.

Payment terms and procedures in construction are complex, but use fiscal sense and trade money for work performed.

5. Nothing Good Can Come from Dealing in Cash.
Another tell-tale sign of an illegitimate contractor is one who seeks payment in cash. Nothing good can come from dealing in cash.

Make sure that you triple-check those who request cash payments, and when you do pay your contractor, keep detailed records of the payments, and be sure you can get copies of cashed checks or other evidence of payment in case of a dispute.

6. Contractors Who Promise to Work With Your Insurance Company or Who Promise that you'll receive Insurance Coverage
Even legitimate contractors are not insurance adjustors, lawyers or experts in reading or applying insurance policies. Accordingly, you should be weary when a contractor claims they will assist you in your insurance claim.

Contractors build things, and when they are promising to get you more insurance money, they're likely going to fail at both.

7. Insurance Certificates Do Not Equal Insurance Coverage, and Insurance Will Not Cover Against Bad Work
In the post-Katrina construction environment, illegitimate contractors will produce fake, expired or otherwise invalid insurance certificates in an effort to fool their potential customers. Construction insurance is quite expensive, and in order for these illegitimate outfits to compete in price, cutting down on overhead in this area is quick and easy.

If you ask for proof of insurance, accept a copy of their insurance, but look a little deeper into whether the contractor has coverage. You can make a phone call to the insurance company to ensure that the policy exists and is in effect, and you can even request from your contractor that your name be placed on the policy as a "certificate holder" during the progress of the construction project.

One common misunderstanding about construction insurance is that it covers bad or faulty construction work. This is not true. Construction insurance simply protects against "accidents" at the job site (i.e. injuries).

Do not make the mistake of hiring a questionable contractor because he is insured. His poor performance as a contractor will likely not be covered by the insurance policy.

8. Contractor who cannot get a building permit, may not be a contractor.
Many unlicensed or illegitimate contractors request that the owner - you - secure the building permit for the construction project. They may represent that this will "save on costs," or is "required," or any number of excuses - the simple fact is, however, that in 95 out of 100 occasions when this request is made, it is because the contractor is not properly licensed and is unable to get the building permit.

9. You should get a written contract, and the contract should be more than an "estimate" or an "invoice."
A written contract is important for a heap of reasons: it memorializes the parties' agreement, it provides critical information about the progress of the project, it imposes clear obligations on both parties to perform under the contract, etc.

Construction projects can be complex, involve multiple parties and disputes are very common. We cannot stress enough how important it is to sign a written contract with your contractor.

One indication that your contractor is illegitimate or not properly licensed is if he doesn't want to sign a contract, provide or contract or otherwise "doesn't use a contract."

10. Hiring an Attorney is a prudent investment
Rebuilding after a disaster is challenging, and there are many traps for the unwary. You may potentially be dealing with large amounts of money provided by insurance companies and/or construction loans, and rebuilding your home or business can be a monumental task.

While hiring an attorney is an additional expense during the difficult time, in many circumstances it can be a money and headache saving decision.

Before committing to a contractor, have an attorney with construction law knowledge review the contractor's credentials and the contract provided.

In regards the contractor, an experienced construction law attorney should quickly recognize any "red flags" that would indicate that this contractor is a potential liability.

In regards to the project as a whole and the contract, an experienced construction law attorney can review the terms and provisions of the supplied contract and help you enter into a contract that is fair to all parties, and a contract that will help the project run smoothly.

About Us
Wolfe Law Group, L.L.C. is an experienced construction law practice with offices in both Seattle, WA and New Orleans, LA. In the aftermath of Hurricane Katrina, we represented homeowners, contractors, architects and engineers in projects of all shapes and sizes to help residents rebuild their lives. We bring a wealth of post-disaster construction and insurance legal knowledge to Western Washington in its post-disaster environment.

• Email This
• Print
• Comments
• Trackbacks

Wolfe Law Group is reporting that construction services will be in high demand after Gustav, as part of its three-part series, Gustav's Aftermath. One of the most difficult tasks is ensuring that your hard earned money is safely managed in your construction project. Similarly, contractors need to be careful in properly bidding work considering the post-storm market, and accepting work where there is concern as to the owner's ability to pay, or pay on time. Wolfe Law Group is happy to provide some insight for both sides to consider when pursuing their own projects.

Luckily, Wolfe Law Group has solutions for both sides of construction project. Wolfe Law Group will be providing a variety of services to its clients to alleviate the risks each party may have to take in the post-storm age.

Consumers Beware...........

Defrauding contractors are often skilled in getting to the disaster relief funds which are intended to provide assistance for those in need. Additionally, construction loans are often piggy-banks for contractors who are able to pick up and leave with large draws made on those loans. Wolfe Law Group suggests that you be proactive in dealing with these contractors. Some tips can be found in the second installment of Wolfe Law Group's aftermath series. However, consumers and commercial project managers need to be proactive in order to ensure that their contractor not only will faithfully manage funds and perform quality work, but that they can complete that work, and on time.

Therefore, it is suggested that all contractors are put through a standard review process. Contractors should of course be licensed and insured, and proof of these qualifications should be provided. Furthermore, they should be able to provide a "portfolio" or references which substantiate that contractor's ability to perform the necessary work. Finally, they should have a clean court record, or at the least have an arguably safe court record. '

Many of the contractors that will be on the streets are the very defrauding and under experienced contractors that took advantage of thousands of consumers and commercial builders after Katrina - do not let this happen again, be proactive. Require a written contract, get copies of insurance and be named on those policies, and require a payment and performance bond for the work. An often overlooked and valuable tool, bonding projects may cost you a bit more up front but will save you thousands in the event of poor workmanship or a runaway contractor.

Sometimes, contractors can be reviewed by simply checking out sites such as Louisiana Rebuilds and using their customized contractor rating system. Unfortunately, this tool is extremely limited and does not provide insight into the professional backgrounds of contractors. Further, the site permits all consumers to write reviews, which may be bias and unfair. So, in order to help consumers and other builders assure they are in good hands, Wolfe Law Group shall, subject to approval, offer to perform contract/contractor reviews for consumers and builders, providing a professional opinion as to your contractor and your project. This service will be provided on a flat fee basis. Call our offices to get started.

Contractor's Care and Safety.....

Wolfe Law Group understands the many pressures and dangers that face contractors entering the post-storm market for work. There are often countless projects and it can be daunting task to determine which ones are best for you and your business.

Most important for the contractor is to determine your workload and your ability to handle multiple projects. Often, projects fail because a contractor over extends itself. The result of multiple projects may be the loss of all projects - not just one or two. Know your workforce, know the availability of labor and understand the costs of materials. If you can determine these items - put them in writing and lock in your client. This will immediately rid yourself of several headaches down the road.

Another problem can be the client itself. Understand your clients and their needs. Not every owner or manager is the same and each have expectations of how they want the work to look in the end. Leave yourself room for changes and delays. Utilize liquidated damages for delays on projects and provide yourself with the right to obtain change orders for a vast variety of changes to the scope of work. Most importantly, be extremely clear about the scope of work you are going to provide at a certain price. Consumers often expect that every dollar in a project is stated in contract, not understanding that changes, alterations, events, and unknowns may significantly change the face of a project and the costs incurred.

To the benefit of contractors, Wolfe Law Group has posted various articles on the values of the construction contract. Further, the firm has crafted various tools for evaluating projects and the persons financing those projects to ensure that our contractor clients are protected, secured and assured of getting paid. If you would like more assistance with reviewing, drafting or obtaining contracts, or obtaining the review of a potential client or project, please contact our offices today!

• Email This
• Print
• Comments
• Trackbacks

This is part of a three part series about Gustav's legal aftermath, including a discussion on (1) insurance disputes; (2) increased construction demand; and (3) the risk of fraud.

The lessons of Hurricane Katrina were many for the construction industry. After Katrina, there was a significant demand for construction services, roofing work, property gutting and more. Contractors who were doing business in the city before the storm found many post-Katrina challenges, including the shortage of quality labor, high material costs and competition from unlicensed and uninsured contractors.

Furthermore, even though insurance proceeds were plenty across the region, they were sometimes delayed or tied up by mortgage companies and government programs - frequently creating cash crunches for contractors.


Things to Expect in the Construction Industry Post-Gustav

• Storm Chasers: It happened post-Katrina, and after the 2007 floods in Washington, and recently again in Iowa...post-Gustav, Southeast Louisiana should be prepared for a re-population of so-called "storm-chasers" who make a career out of providing services to disaster victims.
  
  While the term "storm-chaser" has a negative connotation - it's not necessarily bad thing. After all, the services are in demand and its good to have people who are experienced in the area. However, there are some negative side effects.
  
  Oftentimes, storm-chasers are not licensed or qualified by the disaster state, and all too often these "storm-chasers" are experienced in skimming disaster money...and not necessarily helping. In regards to the construction industry, storm-chasers shake up the market, challenging prices and taking advantage of increased demand.
  
  
• Short-Term Material and Labor Shortages: In the event of mass destruction by Hurricane Gustav, the Southeast Louisiana region should expect a temporary shortage of material and labor shortages.
  
  
• Fast Paced Contracting: Unfortunately, with the increased demand in the construction industry comes increased work, and contractors and those in the industry often find themselves moving at a thousand miles per hour. While the abundance of work is good, it's also problematic, and contractors are challenged to (1) Keep providing a high quality work product; (2) Enter into written agreements to ensure that work is defined and appropriately priced; and (3) Collect money owed to it, rather than bouncing unintentionally from receivable to receivable.
  

Warnings to Heed - Where Contractors Got in Trouble Post-Katrina
Post-Katrina, facing some of the above described challenges, contractors often found themselves in difficult legal scenarios. Here are some "warnings" of touchy legal issues that contractors face in post-disaster environments:

• Mixing Funds. Louisiana R.S. 9:4818 addresses the circumstance of contractors "misapplying" construction payments. Essentially, according to this statute, if a contractor receives payment on a project, it must apply those payments to its subcontractors and material suppliers. Failure to do this, may result in statutory penalties charged against the contractor.
  
  While under normal circumstances not necessarily a difficult task, post-Katrina contractors suddenly found themselves handling 4, 5...10 projects at a time. Project management really became an enormous component of the construction business, and R.S. 9:4818 was certainly more of a challenge.
  
  In the post-Gustav market, be careful not to get behind your receivables and labor force. The 9:4818 penalties can be fatal to your business.
  
  
• Proper Licensing. Once again, the increase in construction demand created situations where those in the construction industry are doing more than usual...and sometimes different types of tasks. In the whirlwind of post-disaster construction, however, be careful that you are not overstepping your licensing boundaries. The Louisiana State Board of Contractors provides the licensing rules for contractors in the State of Louisiana. If you are doing work on a project that cost more than $7,500.00, you'll likely be required to have some type of Louisiana construction license.
  
  Working without a license subjects you to penalties, attorneys fees and contractual complexities. Further, after Hurricane Katrina the Louisiana State Board of Contractors very aggressively pursued unlicensed contractors in the state, and even fined some of its licensed contractors for doing work with unlicensed entities. Even when you are licensed, therefore, you should be careful who you associate with post-Gustav.
  
  
• Contract, Contract, Contract. Post-Gustav, expect construction work to come, go and move with speed. Do not let the hustle and bustle of post-disaster work lead your company into projects without a written contract.
  
  Written contracts are not only required under certain circumstances under Louisiana law, but its also a really, really good idea. In post-disaster environments, there are a number of unpredictable variables: (a) scope of work; (b) timeframe for completion of work; (c) cost of materials and labor...
  
  Good quality contracts are the only effective means for contractors and those in the construction industry to temper these unpredictables. Failing to enter into written contracts can be a significant risk for your organization. Learn more about construction contracts right here at the Wolfe Law Group website by going here: Construction Contracts.
  
  
• Prepare for Non-Payment. A post-disaster environment can be a recipe for a business catastrophe. Cash flow can become tight, legal disputes can be rampant, and if your company doesn't properly prepare for non-paying situations it can be devastating.
  
  Aside from the tips already provided in this post, here are a few other things that can help you prepare for non-paying projects:
  
  (1) Stay behind payments. Put well-worded progress payment provisions in your contract, and follow the schedule to ensure that you don't perform work without payment.
  
  (2) Preserve Your Lien Rights! This is very important, as your company in a post-disaster environment can get sucked dry with accounts receivables. Construction liens are an extraordinary effect collections tool, but in Louisiana you're required to preserve your lien rights (sometimes, even before work begins). Learn more about Construction Liens, and check out ExpressLien.Com, which is a service that helps you file liens and take advantage of the lien process. Visit Wolfe Law Group's Construction Lien Center.
  
  (3) Establish Good Collection Practices. Collection practices are a discipline, and you should stay ahead of your accounts receivables to ensure the most success at collecting them. Learn about Collection Practices on our website. Wolfe Law Group has authored a "Collections Toolkit" for contractors, with information about collection laws and even a set of collection letter templates for various legal scenarios. Buy it here.
  

• Email This
• Print
• Comments
• Trackbacks

This is part of a three part series about Gustav's legal aftermath, including a discussion on (1) insurance disputes; (2) increased construction demand; and (3) the risk of fraud.

With Hurricane Gustav just a few miles off the Louisiana coast and two million Southeast Louisiana residents spread across the country, there are many questions. There are also, however, some other things that are inevitable.

Hurricane Gustav will certainly cause damages throughout the Southeastern Louisiana region, and as a result, property and business owners will once again find themselves preparing and adjusting insurance claims.

The lessons of Hurricane Katrina, however, should help residents and businesses better prepare for the claims adjusting process. After Hurricane Katrina, Wolfe Law Group represented plaintiffs against insurance companies and successfully brokered the settlement of millions of dollars of insurance payouts.

Our construction clients will likely have two types of insurance claims: claims for its business losses and for their personal losses. This post provides some Katrina-influenced and tested tips on how to successfully prepare your insurance claim(s).

1. Make Your Claims Immediately. Not only do you have a legal obligation to make your insurance claims as soon as possible, but its also the correct thing to do. Notify your insurance company so you can get in line for a property adjustment, and so you can be assigned a claim number to track the details of your claim(s).
   
   
2. Journal Your Life and Document Everything. The insurance companies are very, very organized, and they are very detailed. Every telephone conversation, email, letter and other communication will get documented on their end...but in their own words. Be certain to fight fire with fire, and keep yourself organized as well. Keep a journal of your communications with your insurance company, send letters via certified mail and keep record of your correspondence, confirm all conversations with letters to ensure that the spirit of your discussion with an insurance representative is captured.
   
   Remember the frustration of hearing something from an insurance company and having them deny it later? Documenting your conversations is a way to hold an insurance company's feet to the fire.
   
   
3. Capture your damages. Take photographs of everything, make a video, and do absolutely everything you can to document your damages. Remember, YOU have the duty to prove your claim and your damages. While the insurance company does oftentimes "adjust" the damages by sending an adjuster, this does not make it their job to help you document or prove your claim.
   
   
4. Loss of Use? One of the most difficult items of damages to prove post-Katrina was "loss of use" damages. Insurance companies define these damages as those costs you incur which are "above and beyond" what you would have incurred had the storm not displaced you and your family. These types of damages are difficult to prove because they are somewhat based on speculation.
   
   Be prepared to prove what you used to spend on things, and what you spent on them when evacuated. This means you must keep detailed track of everything you spend while out of town and out of your property. Keep track of money spent on gas v. food, on eating out v. eating in, on living with relatives v. living at a hotel.
   
   
5. Business Income Interruption. Policies usually provide coverage to businesses in two respects: (1) for actual income not received because of the loss; and / or (2) for expenses incurred because of the loss.
   
   Be prepared to show how much money you were making and spending before the loss, and how much you made / spent after the loss. Also, be prepared to engage a CPA or other accountant to put together detailed financial reports for the insurance companies. Again, you have the duty to prove your insurance claim - and therefore, the more detailed your records and/or "proof," the more likely you are to settle your claim without litigation or a costly adjusting process.
   
   
6. Prepare your Argument. It's already been mentioned in this post...but it can't hurt to mention it again: YOU have the duty to prove your loss, not the insurance company. Do not wait for the insurance company to "adjust" your losses, nor rely on them. While an adjuster will likely come to your property to view the losses, they are doing it with the insurance company's interest in mind, and not yours. Engage someone to represent you in the adjusting process, or be prepared to provide your own information and documentation related to the loss.
   

How Do You Document Your Losses?
Post-Katrina, it was almost impossible to get a contractor out to properties to adjust losses...and the market was flooded with "public adjusters" not properly licensed or qualified to work in the area.

So in Gustav's wake, and expecting more of the same, how can property and business owner adjust their losses?

While this question is not an easy one to answer, Hurricane Katrina did give the Southeast Louisiana area some experience in the insurance claims process. Furthermore, the region seems better prepared to handle a post-disaster situation.

Since Hurricane Katrina, Louisiana's Department of Insurance began to recognize "public adjusters" and provide a licensing process for them. Furthermore, there are construction companies and similar services available, ready and experienced in producing construction estimates for property owners to specifically provide to insurance companies. One such company in New Orleans is EstimateBuilders.Com, which produces estimates for property owners using programs familiar to the insurance industry.

Further, it's never to early to engage a qualified attorney to help you through the claims process. An insurance contract is not a simple document, as most policies are 50+ pages of dense legal language and requirements. Property and business owners may compromise their rights in a claim by performing on the contract improperly, or not performing when required.

An attorney can guide you through the claims process to ensure that your legal rights are protected, that you get the most out of your insurance claim and that in the event of an improper denial of coverage, you are properly protected and the claim is properly pursued.

Wolfe Law Group has post-Katrina experience in representing plaintiffs in insurance dispute litigation, and has organized millions in insurance settlements since 2005. Further, after the floods in Washington State in December 2007, the firm also represented victims of that disaster against their respective insurance companies.

Post-Gustav, Wolfe Law Group is equipped and experienced to guide you or your company through the claims process, and if necessary, into insurance litigation. Contact us today to learn more - we're available before, during and after Gustav, as our office will work remotely through our Seattle office (206-801-1600).

• Email This
• Print
• Comments
• Trackbacks

In the coming weeks and months, businesses, construction companies and homeowners alike may become frustrated with insurance companies, according to an article and study by the New Orleans Times Picayune. As a result of post-Katrina endorsements and creative policy structuring, some fear that insurance coverage may be more scarce than in 2005.

According to nola.com, insurance policies in the Southeast Louisiana region now systematically include high hurricane deductibles and certain policy exclusions that may make insurance claims more difficult, and insurance disputes more prevalent.

Contractors and property owners in the middle of construction projects will face challenging builders' risks claims after Gustav, and property owners and businesses will have to hurdle over certain policy requirements before a helpful payout is realistic.

With the new policy limitations and extraordinarily high insurance premiums, it's going to be more challenging than ever to recover from hurricane damages sustained. The importance of retaining quality counsel to represent you in an insurance dispute, and to prepare your insurance claim is more prevalent than ever.

Post-Katrina, Wolfe Law Group brokered millions in insurance payouts for contractors, businesses and homeowners. Contact Us today to learn more about how we can help you weather the post-Gustav insurance storm.

• Email This
• Print
• Comments
• Trackbacks

The U.S. Chamber Institute for Legal Reform just released their 2008 Harris Poll numbers related to the Legal Climate across the country. It's bad news for Louisiana businesses and contractors, and marginal news for the same group in Washington.

Louisiana's legal climate was ranked second to worst in the country (49th). U.S. Chamber of Commerce President Tom Donohue stated that businesses in Louisiana still suffer from a court system that allows unsubstantiated evidence and lawsuits that are unfair to businesses.

Washington's legal climate ranked right in the middle of the pack (27th).

These troubling numbers and remarks in relation to both WA and LA underlines the importance of retaining quality legal counsel for contractors in both states. The construction field is stuffed with legal land mines, and construction disputes can carry high stakes and fatal outcomes. A lawsuit based on unsubstantiated evidence can cost your business thousands.

Good legal counsel before a dispute may thwart difficult legal situations, and the same during a dispute may position your company for a "best case scenario" outcome.

Learn more about Wolfe Law Group as a firm, and about our Attorneys, as we're experienced in helping contractors, design professionals, and material suppliers avoid legal catastrophes.

The 2008 State Liability Systems Ranking Study was conducted for the U.S. Chamber Institute for Legal Reform among a national sample of in-house general counsel or other senior corporate litigators to explore how reasonable and balanced the tort liability system is perceived to be by U.S. business.

• Email This
• Print
• Comments
• Trackbacks

The Limited Liability Company is finally a mature entity in the United States. While historically the entity has been here and there since the 70s, it wasn't until 1996 that every state in the U.S. had accommodated the L.L.C.

While a toddler, many were skeptical of the LLC entity. Lawyers and accountants were unfamiliar with the new entity, and were hesitant to give advice when the entity had not been tested in law or in the practical world.

More than one decade after that mid-nineties milestone, however, the L.L.C. is alive and well, and has proven itself to be the entity of choice in America. Accountants, lawyers and the general public are now comfortable with the entity, and its treatment under tax regulations and liability jurisprudence has been tested and made clear.

Despite its overwhelming popularity, however, many are still confused about the differences between the LLC and the Inc. These differences, however, are crucial to your business. The incorrect choice in entity type may defeat the purposes of the entity entirely.

In the Construction Industry where liability exposure and risk are high, it's important to understand your choices in entity types. This article discusses the differences between the LLC and the Inc., their pros and cons, and the ease of converting from one to the other.

LLC v. Inc.
Generally speaking, if you are a small to mid-sized company, you are likely to be better off as a Limited Liability Company (LLC) than a Corporation (Inc.).

A corporation is required by statute to have stockholders, officers and a board of directors. While the Inc. may have only one stock holder and one director, it must have two individual officers. This means a corporation with one stockholder must pull in a second and willing individual to trust as an officer.

Corporations are also required to keep certain corporate records, take votes on decisions, record their meetings through minutes and have annual meetings with its stockholders (even if there is only one).

While large organizations benefit from the structure of a corporation and require it to thrive, small companies fall fate to the structure.

In reality, a small business will have a difficult time meeting the formalities of a corporation, and as a consequence the corporation's liability shield may potentially be pierced in the event of a dispute.

Prior to the introduction of the LLC, there was a void between sole proprietorships or partnerships and full-blown corporations. Small businesses were simply stuck with the corporation as an entity type, because the only alternatives were sole proprietorships and partnerships (both without liability protection).

A Limited Liability Company fills this gap completely. It does not have the same formalities of an Inc., but it offers its members the benefits of liability protection. The entity is seen by many as a blend between the partnership and the corporation, and from the perspective of a small business, an entity taking the best qualities of each.

The LLC offers the flexibility and informality of a partnership, but maintains the liability protection of the corporation. In the spirit of its accommodating nature, the LLC allows its members to elect how it will be taxed: either as a corporation or a partnership. It's the absolute best of both worlds for a small business owner.

Taxing a LLC
After the LLC entity was introduced in the United States, the Internal Revenue Service did not create a special taxation classification for it. To the contrary, the Treasury Regulations Section 301.7701-3 was pieced together, offering guidance to the LLC organizers on the tax classification for their new company.

Generally speaking, the manner of classifying a LLC is entirely up to the members of the company, and the IRS is very flexible in how it will tax the LLC entity.

A single member LLC generally has the following choices:

1. File Form 8832 to be taxed as a corporation f8832.pdf
2. If qualified, file Form 2553 (f2553.pdf), Election by a Small Business Corporation (Under Section 1362 of the Internal Revenue Code) to be taxed as an S Corporation
3. Be taxed (by default) as a disregarded entity (individual single member are taxed as sole proprietorships, business entity single member taxed as a division of the corp.)
   

Multi-Member LLCs have the following choices:

1. File form 8832 to be taxed as a corporation f8832.pdf
2. If qualified, file Form 2553 to be taxed as an S-Corporation f2553.pdf
3. Be taxed (by default) as a partnership

In Louisiana and Washington, a husband and wife who are owners of an LLC and share in the profits of the LLC can file as a single member instead of a multi-member LLC. However, they may also file as a multi-member LLC. This is generally true for other community property states as well, including Arizona, California, Idaho, New Mexico, Nevada, Texas and Wisconsin).

Converting Your Business from an Inc. to a LLC
Converting from an Inc. to an LLC is simply and fairly inexpensive. It requires that you file a certificate of conversion with the Secretary of State's office, along with the LLC's Articles of Organization and its Initial Report.

You must also notify the IRS that the company has converted to the LLC entity. This is important, as you'll make your tax classification election at this time. As above-mentioned, your options for tax treatment are varied, and it will depend greatly on the practical needs of your business. You should review these options with your attorney and CPA.

Your Tax ID Number should stay the same, and if you choose, you can even have your tax classification remain unchanged.

Conclusion
Whether or not it is the correct entity type for your company, if your organization formed between 5 and 10 years ago, it's likely that you formed as a Corporation.

The LLC entity is a safe alternative, and it may be the right entity type for your company.

Related Articles:
The Limits of Liability: Piercing the Corporate Veil

• Email This
• Print
• Comments
• Trackbacks

For families wanting to build their dream home, as well as developers planning their next major venture, borrowing money to finance the undertaking is both necessary and advantageous in most situations. Lenders are a quiet, yet vital part of almost every construction project.

1. Structuring the Loans & Choosing a Lender

One of the first decisions to be made in construction is how best to structure the loans. Homeowners, for example, must decide between obtaining interim financing and thereafter, a separate long-term mortgage, or to combine both those loans into a single package.

Different lenders may offer different services here: some may be interested in offering either option; others may offer only interim financing or only long-term permanent loans. Shopping for a lender can be a lengthy and complicated process; however, choosing the right lender is extremely important to the success of any construction project. For a smooth and successful result, a savvy and resourceful lender is imperative.

What is the best way to find a lender? Over time, many construction professionals built relationships with various financial institutions, based upon years of successful partnerships in the past. Home builders of a certain size, in some parts of the country, may also offer financial assistance to the home owners as they have affiliated entities to provide lending as well as construction services. Today, however, the adage remains true: the best way to find a lender is to ask around, and discover a local institution with a good reputation through simple word of mouth.

2. Types of Financing

A. Interim Financing - "Story Loans"

With interim financing, a loan is created to cover the construction phase. The entire amount of the loan will be due in a short time frame, i.e., when the project is finished.

The term of the loan begins on the day the loan documents are signed. Funding is distributed as the home is built, with the lender, the builder, and the borrower jointly deciding how best the cash will be physically distributed. Oftentimes, a separate checking account is set up for just this purpose: at certain intervals, the lender deposits a sum into the account, with the borrower then distributing those funds as needed. If construction delays cause the project to go past deadline, the loan can be extended, usually for a set fee established in the original loan documents.

Lenders are extremely involved with any construction project where they are providing interim financing. Understandably, these types of construction loans are unique to the particular project, and the lender will want detailed information about the venture, not only before they decide to lend the money, but also during every step of the building process. In fact, lenders want to know so much minute detail about their interim financial projects that these loans have come to be known as "story loans," since the lender "knows the whole story" of the project.

As for the cost of money involved, there is usually a variable interest rate for interim financing with a higher rate paid on the interim loan correlating to a better rate deal on the permanent financing. Borrowers make interest-only payments during the construction; the full amount is only due after the project's completion.

Start-up construction costs are covered as part of the initial funding; thereafter, the lender will usually require a copy of the building permit as well as a set percentage of the construction being completed before any more money will be released. How does the lender determine this percentage?

During construction, representatives of the lender will inspect the construction site. These are usually supplied by third party companies who specialize in this type of work.

The lender's inspector will approve distribution of funds for "board and nails" costs based upon an inspected percentage of construction completed. In this way, the lender protects itself against a stalled or out-of-control project by staggering the amount of loan monies released in tandem with the construction's progress. Lenders will also provide deposits for those items that require custom craftsmanship -- such as windows, doors, flooring, and custom lighting.

As construction progresses, financing continues on a step-by-step basis. Usually, lenders issues two draws per month, based upon their inspector's recommendations.

The final 10% of the interim construction loan is usually held by the lender at the end of the project until verification is provided that no liens exist against the property and that the owner has good and proper title. This may also be contingent upon providing proof that long-term financing is in place to cover the amount of the interim construction loan. At that time, the remainder of the loan is funded, and the entirety of the interim financing will thereafter be due, in lump sum, on a specific date - usually within three years of the signature date on the loan documents.

B. Long Term Real Estate Loans - Residential and Commercial

For any loan secured by land (and its improvements) as its collateral, there are two basic distinctions: residential real estate loans are treated differently than commercial ones. As for the lenders, there are a wide variety of financial sources who view real estate loans as worthy investments because of the interest income they provide over time. Real estate loans have been financed by private individuals, as well as banks, savings & loan associations, credit unions, mortgage bankers, pension funds, and insurance agencies.

1. Residential Real Estate Loans

Residential real estate loans ("mortgages") finance homes for personal use or for rental income. The lender provides a lump sum to the borrower, and that sum is paid back over a long time period, together with interest. The interest rate can be fixed, or adjusted, and the financing institution makes its profit on the interest income it receives over time.

Residential real estate lending is somewhat standardized, with creativity in the past few years being focused upon the adjustable interest rate mortgage and the resulting sub-prime mortgage crisis of the past two years.

2. Commercial Real Estate Loans

Commercial real estate loans finance land (and its improvements) that will be used for commercial, or profit-making, purposes. Apartment complexes, shopping malls, storage warehouses, car washes, and restaurants are backed by commercial lending.

Commercial lending is much more creative and complex. Real estate investment loans in the commercial area include not only short term loans as well as long term ones, but mezzanine financing, foreclosure investor money, permanent debt, equity financing, and hard money loans.

For example, home builders often place their personal financial security at risk as they borrow money to build homes to sell in the marketplace. The builder typically faces a lender that will cover 80% of the cost to build the to-be-sold house, with the builder's personal guaranty, leaving the builder with a 20% cash gap -- he'll have to have that amount in order to build the home, and the profit from the sale will need to cover his cash outlay plus the full amount of the commercial loan. This number exponentially increases for each to-be-sold house he plans to build: he'll need much more cash if he's building 100 houses as opposed to 10, and the builder will also need to have capital in hand to cover subcontractor and supplier payments during the construction process.

While the home builder will recover these financing costs, theoretically, in the sale of his completed homes, he will need to find creative ways to deal with the financial realities not only to maximize his profit, but to protect him personally against financial ruin.

One example of how a builder might minimize his risk in this situation is by sharing it. Commercial real estate investment trusts (REITs) are legal entities recognized under the Internal Revenue Code that either invest in different kinds of real estate or real estate-related assets. Individuals invest in the REIT and receive a return on their investment through its profits. Some REITS own all or part of a real estate project (such as a shopping center or a hotel) and make money off the rents; other REITs lend money to owners and developers and make money off the interest; and still other REITS combine the two as "hybrids," acting as both an equity and a mortgage REIT.

In order to qualify as a REIT for federal income tax purposes, a company must pay 90% of its taxable income to its shareholders each year; invest at least 75% of its assets in real estate; and make at least 75% of its gross income from its real estate holdings (either in equity and/or in mortgages).

C. Finding Financing - the Impact of the 2007-2008 Sub-Prime Crisis

1. What's Happening

In 2007, foreclosure activity across the United States was 79% higher than in 2006, and in December 2007, The Economist estimated that sub-prime defaults would reach between $200 and $300 billion in 2008. What's happening here?

First, housing prices dropped in 2006 in many parts of the country -- leaving many home owners facing adjustable rate mortgages that would be increasing monthly payment amounts as the interest rate rose, as well as a simultaneous inability to refinance for more favorable terms due to the lesser value of their home. Defaults on residential home loans skyrocketed.

Second, the lenders who held those mortgages took a loss, as the borrowers could not pay their mortgage payments. Major, well-known financial institutions announced huge losses -- as of February 2008, totalling $140 billion.

Third, for those corporate and institutional investors who had bought the rights to those mortgage payments via mortgage-backed securities and collateralized debt obligations, their assets were rapidly declining in value along with their stocks. This hit the U.S. stock market, as well as those in other countries, in a significant way.

2. Impact on Owners, Contractors, and Lenders

In response to all this activity, lenders have become less willing to make loans, or have started offering loans at higher interest rates. Economic growth has slowed overall, but especially in the housing market.

Currently, there is a surplus of new homes setting in builder inventories across the country, making it harder for home builders to tread water in the home construction business. For example, D.R. Horton and Pulte Homes are being severely impacted by the current economic pressures and declining new home demand.

Likewise, suppliers are feeling the impact. For example, Home Depot's profits in the past have depended upon construction and Home Depot has announced that it foresees its 2007 earnings to fall by as much as 18% per share, which is much larger than their 2006 estimate.

The good news may be for those involved in constructing apartments -- renting is becoming more popular as buying homes becomes less viable. REITs that own or operate apartment complexes should be increasing in popularity. The construction of luxury apartments, and family-oriented apartment complexes, should be on the rise.

• Email This
• Print
• Comments
• Trackbacks

The start of the new year provides a valuable time to reevaluate the way your business operates. The old saying that an ounce of prevention equals a pound of cure is true for the legal considerations of your business.

The proper corporate formation, the registration of trademarks and logos, and a carefully drafted contract can impact the bottom line of your construction company.

In deciding if your business is ready for 2008, consider these questions:

• Are your private assets protected in the case your company is exposed to great liability?
• Do you own your company name? Your company logo?
  
• Could you get sued in 2008 for using a company name, slogan or mark registered by another company?
  
• In case of a dispute, will you have contractual rights and remedies against your adversary.

This article broadly discusses three important, and very elementary, aspects of your business. The three topics - Business Entities, Trademarks and Contracts - are important for the health of any business, but are especially critical in the fast-paced and dispute-prone construction industry.

Business Entities - Are you Incorporated? Are you sure?

When you're doing business in the United States, you have the extraordinary privilege of operating under a corporate entity.

According to the theory of laws establishing business entities, a business is considered a separate person from those who own and/or operate the business. Since the business is its own person, the debts, liabilities and decisions of the business are the responsibility of the business itself, and not the owners and operators.

Common business entities in the United States (Louisiana and Washington included) are the corporation (Inc.), the limited liability company (LLC) and the partnership.

While every business is different, it is almost always in your best interest to form a business entity for your business. In fact, there are many instances when you should form multiple business entities.

If used correctly, a business entity can protect its owners and operators from personal liability for the debts and obligations of the company.

The formation of a business entity is easy and relatively inexpensive. The process can become more difficult and expensive as your corporate structure complicates (multiple members, etc.), but by extension, so does the benefit of forming the business entity.

What type of entity should you choose? Do you have the right corporate entity for your business?

We've discussed the importance of having a corporate identity, but once the decision to incorporate is made, equally important is the decision on what type of corporate entity to choose. And if you're already incorporated, its important to inquire whether you're operating within the entity that is right for your business.

For the limited purpose of this article, only the differences between corporations (Inc.) and limited liability companies (LLCs) will be discussed.

Corporations - Inc.
Corporations are the much, much older brother of LLCs, existing for decades before the advent of the limited liability company in the mid-90s. The laws governing corporations are time-tested, and the regulations of corporations are well-known by lawyers and synonymous with the traditional understanding of business operations.

Corporations can be classified as "S-Corps" or "C-Corps," the classification of which affects the manner in which they are taxed.

Corporations are required to have by-laws, annual meetings, more than one officer, a board of directors and shareholders. The corporate framework is quite rigid, and if a corporation exists without adhering to the legally defined structure, it runs the risk of exposing its shareholders and officers to personal liability.

In the past, corporations were the choice business entity for anyone who wanted to incorporate. Since the mid-90s, however, smaller businesses were presented with the ability of becoming a limited liability company (discussed below), and its now more typical for small businesses to choose the LLC structure instead of the Inc. structure because of the strict requirements of corporations.

Limited Liability Companies - LLCs
Compared with corporations, LLCs are infants. From the mid-90s until just recently, many legal commentators warned businesses who were considering the LLC framework because the laws governing these entities had not been tested. As we enter 2008, however, most of this criticism has whithered away, and the Limited Liability Company has proved to be a stable and successful business entity.

LLCs are now the most popular choice for newly formed businesses, and its is common for previously existing Inc.'s to change its corporate entity to an LLC.

Unlike corporations, LLCs are not required to have meetings, have by-laws, prepare meeting minutes and/or comply with the formalities of corporations. While corporations require officers, boards of directors, shares and shareholders, the LLC requires only Members (or even a single-member).

The result of these lack of formalities is that LLCs are less expensive, require less overhead, and in-turn, present less risk to smaller organizations of subjecting their owners and operators to personal liability.

LLCs also offer tax benefits, as they allow the Members to choose between being taxed as a corporation or as a partnership.

Conclusion

In conclusion, if you have a business (large or small) you should seriously consider whether your business should be incorporated as a Corporation or a LLC. If your business is already operating as a business entity, you should consider the pros and cons of the entity chosen.

Speak with an attorney and/or an accountant about your business to decide what type of entity is right for your company.

Trademarks - What Every Business Owner Needs to Know about Trademarks
Sometimes business owners think of trademarks as luxuries, or something necessary only for companies who have a large or nation-wide presence. Small organizations, however, are oftentimes those most vulnerable to a trademark violation or infringement, as the expense associated with a trademark problem could have fatal consequences to their profitability.

Here are two ways trademarks, or lack thereof, can affect your business:

1. You spend an enormous amount of time and money on your business, on building the reputation of its name and making yourself recognizable to potential customers. Trademarking your company name, mark and/or logo is important to protect your rights in these items, and its a small price to pay compared to the risk of not trademarking.
   
   
2. A simple trademark search can ensure that you don't accidentally use someone else's trademark, potentially getting your company in hot water.

What is a trademark and How do I protect it?
A trademark consists of a word or words, phrases, symbols and/or images that identify a company's product or service. You can trademark you company's name, logo or tagline.

A trademark sets your company, product and/or service apart from others, and carries with it definite legal rights.

A trademark is established by either registering it with the United States Patent and Trademark Office or by simply using it in the marketplace. That's right, in the United States you're not required to officially register your trademark so long as its used - however, registering the mark is a very prudent measure as it affords you greater legal protection of the mark, and perhaps more importantly, assures you that you have the legal right to use the mark.

You can register trademarks with state, federal and international agencies. Which type(s) of registrations you choose will depend on the nature and size of your organization.

You should consult with an attorney to decide the trademark needs of your organization, and thereby take the first steps necessary in protecting your company's most valuable assets.

Contracts - If it's not in writing, your dispute is a lose-lose
We've published a number of articles on wolfelaw.com concerning construction contracts. Construction contracts are notoriously complex and large, and its not uncommon for a construction project to have stacks of documents legally outlining the obligations of the parties involved with that project. Previously, we've discussed the importance of the contents of your construction contract (i.e., flow-down provisions, pay-when-paid clauses, indemnity provisions, etc.).

The purpose of this article is to just stress the importance of having any contract at all. Construction companies of all shapes and sizes sometimes find themselves with a construction project, or a relationship with a subcontractor or supplier, but without a written contract.

In many instances, a written contract is legally required. Beyond these requirements, however, if you become involved with a construction dispute without a contract between the parties, you may be in for an expensive and trying legal experience. Perhaps you'll be faced with a lose-lose situation.

Without a contract defining the roles and duties of the parties, identifying the agreement struck during more cooperative days can be very difficult, if not impossible.

Unfortunately, these types of disputes oftentimes wind up in court with one party aggressively asserting that the agreement was one thing, and the other party aggressively asserting the opposite. The risk of going to trial based on self-serving testimony is high for both parties, resulting in an unfavorable settlement for the side with the least concrete support.

As you begin the new year, consider the contract needs of your organization. Prepare contracts that can be used for small and large projects, or something that can be easily presented to a new subcontractor for signing before work begins. While there are many contract forms available on the web, each company is different and has different contractual needs. If you can afford it, the advice and counsel of an attorney will benefit you greatly in case of a future dispute.

• Email This
• Print
• Comments
• Trackbacks

Limited Liability has its Limits - Piercing the Corporate Veil
Why your LLC or Inc. isn't as bulletproof as you may think.

Introduction
When starting a new business, it's common for the business owner(s) to establish some sort of business entity in an effort to protect their personal assets against the debts or obligations incurred by the business. Two common types of business entities include the Limited Liability Company (LLC) and Corporation (Inc.).

The legal protections offered by these entities are plenty, with the law considering the entity as a separate and distinct "juridical person." Just like one person isn't typically liable for the debts of another person, the individual equity owners of a LLC or Inc. aren't typically liable for the debts and obligations of their business.

However, while "limited liability" is one of the principal characteristics of business entities, the limited liability is not necessarily absolute.

When Limited Liability is Limited - Piercing the Corporate Veil
The doctrine of "veil piercing," permits courts under certain circumstances to disregard an entity's form and the protections from personal liability otherwise accorded to the members, shareholders or other equity holders. The doctrine most often arises in connection with a person's attempt to hold corporate shareholders or LLC members liable for the debts of the organization.

Louisiana courts will pierce the corporate veil and hold its equity owners personally liable for a debt or obligation when the business organization is found to be simply the "alter ego" of the shareholder or when shareholders disregard the requisite corporate formalities to the extent that the corporation ceases to be distinguishable from its shareholders.

In the landmark 1991 case, Riggins v. Dixie Shoring Company, Inc., the Louisiana Supreme Court noted that in determining whether to pierce the corporate veil, the following factors are among those to be considered:

1. Whether there is commingling of funds between the company and the equity owners (Members, Shareholders, etc.);
   
2. Whether the organization follows statutory formalities for incorporating and transacting corporate affairs;
   
3. Whether the organization is under-capitalized (did your company have enough start-up capitol? is your company properly capitalized?);
   
4. Whether the company provides separate bank accounts and bookkeeping records for the organization;
   
5. Whether the company holds regular shareholder and director meetings.
   

590 So.2d 1164.

The consideration of these factors, and others, will guide the court in determining whether your organization is truly a separate legal entity or simply the "alter ego" of your personal business affairs and transactions, thus holding you (i.e. Members/Shareholders) directly liable for the business' debts and obligations.

On the positive note, in general, Louisiana courts are reluctant to pierce the corporate veil. The court stated in Riggins that "limited liability....should be disregarded only in exceptional circumstances." Id. Further, when considering the above factors, whether the legal entity has failed in respect to any one factor is not always determinative. Instead the courts will consider the "totality of the circumstances" to make a decision.

Nevertheless, it is extremely important for business-persons operating their businesses through a Corporation, Limited Liability Company, or other business organization to rather intimately understand the veil piercing doctrine, and to run their businesses in conformity with it.

Protecting oneself from personal liability in the ordinary course of business is quite possible, but it oftentimes involves more than simply filing Articles with the Louisiana Secretary of State.

Big Business v. Small Business
Tips to Avoid the Doctrine of Veil Piercing
Let's be honest - it's a lot less likely for a court to pierce the corporate veil of a large and established business than to pierce the veil of a small or mid-size operation. Large companies will likely follow more formalities than small organizations (holding meetings, etc.), they will likely have lawyers on staff, and they will also likely have more than one, two, three or twenty shareholders and directors.

As a small business owner - or as a one-man operation - is there anything you can do to avoid being considered by law as simply the "alter ego" to your organization? After all, if it's just you, how can the business not be your alter ego?

If a company only has one or a very few shareholder(s) or member(s), that factor will likely be considered by the Court in determining whether to pierce the veil of your organization. However, the law is fairly clear that this fact alone - that one individual owns all or a majority of the organization - does not support the drastic veil piercing event.

Therefore, here are some tips to help avoid the doctrine of veil piercing:

1. Have a separate bank account for your business organization in that organization's name. No exceptions.
   
2. Do not "commingle" - or freely transfer - funds between your organization's account and your personal account, or between different organizations. Talk to a lawyer or CPA about making proper distributions to Members, or perhaps loans from a Member to the organization.
   
3. If you are a small operation and you have an Inc. or Corporation, consider changing to a Limited Liability Company. Inc.'s require that you hold mandatory meetings, have shareholders, directors and officers, and other tedious formalities. An LLC offers most of the liability protection of an Inc. and significantly less formalities.
   
4. Make certain that you sign contracts and other legal documents as an agent for your organization, and do not simply sign your name without reference to your organization.
   
5. Properly capitalize your organization.
   

Consult with an Attorney
There are slight and important differences between how the doctrine of "veil piercing" is applied to Corporations versus Limited Liability Companies in Louisiana. For the purposes of this short article, however, general principals of "veil piercing" were identified and explored. You should consult an attorney to learn more about these differences, the doctrine of veil piercing, and whether your organization is at-risk.

• Email This
• Print
• Comments
• Trackbacks

Read below to learn:

• Louisiana's approach to Non-Compete Agreements


• Hurdles facing Non-Compete Agreements


• Keys to Drafting an Enforceable Non-Compete Agreement


• The Perils of Small Mistakes in a Non-Compete Agreement


• Whether a Non-Compete Agreement is Right for your Company
  

Generally, Non-Enforceable
It is difficult to overstate the degree of scrutiny judges all across the country provide to non-competition and non-solicitation agreements. Because these agreements are definitively anti-competitive and contrary to the public policy of encouraging free enterprise, they are very strictly analyzed and very often unenforceable.

Louisiana in particular approaches non-compete agreements with great caution.

The Louisiana State Legislature has made Louisiana's position on these types of agreements Statute very clear by enacting Louisiana Revised Statute 23:921, and particularly in its drafting of the statute's opening provision: "Every contract or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession, trade, or business or any kind, except as provided in this Section, shall be null and void."

23:921's very first line, in other words, sets the standard that all non-compete agreements are null and void unless they meet certain requirements. Louisiana courts have taken the cue from 23:921 and have also stressed that these agreements must climb uphill before achieving enforceability.

In Aon Risk Services of Louisiana, Inc. v. Ryan (2002), the Louisiana 4th Circuit Court of Appeals stated, "[s]tatutory exceptions to the public policy against anticompetition agreements are tightly drawn and should be narrowly construed in keeping with underlying policy of prohibiting restraint of free competition."

Making It Work
Despite the clear legal skepticism against non-compete agreements, they are very popular all across the country, and its common to find a non-compete agreement in corporate , employment and independent contractor contracts.

As indicated by their presence throughout the country, non-compete agreements obviously have a value to organizations. A new company in a new market could suffer greatly if a new employee swoops in, takes a few weeks to learn the ropes and then sets up a competing business in the same area.

If your business could benefit from a non-compete or similar agreement, it's imperative to understand the Louisiana requirements before putting pen to the paper. A non-compete agreement must be written correctly to carry any weight in a Louisiana court, and the margin for error is slight.

LA R.S. 23:921, after its general proclamation that non-compete agreements are in general null and void, allows such agreements in the following circumstances:

• When a business is purchased, the seller may agree to refrain from engaging in a business similar to the business being sold within specified parishes, for a period not to exceed 2 years.


• An employee may agree with his employer to refrain from engaging in a similar business to that of the employer within specified parishes for a period not to exceed 2 years from termination of employment.


• An independent contractor, whose work is performed pursuant to a written contract, may agree to refrain from engaging in business similar to the business with whom the independent contractor has contracted, on same basis as if the independent contractor were an employee, for a period not to exceed 2 years from date of last work performed under the written contract.

The Louisiana 1st Circuit Court of Appeals summed up the requirements as simply as possible when in Cellular One, Inc. v. Boyd (1995), it stated: "[t]o be valid, noncompetition agreement may limit competition only in business similar to that employer, in specified geographic area, and for up to two years from termination of employment."

However, this simple statement should not mislead one into thinking that a non-compete agreement technically meeting these three requirements will be valid. In fact, valid non-compete agreement must also (1) properly limit the type of business being restricted; (2) must identify and define a geographic area and ensure it is relevant and proper; (3) must properly and fairly restrict the non-competition time.

Additionally, there are other hidden considerations. For example, Louisiana courts have consistently held that a non-compete agreement will be unenforceable in absence of any specialized training or marketing tailored to the promotion of individual employees - the rationale being that there is no need to restrict competition if the employee or independent contractor doesn't gain a competitive edge. Groome Enterprises, Inc. v. Network Paging Corporation (1993).

Conclusion

Non-Compete and similar agreements present legal hurdles, and are rarely enforceable by accident. No word or phrase in a non-competition agreement should be used without a thorough analysis of its import. Ordinarily, contracts are written with broad language to extent to hypothetical or broad circumstances, but in the case of non-compete agreements, the opposite is required.

It might be prudent to state the following: non-compete agreements are available to protect the employer's (or business') vital interest only. It's important to not only express this in your non-competition agreement, but to also write in such a way as to exclude the possibility of other interpretations of the contract.

The Wolfe Law Offices is experienced in drafting non-competition and non-solicitation agreements, and would be happy to talk with your organization about its needs and whether such an agreement is right for business.

• Email This
• Print
• Comments
• Trackbacks