Another's job can look appealing but it has pitfalls

Sometimes a contractor receives an invitation to take over and complete works started by another contractor. Such opportunities may appear attractive, but may also present many risks.

Below are some key points to consider before taking over construction works from another contractor.

What is the process? It is important to be clear in communications to avoid committing prematurely. Such care is always important, but even more so when entering this type of situation, and commitments should be made only pursuant to a carefully considered written agreement, properly approved and signed by both parties.

What happened? It is important to learn why the original contractor is no longer on the job. What is the disagreement between the original contractor and the employer? Different viewpoints can be obtained by speaking with the engineer and key subcontractors, as well as the employer and, if possible, the original contractor.

Has the original contract been properly terminated? No contractor wants to undertake a project while another contractor has the same project under contract. How has the original contract been terminated? If not by mutual written agreement, then exercise caution.

In some circumstances one party to a construction contract may need court approval before terminating the contract unilaterally. In the absence of court approved or mutually agreed termination, there is risk in proceeding without a consent or "no objection" letter from the original contractor.

What is the source of payment? What is the employer's financial condition?

Does the employer propose to pay the new contractor by encashing performance guarantees of the original contractor? This could ensnare the new contractor in a dispute between them.

If there is a project lender, has it consented to the termination of the original contract and approved the new contractor? Will the lender continue to advance funds?

What is the new scope? A significant risk is becoming liable for work performed by the original contractor.

The new contract can address this vis-à-vis the employer, but in some cases it may not be possible to avoid responsibility for the finished works. There may be liability under the law, consider the Civil Code's decennial liability provision. Or, it may be so difficult to prove who is at fault that the new contractor becomes liable for faults of the original contractor.

The employer should be required to document the quantity and quality of the original contractor's work with independent inspections, surveys, tests, and photographs observed by the new contractor. The contractor must ensure that the employer bears responsibility for all of the work previously performed by the original contractor.

Plant, equipment and materials. The new contractor should inventory what plant, equipment and materials have been ordered but not delivered and what items have been delivered, whether to the site or to offsite storage, but not yet used.

The new contractor should determine the payment status of all those items and whether the employer legally may allow them to be used. Until the new contractor has control of the site, offsite storage and lay-down areas, it cannot prevent theft or other loss.

So, the contract should provide for a final inventory when the new contractor takes over the works, with the employer bearing shortages and damages since the first inventory.

Subcontractors and suppliers. Subcontractors and suppliers must be carefully considered and the terms of the relevant contracts, purchase orders, payment claims and guarantees reviewed.

Permits and Insurance. The building permit must be transferred to the new contractor, and other required permits and approvals need to remain in force or be issued to the new contractor. A seamless transition of insurance coverage is important, including coverage of the new contractor for liability arising out of faults of the original contractor.

Perhaps coverage remains available under the original contractor's insurance for defects in the latter's work.

Some other terms. A contractor may be comfortable mitigating some, but perhaps not all, risks with indemnities, a cost-plus fee arrangement or a significantly higher contract price.

Note: This article is a general commentary on legal affairs and not legal advice. No attorney-client relationship is established by means of this article.


- John Boehm is a Partner at Fulbright and Jaworski. The views expressed are his own

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