By Attorney Edward Jesson
It is often assumed when talking about purchasing a business that your only option is to purchase the business outright. However, there is a different solution which, depending on the circumstances, could have some benefits: purchasing the target business’s assets instead of the whole company.
When you purchase a business outright, be it all of the stock of a corporation or all of the membership interest in an LLC, you are buying everything. That includes all of the business’s assets but also includes all of the business’s liabilities, some of which could be unknown at the time of the purchase. In any business purchase agreement, there should be a “due diligence” period which will allow you to uncover as many of those hidden risks as possible, but it is nearly impossible to uncover every possible risk that exists.
Most purchase agreements will contain some form of indemnification clause providing that the seller will defend and insure the buyer from various liabilities. However, negotiating an indemnification provision that adequately protects the buyer can potentially increase the purchase price requested by the seller and can also be difficult and expensive to enforce if an issue does arise in the future.
However, when you purchase only the assets of a company you are buying the possessions of the business and putting them into a new business name. The buyer can (at least to a certain extent) dictate what liabilities of the selling business are being purchased which can assist in limiting the buyer’s liability and risk in moving forwards with the transaction. Another benefit of buying a business’s assets is that the buyer can also elect to purchase some, but not all, of the target business’s assets. For example, if you were buying a trucking company you may elect not to buy the old trucks that don’t have any useful life left.
There are downsides to an asset purchase. For example, contracts between the old business and its customers/vendors may need to be renegotiated in the new business’s name. There could also be similar implications with key employees depending on the terms of any employment agreements that were in place with the old business.
Whichever route you choose, it is important to work with a team of advisors who can assist you in the process. While not discussed in detail here, there are different tax implications depending on whether you purchase the business or just the assets, about which a CPA would need to advise.
If you’re thinking of purchasing a business, or a business’s assets, the attorneys at Jesson & Rains are ready to help you through the process.
By Attorney Edward Jesson
Hearings were recently scheduled on a proposed North Carolina state bill entitled “An Act to Provide Consumer Protections Related to Roofing Repair Contractors.”
If passed, the law would have a big effect on the roofing industry in North Carolina--written contracts between roofing contractors and consumers would now be required. The proposed bill would require the following provisions to be included in these contracts:
1. The roofing contractor’s contact information;
2. The name of the consumer;
3. The physical address of the property being worked on and a description of the structure being repaired;
4. A copy of the repair estimate that addresses:
a. a precise description and location of all the damage being claimed on the repair estimate;
b. an itemized estimate of repair costs, including the cost of raw materials, the hourly labor rate, and the number of hours for each item to be repaired; and,
c. a statement as to whether the property was inspected prior to the preparation of the estimate and a description of the nature of that inspection.
5. Date the contract was signed by the consumer;
6. A statement that the contractor shall hold in trust any payment from the consumer until the materials have been delivered to the job site or the majority of the work has been done;
7. A statement providing that the contractor shall provide a certificate of insurance to the consumer that is valid for the time during which the work is to be performed;
8. If the consumer anticipates that insurance funds will be used to pay for any portion of the job, a disclosure from the consumer that states that the consumer is responsible for payment if the insurance company denies the claim in whole or in part and a disclosure from the contractor that he or she has made no guarantees that the claimed loss will be covered by an insurance policy.
The new law, if passed, will also give the consumer the right to cancel the contract if the consumer’s insurance company denies the claim. Further, it will prohibit various practices from roofing contractors, including offering to pay insurance deductibles for the consumer or offering the consumer anything of value in order to display a sign or any other type of advertisement at the consumer’s property.
It is important to note that the proposed law specifically excludes licensed general contractors or subcontractors working underneath a licensed general contractor from the definition of “roofing repair contractors.”
While the new law would create an extra requirement that roofing contractors in NC may not be happy about, we always recommend having written contracts in place between contractors and the consumer. Too often the only written documentation is a cost estimate and, if there are any disputes, there are no provisions in these cost estimates for handling those disputes. The proposed law may also strengthen the reputation of the roofing industry by weeding out unscrupulous roofing contractors.
Jesson & Rains will continue to keep our clients updated on the passage of this law and are happy to assist with the drafting or review of any construction contracts. You can follow the status of the law yourself at: https://www.ncleg.gov/BillLookup/2019/S576.
By Attorney Edward Jesson
This week’s article deals with the responsibilities that contractors have with regards to the actual design of the building, which necessarily includes the building’s structural system. Generally, the contractor responsible for building the project, be it new construction or otherwise, is not responsible for the design aspects of the project unless we are talking about a design-build project. The design aspects will usually fall to a “design team,” often comprising of some combination of architects and engineers. Or, more often in the residential setting, the owner will provide plans and specifications to the contractor.
The following problem has come up time and time again: a general contractor finishes work on a project, built perfectly to the plans and specifications, only to find out that the plans and specifications were defective in some way, which has then caused issues with the final project (at the extreme end, these issues could be structural, rendering the completed project unfit for purpose). Invariably, on discovery that the project has some serious issues, the project’s owner will first turn to the general contractor to “fix it.” Of course, if “fixing it” involves starting from scratch, neither the owner nor the contractor wants to come out of pocket to pay for that.
Legally speaking, the courts throughout the United States have created a doctrine whereby the project owner impliedly warrants that the information, plans, and specifications that an owner provides to the general contractor are fit for purpose. In a residential setting, even if the owner used a design team, if the owner provided plans and specifications to the contractor, this doctrine would likely still apply. This doctrine is known as the Spearin Doctrine and arises from the case United States v. Spearin, which was argued in the United States Supreme Court in 1918.
What this essentially means is that, so long as the contractor complies with the plans and specifications supplied to it by the project owner, the contractor cannot be held legally responsible for structural defects if those plans and specifications are not adequate for the specific project. Contrast this, for example, with a design-build project, where the contractor or its consultants are partially responsible for the design aspect of the project, and you can see how Spearin would likely be inapplicable to those circumstances.
There are, of course, exceptions to this general rule. For example, if there is an express term contained in a contract that the contractor is responsible for any design defects, then it is likely that a contractor in that situation could be held legally responsible. Another exception is that of “reasonable reliance,” which means that if a design defect is so glaringly obvious that it could not be missed, a contractor would not then be able to later claim that they relied on the plans in order to avoid liability.
While generally not directly responsible for the design of structural systems (or, indeed, other areas of a project), that does not mean that a contractor cannot be held liable for deficiencies in the design. The best protection against issues such as the ones presented in this article are written contracts in place between all parties to a construction project, including the design team, and not just between the owner and general contractor.
By Attorney Edward Jesson
I am excited for the opportunity to speak to you each month about legal issues in the construction industry. My name is Edward Jesson, and I am a partner with the law firm Jesson & Rains, PLLC based in Charlotte, North Carolina. I grew up in England and moved to the United States in 2005 to attend college in South Carolina before moving to South Florida for law school. Our firm protects businesses and their owners, specifically those in construction and related industries. My wife and I previously practiced in South Florida prior to opening Jesson & Rains in the fall of 2015.
In keeping with the theme of this first issue of Building Savvy, I think it’s important to be aware of a specific contract provision that can save the profitability of many jobs: Differing Site Conditions.
Coming across an unexpected site condition is a fairly common risk in a construction project, especially for those involved in new construction or those involved in the grading industry. Put simply, “differing site conditions” are generally considered to be a condition that is discovered while performing work on a project that was not apparent, visible, or expected at the time the project was bid. The majority of times these differing site conditions would be ones that could not have easily been discovered if the contractor had engaged in a reasonable site inspection during the bidding/quoting process. A good example of a differing site condition that you might encounter throughout the country would be unanticipated ground water. You could also come across differing site conditions during remodels -- a historical renovation would be one such example -- such as something in the walls that wasn’t expected or couldn’t have been uncovered with a reasonable inspection of the property (i.e. without tearing into walls to see what you find—which a lot of homeowners probably wouldn’t be too happy with during the bidding process!).
This presents a problem in construction projects, especially those that are for a fixed price. If you quote a homeowner $500,000 for a new build, and then encounter a differing site condition, the costs of construction can skyrocket. Without the proper contractual provisions in place, the homeowner may not be willing to pay those increased costs, nor may they be legally required to. Issues can also arise as
differing site conditions will often involve a delay in the completion date of the project; something which owners, both residential and commercial alike, are often none too happy about.
One of the main purposes of contracts in the construction industry is to assign various risks to parties to that contract before the work begins. This can clearly be seen with differing site conditions clauses in contracts. The differing site conditions clause in AIA 201-2017 states:
If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially and cause an increase or decrease in the Contractor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15.
AIA agreements are often standard in the commercial construction industry, though much less used on the residential side of things. While that AIA clause is certainly more than you would need for most residential construction projects, it is illustrative of what a differing site conditions clause tries to do. If the contractor notifies the proper people promptly (in this case the owner and architect, but on the majority of projects it would likely just be the owner), the owner must adjust the contract price accordingly to reflect the extra work that will be done and, if necessary, adjust the time required for performing the contract.
Contractors would be wise to consider using a differing side condition clause in their contract. A simple differing site condition clause, in addition to a well written contract in general, can help protect against the unexpected and, more importantly, help a contractor protect its profit when such conditions are discovered.
By Attorney Edward Jesson
It happens more often than we would like to see, but sometimes work is complete, a dispute arises, and suddenly it is discovered that the contract that everyone assumed to be in place was not signed. This happens frequently in construction cases (most often seen with contracts between General Contractors and Subcontractors) but the issue can also rear its ugly head in any other contractual setting, especially where independent contractors are involved.
In legal terms, in order for an agreement between two parties to be binding and valid, there needs to be a “meeting of the minds”. Put simply, it needs to be clear that the parties to the contract intended that contract to govern the relationship between them. Most frequently, a signature on a contract signifies each party’s intent to be governed by that contract.
So what happens when, sticking with the construction industry example, a subcontractor performs all work under its subcontract agreement with the general contractor and then a dispute arises and it turns out the contract wasn’t signed?
Generally, when courts are confronted with an unsigned agreement, their default opinion will be that the parties never reached that “meeting of the minds” and therefore they did not intend to be bound by the terms of that contract.
However, this doesn’t mean that no contract between the parties existed and that the party seeking to enforce its rights under the agreement has no recourse. The court will next look to all other evidence which indicates what the agreement was between the parties. For example, if there were multiple drafts of a contract with different terms included, the court may decide that the earlier draft contracts that had parts removed from them at a later date is evidence that those removed contractual terms were not a part of the parties’ agreement.
Courts may also look to whether there was a “contract implied in fact” between the parties. In the general contractor subcontractor example, evidence that the general contractor asked the subcontractor to perform work and the subcontractor did perform that work would certainly be evidence of a “contract implied in fact”. It would be unreasonable for a court to decide that the subcontractor did that work and did not expect to receive any payment for that work. Oral agreements are oftentimes valid. There is no requirement that many types of contracts be in writing. Therefore, if you’re on the other side (someone completed work for you but you didn’t sign the contract), you don’t get a free pass! If you do not pay, you may find yourself on the receiving end of a lawsuit.
In any event, it is important to have a written contract signed by the parties. It sets the expectations of both parties – what they’re supposed to do in exchange for compensation. When it is reduced to writing, there are less evidentiary issues in court. When it is reduced to writing, it is less likely that there will ever be a lawsuit about the terms because a signed contract shows that all parties agreed to the terms.
The attorneys at Jesson & Rains are ready to assist with drafting and review of contracts, and, importantly, assist clients who find themselves in disputes arising from unsigned contracts. Just because you do not have a signed contract, it does not mean you have no rights.
We have written before that businesses do not necessarily have to have written contracts to form a binding contract. If a customer verbally offers to pay you $200 to do X, and you verbally agree to do X for $200, you may have a binding contract. To form an oral contract, there must be an offer, an acceptance, and mutual assent. This last requirement, also called “meeting of the minds,” means that you both agree to the terms of the contract – which can be tricky if the contract is not written down.
Even though oral contracts are valid, we always recommend contracts in writing because (1) then there is proof that the parties contracted with each other, other than just two people’s versions of the truth, and (2) there are oftentimes many more terms and conditions other than X and the price that need to be included in the contract. What time does X have to be completed? When is payment due? Inclusions/exclusions? For example, if X is painting a house, does the painter include white paint on the front porch railings but exclude the stain on the wood deck?
If you and the customer are not on the same page and do not have a “meeting of the minds” as to these terms, there can be no contract. However, if you hand your customer a piece of paper with terms and conditions written on it, that is simply an offer (or a counteroffer to their offer). How do you know the agree to the terms? This is why people get their customers to sign it, which acknowledges that they agree to the terms (even though a signature is NOT a legal requirement to form a contract).
For a lot of our clients, written contracts and signatures just aren’t practical. The house painter is going to want the homeowner client to agree to the terms and conditions BEFORE the painter buys supplies and drives out to the house, for example.
These days, everyone has e-mail. A lot of our clients are already utilizing e-mail to send their customers appointment reminders and quotes. Why not incorporate terms and conditions into the email? To legally guarantee that those e-mailed terms are incorporated into the contract, the customer would need to take some affirmative step to acknowledge that they’re agreeing to it. They could hit reply to the e-mail and say they agree to everything, you could include a way for them to electronically sign a document, or you could utilize software that allows the customer to click “I agree” or “I disagree” to the terms. This latter example is called “click-wrap” and technology companies like Apple have been using it for years to get consumers to agree to their terms of service. Click-wrap contracts are universally upheld as long as some procedures are put in place, like allowing the customer to click “I disagree,” putting the terms and conditions near the “I agree” button, and allowing the customer to download or print the terms of service.
Putting all the terms of the contract in writing helps to avoid confusion between the parties and prevent potential lawsuits if customers become unhappy. Please keep Jesson & Rains in mind if you or a colleague needs assistance drafting a click-wrap contract or other terms and conditions.
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