Legal Waypoints

“Pay when Paid” v. “Pay if Paid” – a Subcontractor’s nightmare

“Everything was going along fine and then I stopped getting paid.  Because I had a prior relationship with the prime contractor I just kept working.  Then I found out the project was shut down and the owner was out of cash.  What do I do now?”

This is a common scenario for many subcontractors.  In many instance it can turn into a subcontractor’s worst nightmare – no payment, unexpected legal costs and yet a continuing obligation to make payroll or pay lower tier vendors and suppliers.  The first step in the legal assessment is to review the contract documents between the subcontractor and the prime contractor.  Specifically the payment provisions are usually the focus of that initial assessment.  Is it a “pay when paid” or a “pay if paid” provision?  Does the payment provision merely fix a time for payment or does it actually shift the risk of the owner’s insolvency to the subcontractor?

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A Case Study in Rental Engine Warranties – Agape v. Covington

For aircraft owners planning is the key to a successful scheduled engine overhaul event.  Owners seek estimates, select an overhaul shop, arrange for a rental engine and set the date for an engine exchange months in advance of a scheduled overhaul.  Typically there will be at least two significant legal documents associated with this event.  One is the engine overhaul agreement which sets forth the key liability terms, the detailed scope, a schedule and the expected cost associated with the engine overhaul.  The second is the engine lease agreement which governs the lease of a substitute engine for use during the period needed to complete the engine overhaul.  This “rental”, as they are commonly referred to, is often supplied by an overhaul shop as an accommodation while the customer’s engine is in the shop so that their aircraft can remain operational.  The accommodation, which is not free, is an alternative to being grounded.

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Liquidated Damages – a remedy for breach of contract

In the context of commercial contracts the term “liquidation” means to fix or establish the damages owed in the event of a breach of contract.  Rather than add the calculation of the dollar amount of damages for breach to a list of items in dispute, a carefully drafted liquidated damages (“LD’s”) provision can establish the dollar damages for breach at the outset of the relationship.  The law on the enforceability of LD’s varies slightly from state to state but the general rules are well settled and fairly easy to implement.  Using a well crafted LD’s provision in a contract can offer benefits to both parties as they allocate particular transaction risks.

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Flow Down / Consequential Damages Case Study – Costa v. Brait

A recent case decided by the Supreme Judicial Court of Massachusetts illustrates how a flow down provision can work in the context of a claim for consequential damages.  The case of Costa v. Brait Builders Corporation, 463 Mass. 65, 972 N.E.2d 449, (Mass., 2012), involves several areas of dispute between a prime (general) contractor and one of his subcontractors on a municipal construction project.  One of the lessons learned is a keen reminder of the power of simple flow down language and good contract review practices.

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Prime / Subcontractor Relationships – the “flow down” factor.

The “flow down” provision is common tool used by a prime contractor to simplify its preparation of a subcontract agreement.  Rather than repeat and revise the provisions of its prime contract in the actual subcontract document, the prime uses a flow down clause to do protect itself from a drafting gap between the two documents.  A simple flow down provision in a subcontract agreement may read as follows:

“The Subcontractor agrees to be bound to the Contractor by the terms of the prime contract and to assume to the Contractor all the obligations and responsibilities that the Contractor by those documents assumes to the Owner, except to the extent that the provisions contained therein are by the terms or by law applicable only to the Contractor.”

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Consequential Damages – the other damages.

“Take responsibility for the risks that you control.”  This is a common rationale used to justify the allocation of risk in contract negotiations.  Stated another way – “If a loss is the result of your actions you should be willing to step up and take responsibility for the resulting damage.”   This position sounds reasonable.  However, accepting this view will probably leave you vulnerable to claims that far exceed your commercial expectations.

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Warranty and Standard of Care

Do you repair, overhaul or manufacture goods?  Do you provide professional services?  Does your company offer mixed goods and services?  Regardless of the nature of your business keeping your obligations and remedies for non-conformance consistent with industry practice takes some diligence and sharp thinking.

Engineers and other professionals typically provide services in accordance with a generally accepted professional standard of care.  That standard of care does not guarantee perfection.  If it did medical professionals would be on the hot seat every time a patient, despite well grounded advice and care, took a turn for the worse.  The same logic applies to other professionals such as design engineers or financial consultants.  Presented below is an example of a professional standard of care:

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A Case Study in Trade Secrets – AvidAir v. Rolls-Royce

Reading case law isn’t just for attorneys.  If you are part of the aviation manufacture, repair or overhaul industry then the recent case AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corporation (8th Cir. 2011) is a must read.  Decided December 13, 2011 by the United States Court of Appeals for the Eight Circuit, AvidAir v. Rolls-Royce provides an excellent summary of several important intellectual property concepts, including the rights to proprietary documents and trade secrets contained in most OEM overhaul manuals and technical bulletins – in this instance technical documents made available to Rolls-Royce Model 250 engine Authorized Maintenance Centers (AMCs).  The brief summary below focuses on one of the key legal concepts address by the court in the appeal.

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Confidentiality – the ABCs of NDAs

Confidentiality obligations are an ever present part of our working lives. We owe duties of confidentiality to our employers and our clients or customers. Whether you produce a manufactured product or provide a consulting service you are likely bound by written obligations of confidentiality. Sometimes these obligations operate in the background – the specifics being unknown to us as individuals. In other instances they are front and center – part of the first step in our interactions with a business partner. However you confront them understanding the nature of your confidentiality obligations is an essential part of today’s business environment.

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Welcome to Legal Waypoints

Thank you for checking out the blog feature of my newly designed website – Legal Waypoints. I hope you will find this blog a place to seek out fresh legal information and tools that you can put to use in your day to day business operations or just for your own professional interest.

Why the name “Legal Waypoints”?

A waypoint is a set of coordinates that define a physical place in space. In two dimensions these are coordinates of longitude and latitude. When we describe waypoints used by aircraft we add the third dimension of altitude. In either case, a waypoint can be a destination, a designated point along a route to a destination, or a point of reference generally used in navigation but not necessarily on the route itself. Thus it is with “Legal Waypoints”. Think of them as items of information that help us navigate the complex and often confusing legal landscape that we all function in day in and day out. My hope is that the topics and tools provided in this blog will serve you well in the journeys to your destinations.


Steve Pazar