USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
Parent (or Third-Party) Guarantees These are provided by the contractor’s parent company (if it has one) or by a financially respon - sible third party, to guarantee the performance of the contractor. Escrow accounts may be used to hold funds by a third-party escrowee until the contractor meets certain conditions or milestones, after which the funds are released to the contractor. Third-Party Surety This is a company that provides a guarantee of performance on behalf of the contractor (eg, a surety bond, letter of credit, etc). 7.6 Liens or Encumbrances in the Event of Non-Payment Contractors and designers may file “mechanics liens” to preserve their right to seek compensa - tion if the owner fails to pay their fees. In the commercial context, mechanics’ liens are typi - cally filed by contractors who have not been paid for work related to the project. Mechanics liens create “cloud on title” , which appears on the public record and may impair the ability of the owner to sell, transfer or mort- gage the property until the debt is paid and the mechanics lien is discharged or “bonded” by the contractor – frequently a precursor to litigation. Some contracts include “lien waiver” provisions that permit claims but restrict the unpaid party from filing a mechanic’s lien against the property. 7.7 Requirements Before Use or Inhabitation A Certificate of Occupancy (COO) must be issued by the local or municipal authority before project can be used for its intended purpose.
Construction agreements typically contain liq - uidated damages provisions in which the owner may receive stipulated compensation if the pro - ject is not completed by the date called for, and additional costs and expenses are incurred by the owner as a result of the delay. The general contractor may also seek such protections from its subcontractors. Parties may also build in stipulated rights to extend timeframes under certain circumstanc - es with or without additional compensation. For example, if certain unforeseen site condi - tions occur (eg, bad weather or “strikes” , or even pervasive illness delaying construction), the contractor may have the right to extend its deadlines. The parties can also avoid delays through regular communication, during which they devise con - tingency plans, such as reallocating resources and adjusting schedules. 7.5 Additional Forms of Security to Guarantee a Contractor’s Performance The following are typical examples of additional These are a form of surety bond that guarantees that the contractor will complete the project on time. If the contractor fails to do so, the surety company will cover additional costs required for the developer to finish the project. A Letter of Credit This is a financial instrument issued by a bank that guarantees payment to the project owner if the contractor fails in its performance. In the event of a default, the owner may draw upon the letter of credit to pay for the project’s comple - tion, as needed. security provided by contractors. Performance or Completion Bonds
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