Sole Source Specifications for the Contractor's Soul

If a project owner specifies the use of a proprietary product, a particular brand and model, the contractor often finds herself dealing with a sole-source supplier. If that supplier proves unable or unwilling to deliver the product in a timely manner, who is responsible for the resulting delay on the project? The project owner who mandated the product, or the contractor who has a contract with the supplier?

A California court recently grappled with this issue. The contract in question, like most public works contracts, allowed the contractor to propose substitute products that were “equal” to the specified proprietary product. From that, the court concluded the provision was not a sole-source specification.  The result?  The contractor – not the project owner – was responsible for the delay caused by late delivery. This was a great argument for the lawyers in the courtroom, but doesn’t necessarily reflect the real-world goings-on in the field.  Substitution requests deviating from the specified proprietary product are frequently rejected.  Interestingly enough, the appellate court did not question the trial court’s ruling that if in fact the provision in the contract was deemed a sole-source products clause, then the owner bears the risk of late delivery.

It is not always clear when project owners bear the risk of late delivery of specified sole-source products. On federal contracts, the federal project owner warrants only that the sole-source supplier is capable of providing the specified product. The federal project owner does not warrant the supplier will be willing or able to provide the product in conformance with the project schedule. The theory, of course, is the contractor was capable of conducting a pre-bid investigation of the availability of the specified product, and is on the hook for securing a timely delivery.

What do you think? If a project owner insists on one particular product for its project, shouldn’t the owner bear the risk if there are delivery problems? If you have concerns about what you can do to protect yourself when faced with sole-source specifications, give me a call and let’s talk about it!

Nothing in this blog is intended to create an attorney-client relationship.  This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation.  Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.

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IS EXPERT OPINION TESTIMONY REGARDING LOST PROFITS ADMISSIBLE IF YOU HAVE AN UNESTABLISHED BUSINESS?

In these times of economic uncertainty, the failure of a relatively new or unestablished business is not uncommon.  But what happens when the business fails due to the wrongdoing of another?  How does the trier-of-fact value the lost profits with no track record of earnings to look to?

The California Supreme Court has granted review to decide the question of what is the permissible scope of expert testimony regarding lost profits claimed by an unestablished business.  (Sargon Enterprises, Inc. v. University of Southern California (case no. S191550) ___Cal.4^th ___.)  In California, when a defendant prevents the operation of an unestablished business, the plaintiff may recover an award of lost profits only by showing with reasonable certainty their nature and occurrence.  In Sargon Enterprises, the plaintiff alleged he invented a superior dental implant, but was unable to market the implant because of defendant’s alleged breach of the clinical trial agreement.  Plaintiff’s expert witness on the issue of damages would have testified the anticipated lost profits depended principally on the implant’s innovativeness.  Therefore, if the jury found a high degree of innovation, plaintiff would have achieved a larger market share, and larger profits, than if the jury found a lower degree of innovation.  The lost profits calculated applying the plaintiff’s expert’s theory ranged from $1.18 billion to $220 million.  However, the trial court excluded the expert’s testimony as speculative.

In a split decision, the Second District Court of Appeal reversed the trial court’s evidentiary exclusion.  The majority held the trial court’s ruling was “tatamount to a flat prohibition on lost profits in any case involving a revolutionary breakthrough in an industry,” while also acknowledging the “factor of innovation…is not easily converted into dollars and cents.”  The dissent opined the trial court had acted within its discretion ruling a comparison of “degrees of innovation” was inherently speculative.

The California Supreme Court has granted review, framing the issue before it as:  “Did the trial court err in excluding proffered expert opinion testimony regarding lost profits?” Undoubtedly, this decision will be of importance to the technology industry in our State.

If you are interested in following this case as it moves through the briefing process, to oral argument and decision, visit http://appellatecases.courtinfo.ca.gov/, search for the case number provided above, and enter your email in the box provided.  Questions?  Please don’t hesitate to contact me!

Nothing in this blog is intended to create an attorney-client relationship.  This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation.  Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.

Corporate Form May Not Protect You Personally From Employee Claim of Discrimination

Most business people form a closely held corporation, such as an S corporation or LLC, to insulate themselves from personal liability for their business’ operations.  Until recently, there was disagreement about whether an employee, suing for discrimination in violation of state law, could hold a sole shareholder personally liable for the obligation of the corporation. 

In a recent case from the Third District Court of Appeal, Leek v. Cooper (2011) 194 Cal.App.4^th 399, the employees of a car dealership sued the dealership and its sole shareholder for age discrimination.  The employees/plaintiffs argued the sole shareholder also should be personally liable for their damages because of the level of control he exercised over their employment.  At the trial court level, the shareholder filed a motion for summary judgment seeking to have judgment entered in his favor.  His motion was granted, in effect, releasing the sole shareholder from personal liability for any judgment that may ultimately be entered against the corporation. 

The employees appealed.  The Court of Appeal, however, affirmed the decision of the trial court.  The Court of Appeal held an employee may recover against the sole shareholder of an employer corporation for discrimination in violation of state law, but only where the employee can demonstrate the shareholder is the “alter ego” of the employer.  The term “alter ego” has a very specific meaning under the law.  The Court of Appeal explained that mere control was not enough to establish liability for breach of a duty owed only by an employer, and that the sole shareholder could be held liable only if plaintiffs proved the traditional elements of “alter ego” liability, including a “unity of interest” between the shareholder and the corporation, and an “inequitable result” if the alleged discrimination was treated as an act of the corporation alone.

What does this mean?  In the end, things worked out well for this particular sole shareholder.  But if you are the sole shareholder of your closely held corporation, the disgruntled employee suing you may have a lawyer who has read the Leek decision, and may plead you personally into her complaint.  What does “unity of interest” mean in your particular circumstance? How might one of your employees argue an “inequitable result” if you are not held personally liable?  These are risk management issues best covered in a personal consultation, analyzing the facts and circumstances specific to your business, your insurance coverage, and other tools designed to mitigate risk.  Call me.  Let’s talk.

Nothing in this blog is intended to create an attorney-client relationship.  This article is intended to provide a general overview of the current status of the law for informational purposes only, and is not intended to constitute, or serve as a substitute for, a professional legal consultation.  Laws change every day; please consult an attorney regarding the current status of the law, and how the law affects your specific circumstances. Thank you.

"Pay-if-paid" Clauses in Construction Subcontract Agreements -- Are They Legitimate?

“Pay-if-paid” clauses in subcontracts purport to shift the risk of project owner nonpayment from the prime contractor to the subcontractor. If drafted carefully, with express “condition precedent” language, they are enforceable in most (but not all) jurisdictions. The clauses, however, are understandably resented by trade contractors. The prime or general contractor elected to do business with the project owner and had the opportunity to ascertain the financial capability of that owner? Why should a subcontractor, which contracted only with the prime, be asked to assume the risk of owner insolvency?

In a recent federal appeals court decision, an enforceable pay-if-paid clause in a subcontract had been modified. If the prime contractor did not receive final payment from the owner within six months of the date due, the prime would pursue payment remedies against the owner and make a pro rata distribution of any recovery to the unpaid subcontractors. The subcontractor in question still received only a fraction of the subcontract balance. But the risk of owner insolvency was at least shared by the prime, which disbursed the full settlement amount to its subs.

A risk sharing arrangement, such as the one described above, may be a reasonable compromise.  How do you feel about pay-if-paid clauses? Should a prime contractor assume all the risk of project owner insolvency? Or is it fair to pass that risk through to the subcontractors as a cost of doing business?