Working Without a Written Subcontract

Do you write contracts for work assigned to subs? Many prime contractors don’t. And for good reasons, as I’ll explain later. But first, consider a Kansas case decided last month. Lux Building v. Prof’l Mech. Contractors.

Lux, the building owner, selected Farah Construction to turn a former Wichita office building into a mixed-use Leadership in Energy and Environmental Design (LEED) certified property. Farha subcontracted with PMC to install the chilled water Daikin VRV HVAC system. Unfortunately, there were problems. After doing call-backs for several years, PMC refused to do any more repair work. Lux and Farha had to hire another sub to keep the HVAC system working – at a cost of over $2 million. Farah sued PMC, claiming breach of their subcontract. But there was a problem. The PMC subcontract was in Farah’s file. But the subcontract had never been signed! How did that happen?

Farah and PMC had drafted and re-drafted the written agreement. It was ready for signature. And PMC started work. But PMC never signed the final draft of the agreement. Not a problem. For commercial work, Kansas does not require a signed written agreement. An oral contract is enough. Except for one little issue.

Under Kansas law, the statute of limitations on oral contracts is three years. Three years after breach, Kansas courts don’t permit suit on oral contracts. In the Lux case, more than three years had passed since the claimed breach. OK. But there’s a five-year statute of limitations on written contracts. PMC would still be on the hook for contract claims if the agreement had been signed. But a written agreement requires that all material terms be in writing, including a signature. The trial court’s ruling: A contract which is partly in writing and partly oral is an oral contract. The three-year statute applies.

Ted Farah explained why he didn’t always get written subcontracts:

“Depends on the sub and the scope of work. There are subs I have worked with for 20-plus years and, you know, have relationships and we often don't have -- we go to work without subcontracts, written subcontracts on I would say on-not today, but used to on a regular basis. I have worked with trusted [subcontractors] on small jobs in the past without a written subcontract. I would never work on a job of this size [the Lux job] with a party with whom I had not worked before without a written subcontract."

In essence, Ted admitted it was his mistake. He should have insisted on a signed contract before PMC started work.

The Kansas appellate court upheld the trial court decision. Farah Construction’s unsigned agreement was no longer an enforceable contract. PMC wasn’t liable for the extra $2,000,000 in repair work.

Word to the wise: Don’t get stuck like Farah Construction. On larger and more complex jobs, get a written and signed agreement with your subs. It’s easy. Construction Contract Writer drafts letter-perfect agreements for both prime contracts and subcontracts – no matter the state and no matter the type of work. The trial version is free.