Daily Development for
Monday, November 16, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

I’m really not convinced that this case raises new law for parties dealing with contractors, but I am unfamiliar enough with this area to be suspicious that there are some new issues here. I welcome commentary from construction mavens as to how this problem is addressed in the real world.

CONSTRUCTION; CONTRACTORS; AGENCY: Even though an owner limits the amount that it is obligated to pay to its contractor, if such contractor is held out as the agent of owner, the owner can be obligated for additional sums payable to a subcontractor.

McDaniel v. Hensons' Inc., 493 S.E.2d 529 (Ga. App. 1998).

Owner owned property that was used by a prior tenant as a landfill. The discarded material, which consisted primarily of wood, stumps, logs, and dirt, rendered the property undevelopable. It was described as a "million dollar property worth nothing."

Owner entered into a verbal arrangement with Contractor pursuant to which Owner would provide $50,000 to Contractor to start a clean up project. It was anticipated that the project would become selfsustaining from the sale of mulch, wood chips and other products. Contractor was to receive all profit after reimbursing Owner's initial $50,000 investment. Contractor entered into a contract with Subcontractor for work to be performed on an hourly basis for equipment and personnel.

Contractor paid Subcontractor weekly for each of the first two (2) weeks of work. Owner provided the money to Contractor in exchange for lien waivers, as required by the understanding between the parties. During the third week, Owner notified Contractor that it had reached the $50,000 limit and did not intend to provide additional funds. Subcontractor was not paid at the end of the third or fourth weeks of work and, by mutual agreement with Contractor, ceased all work.

Subcontractor asserted a personal claim against Owner and a mechanic's lien against the property for the sums due and owing to it. The parties presented evidence that Owner allowed Contractor to supervise work on the property, permitted the erection of a construction trailer, required lien waivers, had Contractor secure a building permit, and made payments to Contractor of invoices submitted by Contractor for work done under Contractor's supervision. The lien waiver that Contractor was required to sign listed Contractor as the "[owner's] agent." The Court found that, even if Contractor arranged for Subcontractor's work without authority, Owner was liable for the expense because he subsequently ratified that act when he required and obtained Subcontractor's lien releases after paying Contractor.

Comment 1: Although the mechanic's lien aspects of the case may be of interest to Georgia lawyers, the court does not tell us enough about the Georgia mechanic's lien stautute to reach any conclusions as to whether there is new law being made in this regard.

Comment 2: The editor finds the case interesting because of the personal judgment entered against the Owner on the theory that the Contractor acted as Owner's agent in contracting with Subcontractor beyond the $50,000 amount.

The court does not appear to dispute the Owner's allegation that it had agreed to pay only $50,000 and that the Contractor was responsible for costs beyond that. Further, it accepts the allegation that the parties expected Contractor to continue to conduct activities on the property after the initial $50,000 had been expended. Consequently, the fact that Owner was aware that Contractor, through Subcontractor, continued to be active on his property after the $50,000 had been exchausted cannot be construed as relevant to the creation of a true agency, since Owner had a reasonable basis to believe that Contractor was conducting the work on Contractor's own behalf. In fact, it could be argued that there were two projects the first one paid for by Owner, and the second one a joint venture in which Contractor was undertaking all the financial risk.

But the court concludes that Subcontrator was entitled to assume that once the project had begun, all subsequent work done as part of the same apparent project, and that Owner was paying for it.

Where does the line get drawn here? Are Owners personally liable for any work done by subcontractors, regardless of the Contractor's authority to order it? What if the subcontractors (or material suppliers), provide work that is of no benefit to the owner, does the fact that the Contractor ordered it according to the apparent authority of the original project render owner personally liable? For instance, Contractor starts with subcontractors working on Owner's project and later diverts the Subcontractor's efforts to other projects in the same vicinity, so that Subcontractor is not really aware that the work really relates to land other than Owner's. Or Contractor diverts materials to another project after they are delivered to Owner's jobsite.

As stated, mechanic's lien law in this area is quite well developed, and will provide answers to many of these questions from the standpoint of mechanic's liens. But isn't the implied agency recognized by the court here a significant additional danger for owners? How to protect against it?

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