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Commentary: The Risks of Selling Materials to Deadbeat Subs

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here are a few cases winding their way through local courts aimed at testing the merits of mechanic’s liens and bond claims of suppliers who have allegedly continued to sell materials to subcontractors despite the fact that the subcontractors had been delinquent in paying their suppliers’ bills.

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Those suppliers have filed either mechanic’s liens against the privately owned properties upon which the materials had been used or bond claims against the general contractors’ bonds posted on public projects.  In both instances, if the suppliers are successful, the general contractors would be paying double if they had already paid their subcontractors.

A couple of local general contractors and their attorneys think that they may have figured out a way to defeat some or all of those suppliers’ claims. They are asserting the legal defense of failure to mitigate damages.

Under the law, a party has a duty to take reasonable steps to mitigate or reduce the amount of damages it suffers from another’s wrongdoing, such as not paying bills. Using the mitigation-of-damages defense against supplier claims, the general contractors argue that the suppliers could have reduced their damages by not continuing to sell supplies to subcontractors who were delinquent.

The argument is that if they had stopped supplying materials when their subcontractors became in arrears, they would have mitigated their losses.

I confess that I haven’t done the legal research, but I do understand that counsel for one of the general contractors involved has been able to find a reported court decision from another state that gives credence to a mitigation-of-damages defense. It has also been reported that one Colorado judge has ruled that a mitigation-of-damages defense may be possible in a supplier versus general contractor bond case.

The practical solution to this problem is that suppliers may and should exercise that would be in their best interest as well as those of the project contractors: timely notice to the general contractors of their problems in getting paid by subcontractors. This would then give the general contractors the opportunity to address matters with their subcontractors.  

That could lead to termination for default or, better yet, arrangements to check on both the subs and suppliers. The result would be a win-win for the suppliers and the general contractors. The suppliers would get paid, and the general contractors would not risk having to pay twice for the same materials.

Albert B. Wolf is a principal in the Denver law firm of Wolf Slatkin & Madison PC.

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