Legal Advice — Always get any agreements in writing

Jan A. Glassman | 11/4/2015, 12:52 p.m.
Thinkstock.com/ Lisa F. Young

Fred Friendster had a small electrical contracting business. He operated as a “DBA,” without a corporation or LLC. He mostly did residential electrical work for his friends and neighbors when something broke in their homes or when they needed a new appliance installation. His buddy, Earl Eversmart, had a larger commercial electrical contracting business, often bidding and getting projects over $200,000. They had been friends since childhood and played cards together a couple times a month.

While talking one day with his local city councilor, Fred learned that a general contractor was seeking bids for a subcontract in connection with 12 units of elderly housing that were being built nearby. The contract price would be in the vicinity of $300,000. It was a short-term contract, but it required performance and payment bonds. Fred did not even know what those were. Still, Fred knew that the work was not too hard for him if he had some help. He figured he would need a few workers, which he did not have.

So, Fred went to his friend Earl to talk about it. Earl suggested that they create a joint venture and work on the project together. They called it F&E Co. Fred really didn’t know what a joint venture was, although he had heard of it. They would split everything 50-50. Earl would provide the bonds and some of his workers. Earl also had workers’ compensation insurance for his workers and general liability insurance, which Fred did not have. Fred would estimate the job, submit the bid, be the primary contact with the general contractor, attend all of the pre-bid and job meetings, oversee the work and make sure that everything was installed properly. Fred asked Earl about going to a lawyer to get something in writing, but Earl thought that was foolish for just one little project. So, they shook hands.

F&E bid the job, was the low bidder and got the contract. They signed the contract in the names of their companies, as a joint venture. Earl introduced Fred to his bonding agent, who was happy to provide bonds for the project. These bonds were promises by the bonding company to pay workers and suppliers and to finish the contract if anything went wrong. Because this was a joint venture, Fred had to sign the bonding company’s indemnity agreement for the bonds. This meant that if the bonding company was forced to pay out any money on this project, then both Fred and Earl were required to personally reimburse it. Fred was not concerned, because Earl had a lot more money than he did, and it was not a difficult or lengthy job. Fred also felt good about this entire project, as he now knew a bonding agent and it appeared that his business might be moving to a new level.

At first, everything went well. Fred went to all the contract planning meetings and got along with everyone. He also ordered all the materials that were needed for the job. When the bill arrived for the materials, he asked Earl to pay half. Earl told him that he would need a little time, because he was waiting for another customer to pay him. A few weeks later, Earl paid a quarter of the bill and said that the rest would be coming soon.