Thursday, May 17, 2012

Letters of Credit or Payments

In LinkedIn someone asked the question if to get a reduction in price whether it was possible for an employer to issue a letter of credit (LC) to a major equipment supplier for the purchase of capital equipment to be used in the work. The same question could also apply to whether you could make payment. My assumption was there was at least four parties involved, the supplier, the electrical subcontractor, the prime contractor and the owner. In this case the owner has no privity of contract with either the supplier or the electrical subcontractor and you don’t want to make any payments to someone you don’t have privity of contract with as you have no legal relationship with that party. I offered two suggestions:

One way would be to have the contract between the subcontractor and the supplier for the purchase be assigned to the employer. That creates privity. The employer can then issue the LC or make payment. They would then later assign and novate that agreement to the prime contract contractor subject to a deduct in the LC amount. The Prime contractor would treat the equipment as consigned material to the subcontractor or could also assign the contract to the subcontractor, less the deduction in the sub-contract amount.

A second approach would be to have an amendment with the contractor, where in consideration of the Employer issuing the LC or making payment directly to the supplier, the contract price is reduced by the amount of the LC. The prime contractor would need to make similar adjustments in their contract with the subcontractor.

Never make a payment for anyone without a writing in place that establishes your ownership of the equipment until you are either paid or get the appropriate credit from the party your contract is with. The simple reason for that is if the equipment had been delivered but not installed and in the interim the subcontractor went bankrupt unless you can show ownership interest in the equipment it would be considered part of the subcontractors assets which could be disposed of in payment to their creditors.