Sure, a subcontractor can use deposit money for other projects. But if the subcontractor on a construction project defaults on the subcontract and the general contractor finds out, the general contractor can sue the subcontractor for an unfair trade practice lawsuit. This means the Court may make you pay compensatory damages, plus attorney’s fees and punitive damages. You will need an attorney to defend your company, which will just cost your business more money.
Your Subcontract May Tell You Whether You Can Use Deposit Money For Other Projects
The first place you should look to answer this question is your written subcontract. The written subcontract may have the answer. No general contractor will expressly allow a subcontractor to use deposit money for anything but its project. The contract may even state that the deposit money can be used only for that project. Even if the contract doesn’t have that language, you shouldn’t do it. Every written contract, pretty much in every state and certainly Connecticut, contains a covenant of good faith and fair dealing. Think of it like this. As soon as the parties sign the contract, a magical genie appears and puts a magical stamp on it that says “the parties will deal with each other in good faith and fairly no matter what the contract says.” A violation of this promise is “bad faith” and can lead to the breaching party paying the other side’s attorney’s fees.
The Parties’ Course of Dealing May Tell You Whether You Can Use Deposit Money For Other Projects
Often, courts will look at how the parties have dealt with each other in the past to determine the parties’ rights under a particular agreement. So if you are the subcontractor, and the general contractor knows that you are using deposit money for its project and doesn’t do anything about it, you can argue that the general contractor has waived, or given up its right, to complain. But this proposition would not protect you in court unless the facts are very strongly in your favor. Like you asked the general contractor to write the deposit check out to a supplier that the GC knows has no connection with its project. That is a far-fetched example to make a point.
Connecticut’s Unfair Trade Practice Says You Will Be Sued If You Use Deposit Money For Other Projects
Here’s the last place to look but the easiest answer. The Connecticut Appellate Court’s decision in Pointe Residential Builders BH, LLC, v. TMP Construction Group, LLC says a construction subcontractor sued by general contractor for improperly using deposit money is in trouble. So don’t do it. In that case, the subcontractor convinced the general contractor to give it 30% upfront money towards estimated costs of materials and equipment. The subcontractor used that money to finance its payroll and work on other projects. Everything would’ve been fine, except the subcontractor failed to perform its obligations to the GC. Once that happened, the GC sued, and won. And won big: $463,519.77 including punitive damages and its attorney’s fees against the subcontractor. Not only did the subcontractor breach the subcontract, but the subcontractor’s diversion of the deposit money to fund its other projects was “deceptive, unethical and unscrupulous” which violates Connecticut’s unfair trade practice statute. When you do that, and you lose in court, you pay the other side’s attorney’s fees.
The GC May Sue You Personally If You Wrongfully Use Deposit Money To Fund Other Projects
Probably the strongest reason to not use deposit money to fund your other projects, is because even if you have a limited liability company or other legally recognized entity, you as the owner could be held personally and individually liable to the general contractor or owner. This means even if you bankrupt your limited liability company after losing the case, your personal assets are exposed. It’s important for business owners to know that an LLC or corporation is not an impenetrable force field.
Law Junkie Take Away
If your business is struggling, stick with it, you’ll get through it. Take out a short-term loan from a relative or put more capital into it. Don’t use money you get from a customer to finance your other projects in the hope that no one will ever find out. If you do and get caught, don’t lie and don’t cover it up. Don’t say anything. Call the Law Junkies and we will help protect your business.