Problem:

A subcontractor signed an agreement with a general contractor in connection construction of a commercial building for a national retailer. The subcontractor’s portion of the work consisted of installing most of the equipment in the building. The agreement provided the subcontractor would be paid only if the general contractor was paid – a “paid-when-paid” clause. Applicable law in the state in which the project was performed required contractors to notify property owners in writing before beginning work that the contractor may file a mechanic’s lien on the property if the contractor was not paid all amounts when due. If the contractor failed to provide the notice, it waived its right to file a lien. While subcontractor management debated whether to send the necessary notice to the owner out of concern that it might upset the owner, the subcontractor’s workers in the filed started work. The owner accepted the subcontractor’s portion of thQe work, but did not pay the general contractor the full amount due under the general contractor agreement due to other problems with the project.

Solution:

A mechanic’s lien is a type of construction lien that creates security interest in the title to real property. Its purpose is to help ensure that a contractor who improves the value of the property receives payment for its work. The liens are statutory devices that exist in every state and the laws vary by state. Each state’s statute requires specific, critical steps that must be met, or the mechanic’s lien may not be enforceable. Requirements include precise identification of the owner and property, the work to be performed and the amount due. There are also time-limited notice requirements that are strictly enforced. Although the subcontractor had a genuine concern about developing and maintaining a good relationship with the owner, construction lien rights have a long history and have become a standard part of doing business in the construction industry. In this instance, the subcontractor later learned that it was the only subcontractor not to file a mechanic’s lien.

Result:

The subcontractor received only partial payment for its work and payment was significantly delayed despite fully performing the contract and improving the value of the owner’s property. The subcontractor had no right to pursue the general contactor because of the contract’s paid-when-paid clause. Because the subcontractor had not filed a mechanic’s lien, it also could not seek payment from the owner.

Lessons Learned:

Although developing good relationships with customers is important for business success, a contractor must carefully consider the both the benefits and potential risk. Paid-when-paid clauses (and similar, “to the extent paid” clauses) create risks over which a contractor may have no control. Foregoing statutory remedies due to customer relationship or other concerns may not be consistent with industry practice.  Talking with an experienced attorney who can appreciate both the business and legal aspects of an act (or failure to act) and provide insight on industry practices can help you to make a sound decision and complete the necessary steps to protect your interests and bottom line.