In this blog, presented by SunRay Construction Solutions and William L Porter, Founder & President, Porter Law Group, you will learn in detail about how liens, bonds and contracts can help you in getting paid faster.
Contracts are one of the initial documents used in a construction project, and there are two ways to get a contract:
i. Either it is your own contract which you present to the other party for signing; or
ii. You receive a contract to be signed by the other party.
Now, if you are providing your own contract, then you must ensure that you draft it thoroughly with conditions that are favorable to you. However, if you are signing someone else’s contract, then it is important to go over it carefully. Below are some of the key focus areas while working on a contract that is not yours:
a. You must carefully review the contract and offer edits. One of the most important edits that you can offer is the provisions for getting paid quicker.
b. Let’s say you are a subcontractor, and the prime contract that you signed says that you will not be paid until the contract and the owner solve their differences. There was a case, Crosno v. Travelers where the result essentially said that it is unreasonable to require someone to wait forever to get paid. It could potentially take years for the prime contractor and owner to resolve their issues, and go through all the mediation, arbitration, or litigation before you get paid.
c. Hence, one key edit that you must offer is you want to put a time limit in there for your payment. For example, you can put something like “not to exceed X number of months”. You can also put in a provision that says “no later than the day on which a contractor by law is required to meet the deadline to enforce claims (mechanic's lien, stop payment notices, payment bond claims, etc.).
d. Another thing that you will notice in contracts is a clause which states that they don’t have to pay you until they get paid or if they don’t get paid, then you don’t get paid as well.
e. This provision was declared illegal in one of the cases, Clarke v. Safeco. The Supreme Court of California said that such provisions are not allowed and the general contractor getting paid can’t be a condition precedent to you getting paid.
Apart from these three major items, some of the other items that you need to pay attention to in your contract include:
a. Attorney Fees Clause – Make sure that you have your attorney fees clause in the contract. You can add a provision like “if a dispute arises between the contractor and the subcontractor, the prevailing party shall be entitled to their reasonable attorney fees and costs.” You can also add in expert fees, costs of arbitration, etc.
b. Arbitration – You can go ahead and add in arbitration in your contract but avoid mediation. You can always offer mediation voluntarily, but it is better to include arbitration in your contract. Arbitration is an informal process which is like going to court.
c. Interest – In California, you can go up to an interest of 1.5% per month. However, as per the prompt payment remedies, the interest can go up to 2%. Under some statutes, you can get the 2% plus the 1.5% per month which makes it about 3.5%. So, you are looking at 42% interest for a year.
When the other party looks at such high interest rates, it prompts them to take quicker action and resolve your payment issues as soon as possible.
d. Indemnity – Including an indemnity clause is okay; however, you must avoid words like ‘defend’, or ‘solely’. When you use such words, it gives the impression that the other party is not at fault even 1% which is obviously not the case.
e. Comparative Fault – Including comparative fault is also okay. It is a fair provision where it means that, for example, if you are at 30% fault, then you will pay 30% of the attorney fees and costs and whoever is at 70% fault will pay the remaining 70% of costs.
Some final dos and don’ts while dealing with contracts include:
a. You must follow the claims procedures in the contract diligently. If you mess it up, then the other party will have a defense that you did not follow the process.
b. When you are editing a contract, make sure that all those changes are in the contract and all these changes should be initiated by you and the other party. The contract should be signed only after the edits have been initialed by both the parties.
c. During the project, make sure that all the communication is in writing and document issues favorably towards your position. Ensure that whatever you record is accurate.
d. For example, you had a conversation with the other party, and you send them an email stating that below is a summary of what we have agreed (describing the conditions favorably towards your position) and if you don’t have any dispute with this, please respond as soon as possible or respond in writing. If you don’t, then I understand that you don’t disagree with what is mentioned in the email.
You can use this as a piece of evidence when you go to arbitration or court where the judge will state to the other party that you were given the opportunity to disagree, but you did not, so I am going to take what is provided as accurate.
Mechanic's Lien, Stop Payment Notices and Payment Bond Claims
When it comes to having strong rights to getting paid and having a leverage over the other party, it is very important to have your mechanic's lien, stop payment notices, and payment bond claims rights in place and the first step is to send out the preliminary notice.
A. Preliminary Notice
- In private construction projects, all subcontractors and suppliers have to send out a preliminary notice.
- In a private construction project, if there is a construction loan, then the general contractor also must send out the preliminary notice. If they fail to do so, they will lose their rights on the construction loan funds.
- In public projects, the general contractor and the first-tier subs do not have to send out anything. But everyone else has to send out a preliminary notice in order to have the rights to mechanic's lien, stop payment notices, payment bond claims, or all three.
- There are four types of release – conditional, unconditional, progress, and final.
- Make sure that you are using these releases properly and filling the right releases. You can learn more about these releases in detail by referring to Civil Code 8132 – 8138.
Read More: Statutory Construction Releases
C. Mechanic's Lien
- A mechanic's lien is one of the best leverages to use to get paid. However, you must ensure that you are recording your mechanic's lien as per the defined deadlines.
- If you are a subcontractor and there is a notice of completion, then you have only 30 days to record your mechanic's lien.
- If you are the prime contractor and there is a notice of completion, then you have 60 days to record your lien.
- If there is no notice of completion, then everybody has 90 days after the project is completed to record their lien.
- After this, you will have an additional 90 days to file a lien foreclosure lawsuit. So, remember the key numbers – 30, 60 and 90.
D. Stop Payment Notices
- Another great leverage to use against the general contractor.
- If there is a notice of completion, then you have 30 days to send your stop payment notice. If there is no notice of completion, then you have 90 days after the project is completed to send your stop payment notice.
- An additional 90 or more days are available for filing a lawsuit. It is highly recommended that you use 90 as your measurement to avoid missing the deadline.
- When you send a stop payment notice, it stops money flowing from the lender or the owner to the GC. It holds about 125% of that money.
E. Payment Bond Claim
- Payment bonds are not common in private projects; however, they do exist, so keep an eye out for them.
- Public projects typically do have payment bonds which can be used as leverage against the GC/Principal.
You can either use any of these remedies or all three of them together, but it doesn’t mean that if you use all three remedies then you will get paid triple. All of these are considered as arguments to quickly resolve your payment issues.
But one very important part of using these remedies is that they will be favorable to you only if you are in the right. Then you can also argue for attorney fees, interest, prompt payment interest, etc. Ideally, it is best to settle early and avoid any unnecessary expenses.
In conclusion, utilizing liens, bonds, and contracts is a highly effective strategy for ensuring prompt and efficient payment in various industries. These legal mechanisms provide essential safeguards for contractors, suppliers, and service providers, offering them a level of financial security and confidence in their business transactions.