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“Pay-If-Paid” Leaves Subcontractor High and Dry

Posted on April 22, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

“Pay-If-Paid” Leaves Subcontractor High and Dry

An Alabama Court of Appeals has upheld a trial court’s decision: a subcontractor cannot recover its claim from the general contractor’s surety if the subcontract contains a contingent payment clause (pay IF paid). In today’s post I’ll discuss securing bond claim rights in Alabama, explain contingent payment causes, and review a recent Alabama Court of Appeals’ case.

Securing Bond Claim Rights in Alabama

For public projects in Alabama, payment bonds are typically required if the general contract is $50,000 or more. As a best practice, you should always attempt to obtain a copy of the payment bond when you agree to a contract or purchase order.

You are not required to serve a preliminary notice, but it’s a good idea to serve a non-statutory notice to alert parties within the ladder of supply that you are furnishing to the project.

If you furnish to the project and are not paid, you would serve a bond claim notice upon the surety no later than 45 days prior to filing suit. Then, you would file suit to enforce the bond claim after 45 days from serving the bond claim notice, but within 1 year from the date of final settlement. [Ala. Code 39-1-1]

IF and WHEN: Contingent Payment Clauses… if & when…

How quickly two small words can create a payment mess! Pay-if-paid is generally interpreted to mean that the subcontractor will receive payment from the general contractor IF the general contractor is paid by the owner. Whereas, pay-when-paid is interpreted to mean the subcontract will receive payment from the general contractor WHEN (or after/once) the general contractor receives payment from the owner.

The “IF” clause is also known as condition precedent. Payment to the subcontractor is dependent on payment made to the general contractor by the owner.

The “WHEN” clause is viewed more as a timing provision. The general contractor will pay the subcontractor within a reasonable amount of time from when the subcontractor issues its invoices. Payment under this clause is not reliant on the owner paying the general contractor.

Pay-when-paid is more desirable than pay-if-paid, because the general contractor is not relieved of paying its subcontractors under pay-when-paid.

Subcontractor Can’t Recover Claims from Surety

Keller Construction Company v. Harford Fire Insurance Company

  • Subcontractor & claimant: Keller Construction Company (Keller)
  • General Contractor & payment bond obligor: J.F. Pate & Associates Contractors, Inc. (Pate)
  • Owner & payment bond obligee: City of Spanish Fort (City)
  • Surety: Hartford Fire Insurance Company (Hartford)

City hired Pate, and Pate obtained a payment bond from Hartford. Pate hired Keller and the parties executed a subcontract. Under the terms of the subcontract, Pate could withhold retainage from Keller for the same retainage amount City withholds from Pate. Also, under the terms of the subcontract, Keller assumes the risks associated with the City not paying Pate.

Language from the subcontract, in part:

“[T]he receipt by [Pate] of payment from [the city] for the work performed by [Keller Construction] is a condition precedent to the obligation of [Pate] to pay [Keller Construction]. [Keller Construction] further acknowledges that it is assuming the risk of delay in payment or non-payment by the [city] to [Pate]. Both the condition precedent for payment and the assumption of this risk are bargained for considerations in this agreement, without which [Pate] would not have entered into this agreement with [Keller Construction].”

The words “condition precedent” are right there in the contractual language. Not only that, but the language clearly indicates that Keller is aware of and is assuming any of the payment risk. The Court’s opinion states Keller was fully aware of the conditions of the contract and understood the provisions.

Keller completed its work and Pate had remitted payment to Keller except for the retainage amount. Why? Because City did not pay Pate the retainage or the withheld funds. And according to the subcontract, if Pate was not paid by the owner, Pate did not have to pay Keller.

Keller proceeded with a bond claim and Hartford denied Keller’s claim. Hartford claimed it was not obligated to pay Keller, because the surety is only obligated to pay what the general contractor was obligated to pay. In this case, the general contractor wasn’t obligated to pay retainage, because it hadn’t been paid retainage, thus, relieving the surety of any payment obligation.

Keller tried several arguments, all of which failed, including conflicting language within the terms of the payment bond and the terms of the subcontract.

It got a bit muddy, but the gist is the court determined the two contracts (payment bond and subcontract) need to be treated separately as they fall under separate laws. Essentially, you can use payment bond language to override subcontract language.

Takeaway

Payment provisions are often strictly interpreted. If you enter into a contract, make sure you understand the terms of the contract and know that if you execute the contract you are committing to the terms. When reviewing the contract, it’s a good idea to have a legal professional also review, specifically to look for clauses that may jeopardize payment.

Washington Liens: When Frivolous is Better Than Absent!

Posted on April 8, 2019 by - Mechanic's Liens & Bond Claims

frivolous lien

This Washington Lien Was Late, Excessive, and Inaccurate. But It Wasn’t Frivolous.

Late, excessive, inaccurate, but not frivolous: sounds like a terrible report card. You know the story, right? It’s about a mechanic’s lien filed in Washington which was initially invalidated and then reinstated by the Court of Appeals. How does a late, excessive, inaccurate lien get reinstated? Well, it’s a story worth sharing! (Spoiler: because it’s not a frivolous lien!)

Project-Condo-Dry-Out

Ongoing roof construction and an untimely rainstorm created quite a mess for more than a dozen condominium units. The property management company, MacPherson’s Property Management (MPM), hired Style Corporation dba Servpro (Servpro) for clean up and restoration work.

Servpro brought in its drying equipment & the equipment remained in the impacted condominium units for approximately two months. When the condominium association failed to pay Servpro for its services, Servpro filed a single lien for $183,945.09.

Servpro filed a single lien – not a lien on the individual impacted units. Within the lien, Servpro identified the debtor as the condo association, but the lien “applied to the 20 specific units and a common storage area where Servpro provided services.” Servpro also listed the 20 condo unit owners within the lien but did not indicate or allocate specific costs to each unit – the lien was a lump sum.

“Frivolous and Clearly Excessive”

It was the line held by PMP when it sought the release of Servpro’s lien: the lien is “frivolous and clearly excessive.” The court agreed and released the lien. But what kind of story would this be if it ended there? Servpro appealed the decision.

Court of Appeals on Frivolity

Per the Court of Appeals opinion:

“A lien is frivolous if ‘improperly filed beyond legitimate dispute’ and ‘so devoid of merit that it has no possibility of succeeding.’ Even if a lien is invalid, it may not be frivolous.”

A representative from MPM provided four reasons it believed Servpro’s lien was frivolous: 1) the representative from MPM did not authorize Servpro for ongoing work 2) Servpro’s lien was filed late 3) the agreement between MPM and Servpro did not dictate a contract amount as required by statute, and 4) Servpro’s lien was factually inaccurate.

Court of Appeals shot down MPM’s four reasons

The Oxford Comma Means Frivolous is Separate from Clearly Excessive

I must say, I did not see the Oxford comma making its way into a mechanic’s lien dispute. And yet, here we are! Washington’s mechanic’s lien statue, according to the Court of Appeals, clearly treats frivolous and clearly excessive separately under RCW 60.04.081(4).

The clear distinction lies in the comma between “cause” and “or” – actually, it’s the combination of the “,” followed by “or.”

Not to be outdone by the Oxford comma, the Court of Appeals also defined “clearly excessive” based on the dictionary definitions, because statute does not offer a definition.

Because Servpro did not break down the total claim amount by the number of units and filed its lien as though it were against one property vs. varying units, it appeared (for this case) a lien for $18k+ was filed against one unit, which makes Servpro’s lien clearly excessive.

The Court of Appeals concluded

“The trial court erred by determining that Servpro’s lien was frivolous and releasing it. Although Servpro’s lien may ultimately be invalid and unenforceable, the narrow hearing authorized by RCW 60.04.081 does not allow for release of a lien based on invalidity alone.  Accordingly, we reverse the trial court’s ruling releasing the lien.

The court correctly concluded that Servpro’s lien was clearly excessive, but the court made no findings of fact about the amount by which the lien was excessive.”

What Could Servpro Have Done to Avoid this Mess?

Here are the actions Servpro could have taken to alleviate some of the issues:

  • Execute a Contract. While statute provides for an interpretation of a contact amount if it isn’t included in a contract, it may have alleviated some confusion if even an estimate was included.
  • Get the facts. Condominiums and mechanic’s liens can be a major pain. Title work can be cumbersome and expensive, but it provides critical information. If Servpro had correctly identified the property/units and allocated costs to each unit, it may have escaped the “clearly excessive” issue.
  • File a lien on time! In Washington, the mechanic’s lien should be filed within 90 days from last furnishing.

This case is on its way back to the trial court where it will likely be invalidated because of timeliness and an excessive claim, but at least we now know it wasn’t a frivolous lien.

Not-So-Peachy Mechanic’s Lien for One New York Landlord

Posted on April 5, 2019 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Not-So-Peachy Mechanic’s Lien for One New York Landlord

According to a recent Court of Appeals decision, enforcing a mechanic’s lien on leased property in New York does not require consent of the landlord. That is, if the lease agreement required the tenant to improve the property.

Lien on Leasehold

Landlord/tenant agreements aren’t uncommon; just drive by any strip mall or shopping plaza and you’ll see oodles of stores operated by tenants that are leasing space from the property owner.

In a lease situation, the property is owned by one party & then a second party leases or rents the space from the owner. When improvements are made to the property, depending on the hiring party (the owner or the tenant), a mechanic’s lien may attach to the property, the leasehold interest, or both the property and the leasehold interest.

For this Court of Appeals case, there is one additional variable to be considered: the language within the lease agreement between the landlord (COR) and tenant (Peaches Café LLC).

In Ferrara v. Peaches Café LLC, Peaches Café LLC (Peaches) hired Ferrara (prime contractor) to perform electrical work. Peaches hired Ferrara because the lease dictated that Peaches would need to improve the property to meet electrical specifications.

“The lease imposed certain construction requirements on Peaches [tenant] for it to operate its restaurant, including adherence to specific electrical specifications. The lease also provided that COR [landlord] approve of any improvements to the premises, that Peaches submit to COR all design plans for the electrical work, and that any improvements made become part of the realty.” – Michelle Cuozzo of Pepper Hamilton LLP

As is common in the restaurant industry, Peaches went out of business and Ferrara was stuck with an unpaid bill of $50,000. To recover the claim, Ferrara filed a mechanic’s lien against the property and eventually filed suit to enforce its mechanic’s lien.

Once suit had been filed, the property owner (i.e. the landlord) moved to have Ferrara’s lien invalidated. The owner argued the lien could only be enforced if the owner expressly consented to the work performed. The court didn’t agree; here’s a recap from Michelle Cuozzo of Pepper Hamilton LLP:

“COR [owner/landlord] argued that a contractor performing work for a tenant can only enforce a lien on the property if the landlord expressly or directly consented to the work performed. The Court of Appeals rejected this argument… [T]o enforce a lien, the landlord must “either be an affirmative factor in procuring the improvement to be made, or having possession and control of the premises assent to the improvement in the expectation that he will reap the benefit of it.” Affirmative acts by a landowner include lease terms requiring the tenant to make specific improvements to the property.”

The lease clearly required Peaches to improve the property to meet the electrical specifications. Plus, the lease included language that the landlord could “retain supervision over the work by reviewing, commenting on, revising, and granting ultimate approval for the design drawings related to the work.”

Ultimately, the landlord consented to the improvement when it incorporated the requirements within the lease. Thus, the court held Ferrara’s lien to be valid.

Retainage, Payment Bonds, and Private Projects in Texas

Posted on March 29, 2019 by - In Other Commercial Credit News

Retainage, Payment Bonds, & Private Projects in Texas

Private projects in Texas – mechanic’s lien or bond claim? Ordinarily I would say “Mechanic’s lien!” However, that may not always be the case. And be careful, because mechanic’s liens and bond claims are not the same and may require different actions.

Texas Bond Claim

In Texas, a properly recorded payment bond prevents mechanic’s liens from attaching to the property (think “bond off lien”). Author Amy Wolfshohl explains in her article The Often Overlooked Protection Provided By A Statutory Payment Bond Under Chapter 53 Of The Texas Property Code, the payment bond must meet the following criteria.

To provide the protection contemplated by the statute, the bond must:

1. be in the original contract amount;

2. be in favor of the owner—as obligee;

3. have the written approval of the owner endorsed on it;

4. be executed by:
(a) the original contractor as principal; and
(b) a corporate surety authorized, admitted, and licensed to do business in Texas;

5. be conditioned on prompt payment for all labor, subcontracts, materials, specially fabricated materials, and normal and usual extras not exceeding 15% of the contract price; and

6. clearly and prominently display the contact information for the surety.

Although the security is different – a payment bond instead of a mechanic’s lien – you protect your Texas bond claim rights similarly to how you would protect mechanic’s lien rights.

Notice of Non-Payment (Commercial): When contracting directly with a subcontractor

– Serve notice upon the prime contractor no later than the 15th day of the second month following each month in which materials or services were furnished.

– Serve notice upon the owner and prime contractor no later than the 15th day of the third month following each month in which materials or services were furnished.

The difference? Also serve the surety with a copy of the notices and subsequent lien. And, be aware, if a payment bond is not properly recorded, you must comply with the terms and conditions of the payment bond when perfecting a claim!

Interesting Fact

Did you know, for private projects in Texas, the owner is required by statute to withhold 10% retainage?

Retainage is an agreed amount of a contract price retained from a contractor as assurance that subcontractors will be paid, and the job will be completed.

Sec. 53.101.  REQUIRED RETAINAGE.

(a)  During the progress of work under an original contract for which a mechanic’s lien may be claimed and for 30 days after the work is completed, the owner shall retain:

(1)  10 percent of the contract price of the work to the owner; or

(2)  10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work.

(b)  In this section, “owner” includes the owner’s agent, trustee, or receiver.

According to Wolfshohl, if the payment bond is recorded, the owner does not have to withhold retainage.

“If the owner obtains a bond that is consistent with these requirements and records it in the applicable real property records, the owner is relieved of the requirement to withhold retainage and cannot be held liable for failing to trap funds.”

Wolfshohl reminds readers, payment bonds aren’t just good for project owners, they’re good for subcontractors too!

“This is a win-win for owners and subcontractors because the subcontractor’s remedy is not limited to its proportionate share of retainage plus any trapped funds and the owner is not subjected to a multiplicity of often conflicting subcontractor claims if bankruptcy, termination, or abandonment occurs at the prime contractor level.”

Maine Mechanic’s Lien & Bond Claim Rights

Posted on March 18, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Here’s What You Should Know about Maine Mechanic’s Lien & Bond Claim Rights

Maine, the most northeastern state in the U.S., famous for lobsters, very chilly winters, and the backdrop for many of the terrifying novels by Stephen King. What’s scarier than a Stephen King novel? Furnishing to a construction project and not getting paid!

In a Time-Crunch?

Here’s an at-a-glance review of mechanic’s lien & bond claim deadlines in Maine:

For those with a few minutes to spare, today’s post is all about Maine, so sit back & relax, because I have a little family story to share too!

The Summer of Camping

(Not interested in my story? Skip to the next section “Maine Mechanic’s Liens”)

One summer, when I was in my early teens, my parents took my sister and me on a 3-week camping trip up through New England.

Three weeks of tent camping? I was about to spend 3 weeks in a horrifying Stephen King novel!

As a teenager I was fully committed to blow drying my hair and wearing the pinkest of lip glosses; I was less than thrilled at the prospect of sleeping in a tent in the foggy cold of Maine. Tents, port-a-potties, and bugs aside, I do distinctly remember how beautiful the sunrise was in the wee hours of the morning as we drove to the top of Cadillac Mountain in Acadia National Park.

My parents carted us through the various national & state parks, stopped for shopping at L.L. Bean, explained the importance of the geographic landscape of Camden, and asked a local resident to teach us the proper way to say Bar Harbor.

Speaking of Bar Harbor, I was reviewing MaineDOT’s website and noticed the construction on Route 3 is coming in to its 3rd year. Fortunately, lien and bond claim deadlines are not based on project completion! Which leads me to the real reason you are reading this post: lien and bond claim rights in Maine.

(Did you like that segue?)

Maine Mechanic’s Liens

Generally, there is no statutory provision requiring a preliminary notice on private commercial projects. Of course, NCS always recommends serving a non-statutory notice when no notice is required.

Residential projects are a bit different. There is a preliminary notice which may be served upon the owner at any time. It is recommended to serve the notice as early as possible as the lien, when later filed, will only be enforceable for the amount owed by the owner to the prime contractor at the time the notice is served. If no notice is served, a lien may still be filed. However, the lien will only be enforceable for the amount owed by the owner to the prime contractor at the time suit to enforce the lien is commenced.

There is one other notice remedy available. Bona Fide Purchaser: A notice may be recorded, at any time prior to the sale of the property, to protect against a bona fide purchaser taking title free of liens. If the work is ongoing, the notice must be renewed every 120 days.

Regardless of project type (commercial, residential, or a State of Maine Project), you should file the lien within 90 days from your last furnishing. Maine is a full balance lien state for commercial projects, which means the lien is enforceable for the full amount owed, regardless of payments made by the owner.

Wait. Did you catch that? A mechanic’s lien is available on a public project? In Maine, yes! Keeping reading!

But First, Maine Bond Claims

Just as with private commercial projects, public projects do not have a required preliminary notice. Again, as a best practice, always serve a non-statutory notice. In Maine, payment bonds are generally required for general contracts exceeding $125,000. Another best practice? Request a copy of the payment bond while obtaining project information – the earlier, the better.

“§871. Public Works Contractors’ Surety Bond Law of 1971 | 3. Surety bonds.  Except as provided in Title 5, section 1745, before any contract exceeding $125,000 in amount for the construction, alteration or repair of any public building or other public improvement or public work, including highways, is awarded to any person by the State or by any political subdivision or quasi-municipal corporation or by any public authority, that person must furnish to the State or to the other contracting body, as the case may be…”

You should serve the bond claim upon the prime contractor within 90 days from last furnishing (if you contract directly with the prime contractor, a bond claim notice is not required).

Yes, a Mechanic’s Lien on a Public Project!

It’s true. It goes against everything I know about lien and bond claim rights. In fact, it blatantly contradicts one of the first rules I learned “no liens on public projects.” Alas, Maine statute is as unique as the landscape of the state itself. Maine statute allows for the filing of a mechanic’s lien on public projects:

“§3251. Lien established Whoever performs labor or furnishes labor or materials, including repair parts of machines used, or performs services as a surveyor, an architect, a forester licensed under Title 32, chapter 76 or an engineer, or as a real estate licensee, or as an owner-renter, owner-lessor, or owner-supplier of equipment used in erecting, altering, moving or repairing a house, building or appurtenances, including any public building erected or owned by any city, town, county, school district or other municipal corporation, or in constructing, altering or repairing a wharf or pier, or any building thereon…”

If you need to proceed with a mechanic’s lien, you will want to refer to the guidelines for private projects.

Questions about Maine’s mechanic’s lien and bond claim rights, or even questions about my thrilling 3-week camping trip? Feel free to contact me!

P3s Created by Contract, Not Statute

Posted on March 15, 2019 by - In Other Commercial Credit News

Public Private Partnerships (P3s) Are Created by Contract, Not Statute

Public Private Partnerships (P3s) can be incredibly beneficial, especially in financing large construction projects. Frequently, a P3 assists public entities with improving public infrastructure by teaming up with a private entity for funding.

Generally, a P3 is an agreement between a private entity & public entity for the construction of a project, whereby the private entity provides the funding which is often lacking in the public sector.

An article from the Associated General Contractors of America (AGC), includes a definition of P3 from The National Council for Public-Private Partnerships. A P3 is a:

“contractual arrangement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.”

Yes, P3s are Created by Contract, Not by Statute

In Would Broader Use of P3s Benefit Subcontractors, attorney James Rohlfing states all P3s are different “Because P3s are created by contract, they vary greatly from one state and one project to another.  For that reason, to protect the public, many states have enacted broad enabling legislation that describes the potential uses of P3s as well as the restrictions on their use.”

Not only is P3 legislation broad, it’s still quite young; the industry should anticipate and participate in future proposed legislative changes. Rohlfing points specifically to subcontractors and key factors they should be watchful of –

“Subcontractors should be watchful that any proposal for a law enabling the broad use of P3s not undercut the rights of subcontractors under existing laws and contracts to:

1) secure payment for work and materials furnished for a project;

2) protect subcontractors and others under public procurement restrictions;

3) mandate prompt payment of invoices; and

4) recognize flow-down responsibilities from higher tier participants in the construction chain.”

Mechanic’s Liens or Bond Claims on P3s?

That’s a great question! The answer, unfortunately, may not be as great. “P3s are a hybrid between public and private, neither liens nor bonds are assured as a means to secure payment.” writes Rohlfing.

If you are furnishing (or will be furnishing) to a P3 project, you must carefully review the state’s statute. Always request a copy of a payment bond as the bonds are often required by statute.  You may even want to consult with legal counsel to confirm whether you are covered by statute, your contract, or if it’s in your best interest to obtain alternative security like credit insurance.

Kristin’s Credit Corner

Perhaps I should call it “Kristin’s go-to advice” instead, since I seem to say this often – but hey, at least I’m consistent: Know who you are doing business with and take steps to secure your right to payment.

Ask questions! 

  • Complete a job information sheet, make sure you know who is within the ladder of supply.
  • Don’t wait until the last minute to inquire about whether the project is bonded & if it is bonded, obtain a copy of the bond as soon as possible.
  • Embark on each project with the intention of keeping the lines of communication open and flowing.

To echo a sentiment from Rohlfing’s article, don’t assume you can rely on mechanic’s lien statute or bond claim statute, and NEVER assume you will be timely paid.

P3s have seemingly infinite potential! But you must be your own advocate.

Advocate for your rights to payment protections and if managing the process becomes too cumbersome, partner with companies like NCS – let someone with the expertise carry the burden so you can keep doing what you do best!

Is it a Bird? Is it a Rule? It’s a Cardinal Change Order!

Posted on March 8, 2019 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Is it a Bird? Is it a Rule? It’s a Cardinal Change Order!

Change orders. Everyone’s got ‘em! But, what’s the difference between a change order and a cardinal change order? Read on to find out!

Boring Ol’ Change Orders

A change order is a change to the original contract. “I need more material” is a common trigger for a change order. Some construction projects encounter hundreds of change orders – verbal and written (written, of course, is preferred, though surprisingly difficult to obtain).

Generally, a “boring ol’ change order” isn’t for terribly significant changes or changes that would change the entire scope of a project. As I mentioned above, a change order is likely a request for additional material because an estimation was wrong, or the material sent needs altering.

I should mention, although it may not be a significant change it may be substantial enough to change your last furnishing date.

I know…“Can open. Worms everywhere.”

Cardinal Change Orders

When you think of cardinal change orders, think specifically about the word cardinal. Not the red bird, but rather the idea that something is essential, fundamental or vital (thank you Merriam-Webster).

Joseph R. Young with SmithCurrie provides an excellent definition in his article Changes and Extra Work – Is There a Limit?

“A “cardinal change” is a change or the culmination of changes ordered by the owner that are beyond the scope of the contract and that may constitute a material breach of contract.” 

Young goes on to explain that these cardinal changes are “beyond the reasonable expectation of the original undertaking and have significant planning, scheduling, and cost implications…”

How Do I Know the Difference?

Construction contracts and, of course, mechanic’s lien statutes are never black and white. Within the text there are inferences, assumptions and text is always open to interpretation. So, how do you know if the change order(s) is a cardinal change order?

In true construction-related fashion, the answer is: it depends.

Young reinforces this answer:

“There is no bright line rule about what could be considered a cardinal change or what was reasonably contemplated by the parties in the original contract. Unless the contract expressly limits the owner’s right to issue changes, reliance on the cardinal change doctrine is a risky basis to refuse additional or changed work. Clear contract language addressing the scope and magnitude of permissible changes is the most reliable source of addressing significant changes.”

There is a chance that a change may be drastic enough to be an obvious cardinal change, such as changing plans for the construction of a 1200 sq ft single family residence to a 200,000 sq ft commercial shopping center. But, the likelihood of something that obvious is slim at best.

Best defense? Young recommends including verbiage within the contract.

“The contract should address some limitations on the extent of changes or place restrictions on material changes in the use of the project or the contractor’s work. The contract should also address when the contractor may refuse to perform changed or additional work. By clearly defining the limitations of the changes clause, parties can minimize the disputes about ambiguities over the legal concept of “cardinal changes”, and the parties can eliminate the risk of an unnecessary dispute as to whether there has been a cardinal change. The best course of action for all parties is to incorporate the cardinal change concept into the contract and follow the terms of the contract in managing and addressing changes.”

My Advice

If you are drafting a contract, have a contract lawyer review the document. If you are in the middle of a dispute, consult an attorney – don’t try and navigate the possible breach of contract claims on your own.

Washington Mechanics Lien and Bond Claim Rights

Posted on March 4, 2019 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

Everything You Need to Know about Washington Mechanics Lien and Bond Claim Rights

Starbucks, Jimi Hendrix, Bing Crosby, Mt. Rainier, Boeing and Microsoft come from the great state of Washington, the only state named after a president. The intense clean-up efforts of the Hanford Nuclear Waste site, the replacement of the Alaskan Way Viaduct, the continued expansion of the Sound Transit and the ongoing construction of mixed-use property (commercial & residential) in high population areas are driving construction in Washington.

In fact, according to ENRNorthwest, Seattle ranked at the top of U.S. cities with active construction cranes in 2018 (neighboring Portland, Oregon held its own in fourth place) much in part to the boom in mixed-use real estate construction.

Construction is awesome!

It is great for the economy, state infrastructure and, with a growing population, it’s a necessity. Unfortunately, construction projects also come with financial risks. 2018 was a big year for construction in Washington and predictions for 2019 are just as strong. Are you prepared to secure your Washington mechanic’s lien, stop notice, bond claim and public improvement lien rights?

Washington Mechanic’s Lien

First Step? Timely Serve the Preliminary Notice!

Washington preliminary notice requirements are a bit intense, depending on the project type:

  • On small commercial (when general contract is $1,000.00 or more, but less than $60,000.00; or 4 or fewer unit Residential Projects when general contract is more than $1,000.00), contractors who contract directly with the owner must serve a Notice to Customer upon the owner and obtain a signed copy prior to first furnishing materials or services. Contractor must retain the signed copy for three years.
  • On commercial, multi-family, or small commercial projects, serve the Notice to Owner upon the owner and prime contractor within 60 days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided 60 days prior to serving the notice and thereafter. The Notice to Owner is not required for subcontractors contracting directly with the prime contractor, laborers, and those contracting directly with the owner.
  • On new construction of residential single-family projects, serve Notice to Owner upon the owner and prime contractor within 10 days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided 10 days prior to serving the notice and thereafter. The Notice to Owner is not required for subcontractors contracting directly with the prime contractor, laborers, and those contracting directly with the owner.
  • On construction of existing residential single-family projects, serve Notice to Owner upon the owner as early as possible. The lien, when later filed, will only be effective for amounts not yet paid to the prime contractor at the time the notice is received. The Notice to Owner is not required when contracting directly with the owner.

Second Step? Mechanic’s Lien Time!

Whether the project is commercial, residential, new or improvement, the mechanic’s lien deadline is the same: file the mechanic’s lien within 90 days from last furnishing and serve a copy of the lien upon the owner within 14 days from the filing of the mechanic’s lien.

OH! I nearly forgot, for commercial projects Washington is a full balance lien state. This means, the lien is enforceable for the full amount owed, regardless of payments made by the owner.

And one more tidbit: mechanic’s liens can be bonded off in Washington! But don’t fret – that just means your security changes from the property to the bond.

Third Step? Suit Up!

If the filing of a mechanic’s lien does not prompt payment, you should file suit to enforce the mechanic’s lien within 8 months from the filing of the lien.

Washington Stop Notice

First step? Timely Serve the Preliminary Notice!

Fortunately for you, me & this blog post, I don’t have to restate the information for serving a preliminary notice to secure stop notice rights. In fact, it is recommended you serve the preliminary notice as outlined for the mechanic’s lien section. This means I can literally say, see above! <<insert grin>>

Important Note: in Washington, a stop notice is not applicable if there is a payment bond of at least 50% of the amount of construction financing.

Second Step? Stop Notice Time!

Serve the Stop Notice upon the lender, owner and prime contractor after 5 days from the date payment was due, but within 35 days from the date payment was due. If the lender does not withhold the amount claimed from subsequent draws, the mortgage, deed of trust, or other encumbrance securing the lender shall be subordinated to your lien to the extent of the construction financing wrongfully disbursed.

Third Step? Suit Up!

Actually, statute does not include a provision for suit against the stop notice. In the event the lender does not withhold said payment, you may need to proceed with suit (think “breach of contract” type suit). Although I find statute fascinating, I am not an attorney & I strongly encourage you to seek legal guidance!

Washington Bond Claim

If you are furnishing to a public project in Washington you should always attempt to obtain a copy of the payment bond from the public entity which contracted the project. For that matter, any time you are furnishing to any public project across the US and even in Canada, always attempt to obtain a copy of the payment bond!

Generally, payment bonds are required on all public work contracts. General contracts of $150,000.00 or less may be exempted from the bonding requirement provided 10% of the contract amount is retained by the owner for a period of 30 days after final acceptance.

First Step? Timely Serve the Preliminary Notice!

Serve notice upon the prime contractor within 10 days from first furnishing. The notice is not required when contracting directly with the prime contractor or when providing only labor.

Pro Tip: a notice may not be required, but as a best practice, you should ALWAYS serve a preliminary notice

Second Step? Bond Claim Baby!

Serve and file the bond claim notice with the public entity within 30 days from completion and acceptance of the project.

Third Step? Suit Up!

File suit to enforce the bond claim in accordance with the terms and conditions of the payment bond. It is recommended that suit be filed to enforce the bond claim after 30 days from filing the bond claim, but within 4 months from filing the bond claim or 4 months from completion and acceptance of the project.

Washington Public Improvement Lien

First Step? Timely Serve the Preliminary Notice!

Material suppliers must serve notice upon the prime contractor within 60 days from first furnishing materials or services. A late notice may be served, but the lien, when later filed, will only be effective for materials and services provided 60 days prior to serving the notice and thereafter. No notice is required when contracting directly with the prime contractor or when providing only labor.

Second Step? Public Improvement Lien Time!

Serve and file the lien upon the public entity within 45 days from completion of the project. The claim is a lien on the funds the public entity is required to withhold from the prime contractor. Serve and file the lien as soon as possible to trap the funds.

Third Step? Suit Up!

If serving the public improvement lien does not prompt payment, you should file suit to enforce the public improvement lien within 4 months from the filing of the lien.

Side by Side Comparison

There is a LOT of information in this post, so I thought a table may help!

Questions about lien and claim rights in Washington? Contact us today!