Archive for July, 2012

If There Is a Payment Bond on the Project, Keep Your Eye on the Correct Deadline for Filing a Claim

Payment bonds are a part of many (if not most) construction projects. Payment bonds often are required under state (or federal) law for public projects. But these bonds also are commonly required on private projects when the owner demands it.

A payment bond is an agreement between a general contractor and surety for the surety to guarantee the payment of labor and material costs on the project. The existence of a payment bond provides a measure of security for subcontractors and suppliers. Even if the general contractor cannot or does not pay, a subcontractor or supplier can file a claim for payment from the bond.

But subcontractors and suppliers should understand the deadline they face if they try to collect against the payment bond.

Subcontractors and suppliers may be most accustomed to filing mechanics’ liens against the project to remedy nonpayment. Depending on the state where the project is located, an unpaid sub could have several months to file a lien or notice of lien. But a filed mechanics’ lien is not a claim against the payment bond. More importantly, a mechanics’ lien will not stop the clock from running on the deadline to file a claim against the bond. It is common for payment bonds to require that claims against the bond be filed within 90 days after the last day of providing service or materials.

So while it might be a good idea to also file a mechanics’ lien, keep your eye on what the payment bond requires. Courts will uphold the 90-day claim period, and if you miss this deadline then you miss your opportunity for payment under the bond.

“Substantial Compliance” with the Missouri Mechanics’ Lien notice requirement may be sufficient, but “strict compliance” will help you sleep at night.

Missouri law imposes an unusual prerequisite on general contractors before they can file a mechanics’ lien. Early in a project a general contractor must issue a notice to the property owner that mechanics’ liens could be filed in the event of nonpayment. According to the statute, the following notice must be given in ten-point bold type:

NOTICE TO OWNER

FAILURE OF THIS CONTRACTOR TO PAY THOSE PERSONS SUPPLYING MATERIAL OR SERVICES TO COMPLETE THIS CONTRACT CAN RESULT IN THE FILING OF A MECHANIC’S LIEN ON THE PROPERTY WHICH IS THE SUBJECT OF THIS CONTRACT PURSUANT TO CHAPTER 429, RSMO. TO AVOID THIS RESULT YOU MAY ASK THIS CONTRACTOR FOR “LIEN WAIVERS” FROM ALL PERSONS SUPPLYING MATERIAL OR SERVICES FOR THE WORK DESCRIBED IN THIS CONTRACT. FAILURE TO SECURE LIEN WAIVERS MAY RESULT IN YOUR PAYING FOR LABOR AND MATERIAL TWICE.

The law is unusual because the general contractor must issue the notice early in the project before any issue of nonpayment even arises. If the general contractor forgets to issue the notice either when the contract is signed, materials are delivered, work is started, or the first invoice is issued, any later-filed mechanics’ liens could be invalid. It can be a steep price to pay for a failure to supply a notice.

Missouri courts have struggled to determine when a mechanics’ lien should be invalidated for failure to comply with the statutory notice requirements. The relatively easy cases are those where a general contractor does not provide any notice at all. In these instances, the general contractor can expect that a court will invalidate mechanics’ liens, even where work has been completed to the satisfaction of the owner.

The trickier cases are those where the general contractor provides written notice to the owner but without using the exact statutory language. The question here is whether “strict” compliance with the statute is required or whether “substantial” compliance satisfies the law’s requirements. At least one Missouri state appellate court and a federal bankruptcy court applying Missouri law have held that substantial compliance is sufficient. In those cases, the general contractor provided written notice in the parties’ contracts, although without using the exact language from the statute.

Given the remedial purpose of mechanics’ liens, it could be that the Missouri Supreme Court would agree with substantial compliance. But the better path is to copy and paste the statutory text, keep your mechanics’ lien out of court, and sleep better at night.