Construction Law Series
Mechanic’s Lien for the value of Materials Stored On Site
11-27-12. As is commonly known, one can receive a mechanic lien for the value of labor and materials conferred upon the project. This usually means used or consumed in the improvement. But what if materials are simply delivered to the job site? Will this qualified for a mechanic’s lien if they are unpaid?
State’s vary in their case law, but as a general rule material that has been ordered specifically for a site and is delivered directly to the project qualifies. As such, it is typically dropped by the shipper, signed by a job foreman, and then stored in some manner on the project premises. As is also common, the material is either used immediately or is contemplated to be used shortly for the next stage of construction. Under this rule, general inventory items (material that can be used on other projects) as well as specially fabricated ones would qualify.
Under that same rule, unless the material is taken back, a lien could still be filed for its value even if it is not actually used or consumed. On the other hand, some states require that the materials eventually be consumed or used.
But there is a major difference if the material is ordered and either 1) stored at an off-site facility or 2) stored as ordinary inventory at your office or yard. In most cases, that would not qualify for mechanic’s lien.
The only exception would be specially fabricated items. In other words items that can only be used for that specific project (example: a store sign). In most cases, the courts allow a lien, even if the material is not used. Specifically, Texas has a rule that if a Notice of Specially Fabricated Items is served by the 15th day of the second month after the order, one can receive a mechanic’s lien even if the material is not consumed or the purchase order is canceled.
To be safe, consider using the following clause in your contracts:
“All payments are due on presentation of an invoice, which includes materials stored on site, regardless of whether same have been used or consumed, as long as such items were specifically ordered for this project and have been available for use throughout to the construction phase.”
Getting a Mechanic’s Lien for Work Done as to Unforeseen Site Conditions
11/26/12. It’s hard enough to enforce a mechanic’s lien for unpaid labor and materials, but even more difficult if there is the aura of dispute from the opposite party. The burden is upon you, the potential lien claimant, to perform under the contract, do so timely, follow the plans and specifications, and serve all relevant pre-lien notices. Then, on top of this mountain of technicality, the other side can argue that the lien cannot be enforced because the services performed are unwarranted.
As we all know, there are an infinite number of reasons for nonpayment, such as unauthorized work, change orders that have not been signed, work claimed to be unsatisfactory, and a whole litany of other excuses. In essence, the contractor or subcontractor becomes the bank, helping finance the project.
But what about unforeseen side conditions? Assume you are renovating an older building and have no idea of the electrical system until after tearing out walls. You then encounter a situation that costs much more than expected. Unlike soil and groundwater conditions that can be somewhat detected by testing, this is a classic unforeseen situation. In many cases, the owner or general contractor insists that you complete the contract even if it is much more expensive (because of the need to correct these problems).
One solution is to have a contract provision addressing the issue. Although not a guarantee, it goes a long way to help improve your case for extra compensation.
“Any changes to the work will cause a project cost to either increase or decrease, as appropriate. Contractor is entitled to extra compensation for differing site conditions not initially and visually noticeable or accessible, later discovered, or which have changed and are either different from those indicated in the contract or not ordinarily encountered and not generally recognized as inherent in work of the character provided in this contract.”
Should a mechanic’s lien be reduced for back charges caused by ambiguous drawings?
11-23-12. A general contractor or sub not only bases their estimate upon the accuracy of drawings and specifications, but the whole logistical scheme, including preparation, manpower, ordering of materials and supplies, and the sequencing on the job. It is no wonder that this causes havoc when those plans are ambiguous and the project engineer or architect insists on a number of change orders. But how does this affect one’s right to a mechanic’s lien for unpaid services?
If a judge or arbitrator finds the plans are truly ambiguous and drafted by someone other than the contractor, and the contractor did his or her estimate based upon a reasonable interpretation, then any changes would be the responsibility of the owner or design professional. In such cases, the claimed extras could be included in the mechanic’s lien.
But how is it determined which change orders will receive additional compensation? Many times the design professional claims the changes are required under the base contract and no extra compensation will be paid. What a court or arbitrator does is go through each one and see if they were caused by an ambiguity. One by one, change order by change order, a decision is made.
But why go through this uncertain torture? At the very least, there should be a contract revision which states:
“Contractor shall not be responsible for errors, omissions, or ambiguities in drawings, plans, or specifications prepared by others. If any such uncertainty exists, the contractor is entitled to base its contract upon a reasonable interpretation under industry standards, which shall be considered the binding provisions between the parties in any subsequent court or arbitration proceeding, as well as whether or not any work is deemed an extra.”
How do you enforce your mechanic’s lien if you have a binding arbitration provision?
11-19-12. It is very common for a construction contract to include a provision for binding arbitration. This means that in any enforcement procedures or for breach of contract for damages, you must seek redress through an arbitrator and not your local courthouse. Frankly, this is a good idea, because traditionally arbitration is a better method to resolve disputes because the arbitrator typically has vastly more experience than a judge. For example, arbitrators are typically experienced construction attorneys, as well as engineers or architects.
But we also know the lien must be perfected through an action to enforce the mechanic’s lien or it will expire. So what do you do if there is an arbitration provision? Simple. You bring a lawsuit in local court through the filing of a summons and complaint. You then prepare a short petition with an order for the judge to sign indicating the proceedings will be stayed pending the outcome of the arbitration, thereby preserving the statute of limitations as to timely enforcement of the mechanic’s lien. You then go on your merry way through the arbitration proceeding and when you have finished, simply confirm the arbitration award as a court judgment.
Technically, an arbitrator may not issue an award enforcing a mechanic’s lien. They can only award monetary damages for the unpaid labor and materials. This is because it is an equitable cause of action that only the courts can do. However, in most cases, if you win the arbitration, the other side makes payment quickly because they do not want a judgment to be entered. Or the arbitrator can simply indicate the prevailing party is entitled to the amount stated in the breach of contract count and to foreclose a mechanic’s lien. When you confirm the arbitration award as a court judgment, the court can then use that language for the foreclosure of the lien itself.
Is a G C liable for job site injuries suffered by the employee of one of the subcontractors?
11-16-12. In most states, no. There is a major distinction between hiring an employee and an independent contractor. With the former situation, under respondent superior, the employer is liable for the employee’s injuries because of the extent of control exercised by that employer. But when you hire an independent contractor, such as a specialty subcontractor, you have no right to control the course of work and therefore that sub himself or herself is liable for damages caused to their labors and employees.
This was borne out in the recent California Supreme Court decision of SeaBright Ins. Co. v. U.S. Airways, Inc. (2011). The court laid out the familiar California Privette– Toland doctrine stating:
“Generally, when employees of independent contractors are injured in the workplace, they cannot sue the party that hired the contractor to do the work…. By hiring an independent contractor, the hirer implicitly delegates to the contractor any tort law duty it owes to the contractor’s employees to ensure the safety of the specific workplace that is the subject of the contract.”
One of the reasons for this ruling is the availability of workers’ compensation to the injured employee:
“[W]hen the person injured by negligently performed contracted work is one of the contractor’s own employees, the injury is already compensable under the workers’ compensation scheme and therefore the [law] should provide no tort remedy, for those same injuries, against the person who hired the independent contractor….”
Because the workers’ compensation law exempts an independent contractor from negligent tort liability to its employees, “[a]pplying the peculiar risk doctrine [allowing suit against the hirer] to the independent contractor’s employees would illogically and unfairly subject the hiring person, who did nothing to create the risk that caused the injury, to greater liability than that faced by the independent contractor whose negligence caused the employee’s injury.”
In that case, when a masonry subcontractor employee was injured slipping on a plastering subcontractor’s wet scaffolding, the laborer sued the GC claiming it was caused by the GC’s negligence in sequencing and coordinating construction work at the site. The court disagreed.
But to be safe, it is recommended that you include language in your subcontracts, to the effect: “ Subcontractor shall be solely responsible for injuries sustained to its employees, including as a result of any job site conditions, and subcontractor is cautioned to take all measures and actions to insure its employees are free of any unreasonable risk of harm. As a consequence, General Contractor’s employees or job site foreman shall not be responsible thereof.”
There is no need to specify your exact profit and overhead in a contract–that is your private business.
11-15-12. No state regulates the amount of your profit and overhead. Basically, it is what the traffic will bear. However, most states have home improvement contract laws which require you to specify the terms of the contract. But this applies to the overall contract price and does not require itemization of the exact profit or overhead. Any subsequent mechanics lien can be based on that internal figure.
If it is a lump sum or stipulated amount, you do not have to specify your profit. That is your private business. Sometimes you make money and sometimes you don’t and that is your risk.
Nor do you have to specify the exact profit on T & M or cost-plus. You may have to specify the hourly rate in a home improvement contract, but this includes a labor burden which in turn encompasses your profit. So if your raw hourly rate is $55.00 an hour you might charge $75 which covers the burden and the profit–but you don’t have to specify or break it down.
Having said that, small jobs have anywhere from 10 to 25% P and O, medium size jobs between 5% and 10%, a large job 2 to 3%. This is my experience and I look to others “in the trenches” to make comments as to what they have found.