Tag Archives: payment issues

Pay when Paid & Pay if Paid

Posted on by

pay here signRecently I was contacted by several readers asking questions about “Pay when Paid” clauses.  For those of you who may have missed it, I’ve previously addressed Pay When Paid issues in my April 29, 2010 post, Pay When Paid Clauses in the NC Construction Contract.

For a good discussion of the application of N.C. Gen. Stat. 22C-2, the Court of Appeals opinion American Nat. Elec. Corp. v. Poythress Commercial Contractors, Inc., 167 N.C.App. 97, 101, 604 S.E.2d 315, 317 (2004) is worth a read.

In that case, the electrical subcontractor sued the general contractor for delay claims. The contract provided that the contractor would only be liable to the subcontractor for delays if the contractor was compensated for such delays by the owner.  While such a term is clearly a “pay if paid” provision, the Court called the provision a “pay when paid,” and declared it unenforceable in North Carolina.  It seems likely, therefore, that the Court would find that both provisions have the same legal effect in North Carolina– that is, both are unenforceable.

One time when a “pay if/when paid” provision could be enforceable?  Residential construction of fewer than 12 units.

As always, consult your local attorney because such clauses very widely in their enforceability from state to state.

Questions or comments on “pay when paid” or “pay if paid”?  Drop me a line in the comments section, below.

—————————-

Photo: “Pay Here” via Freefoto.com / Creative Commons License. 

 

The 123s of Current NC Lien Law: Issues for Owners

Posted on by
Last week, we talked about the ABCs of liens for contractors, subcontractors, and design professionals.  For every yin, there is a yang.  Today we’ll talk about the 123’s of how to handle a lien claim if you are the Owner of the property. 
 
   James Bond 007   An Owner can always “Bond off” a lien
  

—————-

If you are  the owner of the property, you may not have been aware that subcontractors were not being paid, if lien waivers were not being submitted or were fraudulently executed by the general contractor.  Being served with a Notice of Claim of Lien on Funds and/or a Claim of Lien on Real Property can literally stop work on a project.  Many construction deeds of trust and similar bank financing require owners to keep the property free from liens or other claims on title.

If you are the Owner faced with a Lien on your property, what can you do?

Rule #1:  Never pay “over” a lien.  Even if you owe the contractor $80,000, and the subcontractor’s lien is for $5,000, do not think you can set aside $5,000 for the subcontractor (to be worked out later) and pay the contractor $75,000.

Rule #2:  Consider your options carefully:

            Option 1:  Finish the project without any additional payment to the contractor.  Pay for a replacement contractor to finish, offset those payments, pay lien claimants from remaining funds.

             Option 2:  Issue a joint check payable to the lien claimant and the contractor.

             Option 3:  Bond off the lien upon funds (N.C.Gen. Stat. 44A-20)

             To bond off the lien, you issue either a bond (equal to 1 ¼ ) or a cash payment (equal to the full lien value) to the Clerk of Court, which is held pending resolution of the dispute.

Rule #3:  If the project is upside down, consider negotiating directly with a subcontractor for a reduced payment in exchange for a lien cancellation filed by the subcontractor.

Rule #4:  Whatever you do, do it after consultation with your construction law attorney.  Liens cannot be ignored, and properly handling them can make or break your project.

Experience working with a lien on your property?  How did you handle the situation?   Also, as always, if you have questions or comments about this or any other post, drop me a line. 

Note:  While I welcome comments from all, be aware that  I do not currently accept homeowner (residential) clients.

———————————

Photo “James bond – quantum of solace” by Julien Haler via Flickr/Creative Commons license.   

 

The ABCs of Current NC Lien Law

Posted on by

Since we talked last week about possible changes to the lien law, I’ve had a few folks ask me to take a step back and discuss the ABCs of current lien law in North Carolina.  Ask and ye shall receive………..

 Part 1:  Lien Law Rights for Contractors, Subcontractors, & Design Professionals

Who can file a lien?

Anyone who furnishes materials or labor to improve real property can file a lien on that property.  This includes design professionals who provide services related to improvement of real property, contractors, and subcontractors (down to the 3rd tier). 

What types of liens are there in NC?

There are three types of lien claims in North Carolina.

1.  The Claim of Lien on Real Property (NC Gen. Stat. §44A-12) is for a person who contracts directly with the owner of the property.  This can be a general contractor, a separate independent contractor, or a design professional.

2.  The Notice of Claim of Lien upon Funds (NC Gen. Stat. §44A-18 and §44A-19) is available to subcontractors (down to third-tier subcontractors), and allows them to have a lien right to any funds owed to the party that contracted with them in the chain of title.  In other words, if the owner still owes money to the general contractor, and the owner receives a Notice of Claim of Lien upon Funds by a subcontractor (and the lawsuit to enforce the lien is thereafter properly filed), the owner cannot pay the general contractor until the subcontractor’s lien is extinguished.

3.  The Subrogated Claim of Lien on Real Property (NC Gen. Stat. §44A-23) also provides real property lien rights to the subcontractor, to the extent the party he contracted with has lien rights.

When and Where must a lien be filed?

Lien claims in North Carolina must be filed in the clerk of court where the property is located, within 120 days of the claimant’s last date of furnishing. 

What does “perfecting a lawsuit” mean?

A lawsuit must be filed to enforce the lien.  This is called “perfecting” the lien, and it must be done within 180 days of a claimant’s last date of furnishing.  The lawsuit can be filed in any proper county so long as an appropriate Lis Pendens is also timely filed in the county where the property is located. 

What special remedies are available for a lien claim?

If a lien lawsuit is perfected and a judgment rendered, the court can direct the property to be sold to satisfy the lien.  Additionally, you can recover attorney fees for the lien lawsuit.  Pretty cool, huh?

  souffle

Crafting a proper lien is like making souffle- no room for error!

In summary:

As you can imagine, liens can be very powerful tools to help ensure recovery of money owed to contractors and subcontractors on a project.  The key to exercising your lien rights is to keep watch on the running of the claim period (use of online resources can help with this)  and to ensure that the lien is (1) properly drafted; (2) timely served; (3) appropriately filed; (4) perfected with a timely lawsuit.  This is not an area where you can make a mistake—liens are subject to strict rules that must be followed to the t.  If in doubt about a lien issue, contact a knowledgeable construction law attorney in your jurisdiction.

We’ll continue our discussion with Part 2 (next Thursday), when we discuss how to handle a lien on your property if you are the Owner

Comments about your experience using liens to maximize your chances of recovery?  Post below.  [And as always, please sign up for an email subscription to the blog  if you have not already done so].

—————————

Photo “Soufflé” by stu_spivack via Flickr/Wikimedia/Creative Commons

NC surety bonds- what they are; how they work (Guest Post)

Posted on by

checking the bondToday, another guest post– this time from Danielle Rodabaugh, a principal for Surety Bonds.com, an agency that issues surety bonds to individuals and businesses throughout the nation. She aims to clarify bonding rules & regulations, and has recently been focusing on construction/contract bonds. Danielle will be discussing bonding issues within the North Carolina construction industry.

————————————–

Reliable professionals working in the construction industry want to guarantee the quality of their work to their clients, and that’s where surety bonds come in. In construction, contract (or construction) bonds are a type of surety bond utilized to ensure that professionals follow regulations and make appropriate decisions while working on a project. Construction bonds typically protect the client and work similarly to insurance—although they offer a different kind of protection.

What’s a surety bond?
In the construction industry a surety bond is essentially a legal agreement between three parties to help ensure the fulfillment of a contract:

  1. Obligee–typically the developer or worker who receives the protection of the bond, guaranteeing that the contractor fully completes the project
  2. Principal–the contractor who gets the bond, guaranteeing that they will fulfill various aspects of the project as outlined in the contract
  3. Surety–the agency who issues the bond to the principal, thus backing the contractor’s work and acting as an intermediary between the contractor and obligee

There are three main types of construction bonds that are utilized in North Carolina:

  • bid bonds
  • performance bonds
  • payment bonds

Each of these bonds plays a different role in guaranteeing the work of a contractor throughout a project’s duration. North Carolina surety bond agencies have the ability to issue construction bonds to qualifying professionals who want to take advantage of their benefits. Unfortunately, many working in the construction industry are still unaware of the legal financial protection offered by construction bonds.

 

Bid Bond Issues in North Carolina
Bid bonds guarantee a developer that—if selected—a contractor will agree to work on a project for the amount proposed in the original bid. This guards against contractors who might try to increase their bid on a project after being contracted by the developer. With a bid bond in place, the developer may collect appropriate reparation if the contractor breaks the bond’s terms. If such a situation arises, the resulting compensation is typically calculated by how much more the developer has to pay to contract the next-lowest bidder for the project. If the contractor does not have the ability to adequately compensate the developer the surety becomes responsible for paying reparation up to the bond’s full value.

Although North Carolina state law does not require the use of bid bonds on either private or public construction projects, a developer may still choose to require them as an added form of protection. According to N.C. Gen. Stat. s. 143-129, which outlines the procedure for letting of public contracts, North Carolina contractors must provide an upfront deposit in the amount of 5% of the total bid when submitting their bid. The language explains that a contractor may choose to provide a bid bond in lieu of making the required cash deposit. Bid bonds can be especially helpful for new contractors who may not have the necessary cash on hand for the collateral, as the surety would financially back the contractor’s bid.

 

Performance Bond Issues in North Carolina
Contractors secure performance bonds to guarantee that they will perform all aspects of a project as outlined in the contract. Should the contractor fail to complete the project satisfactorily, the performance bond allows the developer to regain appropriate compensation. If the contractor cannot pay the reparation then the performance bond instructs the surety to step in. Depending on the situation, the surety might be responsible for paying retribution up to the bond’s full face value for any extra fees incurred as a result of the contractor’s incomplete work.

Performance bonds are not required for private projects in North Carolina, however some regulations mandate their use for certain public ones. For example, the use of performance bonds is required when any government entity enters into a construction contract in an amount more than $100,000. Furthermore, they are also required for any other public construction project that exceeds $15,000, no matter the developer or specific contract. Additionally, any developer has the right to require a selected contractor to get a performance bond prior to a project, which especially benefits the developers of private projects or smaller projects that cost less than $15,000. All state-mandated performance bonds must be issued for 100% of the project’s contracted cost.

 

Payment Bond Issues in North Carolina
Payment bonds are put in place to make sure that contractors will pay all labor and material costs as outlined in the contract. Because mechanic’s liens—which ensure payment of outstanding debts upon sale of a property—can only be used on private property projects, payment bonds are essential to making sure that all bills are paid in full. Subcontractors (or other workers) can make a claim on the bond if a contractor does not make the appropriate payments, allowing them to recover deserved compensation.

Simply put, payment bonds are required on all projects that mandate the use of performance bonds. North Carolina General Statute 44A-27 explains that any professional working on a bonded project who is not paid for his labor within 90 days has the ability to make a claim on the bond. Private projects in North Carolina do not require the use of payment bonds, although these individuals may elect to use them at their own discretion. This goes to show that although bonds are not always be required in North Carolina, they are most certainly enforced. Oftentimes this means that individuals working within North Carolina’s construction industry must take the initiative to utilize construction bonds.

——————————-

Danielle and I welcome your thoughts, comments, and questions about surety bonds in the comments section, below.

——————————-

Photo “Checking the bond” by Stephen via Picasa/Creative Commons License.

5 Ways to Ruin Your Business (Tues Tip)

Posted on by

Failing Street streetsignWhile my goal on this blog is to help your construction, architecture, or engineering practice thrive, sometimes it’s best to demonstrate by example of what *not* to do.  This list is good for any business, not just those in the construction field.

1.

Don’t bother running a credit report, Google check, or otherwise investigating who you will be doing business with. If you do check references, only call the cousin they listed, because a credit reporting service might cost money.  (Can you say penny wise and pound foolish?).

2.

Don’t talk about costs, estimates v. fixed fees, and extras up front.  Wait until they get the bill and complain to have that conversation. (It’s much less awkward then!).

3.

Don’t bother to train your staff or even tell them who the important clients are– let them treat your most important customer like an annoying telemarketer.

4.

Don’t bother to keep organized documentation on projects.  Only lawyers worry about those details.  (And you, when you get sued or audited).

5.

Don’t answer written communications  in writing– a phone call or handshake is all that is necessary.  (Who needs “proof” when you go to court? The jury will believe you over the written documents, right?).

_____________________

Any other big mistakes that should be added to the list?  Let me know your thoughts in the comments!  (And as always, if you enjoy these tips, please sign up for email delivery of my blog posts so you can be sure to see them all).

_____________________

Photo “Failing Street” by Chris Daniel via Flickr via Creative Commons License.